Clause 1 - Payment of Class 1 contributions: Great Britain
National Insurance Contributions and Statutory Payments Bill
9:30 am

Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

Good morning, Mr. Butterfill. I am delighted to see you in the Chair this morning, and to see you looking so well.

First, I must apologise to the hon. Members for Hertford and Stortford (Mr. Prisk) and for North Norfolk (Norman Lamb). I understand that they did not receive their copies of the draft regulations until this morning, although we tried to get them to all members of the Committee by yesterday afternoon. None the less, I hope that the information in them will assist the hon. Gentlemen in debating the Bill, although they will not have had time to study them for this morning's sitting.

Mr Norman Lamb (North Norfolk, Liberal Democrat)

It seems extraordinary that the Department could not have got the draft regulations to us before today. Given the time that such legislation has been under consideration—we heard only last week that consultation on it ended some two years ago—surely it would have been possible to have given us 24 hours' notice of the draft regulations.

Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

I have been remiss, Sir John. Congratulations, by the way—I should study such things much more closely.

The regulations are still in draft form; more discussion is needed as they depend on other legislation. I take the point made by the hon. Member for North Norfolk, but those with the parliamentary skills necessary to draft our regulations are under a great deal of pressure, and it was a question of priorities.

I did my best to ensure that members of the Committee received the regulations before our first sitting, but the hon. Gentleman may remember that I undertook to ensure that the Committee had them before the Bill had completed its parliamentary proceedings. I do not wish to be churlish, and I did my best to ensure that the draft regulations were available in time, but given the nature of the work and the demands made on staff that is not always possible. If my officials had to draft only this Bill things would be so much easier, but I take the hon. Gentleman's point.

Mr Mark Prisk (Hertford and Stortford, Conservative)

The Paymaster General promised on Second Reading to provide the draft regulations, and I am satisfied that she has made the effort to do so, but will she reflect on the fact that we will not be able to scrutinise the Bill as we would wish, having had virtually no time to read the regulations and thus to understand how the Bill works? Given that this is a technical Bill, the technical details of the secondary legislation are even more relevant. Will she further agree to ensure that we are given the opportunity to raise such points on Report, even though that is not normally the convention?

Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

Of course, it is open to Opposition Members to table amendments on Report, as it is for them to follow the procedures in respect of any Bill. I take the hon. Gentleman's point, but given, as he says, that this is largely a technical Bill and that outside the House there is general agreement with the provisions, I hope that that will not be necessary. However, I am sure that my hon. Friend the Member for Luton, South (Margaret Moran), the Government Whip, listened very carefully, as did Opposition Whips, to the point about the need to be able to scrutinise draft regulations and I am sure that, should the need arise, it will be possible for Opposition Members to table subsequent amendments.

I move to clause 1, which extends employers' ability to recover class 1 primary national insurance contributions paid on behalf of their employees and ex-employees on security-based earnings. It allows the employer, with the agreement of the employee, to withhold shares to the value of the national insurance paid on the employee's behalf in, for current employees, the year in which the gain arises and, for ex-employees, the year of cessation and the year following cessation.

The first part of the Bill concerns national insurance contributions payable on earnings paid in the form of securities. Most security-based earnings are paid in the form of shares. The Government, as is to be expected, encourage a wider share-owning population—that is at the heart of our enterprise and productivity agenda. The purpose of clause 1 is to increase the choices available to employers and employees to meet the primary national insurance liability that arises when employees are rewarded through payment in the form of shares or other securities. It might help if I explain to the Committee how national insurance contributions are paid in the case of share-based earnings.

The employer is liable for secondary class 1 contributions and the employee for primary class 1 contributions at the point at which the gain on the shares arises. However, in the first instance, the employer is liable to pay the primary national insurance to the Inland Revenue and may recover it from the employee, subject to certain conditions. Those conditions form the nub of the clause.

It is necessary to attach some new rules to how an employer recovers payments from employees. Employees need to be protected by a basic framework to ensure that they are not subjected to hardship because of unreasonable deductions being made from their earnings, such as an employer deducting a year's worth of primary national insurance in one go. In the normal course of events, should an employer be unable to deduct the primary national insurance due at the normal time when earnings are paid, he or she may catch up by making further recoveries, but only from cash earnings in the year in which the earnings were paid and at an amount that is no more than the normal primary national insurance due on that month's earnings.

On most occasions the employer will be able to deduct the primary national insurance immediately from the cash earnings paid to the employee. However, when making a payment of share-based earnings, there is no cash from which the primary contributions can be deducted. Therefore, we recognise the need to ensure that the conditions restricting recovery of the primary contributions relating to share-based earnings are appropriate.

We do not want to penalise employers who reward their employees with share-based earnings by making it difficult for them to recover the primary contributions that they have paid to the Inland Revenue on behalf of their employees and are therefore entitled to recover.

We have already taken steps to help employers manage such recoveries. We amended regulations last year, which give employers an additional year—the year after the payment of the share-based earnings—in which they can deduct the national insurance from the employee's earnings so as to deal with circumstances where the gain from the shares arises towards the end of the financial year. We also removed the limits on the amount that can be deducted from the employee's future earnings where national insurance liability arises on share-based earnings.

There are two instances where an employer can recover primary national insurance contributions from an employee's non-monetary earnings. With the employee's written agreement the employer can withhold an amount of shares equal to the value of the primary contributions paid on their behalf, when the employee has been paid share-based earnings after they have ceased employment but during the year of cessation, or when the employee is ceasing employment in that year and there are insufficient future cash earnings from which to recover the primary contributions.

The purpose of the clause is to extend such provisions further. We are enabling employers, with the written agreement of the employee, to withhold an amount of shares equal to the value of the primary contributions paid on their behalf for current employees, as well as those who have ceased to work for them. We are extending the right to withhold shares in respect of ex-employees so that recovery may be made when the gains on the shares arise in the year after they ceased work, as well as the year of cessation. We will allow employers and employees to make those agreements whether or not the normal cash earnings are sufficient to meet the primary contributions due on the share-based earnings.

The clause therefore allows much greater flexibility for both the employer and the employee. They will be able to agree on the most mutually convenient method to recover primary contributions. We want employers and employees to be able to choose the form of recovery that suits them best, whether cash earnings are available or not for the deduction of the primary contributions. Those changes will be made by amending both primary and secondary legislation. The clause sets out the primary powers. I hope that I have made it clear to the Committee that we will be making the draft regulations available so that the Committee can study them and see how the provisions will work in detail.

I am happy to commend the clause to the Committee.

Mr Mark Prisk (Hertford and Stortford, Conservative)

I welcome you to the Chair, Sir John. This is the first time that I have been under your chairmanship, so I shall look forward to receiving your guidance as we proceed.

I welcome the Paymaster General's opening remarks. Clause 1—and, I think, clause 2—will, as she intimated, extend the ability of employers to recover contributions in two instances, depending on whether an employee is a current or former employee. The Government tell us that the aim of this measure is to militate against the impact of the additional 1 per cent. national insurance charge on employee's earnings over the upper limit. We had a thorough exposition of that point on Second Reading and I do not intend to pursue it further.

I welcome the Paymaster General's remarks on the secondary legislation, although it is disappointing and to be regretted that we have not had a chance to get into the details. I am sure that Labour Members feel cheated of that opportunity, but will nevertheless be keen to read the legislation as the day progresses and to make their contributions. On a more serious note—I am sure that other Members in the Committee share this view—our job of scrutinising the legislation is extremely important. That is, after all, why we are here.

To ensure that this is an informed debate, I hope that the Minister will clarify the scope and application of the regulations. Who is and is not affected? Will the Minister also clarify the cost implications? We have not seen any regulatory assessment in the draft

regulations yet, but anything that we should be aware of that is material to the original legislation would be helpful. In addition, will the Paymaster General say what outside input and consultation, informal or otherwise, has helped in drafting the secondary legislation?

Subsection (3) states:

''Sub-paragraph (3B) applies where a person (''the employee'') who is employed by a particular employer (''the employer'') receives earnings in a form other than money (''non-monetary earnings'') from the employer in a tax year.''

Non-monetary earnings is a very wide definition and goes beyond what I understand to be the purpose of the clause, namely to deal with securities-based earnings. Non-monetary earnings might come in the form of a wide range of benefits that employees receive, such as vouchers and other kinds of help. My understanding is that ''securities-based earnings'' has a recognised definition, which was established in the most recent Finance Bill. Does the wider definition in subsection (3) therefore anticipate the need to apply the legislation to other forms of non-monetary benefit or remuneration? If so, in what circumstances would it apply? Will the Paymaster General confirm what the limit of the definition is, for the sake of clarity among those to whom it applies? For example, would the definition include payment of dividends to the owner-manager of an enterprise, incorporated or otherwise, or their spouse?

Subsection (4) refers to ex-employees, the definition of which is someone whose employment has ceased. However, will the Paymaster General say whether that includes those whose contracts may have ceased, but who have been retained to provide advice or other work in a consultancy capacity? I am sure that she and other hon. Members are familiar with the distinction between worker and employee from previous debates. An important element still needs to be drawn out, and I hope that the right hon. Lady will clarify the matter.

The clause's critical concept can be found both in the remarks that the Paymaster General just made and in paragraph 49 of the explanatory notes, which says:

''It is intended that regulations will allow the employer, with the written consent of the employee, to recover the primary Class 1 contributions''.

The key phrase is ''written consent'', which is at the heart of the clause, whether it applies to current or former employees. Written consent is an entirely logical mechanism and is frequently used in other statutory situations—wearing my chartered surveyor hat, I immediately think of the role of the written consent between landlord and tenant where a lease renewal is to be considered. In that and many other statutory situations, the principle of written consent is allied to the argument that it should never be unreasonably withheld. However, I do not see that condition established in the clause. Will the Paymaster General say what will happen if written consent is withheld? What would employers do? What would their redress be in such circumstances should the Bill be enacted as it is? The Committee will have noted from the Paymaster General's remarks that the time

limit within which, with an ex-employee, an employer can secure that consent is within the year of cessation or the year after. However, let us imagine that an ex-employee has moved to Hong Kong or Tokyo, perhaps in financial services, and that the original agreement did not include express written consent for that change. Perhaps the Paymaster General can enlighten us about what would happen in those circumstances.

Without any specific comment on the secondary legislation at this stage, I would say that the principles underlying the clause are welcome, but I hope that the Paymaster General will be able to clarify the points that I have raised.

Mr Norman Lamb (North Norfolk, Liberal Democrat)

I, too, welcome you to the Chair, Sir John. I join the hon. Member for Hertford and Stortford in asking the Paymaster General to summarise the effect of the draft regulations that have been handed to us this morning. The explanatory notes include several references to what will be provided for in regulations in relation to clause 1. Do the draft regulations that have been prepared accurately reflect that?

My second point is about non-monetary earnings. I want to understand whether that term is defined anywhere. The Paymaster General is nodding, and I shall be interested to hear her full answer. I do not think that I need to develop the point, as she seems to be giving confirmation.

As I understand matters, existing regulations for the current more limited arrangements already provide protection to ensure that employees are not exploited by employers. I should be grateful if the Paymaster General could summarise that protection and explain how she has ensured that it remains, given that we are widening the scope for agreements between employers and employees.

Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

I should perhaps make clear the difference between clauses 1 and 3. I should like to return to the question of election and the protection of the employee under clause 3. Clause 1 deals with the employer's ability to recoup the employee's class 1 national insurance liability. The election arises under clause 3, which deals with payment of employers' class 1 liability. In relation to clause 1, procedures have been established for some time.

On the point about non-money earnings, agreements can be made on all earnings classified as security-based earnings by section 420 of the Income Tax (Earnings and Pensions) Act 2003, as amended by schedule 22 to the Finance Act 2003, as hon. Members will remember. Schedule 22, as those who served on the Finance Bill Committee last year will remember, was the rewriting of all the share-based and share ownership schemes, in recognition by the Inland Revenue of certain schemes.

The majority of security-based earnings are paid in the form of shares. However, the legislation providing for income tax and national insurance treatment of earnings paid in the form of shares also applies to earnings paid in the following types of securities: debentures, debenture stock, loan stock, bonds,

certificates of deposits, warrants entitling holders to subscribe the securities, units in a collective investment scheme, futures, rights under contracts for differences, or similar contracts.

As I tried to explain on Second Reading, the lead comes from the 2003 Act, as cross-referenced with the Finance Bill and tax legislation. As we discussed when considering the Finance Act 2003, this is a complicated area, in terms of the different types of remuneration that employers are providing to their employees in this category. That is the anchor. The Bill brings together our treatment of tax and national insurance, and deals particularly with employers' liability to national insurance.

Perhaps it would help if I gave an example of the changes that clause 1 will make and explain how they would help employees. In order to demonstrate that the matter pertains regardless of the 1 per cent., I have chosen an employee who earns less than the upper earnings limit for my example. [Interruption.] When the hon. Member for North Norfolk hears the example, he will see why.

One issue of share-based ownership is that, in order to be recognised it must be available to all employees in a company. Let us consider an employee who receives monthly cash-based earnings of £800, from which the employer deducts £45.65 in primary national insurance. One month, the employee receives a share-based earnings bonus payment of £15,000, on which primary national insurance of £327.90 is payable—the majority of which, £195.69, arises on the earnings below the upper earnings limit. As those earnings are not cash payments, the employer has nothing to deduct from in order to fund the contributions to the Inland Revenue that it must make on the employee's behalf. Currently, the employer would not be able to agree with the employee to withhold or sell shares equal to the £327.90 national insurance that it paid on the employee's behalf, as the employee is not ceasing to be employed. The only form of recovery open to the employer would be to recover the national insurance from the employee's future earnings. The employer could take that in one go, or a portion could be deducted each month, but if the employer deducted all the national insurance in one go, the employee would lose a significant part of his monthly salary and might suffer economic hardship.

With such a dynamic, employers may feel unable to award shares because of the problems that it might cause their employees, who might suffer even if employers deducted only a proportion each month, as those deductions, on top of the normal national insurance payments, could significantly reduce employees' incomes.

Mr Norman Lamb (North Norfolk, Liberal Democrat)

The example seems to demonstrate why the main purpose probably does relate to the 1 per cent., because it is such an extraordinarily unlikely scenario that someone earning £900 a month would suddenly receive £15,000 in shares and would suffer economic hardship from a deduction from the next month's pay, given that they had just received a bung of £15,000.

Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

If the hon. Gentleman cared to study the arrangements made in the provision of shares to employees, he would see that I have not chosen an unreasonable example. In any field, people are careful and are resistant to any reduction in their expected income per month, however small that reduction may be, unless they are given good cause and accept the provisions.

It will be in both parties' interests to enter into an agreement with the employer to retain an amount of shares equal to the national insurance liability of the £327.90. The employee will be able to repay the employer when he has the money to do so. The example demonstrates that cash can still be deducted in one month, but that there is another way of ensuring that an employer's desire to provide shares and an employee's desire to receive them are not impeded by the operation of the national insurance system. The liabilities of employer and employee can, however, still be made according to the principles of the national insurance system.

Mr Mark Prisk (Hertford and Stortford, Conservative)

I am sure that that fascinating example will enlighten the Committee. The Paymaster General's list defines the earnings meant by the clause and the Bill, and is helpful. It may be because it is early in the morning, but I am still unclear about what ''non-monetary earnings'' means. Does it include non-securities-related earnings?

Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

The term relates to the sections of the securities and pensions legislation that I referred to and to schedule 22 of the Finance Act. It clearly sets out what would and would not be included.

The hon. Gentleman asked a series of slightly less detailed questions, the first of which was whether we had consulted on the secondary legislation. That is still in draft, rather than final, form because if other points arise during consultation, it may be necessary to make technical changes to the regulations so that they accurately amend all necessary legislation to give reality to the points that we are discussing this morning, which is exactly the point made by the hon. Gentleman and the hon. Member for North Norfolk.

The hon. Member for Hertford and Stortford also asked about employment status. He has told the House before that he was once self-employed, so I am sure that he is aware that in this case ''tax'' follows the normal meaning of the word. According to employment law, if an employee's contract ceases and they then work in a different capacity with the same employer, that employer no longer employs them, so they can be an ex-employee. That, however, absolutely depends on the facts of the employment relationship, as it always does.

The hon. Gentleman also asked what would happen if written consent was not agreed. If an employer was left with a liability that they could not recoup from their employee—the employer is liable to pay it—presumably the employer would have to reflect on whether they wanted or felt able to make the shares available if they believed that the liability they retained was too great. Indeed, in discussions held since 1998,

employers have continually told the Government about the need to resolve this issue, because they believe that achieving the liability impedes their ability to make shares available for all employees.

The hon. Gentleman's final question related to owner-managers or spouses. I told him that the legislation dictating the grounds that the Inland Revenue will recognise for tax and now national insurance clearly sets out the employer's payment of shares to the employee to give him or her a stake in the company, and the necessary relationships between the employee and the employer.

Mr Mark Prisk (Hertford and Stortford, Conservative)

On the Paymaster General's latter point, there are obviously many instances in which a spouse can be an employee of an owner-managed business, so I am not entirely sure that she clarified that issue, and she may want to return to it.

On the point about ex-employees, there is often a significant dispute between an employer and an ex-employee, which is where the awkwardness may arise. Let us say that someone is an ex-employee who left under a cloud, and a legal dispute is in train. It could be in Aberystwyth, for all one knows, but let us say that it is in another legal jurisdiction such as Tokyo. I am trying to establish whether there is a mechanism by which that written consent can be secured. I heard what the Paymaster General said, which is that the employer may have retained certain shares in some instances, and will therefore have some leverage, but that will not be the case in other instances. Is it envisaged in the Bill what would happen in those circumstances?

Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

The operation of the scheme in its limited form provides for the relationship whereby an employer recovers from an employee. In the case of a dispute between the employer and the employee, it would be a contractual dispute between the employer and the employee; that is not the relationship with the tax authorities. I have not been given any examples of such a scenario, nor have companies asked us in their representations to try to provide for such a scenario. I cannot, therefore, answer the hon. Gentleman's question in detail, because his point is theoretical, the matter never having been raised with us. Such a scenario would be part of the usual relationships between an employer and an employee, and it would not be a matter for us. It becomes a matter for us in clause 3, which relates to the acceptance and transfer of liability.

Mr Mark Prisk (Hertford and Stortford, Conservative)

That is very helpful. After all, the critical part of our process is to try to tease out and identify circumstances. I fully accept that legislation cannot provide for every possible circumstance. However, I am concerned not about the employee, but about the ex-employee: someone who has left, perhaps in a serious dispute with their former employer. An extreme example is Nick Leeson. The issue that I have raised would be quite awkward for the employer in a ''Nick Leeson'' situation. The Government may have decided that that is not crucial and that no

representations have been made, in which case we can at least put that on the record. I simply want to establish the position.

Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

Where an employer had withheld a proportion of the shares to cover liability, the only dispute that could arise would presumably be the employee saying, ''I want those shares back,'' or, ''That was not a fair representation of the liability.'' As the liability for national insurance can be easily calculated, and given the tables published on the values, the employee should be in full knowledge, so I do not really understand the point of the hon. Gentleman's question.

The clause provides a protection for the employer to ensure that their liability is covered. They do not have to take it all in one go and perhaps thereby cause a cash-flow problem for the employee, but equally they are not faced with having to cover the cost in instalments over a number of months, perhaps when the employee is no longer working for the company. The share option of retaining for the value covers the hon. Gentleman's point, so it is difficult to see where other disputes could arise. However creative in tax planning the financial industry is, we shall of course keep an eye on the situation.

Question put and agreed to.

Clause 1 ordered to stand part of the Bill.