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My Lords, this legislation allows the Government to increase the employment allowance by one-third, giving over 1 million small and medium-sized businesses up to £4,000 off their employer NICs bills. Employers pay secondary class 1 national insurance contributions on their employees’ earnings above the secondary threshold, set at £8,788 this year. This is charged at 13.8% and constitutes the largest business tax by revenue in the UK. The employment allowance was introduced in 2014 to help businesses with the costs of employment and to encourage businesses to grow and hire more staff. It is claimed by over 1 million employers to reduce their employer NICs bill by up to £4,000 per year.
The Government recently restricted the employment allowance to smaller businesses with a national insurance contributions liability under £100,000. This ensures that valuable government support is targeted at those who need it most. The Government announced in the Budget that we would be delivering on our commitment to increase the employment allowance for smaller businesses from £3,000 to £4,000 from April 2020. Businesses have been able to access increased support since the start of the tax year.
Passing these regulations will legislate for this increase to the employment allowance. Over 500,000 eligible businesses will benefit from the increase by up to £1,000. We expect the average gain from this measure to be around £850.
The Government are committed to supporting our smallest businesses, and this measure achieves that; 95% of businesses benefiting from this increase are small and micro businesses. Increasing the employment allowance to £4,000 means that 65,000 more businesses will see their employer national insurance liabilities fall to zero. Since introducing the employment allowance in 2014, the Government have taken around 650,000 of our smallest businesses out of paying national insurance contributions entirely.
The Government are more determined than ever to support people and businesses. In the Budget we increased the national living wage by 6.2% to £8.72. Along with increases to the income tax personal allowance and the national insurance primary threshold, an employee working full-time on the national living wage is £5,200 better off compared to April 2010.
However, we are aware that by supporting hard-working people through national living wage increases, we also increase costs for businesses. Increasing the employment allowance helps businesses to meet this cost. Businesses will now be able to employ four, rather than three, full-time employees on the national living wage without paying any national insurance contributions.
This increase will cost over £2.3 billion over this Parliament. This is a significant tax cut, and it should be noted that in just four years the Government have doubled the value of the employment allowance.
These regulations legislate for a Budget measure already helping over 500,000 of our smallest businesses with the costs of employment. I beg to move.
My Lords, I welcome the rise in the employment allowance from £3,000 to £4,000 because it will help many companies and charities, particularly at this difficult time. However, a number of issues stem from this change of policy that are worthy of examination in more detail, because they might have a negative consequence.
For the first time, as the Minister said, this allowance is being targeted. While there will be more for those within the scheme, there will obviously be less for the larger companies and charities that will no longer be eligible for the allowance for the first time and now fall outside the scheme. I would therefore be grateful if the Minister could confirm what the net financial effect of this change will be on the Exchequer. What is the impact, for example, of increasing the allowance this financial year by £445 million measured against the total of the allowances provided in the last financial year? The 2018 Red Book said that restricting the number of companies and charities eligible for the allowance would save the Exchequer £225 million in this financial year. Set against that, is the net effect of the change £220 million?
My second point relates to state aid. If I have understood it correctly, this allowance now falls within the ambit of state aid because the allowance is now a targeted rather than universal allowance. As a consequence, the restrictions on state aid come about because the allowance is largely targeted at certain groups of companies—those that make a national insurance contribution of less than £100,000 per year. This change has resulted in what might be described as some unforeseen circumstances. For example, companies within the scope of the allowance and in receipt of state funding for other reasons might find themselves affected. If a company exceeds the de minimis threshold of government funding, they breach European Union state aid rules—rules that we must stick to until at least the end of the transition period and probably well beyond. I will return to the future application of state aid in the UK shortly, but I will first explore the potential for companies and even charities to exceed the de minimis, although charities are of course excluded.
State aid rules determine that companies in the agriculture sector must not receive in excess of €20,000 of UK government aid. In the fisheries and aquaculture sector, that figure rises to €30,000, in the road transport sector to €100,000, and in the cover-all industrial sector, which covers virtually every other company, to €200,000. These ceilings are a cumulative total over a three-year period. Just for accuracy, I understand that the Government have now indicated an exchange rate figure of £1 equalling €1.1249 for the purpose of working out the ceiling figure. I hope that the Minister can confirm that exchange rate. That exchange rate would mean that companies could not receive the employment allowance if they had received government assistance amounting to £17,780 in the agriculture sector, or £177,794 in the industrial sector, over a three-year period.
Two matters arise from this. The first matter is the administrative burden on checking the amount of aid received and whether there is headroom for adding in the £12,000 employment allowance, which would be the maximum over a three-year period. The requirement to quantify amounts of state aid received could be difficult to achieve in practice, as where state aid arises in the form of a tax relief, it may not be as simple as identifying a gross figure which occurs in your accounting records or tax returns. Added to that is that those who are responsible for submitting the claims for the employment allowance may not be familiar with state aid rules and how they apply. In addition, the Government now require annual claims to be made for the employment allowance; relief will no longer be carried forward from one tax year to the next, as has been the case to date. Does the Minister recognise that this new burden poses some problems for companies? There is a danger, for example, that some companies might not bother to apply, given the level of paperwork that they will have to go into. I am sure that they would welcome some reassurance from the Minister on this.
The second matter I am very concerned about is state aid. Will the current support for businesses that are receiving it during this pandemic count towards the cumulative total for state aid? Apart from the grants to small businesses which we are seeing at the present moment, I am particularly interested in the payments that companies receive for furloughing staff. If these are to be counted, that could severely affect a small company’s ability to claim the employment allowance. For example, four workers on the minimum wage in an agricultural sector company who are now furloughed for two months could certainly tip the company over the ceiling level, or up to it, which would then rule that company out of seeking the employment allowance for three years. Similarly, a company in the severely affected hospitality sector that is furloughing most, or all, of its workers could also be affected. Add to this any other grant aid received because of the pandemic, and there is real potential for the ceiling to be approached or breached.
Since the employment allowance was created to stimulate employment, and given the Chancellor’s statement that he does not want to see a cliff edge or a surge in unemployment as furloughing comes to an end, I would be grateful for the Minister’s clarification on whether financial support during this pandemic counts towards the state aid ceiling, and, if so, what modelling the Government have done of the numbers of companies which would now reach that ceiling.
Finally, can the Minister confirm the Government’s intentions on the future of state aid? In August 2018, the Government said that, in the event of a no-deal Brexit, they would mirror EU state aid rules. Is that still the case? I have no doubt that this will feature in any deal to be done with the European Union, and indeed the matter of state aid within the United Kingdom is still to be resolved; as I understand it, that role is being passed to the Competition and Markets Authority. Whether we have a deal with the European Union or not, I think that state aid rules will still feature, and will probably mirror EU state aid rules. I would be grateful for the Minister’s comments on that matter.
Like many other noble Lords, I am anxious that the potential obstacles and hurdles I have outlined do not detract from the ambition of this policy, which is to promote jobs and job security. The employment allowance is very important at this very difficult time for companies. A fully functional employment allowance is one of the tools which can make the difference between an employee being let go at the end of this furloughing period or retained. This Government will have to do all they can to prevent that happening and to ensure that support is only gradually withdrawn as the financial health of companies improves. If it is withdrawn very suddenly, companies will certainly be looking at lay-offs rather than retention. I am sure the Minister will agree with me that the employment allowance and other support will be needed more than ever before, as this crisis comes to an end.
My Lords, I add my support and welcome this measure, which, as has been said before, is incredibly important at this time, when many are worried about their job security and a global and national crisis is upon us. My questions are about whether it is enough. This measure was proposed as part of a manifesto by my party, the Conservative Party, not that long ago. But given the circumstances and what has transpired in these last few months, the world has changed tremendously and may never be the same again. I therefore have a number of questions about how this can be thought through, revised or built upon to meet the challenges that we face this year and in the coming years.
The living wage, which this is designed to complement, is certainly very welcome. Moving forward, however, the question is not, as it perhaps was last year, how we increase the wages of workers in an economy that is seemingly near full employment, but how we keep people in employment and support the process of work being carried on.
One of my questions, especially given the remarks just now about state aid, is whether this policy has been designed primarily for a different age—one in which state aid is driving what we are doing. Given that next year and moving forward we may have more flexibility about state aid, I wonder whether we should think about what we actually need this year and in the coming years, as we try to come out of these crises—both the health and financial ones—and design in a more integrated way not just this employment allowance policy but others relating to it.
Why are we focusing just on small business employment and not thinking about measures to support those in self-employment and freelance positions? Is there anything in this, or anything we can add to this, that would support the many freelancers out there—particularly in the light of the Government’s stance on IR35, which I am worried is slightly anti-entrepreneurship in its thinking?
While I welcome the measures to incentivise businesses to retain employees, I wonder whether we are limiting this, and whether our view of the world, which relies on millions of small businesses continuing to employ people, limits our ability to generate future employment through entrepreneurship and self-employment. Of course, we must not forget that much employment in this country is, for better or worse, with those larger businesses. My concern is that this measure, just at the time we need it, bypasses many of the larger employers out there, which literally right now are thinking about whether to keep on hundreds or thousands of employees.
Related to this question is the furlough. I am sure that there is, and will be, much debate and discussion about what we do with this quite expensive measure and how we avoid the cliff edge. I wonder whether the allowance—I would love to know what my noble friend the Minister and the Government are thinking on this—can be used to create financial incentives for employers to retain and even hire workers, at a time when we need people to carry on. Especially when restaurants and many businesses will be not full but empty, there will need to be some mechanism by which we enable people to continue to work and be supported, potentially financially, by the Government. I am not sure that the current furlough system—efficient as it has been built to be—necessarily solves this problem, because it will happen many months after the event. Could the employment allowance be redesigned and built into something that is more “business as usual”, using the systems that we have, to ensure that employers retain employees beyond the initial furlough?
I will make a final point about the general principle of charging NI. I know that, in previous years, there was discussion about merging our different taxes. NI seems a very obvious one. We ought to simplify the tax system and be honest with our citizens about what tax is being paid. There is a danger in using things such as this allowance on an ongoing basis in the long term: given all the allowances out there, it makes it even harder to unravel the system and make it simpler.
At the end of the day, if you level with people—whether they are freelancers, businesses or individuals—and tell them how much tax they owe, then try to simplify things to reduce the paperwork and the cost associated with collecting the tax, you may have a better system that will allow us to rebound as we move in to the next phase, with higher employment and fewer incentives to game the system. So, while this allowance is welcome to alleviate some of the pressures which employers are facing, do we now need to think bigger? This is not just about Covid and the immediate financial impact but how we can think longer-term about building a more resilient economy and a tax system that complements it. The crisis gives us a chance to think deeply, not just in a knee-jerk way, about what systems we need moving forward. What thinking—if any—has there been about simplifying the tax system and how does this work with it?
Finally, with Brexit coming, what are the plans to remove ourselves from the straitjacket of state aid? We are in emergency circumstances. Many countries around Europe are either not following the rules or have been given exemptions. Are we pursuing means by which our country can have greater flexibility to help our workforce and our businesses as we move forwards?
My Lords, I thank the Minister for her explanation of the regulations before the Virtual Proceeding today. Like the previous two speakers, I support the changes being made; they are a way of trying to incentivise business. However, I have a couple of questions for my noble friend about their potential impact on charities. Last Thursday, the House debated the impact of Covid-19 on the ability of charities to continue their valuable work. Noble Lords gave examples of how charities vary considerably —really widely—in their ability to gain funding, the number of their employees and volunteers, their turnover and in the specific area of activity that they focus on.
Large or small, they are all now facing huge financial losses incurred by the immediate loss of income during lockdown from charity shops and fundraising events. I do realise that the Government have already taken significant measures to reduce the impact of Covid-19 on the ability of charities to survive and function effectively, while also taking into consideration the wider financial consequences for the Treasury. My noble friend Lord Wei has just remarked on the fact that the proposals before us today were forecast in the Conservative Party manifesto, long before anybody thought that this appalling pandemic might be on its way.
As has been said already, these regulations increase the maximum amount of the employment allowance by £1,000 to £4,000. However, the regulations also change employment allowance rules in order to exclude employers whose national insurance contributions liability in the previous tax year was over £100,000. I note that the section “Impact on business including civil society organisations” does not refer to the possibility of losers among charities. Of course, regulations covering businesses cover charities. Do any of the larger charities in this country fall within the category of those organisations which will now be excluded from this new scheme by these regulations, having previously qualified? Did any charities take the opportunity to respond to the Government’s consultation, either directly or through a representative? If so, were those representations confidential or are they available for public view online?
I ask because the Government’s online section on this, headed “Detail of outcome”, is a very brief— I am being generous—three paragraphs, all of which are general in their comments. They do not mention charities, which is why I am pursuing this point. The change of course will be welcomed by those charities which qualify for this increase to £4,000. Have the Government calculated how many charities might benefit from that change?
I note that the consultation period on the regulations we are considering today was last summer, closing on
My noble friend will be aware that last month the OBR calculated that GDP would contract by up to 12.8% for this year as a whole, taking into account what we hope will be a bit of a bounce-back for the economy during the late summer and autumn. Accordingly, will the Government keep their position on the employment allowance regulations under review during the rest of this year, as the impact of Covid-19 on the economy becomes clearer and appropriate adjustments could be made?
I say that because I notice that in the explanation of the regulations it says, under “Monitoring and evaluation”:
“The measure will be monitored through information collected from receipts.”
It might also be valuable, therefore, to not only look at that but to receive further representations from charities which find themselves—unexpectedly now, perhaps—excluded from the opportunity to benefit from the regulations today. I look forward to my noble friend’s responses.
My Lords, as this is the first debate in which we have spoken together, I start by congratulating my noble friend Lady Penn on her appointment, and on starting her new career so well in the virtual Chamber. I must say that I cannot wait to be back on the red Benches, enjoying the repartee that makes Parliament famous everywhere—but every cloud has a silver lining.
I support these simple regulations. They increase the employment allowance paid without fuss through payroll software to businesses and charities which made employer national insurance contributions of less than £100,000 in the previous year. That, as we have heard, is up from £3,000 to £4,000. It is double what it was when the Conservatives introduced it in 2014, as my noble friend said. It is a targeted measure to help small business, the backbone of Britain, and small-scale civil society.
The Red Book for 2020 stated that it should help over 500,000 small operators, taking 65,000 out of employer contributions altogether—so less to pay and less red tape. HMRC research, which our wonderful Library unearthed in this lockdown, revealed that three out of four small employers who had claimed the allowance would recommend it to other employers. Even more importantly, as the economy recovers and small business eventually rebounds or new ones spring up, it would mean that a qualifying business could employ four full-time employees on the national living wage without paying employers’ national insurance. I note also, although it is not relevant to today’s debate, that there was a Budget commitment to introduce a national insurance holiday for employers of veterans in their first year.
On these occasions there is always some debate about those not covered by the allowance: bigger companies and charities, whose interests my noble friend Lady Anelay highlighted well; domestic and personal staff; and those operating under IR35 off-payroll-working rules. I am not going to carp about those, but I was pleased to see from yesterday’s committee report from the Deputy Speaker that the Economic Affairs Finance Bill Sub-Committee had concluded that IR35 had not worked properly throughout its 20-year history and that the Covid-19 deferral of plans to extend off-payroll changes to the private sector should be changed by legislation. I declare my interests in the register, in case businesses with which I am associated might benefit, but this seems to be a common-sense move—and, as my noble friend Lord Wei said, it must be entrepreneur-friendly.
The most important thing about the employment allowance is totemic: it backs small business and enterprise and keeps people working. Since 2010, that has been one of our greatest achievements. It has been particularly pleasing to see jobs created in the private sector bring dynamism and creativity, especially to sectors where we are strong, such as digital and tech, research-based start-ups, food and drink, entertainment and, of course, financial and business services.
To deal with Covid-19, the Chancellor has bravely introduced temporary support: furloughing, loans and his new bounce-back variant. However, I worry that millions of small businesses will be destroyed if we allow the lockdown to be extended for much longer. The Government’s messages, in creating fear, have been too successful. They urgently need to find the right language to explain to the British people that some risks must be taken with coronavirus if we are to head off a recession that will financially cripple the country for decades to come. It is no coincidence that there is no economist on the SAGE committee despite the impact of income and job loss on health and well-being.
May the employment allowance be a small flame of inspiration that we can build on as we work together to get out of the current crisis and as state rules become less bureaucratic and interfering when the Brexit transition period ends.
My Lords, unlike my noble friend Lord German and the other speakers this afternoon, I do not know a lot about tax—I did not even when I was an entrepreneur. I hope that the House will forgive me if I say anything that is uninformed or naive to the initiated.
I am afraid that I was unable to get through to the recommended Treasury helpline. Apparently, it is not functioning; perhaps that could be checked out. So, for help, I phoned a friend—Rick, an accountant—who gave me a stark account of what life is like for small businesses under lockdown. I will return to this later, if I may. On the positive side, Rick told me that the employment allowance has been a lifeline for many small businesses, and that many a sole trader has taken on their first member of staff as a result, so the increase in the allowance of £1,000 to £4,000 in the current financial year is very welcome indeed.
Employment allowance was first introduced in 2013 and has been increased several times since. As I understand it, however, in the summer 2018 Budget the allowance was removed from businesses with an NICs bill of more than £100,000. This was scheduled to commence in April 2020. Can the Minister confirm that while this year, most small businesses will pay £1,000 less in tax, larger businesses will pay £4,000 more than they otherwise would have? Does she think that now is a good time to remove this help, albeit that it will come as less of a blow than it would have to smaller businesses? I look forward to the Minister’s response to the question put by the noble Baroness, Lady Anelay, about how charities are going to be affected. The Minister said that the cost of the employment allowance will be £2.3 billion, but how much will the Government save by not paying the employment allowance to larger companies and, indeed, to charities?
My next question, which is probably a naive one, concerns which categories of organisation will receive the increased allowance and which will not. The Explanatory Notes refer to some employers,
“charities and community amateur sports clubs” being eligible. That strikes me as a bit odd. Community sports clubs are presumably constituted in a different way so that they do not fall into the same category as employers and charities. That is something I would really like to know the answer to, and prompts me to ask my next question. Are there other types of organisation paying NICs which will be excluded from the employment allowance? I appreciate that, knowledgeable as no doubt the Minister is, she is not a long way into what I am sure is going to be an excellent ministerial career and may not have the answers to all my questions at her fingertips. However, I would be grateful if she could write to me with her answers to anything that she cannot respond to today.
Finally, I want to return to my friend Rick and what he told me about the clients he had been ringing up to see how they have been faring during the pandemic. He said that owner-managers are faring the worst, principally because many of them have not qualified for the furlough scheme given that they are paid only through the profits they make. He said, “I feel like a doctor visiting an NHS ward full of terminally ill cancer patients and trying to assure them that they will be fine because help is on its way to save them, but knowing that it is not.” I believe that people should pay all their tax so I replied to him, “Well, they should have paid their NICs, shouldn’t they?” However, as a country we will be the poorer for it if we let these small businesses go to the wall. We will lose the VAT and corporation tax income they would have paid, not to mention the entrepreneurial jobs held by those who rely on them for their living, and of course who themselves pay tax. They will not be here to take risks and help drive the recovery. Will the Minister give some thought to this and speak to her friends and advisers in the Treasury to see whether anything can be done to help this category of entrepreneurs? We cannot afford to lose them simply because they chose the wrong category of employment status for themselves. Perhaps the Government can find some way of keeping them afloat.
My Lords, I thank the Minister for presenting the regulations and I can assure her that we on this side will not oppose them. However, they raise a number of interesting points. The noble Lord, Lord Wei, said that they will have an impact, but perhaps we should think about their impact in a more holistic way over the longer term, because a much bigger issue is the long-term effect of the coronavirus outbreak.
I am particularly concerned, as were the noble Baroness, Lady Burt, and the noble Lord, Lord Wei, about the impact on the hospitality and leisure sector. It is clear that it will be one of the last sectors to recover, but it plays an incredibly important role in our society. It creates good jobs and is a great source of pleasure for many people. It is therefore important that the Government bear the sector in mind and take a rounded approach. They need to make sure that the businesses operating in it do not go bust so that they can recover and thus provide pleasure for people, as well as employment.
I also regret that these regulations, which cost about £450 million per annum, come with no analysis of the benefits. I checked with the appropriate contact named in the Explanatory Memorandum and was assured that the Government do not have an estimate of how many employers might take on more staff because of this measure.
Finally, it seems to me that the scheme must have problems with respect to fraud. It is important that the Government have thought this through and have appropriate mechanisms to ensure that fraud is deterred. With those few comments, I repeat that I have no objection to these regulations and wish them well.
My Lords, I am very grateful for the consideration of these regulations and for the points noble Lords have raised. The noble Lord, Lord German, and my noble friend Lord Wei asked several questions on state aid. I can confirm that the majority of support announced by the Government in response to the coronavirus pandemic is not state aid and, specifically, the Coronavirus Job Retention Scheme is not state aid.
On exceeding the de minimis tax limit for state aid, we undertook consultations with external stakeholders, representatives and the devolved Administrations, and they provided no evidence to suggest that large numbers of agricultural businesses will lose access to the employment allowance because of state aid rules.
The bureaucracy of administering this allowance was also raised. I reassure noble Lords that the allowance will be applied automatically to businesses. The Government will write to those businesses to inform them that they have been in receipt of state aid.
There were also questions about the future of state aid more generally. I shall not go into huge detail in this debate, but the Government have negotiated a deal to exit the EU that includes the transition period we are currently in until December 2020, during which we must adhere to EU state aid rules. After that transition period, we will develop our own separate, independent policy of subsidy. We will have a modern system, supporting British businesses in a way that fulfils British interests.
On the restriction of this allowance to focus on small businesses and smaller employers, my noble friend Lady Anelay stressed that this impacts on charities as well as businesses. I can confirm that the net effect of the restriction to small businesses and the increased allowance is a more generous system. Our estimate is that it will be more generous by around £220 million per year. I reassure my noble friend Lady Anelay that 93% of eligible businesses, including charities, remain eligible for the employment allowance following the reform to restrict it to smaller businesses, organisations and employers.
I shall also address my noble friend’s broader point about the pandemic’s impact on charities. The restriction to the employment allowance announced in 2018 and the more generous increase in the allowance to which these regulations refer were announced before the full impact of the pandemic had been felt. Indeed, we still do not know what that full impact will be. We will continue to keep under review all the measures needed to support businesses and charities at this time. As my noble friend will know, we have announced a £750 million package of support specifically for charities during this pandemic.
Several noble Lords raised the question of the self-employed. The employment allowance is claimed against employers’ NICs only and the self-employed have no equivalent charge unless they have employees, in which case they can benefit in the same way as other employers. The self-employed also benefit from the increase to the personal allowance announced in the Budget and the increase in the NICs threshold.
Several noble Lords encouraged the Government to consider the debate in the context of the pandemic and its impact on jobs and livelihoods. The Government are considering that all the time. I thank my noble friend Lady Neville-Rolfe for her comments and agree that this increase will stand as a vital support for businesses as we pull together to recover from this crisis. It was not announced in that context in the Conservative Party manifesto, but the reason for this focus on smaller businesses and for the allowance increase is precisely to encourage small businesses and organisations to employ an additional or extra person; this is rather than targeting larger businesses, where the difference made would be smaller.
On my noble friend’s points on lockdown, our action plan to beat the pandemic is the right thing to do but we know people are worrying about their jobs and incomes. The Government’s strategy is to reduce the infection rate, ease the pressure on the NHS and save lives. The First Secretary announced on
I hope my response has addressed most of the points raised by noble Lords. If there are any that I have not addressed, I will, as the noble Baroness, Lady Burt, suggested, be very happy to write to noble Lords.
These regulations make important changes. Small businesses play a vital role in driving the economy and creating jobs. By increasing the employment allowance by one-third, these regulations increase by £1,000 the support such businesses are able to receive. They take a further 65,000 small businesses out of paying employer NICs entirely and provide an immediate benefit to over 500,000 businesses. I beg to move.
Virtual Proceeding suspended.