David Gauke, Clare Sheehan,David Edney, Robert Burton and JaneEdwards gave evidence.

Q 46

We will now hear oral evidence from our colleague David Gauke, Financial Secretary to the Treasury, and from officials from Her Majesty’s Revenue and Customs and the Department for Work and Pensions. We have until 11.25 am for this session. First, I ask the witnesses to introduce themselves for the record, and to indicate their department in the case of the civil servants. This room has an acoustic problem, so if possible please do not let your voices drop.

Jane Edwards: I am Jane Edwards. I am a policy adviser at DWP.

Robert Burton: Good morning. I am Robert Burton. I am the policy adviser for employment status at HMRC.

Mr Gauke: David Gauke, Financial Secretary.

David Edney: David Edney, policy adviser on counter-avoidance at HMRC.

Clare Sheehan: Clare Sheehan, also from HMRC. I am a policy adviser for the reform of class 2 national insurance contributions.

Q 47

Thank you, Mrs Brooke, and thank you to all the officials for coming to speak to us this morning. We have just had a very useful discussion about the targeted anti-avoidance rule, starting with clause 5 of the Bill. I know the Minister certainly heard—and I hope that the official response will also have heard—a discussion with Mr Green in the previous session, about ways that end-users are already manipulating the rules. They are adopting different models, such as the elective deduction model or the contractual restrictive model, and also making use of travel and subsistence rules. It would be helpful to know what action HMRC is taking on those areas, and whether you are aware of what is happening. It would also be helpful to hear your view on the effectiveness of the TAAR or targeted anti-avoidance rule to deal with this. What thought has been given to the possibility of putting liability all through the supply chain, as opposed to it sitting only with the intermediary?

Mr Gauke: Perhaps I may start the response, and then bring Robert in to answer on some of the details. It is worth making the point that it is necessary for us to address the role of the intermediary in this process. This  can be a complicated matter, and there can be many parties to the arrangements that are in place. However, we are talking about a targeted anti-avoidance rule, which is designed for artificial and contrived arrangements. We believe that in order to address this it is necessary to deal with the intermediary, which is the thinking behind the legislation which we debated earlier this year that was contained in the then Finance Bill. By and large, that is what the Bill in front of us seeks to replicate. Of course, it is always the case that, as you deal with a problem in one area, there are risks of changes in behaviour and further matters then arising. Certainly, as a Government we are very much alive to that. Let me bring in Robert on this issue.

Robert Burton: When we consulted on this during the summer, we discussed many questions about what our intentions were and whether such a TAAR would be required. We tried to deal with taxes and NICs in the primary legislation introduced in the Finance Act 2014, and to ensure that it was sufficient and robust enough initially to counter any such avoidance. However, we were mindful that parties were possibly looking for ways to circumvent the intention of the legislation. This is why we asked one of the questions in the consultation document, about whether a TAAR would be appropriate. We received quite a lot of responses stating clearly that, yes, parties who were involved in this area thought that a TAAR would be needed.

The second part of your question asked whether we are aware of such things as the elective deduction model. Yes, we are. We speak to stakeholders and parties on the ground throughout the whole process, and continue to do so and to listen to what they say to us. Clearly, we are fact-finding on each of these occasions. We cannot assume straight away that something that has passed in front of us is an avoidance scheme. We have to listen and then establish the facts, and we continue to do so. It may be that a vehicle such as the one being referred to here could circumvent the legislation. I say “it may be”, and that is one of the reasons why we feel that it is appropriate that the targeted anti-avoidance rule is there. It covers such instances, and gives reassurance to those who have complained that there is a race to the bottom, who have said that they require the levelling of the playing field.

Q 48

Much of the discussion we had on the Finance Act 2014 and the previous National Insurance Contributions Bill was around offshore intermediaries and the different ways people use those to circumvent the rules. However, Mr Green’s point was that people get very smart and start doing things along the supply chain once you point the liability at one place. What thought has been given to something that catches everyone? If the Government have acted on a specific issue with intermediaries, but those measures—although we support them all—only push problems into other areas of the supply chain, it might be better to take a broader view and introduce something that catches everyone. That would say, “We’re on to you. You’re not going to be able to get away with circumventing in this way.”

Robert Burton: It is clearly a difficult question. Where do we take action? We have to consider business efficiencies and administration burdens. Where is the best place? Who are the most knowledgeable parties involved in  this chain? When the legislation applies, the intermediaries are the instrumental parties involved in this. They have a clear relationship with and understanding of the end clients and also of employment law and tax law in terms of employment. We considered them to be key. Throughout this process, we have tried to reduce the administrative burden and bring in legislation that will affect such avoidance but, at the same time, not add to businesses’ burdens.

Q 49

Minister, can you update the Committee on the accelerated payments policy? Does HMRC have the resources it needs to implement this new regime?

Mr Gauke: We legislated for accelerated payments earlier this summer with the Finance Bill. The plan from HMRC has always been to start off relatively cautiously in terms of numbers and ramp it up. The first notices went out at the end of August. Something like 600 notices have been sent out, covering tax liability of up to £250 million. The notices give the parties concerned 90 days in which to settle and make the payment, so one would not expect us necessarily to see the money coming in until the end of November. I can inform the Committee that, up until now, over £25 million has been paid as a consequence of the accelerated payments project. There is clearly much more to come.

The other point I would make—Andrew Hubbard touched upon this—is that we are seeing changes in behaviour. I might ask David Edney to come in, because there has been a significant change in the economics of tax avoidance. There was always the argument that someone could engage in a tax avoidance scheme and, even if they lost, they sometimes had the benefit of the money for many years. Some of the high-profile cases reported in recent months and which have now been addressed go back to schemes that were put in place in 2004, 2005 and 2006. This fundamentally changes the economics, and the business case for pushing these artificial, contrived tax avoidance schemes therefore becomes much less attractive.

David Edney: We set up a dedicated helpline for people to contact us. It was noticeable that, as soon as accelerated payments were talked about and the first notices went out, the calls started coming in. They first asked, “What is this all about and am I affected?” and then minds started to concentrate and people said, “I really want to get out of this. I see now that I cannot hold on to the money any longer. What do I have to do to settle?” As well as the advisers we have in place to issue the notice, we have advisers to settle their liabilities without even receiving a notice.

Q 50

Are there new resources for the helpline or are people just reallocated to man it?

David Edney: This is all part of setting up our new counter-avoidance directorate, which came into being almost a year ago to tackle all forms of counter-avoidance. There is a small amount of extra resource and, as the Financial Secretary explained, this is a slow build-up. We have added a little bit of resource to issue the first tranche of notices. We will build up the staffing into the new year as we build up to full capacity. As the reaction builds in, we will then look at resources on our debt management teams, for example, and our legal teams. Rather than recruiting very large numbers up front, we are taking it in stages as the programme unfolds.

Q 51

This very much follows on from the last two questions. I am very conscious of the administrative burden, which I think Mr Burton mentioned. One does not want to pile administrative burden on. May I take you back to the comments of Mr Green of the Recruitment and Employment Confederation? He talked about a huge amount of resources, which Mr McCartney has just mentioned. His solution to enforcing this was to have reporting by everybody in the supply chain who should be accountable. I understand what he was saying, but would that be a huge administrative burden? Why do you think he is wrong?

Robert Burton: Would it be a huge administrative burden? Any client or any party involved in that chain would have to make a report—I think that is what Mr Green is suggesting—to HMRC. Clearly, that is a large burden for businesses that are not set up for making such returns. And on what basis and how regularly would they do that? We are bringing in a quarterly return in 2015, which will be made from the employment intermediaries who are affected by the legislation, and we have worked closely with them to simplify that. Because they are the key relationship holder in this chain and they are placing the workers with the end clients, they should have the majority of the information already there with them. We have tried to ensure that what we are asking for is what they are already required to keep elsewhere.

Q 52

I just want to go back to the issue around accelerated payment notices and the point made by the CIOT in its written evidence about HMRC needing a power to be able to repay the NICs that might have been found to have been overpaid in connection with an APN. The CIOT mentioned that there had been correspondence with HMRC, which was of the view that such a power is not needed. It would be helpful to get clarification and to understand why nothing is needed in the Bill.

Mr Gauke: Yes, that is a fair description of the communication. It is the view of HMRC and the Government that it is not necessary for there to be a power in the Bill. If the courts determine that the amount that has been paid under an accelerated payments notice, whether in respect of tax or national insurance contributions, ultimately does not need to be paid, and if the scheme in question, for example, was legal and effective, HMRC would be obliged to make that repayment. Although it is not in the Bill, I am grateful for that question and I am happy to make that statement and to make it clear that that is the view of HMRC and the Government, having looked at it very closely. Do you want to add anything, David?

David Edney: We did look at this and we took legal advice. When a court decision or an agreement is reached that national contributions are not payable, we are advised to repay them.

Q 53

Ms Edwards, in the early part of our session this morning we had a discussion about the interplay between universal credit and the simplification in the Bill for those on very low incomes who are self-employed. What discussions have you had with colleagues in HMRC about the impact on those with very low incomes who will be paying their NICs slightly differently as a result of the Bill, and on their eligibility for benefits as well as universal credit?

Jane Edwards: HMRC and DWP have worked together quite closely to make sure that benefit claimants are not disadvantaged by the move to self-assessment. One of the founding principles of universal credit is financial responsibility. That is why the minimum income floor may be applied to the lower income claimant. There will be a method for them to make in-year payments, if they want to do that, or for them to take financial responsibility themselves, so that they are not disadvantaged by a massive outgoing at the end of the year when self-assessment is due.

Q 54

How are you going to make sure that this cohort of people properly understand the rules and know exactly how they are affected? The rules can be a bit of a minefield for many people to navigate, even without any changes. Do you know what the size of that cohort is going to be? How many people will you have to thoroughly explain this to, so that they do not get caught out?

Jane Edwards: We understand that communication is a very important part of any change. HMRC and DWP are working together to make sure that we have a comprehensive and far-reaching communications strategy, so that all claimants will be aware of the change, from the self-employment communications from HMRC or from DWP. We are going to make sure that people know about the change to class 2, so that they can take account of it for themselves. We are going to make them aware. We do not want any disadvantage to fall on any of our claimants.

Q 55

Will you make sure that the communication is oral as well as written? Will there be help to take claimants through the changes on the phone, at a job centre or in some other DWP arena? Somebody should explain how the rules work; a letter may be a bit more difficult for claimants to get their head around.

Jane Edwards: There will be online guidance and helpline assistance in certain instances. We have also got an extensive communication network with stakeholder groups, and we intend to use those avenues as well to promote awareness. We will see how it impacts as it goes along and, if necessary, we will adapt accordingly to make sure that people are aware of the need, so that nobody loses out.

Q 56

I am sorry to go back to the subject of intermediaries, but I am simply not convinced by the answer. It is certain that there is a problem there. You talk about artificial and contrived arrangements. It is certainly the case for a proportion of the intermediaries that they were effectively set up as arm’s length companies solely to avoid tax and national insurance implications. This will no doubt frighten them into going into a different arrangement. Surely, we will potentially damage an industry that has good players in it and good intermediaries who are providing a service within the law in order to get to the bad players who are going to come up with a different model that ends up not falling within the powers in the Bill. You say that that is why the TAAR is there, but the evidence is that the TAAR will not now apply, because there will be no intermediary and there will be a new model that will take that out of the equation. So I am not convinced about how you are dealing with this.

Mr Gauke: Let me start, and then I will let Robert respond as well. The first point to make is that an abuse was clearly in place which was making use of intermediaries and artificial arrangements which cost the Exchequer considerable sums of money. It is right that we deal with that abuse. A lot of employment intermediaries were very keen that we should deal with this issue, because it meant that those who were abiding by the rules and intentions of Parliament were finding themselves at a competitive disadvantage. So it is right that we try to address that point. If the point being made here is that that does not solve the problem for ever in every respect, I am not denying that, but it is right that we take the action that we can take. This is a targeted anti-avoidance rule and that first point—targeted—is relevant here. The rule is addressing a particular matter.

The next point is whether it moves the problem on to somewhere else. Well, HMRC is very much alive to that issue and continues to analyse the evidence as it comes forward, with a view to taking action as and when that is necessary. None the less, we have made it much more difficult to contravene the system that is in place. We have made it much more difficult for people to engage in the type of artificial arrangement that has existed up till now.

Robert Burton: We clearly listened to what we were being told by intermediaries who were compliant and who were spending time and money to ensure that they abided by the legislation. They told us that there was a race to the bottom. They could no longer stand aside while others, who ignored the legislation and did not adhere to what was required of them, drove prices down to where they just could not compete any more; they wanted action there. So we have tried to bring in the action to support those who are compliant, without adding to the administrative burden, at the same time ensuring that we have the powers that we need to take action against those who choose deliberately to try to circumvent the legislation.

Q 57

But the evidence that we have heard today is that, far from supporting those who were complying, the measure would give an incentive to the end users—the companies that were using intermediaries—to do away with those intermediaries entirely. The evidence that we heard was that it had effectively halved the number of people on their books because the end user had subverted them and gone into direct arrangements with the contractors rather than using an intermediary.

Robert Burton: Clearly, the agency legislation has acted against the intermediaries. There are many models out there. Some of the evidence that has been given is that in some circumstances end clients who may be driving some of these avoidance measures have decided to engage their own staff directly. We identified that there were some key weaknesses in the agency legislation which we rectified in the Finance Act 2014. We did not identify such a large loophole with employment status that needs to be addressed. It is an argument that we can address directly with that engagement. It is an argument about the status of that worker. Therefore, we already have compliance in that area and we will ensure that that continues to address those who are trying to engage people directly but, again, not as required in the legislation to ensure that tax and NICs are not avoided.

Mr Gauke: And just to be clear, when we say we have acted against intermediaries, we have acted against intermediaries who engage in artificial and contrived behaviour. This is not designed to be anti intermediaries per se. It is about addressing intermediaries where the structure is artificial and designed to reduce tax or national insurance contributions liability. But, of course, we remain alive to any threats to our tax base and any attempts to reduce payments of tax or NI as a consequence of artificial behaviour.

Q 58

Equally, you have to be mindful of the potential for unintended consequences upon that very industry.

Mr Gauke: Indeed.

Q 59

My question is directed at the Minister. Is he personally comfortable with the level of resource that he has available, particularly within the national insurance section of his responsibilities? That follows on from my sharing some of the concerns outlined by the hon. Member for Birmingham, Ladywood on budgeting and the impact on lower paid workers of their benefit entitlement. There may be people who will be excluded by the lower floor, as it were, who will have to opt back in to bring their record of contributions up. We have already seen that that will probably involve disproportionate engagement with such individuals.

In explaining my concern, I want to refer to a conversation I had with the authorities on national insurance in Newcastle. People who have more than one employment are likely to overpay their national insurance contributions during the course of any one year and get a refund. I am in the happy position of getting a refund each year, but I want to relate to the Minister a conversation that I had 18 months ago when there was a rather long delay in getting my refund. I rang up—you can get through to people, which is good—but the person I spoke to pointed out that my letter would not be responded to for three weeks because, owing to the volume of work that they were dealing with, it was in the pile to be responded to in three weeks’ time.

That was a straightforward matter, but when we look at the complication in the situation of lower paid workers and the impact that the Bill may have on them, I do not think it is enough to expect that, by accessing the internet, they will be able to understand these matters. Will sufficient resource be available so that those of us who are concerned can be satisfied that the officials dealing with national insurance can ensure that lower paid workers are not disadvantaged?

Mr Gauke: There are a couple of issues here: one is a general point about HMRC resources and its ability to respond to letters and phone calls; the other is the additional demand on HMRC’s resources as a consequence of the changes we are making here. First, HMRC’s resources and its service standards are higher than they were four years ago. The percentage of letters that HMRC responded to within the three-week target is higher than it was and I think it is meeting its targets on phone calls dealt with first time round. I would like the numbers to be higher, and HMRC is making considerable efforts to improve its response numbers and times for telephone calls, but again those are significantly higher than four years ago. We need to look at how HMRC can design its systems so that people do not have to  phone up or write as often as they do. In that sense, the tax system could be simpler and not require as many communications.

In terms of this measure and the change for class 2 national insurance contributions, the first point to make is that this is a simplification: it will be easier for the self-employed to comply with the tax system. They now have one payment system rather than two and they are able to deal with their class 2 national insurance contributions as part of the self-assessment system, which is a step forward that has been widely welcomed.

We have discussed this morning and you alluded in your question to the interaction with universal credit. I come back to Shabana Mahmood’s question a little earlier. Clearly, communication is very important here. As we have heard, DWP and HMRC are working closely together. HMRC is writing to all of the self-employed, informing them about this issue. In the context of universal credit, people can pay by instalments through a budgeted payment programme, which means that they do not get the spike that can cause a particular problem in terms of the minimum income floor. That is the best way of trying to deal with that.

A point that the Committee made, and we fully accept, is that communication is important. We take that on board. More broadly, HMRC has carried out a review of the resources required and is committed to ensuring that the appropriate resource is in place to introduce the new changes. You ask a fair question, but HMRC would come back strongly in terms of what is, after all, a simplification. Clare, is there anything you would like to add?

Clare Sheehan: Just to reiterate the point: the reforms to class 2 are very much intended as a simplification, meaning that customers will not need to contact us or to have the sort of interventions that they found complex and confusing in the past. An example of that, specifically for the low paid, is the current small earnings exception, where someone who has low profits and does not want to pay class 2 has to apply in advance for a small earnings exception certificate. They have to try to forecast what their future profits might be, which is sometimes quite complicated. We have designed the new system to make that much simpler so that if a person has profits below a certain level, they can make a decision to pay voluntarily or choose not to. That decision will be built into the self-assessment form so that they can make an informed decision as they are filling in their SA return; there is no longer a need for that specific separate process.

Q 60

I just want to go back to a point raised by Mr Hubbard. I raised it because I was not immediately sure what the answer was myself, without going away to check. I hope that the Minister or one of his team can help us. What does the voluntary class 2 contribution entitle you to, as opposed to the class 3, for NICs? Do we know?

Clare Sheehan: The main thing that voluntary class 3 contributions entitle you to is pension entitlement, whereas the benefits associated with voluntary or liable payments of class 2 are wider than that, and include maternity allowance, employment support allowance and bereavement benefits. For the purposes of benefits, there is no difference between what a voluntary payment of class 2 would give you and what a compulsory payment of class 2 would give you‘.

Q 61

So it is just the pension bit that is different.

Clare Sheehan: In class 2, you get pension as well, but class 3 is predominantly about securing pension entitlement.

Q 62

I have a very quick question, which will need a very quick answer as long as it is the right answer. It is about foster carers and shared lives carers, in particular the definition of a worker and ensuring that the definition does not, whether by design or accident, exclude people who previously paid class 2.

Clare Sheehan: Yes, I can reassure you on that point. The population, for class 2 purposes, is not changing; foster carers will still be able to pay class 2 national insurance.

Q 63

Will there need to be any changes in the Bill to make that clear, or will there be guidance?

Clare Sheehan: I do not think there is any need to make changes to make that clear. The guidance will certainly be clear on that point.

Q 64

It is just that the new definition refers to being “in employment” as a self-employed earner. It is difficult to see how you would class a foster carer as being in employment.

Clare Sheehan: The key point is being a “self-employed earner”. The way that the categorisation works for national insurance is that you are either an earner or a self-employed earner—that is effectively everybody else who is gainfully employed.

Q 65

The key point is that there is no intention to change that?

Clare Sheehan: No.

As there are no further questions from Members, I thank the final witnesses for their evidence. That concludes our business for the morning.

Ordered, That further consideration be now adjourned. —(Harriet Baldwin.)

Adjourned till this day at Two o’clock.