National Insurance Contributions Bill

It is self-evident that there are few subjects of debate more likely to empty the Chamber than national insurance contributions. In an age in which consecutive Finance Acts create and then abolish new-fangled tax instruments, national insurance contributions have proved remarkably resilient. We are now in the 58th year since their coming into force as part of the welfare state establishment that followed world war two. Back in 1948, all those at work except married women paid the princely weekly sum of 4/11d—that is 24.5p for all those Members of the House younger than me—in a flat-rate compulsory contribution. How times have changed! The only thing that is flat about national insurance today is the spin in which the Government find themselves when trying to raise as much money as possible in their frantic attempt to balance their books. I said in Committee in June during the passage of the Finance Bill in June that,"““for our part, it is difficult to avoid the conclusion that many of the anti-avoidance proposals are driven by an increasingly desperate Treasury desire to fill its revenue black hole without regard to the damaging effect that it will have on the development of start-up ventures, and, indeed, some bona fide remuneration schemes.””—[Official Report, Standing Committee B, 21 June 2005; c. 43.]" The Finance (No. 2) Act 2005 made a number of amendments to the Income Tax (Earnings and Pensions) Act 2003, with the aim of closing down schemes to avoid income tax using employment-related securities. Those amendments have retrospective effect, as the Paymaster General rightly pointed out, going back to 2 December 2004. It is not currently possible to extend retrospective income tax provisions to national insurance contributions, because liability for NICs can be charged, as the Paymaster General mentioned, only from the date on which NICs regulations are made, except in limited circumstances in which the regulations can be backdated to the beginning of the tax year. The Bill’s stated purpose is to align national insurance legislation with income tax legislation, which will allow tax liability to be applied back to the date of the announcement. As the Paymaster General pointed out, the Bill also contains provisions to restrict employers’ ability to pass on any secondary NICs liability to employees and extends the existing tax disclosure rules to NICs. I shall come to aspects of that in a moment, if I may. There is, however, a good reason for existing NICs legislation not allowing regulations to take such retrospective effect. In my view, only in the rarest of circumstances should the Government contemplate either retroactive or retrospective legislation. I fear that the Bill’s effect will be to institutionalise retrospection. We shall certainly need to explore that in far greater detail in Committee. The substantive clauses will put in place the intention of the Paymaster General’s statement of 2 December 2004. Recognising the difficulty of anticipating the ingenuity and inventiveness of the avoidance industry, she gave notice of the Government’s intention to deal with any arrangements that emerge that are"““designed to frustrate our intention that employers and employees should pay the proper amount of tax and NICs on the rewards of employment.””" She continued:"““Where we become aware of arrangements which attempt to frustrate this intention we will introduce legislation to close them down, where necessary from today.””" As we gathered from the previous exchanges, it is clear that there may be 100 such contrivance schemes. We need to understand whether some of those are in many ways bone fide remuneration schemes, and indeed whether their closure might be detrimental to the very start-up operations that I think all of us in the House agree are the lifeblood of the economy. The key issue, however, is whether the importance of protecting tax revenues outweighs the need for certainty in commercial forward planning, because the threat of retrospection came as a great surprise to many tax professionals, as it falls foul of one of the great canons of taxation—that of certainty. Arguably, retrospection is also unconstitutional, and if not it should be regarded as acceptable only when couched in unambiguous terms. The Government’s admirably comprehensive explanatory notes make much of what they regard as the position under the Human Rights Act 1998. In spite of the characteristically robust protestations of human rights compatibility from the Chancellor of the Exchequer, his is a position of an interested party, for the reasons I have set out. These measures will obviously bring in more money—perhaps as much as £240 million during this year and years to come. The Chancellor and the Treasury need that money to keep flowing in, and it strikes me that several experts in this novel but complex field of human rights take a different view on compatibility. No one disputes that it is the Government’s duty and responsibility to devise policy, but equally, Parliament must retain effective control over how that policy is implemented by legislation. In spite of the Paymaster General’s suggestion that this power is relatively limited—the words of comfort about the affirmative procedure were positive—Parliament will undertake only cursory scrutiny, because the Bill is designed to enable Her Majesty’s Revenue and Customs to backdate to December 2004 all those NICs to which the Finance (No. 2) Act 2005 changes apply. We must consider some of the practical effect—my hon. Friend the Member for West Suffolk (Mr. Spring), the shadow Paymaster General, will mention some such examples later—and remember that NICs come from both the employer and employee. Are the Government seriously suggesting that erstwhile employers of someone who has died after December 2004, or perhaps of a former employee who has been fired in acrimonious circumstances, should have disputed NICs clawed back? This has all the makings of another farce on the lines—although, I accept, not to the same degree—of the tax credits fiasco. How much contingency has the Paymaster General made for writing off sums that can neither be claimed nor easily traced? It gets worse, because by the time the Bill has made it through Parliament, no doubt the new year—2006—will be upon us. Unravelling NICs arrangements, which by then would already be over a year old, will also most likely have knock-on implications for the disclosed employer company profits in previous tax years. That may have a crucial impact, especially if the tax avoidance in question is considered widespread within a particular industry sector.