National Insurance Contributions Bill

– in a Public Bill Committee on 2nd December 2010.

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[Jim sheridan in the Chair]

Photo of Jim Sheridan Jim Sheridan Labour, Paisley and Renfrewshire North 1:00 pm, 2nd December 2010

Before we begin, I shall read out a brief introductory statement and make a few preliminary announcements.

Members, if they so wish, can remove their jackets during the Committee meetings. Would all Members please ensure that mobile phones, pagers, etc. are turned off, or switched to silent mode, during the Committee meetings?

As a general rule, I and my fellow Chairs do not intend to call starred amendments that have not been tabled with adequate notice. The required notice period in Public Bill Committees is three working days. Therefore, amendments should be tabled by the rise of the House on Monday for consideration on Thursday and by the rise of the House on Thursday for consideration on Tuesday.

Not everyone is familiar with the process of taking oral evidence in Public Bill Committees, so it might help if I briefly explain how we will proceed. The Committee will first be asked to consider a programme motion on the amendment paper, debate about which is limited to half an hour. We will then proceed to a motion to report written evidence and then to a motion to permit the Committee to deliberate in private in advance of the oral evidence sessions, which I hope we can take formally.

Assuming that the second of those motions has been agreed to, the Committee will then move into private session. Once the Committee has deliberated, the witnesses and members of the public will be invited back into the room, and our oral evidence session will begin. If the Committee agrees to the programme motion, the Committee will hear oral evidence this afternoon.

On the question of the programme motion, the amendments tabled in the name of the hon. Member for Scarborough and Whitby (Mr Goodwill) are intended to remove the names of organisations that are not able to send representatives. Since the amendments were tabled, two further witnesses have had to drop out because of the bad weather: Hampshire Chamber of Commerce, which was due to replace Southampton Chamber of Commerce in the original list; and the East London Small Business Centre. That leaves Wenta alone in the second panel.

Therefore, in order that amendment (b) on the amendment paper should reflect the current situation, I suggest that the Whip moves it in amended form—namely, leaving out Cambridgeshire Chamber of Commerce, Southampton Chamber of Commerce, Portsmouth Chamber of Commerce, London First and East London Small Business Centre.

Motion made, and Question proposed,

That—

TABLE

Date

Time

Witness

Thursday 2 December

Until no later than 2.30 pm

British Chamber of Commerce;

Federation of Small Businesses; London Councils

Thursday 2 December

Until no later than 3.30 pm

Cambridgeshire Chamber of Commerce; Southampton Chamber of Commerce; Portsmouth Chamber of Commerce; London First; East London Small Business Centre; Wenta

Thursday 2 December

Until no later than 4.00 pm

Treasury; HM Revenue and Customs

Amendment made: (a), in the table, in the third column, leave out “; London Councils”.—(Mr Goodwill.)

Amendment proposed: (b) in the table, in the third column, leave out

“Cambridgeshire Chamber of Commerce; Southampton Chamber of Commerce; Portsmouth Chamber of Commerce; London First; East London Small Business Centre;”.—(Mr Goodwill.)

Photo of David Hanson David Hanson Shadow Minister (Treasury)

May I welcome you to the Chair, Mr Sheridan? The Opposition are content with the proposed amendment.

Amendment agreed to.

Main Question, as amended, put and agreed to.

Ordered,

That—

TABLE

Date

Time

Witness

Thursday 2 December

Until no later than 2.30 pm

British Chamber of Commerce;

Federation of Small Businesses

Thursday 2 December

Until no later than 3.30 pm

Wenta

Thursday 2 December

Until no later than 4.00 pm

Treasury; HM Revenue and Customs

Resolved,

That, subject to the discretion of the Chair, any written evidence received by the Committee shall be reported to the House for publication.—(Mr Goodwill.)

Written evidence to be reported to the House

NI 01 Wenta

NI 02 Thames Gateway London Partnership

NI 03 Her Majesty’s Treasury

NI 04 East London Small Business Centre

NI 05 Hampshire Chamber of Commerce

Resolved,

That, at this and any subsequent meeting at which oral evidence is to be heard, the Committee shall sit in private until the witnesses are admitted.—(Mr Goodwill.)

The Committee deliberated in private.

On resuming—

Photo of Jim Sheridan Jim Sheridan Labour, Paisley and Renfrewshire North

Good afternoon. Thank you for coming along. We will now hear oral evidence from the British Chambers of Commerce and the Federation of Small Businesses. For the record, please introduce yourselves to the Committee.

Steve Hughes: I am Steve Hughes, and I am an economic adviser at the British Chambers of Commerce.

Priyen Patel: I am Priyen Patel, a policy adviser at the Federation of Small Businesses.

Photo of Jim Sheridan Jim Sheridan Labour, Paisley and Renfrewshire North

Before calling the first Member to ask a question, I remind all Members that questions should be limited to matters within the scope of the Bill and we must stick strictly to the timings of the programme motion that the Committee has agreed. I hope that I do not have to interrupt mid-sentence, but I will do so if need be.

Q 1

Photo of David Hanson David Hanson Shadow Minister (Treasury)

I welcome both witnesses to the Committee.

My opening question is to Mr Patel and Mr Hughes in turn. Do you feel that a payment holiday for new businesses and, generally, for businesses with fewer than 10 employees is a good idea?

Priyen Patel: The principle of the idea is to promote job creation in new, young and small enterprises. It is obviously a very good idea, and we supported it when it was announced by the Conservative party before the general election. In a perfect world we would have tweaked it and we would have probably gone a little further, which you would probably expect us to say. For the time we are in, and with the fiscal constraints that the Treasury is working under, we think the Bill is very good. The principle of the idea is very good.

Steve Hughes: There is not much to add to that. If you are in a situation in which you are trying to engender a culture of employment, you have to look at ideas that are, in essence, a little experimental and perhaps more radical than normal. There are, as Priyen said, issues surrounding the establishment of businesses, the age of businesses the scheme applies to and also the geographical areas it applies to. The fundamental principle of trying to encourage employment among our businesses is a good one.

Q 2

Photo of David Hanson David Hanson Shadow Minister (Treasury)

Do you have a view as to whether the absence of London, the south-east and the eastern region is positive or detrimental to the overall acceptability of the scheme and the positive nature of the scheme that you have expressed for both your organisations?

Priyen Patel: As I said, in a perfect world we would have liked this policy to be applied to all of the UK, including the south-west, the east of England and London, because there are pockets within those regions that obviously have high unemployment, or could do with a boost to the private sector. Secondly, we would have gone a little bit further and seen what the capability and capacity was to extend it to microbusinesses, businesses that are currently trading, and may have experience of hiring and are in the marketplace at the moment. But that is in a perfect world. At the moment is it detrimental to those areas? I am not sure it is, but in a perfect world it would obviously be very beneficial if it had been rolled out to those three excluded areas.

Steve Hughes: The fiscal impact of the measure is the crux of the problem. If you extend it to those regions, there is a fiscal impact of around £650 million. The problem associated with any area of policy is that we have to keep a tight rein on these things at the moment. It is all very well saying £650 million here or another policy area taking a fiscal impact of another few million pounds there, but given the situation with the deficit and certainly the approach adopted by the coalition Government, these are the regions that can better absorb economic shocks, have greater economic activity and greater capacity for private sector employment, so it seems natural that if any areas were to be excluded it would be those.

Q 3

Photo of David Hanson David Hanson Shadow Minister (Treasury)

The Government have argued that this scheme is to support areas where there are high levels of public sector employment that will be hit by redundancies and job losses. Statistics show that 23 of the top 100 constituencies for public sector employment are in London, the south-east and east. How do you think your members in those areas will react when they are defined, according to the Government’s own definition, as a high public sector area yet they will not be able to apply to a scheme that will help with deprivation and advance the Government’s stated objective. Do you have any views on that?

Steve Hughes: Yes, certainly. We can all point to areas where there are higher levels of public sector employment and where the scheme does not apply. In policy terms context is everything and if you look at the regions outside the south-east, the eastern region and London, those are the areas that are most dependent on public sector money, first and foremost. It is not just about the narrow definition of pure employment. The figures for the contribution to gross value added in those areas of public sector employment to which the scheme applies are much higher than in the three regions that are exempted.

Priyen Patel: I would just add one point. Our members, and Steve’s members too, do not define themselves as a business in a certain area. They define themselves as businesses that are providing goods to their marketplace, essentially. Their marketplace could be in one area. It could be in one region. It could be in one constituency. But for many businesses, their market footprint is actually quite large and will cover perhaps two or three regions and numerous constituencies.

Q 4

Photo of David Hanson David Hanson Shadow Minister (Treasury)

Do you have any view as to the competitive nature of the proposal in relation to those regions, particularly on the borders of regions where there could be companies on one side of the border that qualify and companies on the other that do not but which are operating in the same market?

Steve Hughes: I think there is a potential behavioural effect. Ultimately the policy is in part experimental. When the Treasury comes to analyse what happened with the policy and the jobs it created and its behavioural effects, that is something that clearly needs to be looked at. There are competition issues around that. We fully recognise that there is a potential issue around whether companies locate in a certain area rather than another because of the holiday. But again it is about the not easy decision of cost versus benefit. You may have to take as part of the policy cost potential competition issues at a local, sub-regional level.

Priyen Patel: It will obviously have some behavioural impact on people who are looking to start up a business and looking to employ people almost from the first day. The other thing businesses will look at when they are looking to start up a business is where they can start up—where they should start up. That could be infrastructure or a skills base. This obviously provides an incentive for them to start up a business that will employ people very quickly, in a certain area or not in a certain area.

Businesses tend to employ people when there is added demand to the company—when invoices are becoming greater in volume and when they are looking to expand. That is obviously something that will provide a fiscal incentive, but it is a fiscal incentive that is, as Steve has mentioned, quite experimental. I do not know of any other tax, or incentive in the form of tax, that is regionally based. Most taxes cover most of the country. It is an interesting experiment, but I think it will have some behavioural impact on businesses.

Q 5

Photo of David Hanson David Hanson Shadow Minister (Treasury)

Just one final question from me, because I know that other colleagues want to come in. Do you have any current awareness of the total amount of resource the Government have put into the scheme for your members as a whole? I am interested in whether, if you had that awareness, you would use that resource in a different way to help support your members.

Priyen Patel: By resource do you mean just money?

Q 6

Photo of David Hanson David Hanson Shadow Minister (Treasury)

The scheme will cost an amount of money; the Government have estimated between about £900 million and £1 billion. The potential amendments that we have included could increase the resource and divide it in different ways. If that resource was available to you to plan for supporting small businesses and chambers of commerce generally, would you would think of using it in a different way?

Priyen Patel: I think that £900 million would be a good amount to give. Looking at a policy such as this, we might have looked at reducing the number from 10 to maybe five, and then stipulating that for businesses that are already in existence—maybe for just a number of years—the next three employees or the first three employees they hire would also receive this type of help. The principles are still the same; it is just a little tweak to the policy. That is the only difference I would make.

Q 7

Photo of David Hanson David Hanson Shadow Minister (Treasury)

Just out of interest, have you made any representations to the Government in the development of the scheme about those issues? Have you put them on the table?

Priyen Patel: Before the general election we spoke to advisers and shadow Ministers. Afterwards we did the same, and we have spoken to a Treasury official about it as well.

Q 8

Photo of Mel Stride Mel Stride Conservative, Central Devon

May I clarify something that I think you both said earlier? You recognised that to roll the scheme out to the other three regions, which are currently proposed to be exempted, would cost about £650 million out of a scheme that will cost about £940 million in total. Are you saying that in your view, taking into account the fact that we have to get the deficit down and the needs of those three regions, it would not be a good idea to spend that additional £650 million in that way?

Steve Hughes: I would return to what I touched on earlier, which was essentially that if you, as a representative group such as we are, talk to civil servants and officials about policy implementation that costs money the question now comes back—quite rightly so—“How are you going to pay for it?” If we were to use that £650 million for this scheme, it would not be available for possible infrastructure spending, capital spending or other elements of the business policy world that we see as vital and as part of the package that will help economic recovery. Again, it goes back to the point that, taking the behavioural effects of the boundaries of the exemption into account and looking at household spending statistics, birth and death rates and the business statistics that were released yesterday, those three regions were historically, and still are, the main drivers of UK growth. They will be able to absorb economic shocks in a more robust manner than the other regions, which are more dependent on public sector spending, and they will continue to do so. They will drive recovery and drive out of the recession or downturn quicker than those other regions. When there are limited resources, it is better to focus them on the regions most in need.

Priyen Patel: I do not have a great deal to add to what Steve has said. As you can imagine, all businesses—small, medium or large and wherever they are based—are competitive by nature. Business people are like that. If a business is based in London or the south-east and a policy like this is presented to them, the first two questions they will ask are, “Why am I not eligible?” and, “Why is my region not eligible?” As Steve said, GVA records and historical factors show that private sector growth and drivers in these areas are quite strong. The principle behind the Bill is obviously to boost private sector economic activity in the other regions.

Q 9

Photo of Mel Stride Mel Stride Conservative, Central Devon

The national insurance holiday is basically permissive, in a sense, rather than prescriptive. In other words, companies have to actively apply for it, rather than being given it when they set up, which then brings into play this whole issue of how it is advertised and marketed as a scheme. My concern, or one of the concerns that I might have, is that we don’t get the message out effectively, so I would very much value comments from both of you on how you think we should ensure that new start-ups are very aware of what is on offer here.

Steve Hughes: It is a very important point. I can point to examples throughout the stimulus package where recession-specific measures such as the enterprise finance guarantee and the trade credit insurance scheme were potentially—certainly in their infancy as a policy—not necessarily as successful as they could be, because of the communication of their availability to the business community.

I can give you other examples as well. We sent in freedom of information requests about national minimum wage advertisements for the change in its rate, and, in 2008-09, £874,000 was spent on advertising to the business community the national minimum wage uprating. Last year, it was £850,000. So far, there has been no resource allocated to change for next year. In the fiscal environment, there is a question of how much money is dedicated to ensuring that the business community is aware of that. It is not just about resource from central Government; representative bodies also have a responsibility to highlight these changes, as do things like Business Link and the end of the regional development agencies and the creation of the local enterprise partnerships. It is through all those channels that it has to be communicated.

I have seen Government policies where those channels haven’t necessarily been utilised, but if the Government want to get the most out of it, you properly use every available resource to ensure that the business community, and certainly those who are just starting up, know about it.

Q 10

Photo of Mel Stride Mel Stride Conservative, Central Devon

On that point, do you think that using LEPs—they are emerging now—Business Link, and so on is a good enough channel to get the message out? Or do you sense that there is something wider that needs to be done here?

Steve Hughes: On LEPs, possibly not, because they’ve only just been created. They’re only just getting into how they’re going to be organised, meet and operate after their bids have been accepted, so, given that this policy is already in play, perhaps they will be the perfect vehicle to advertise it in a year’s time, but certainly not now.

Priyen Patel: I have one thing to add to that. I have examples, and I’m sure that Steve has examples as well, of businesses that have started up since the emergency Budget—I can think of one that has even employed someone—but had no idea of this policy until I proactively told them. I’m sure that there are numerous cases of that.

The promotion of this scheme is vital. I checked on the HMRC website this morning, and there is a little box right down in the corner, which you have to scroll all the way down to find, but it doesn’t actually say what it is. You click on it, and then you have to go through a whole process. It needs to be promoted, because it is good policy, and, as Steve said, LEPs probably aren’t the place for this to be looked at—local authorities, perhaps. It is up to the Treasury to be creative and innovative in a tight fiscal environment, and to ensure that small businesses, or new businesses, look at the scheme. For example, 72% of our members use accountants. They start talking to accountants almost from day one. Perhaps the Treasury should start looking at accountancy, trade bodies, or the ongoing training that accountants do to plug the scheme.

Q 11

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Thank you for your comments so far. I am interested in picking up the question about the awareness of the scheme among potential new businesses. I would normally ask whether any of your existing members had made inquiries with you, but I assume not because new businesses would not yet be your members. Would it be a good idea to require all communication, literature, websites, mailings or whatever, that HMRC has with new business start-ups to have a clearly marked section or a link to a website to market and promote the scheme?

Steve Hughes: Obviously, in the interface between HMRC and businesses, as Priyen said, quite a lot of the time it is between accountants acting as agents of behalf of businesses, and HMRC. The message should be getting to them anyway. I can give another example of the way in which a recession-specific scheme has benefitted businesses. The time to pay scheme was well advertised through HMRC. It was an existing scheme, but it was beefed up in a time of tight credit and many more businesses utilised it as a result. HMRC is the perfect vehicle for that.

Priyen Patel: HMRC sends a lot of information to people who are HMRC-bound, whether that is through employment, through changes, through CD-ROMs and all the rest. It is not about an increase in the number of letters from HMRC, because those mailshots probably cost a lot of money. It is about utilising the mailing and information that HMRC proactively sends out, to ensure that the scheme is actively and thoroughly promoted.

Q 12

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I do not know whether sufficient thought has been given to the design of the scheme and its promulgation to make people aware of it. You made a point about minimum wage advertising, and I do not know whether enough has been put into that. Have you seen the suggestion in the regulatory impact assessment that apparently 240 HMRC staff are to be dedicated to the promotion and administration of the scheme? Do you have a sense of whether that is sufficient or whether, in your experience, getting through to HMRC and getting information for your members has always been sweetness and light and straightforward? Have there been difficulties for your members in the past with similar schemes?

Steve Hughes: In terms of the 240 staff and the impact assessment, as I understood, that was not broken down into how much will be in stakeholder engagement, as opposed to the general administration of the scheme’s operation. Certainly, the principal Government Departments that we work with, such as the Government Equalities Office, the Department for Business, Innovation and Skills, the Treasury and HMRC, have stakeholder engagement. They have specialists and people whose job it is to engage with the business community and get things out there. Some of those stakeholder engagement functions are naturally more effective than others, and it requires leadership from those Departments that sponsor them, such as HMRC, to ensure that the message gets out.

Q 13

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Would your organisations be willing to be contracted to do some of that marketing and promulgation?

Q 14

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Do you think the NI holiday proposal will create jobs? Economists talk about the dead-weight cost of money that will go into business, which would have already created those jobs anyway. Will it create extra employment?

Steve Hughes: I think that there are two elements to that. The first, in one sense, relates to the 800,000 people in the impact assessment to whom it would apply. Even the businesses that take on those 800,000 people will have extra resource to allocate how they wish as a start-up company, which could be for investing, advertising, marketing or whatever they want. That is a fundamentally good principle to follow for a start-up business, allowing it to have the freedom to do that.

Whether it will create new jobs is a difficult question. I have no doubt that some start-ups will be incentivised to take on people, and the national insurance holiday will be one of a number of factors that a business start-up uses in trying to take on staff. So, it is difficult to say whether it will on its own, but it will certainly contribute to a beneficial outcome for the employment market.

Priyen Patel: Before the election, when the previous Government were going to put national insurance up by 1%, we calculated that that would cost 57,000 jobs. So, it has a negative impact. We also asked before the election, “What trigger points would lead to an extra employee?” We did not ask, “What would you like as an everyday cut in a rate, or investment in something?” but “What would actually trigger you to employ someone?” Some 60% said that a cut in employee costs would incentivise them to take on employees. However, it is important to remember that businesses will not employ someone for the sake of it; there has to be that demand, extra invoices, and extra orders coming into the business for it to go and get someone.

Q 15

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Would it be a more flexible design of a scheme if, rather than accounting for even the person on the smallest number of part-time hours, businesses were allowed to aggregate somehow to allow the full-time equivalent? So, essentially, they would not be penalised for having lots of part-timers. Obviously, new start-ups will not necessarily take on full-time staff straight away, but they might lose out on some of the NI holiday relief, simply by virtue of having part-timers. Do you think that there should be a proposal that would allow the full-time equivalent in aggregation to count, in order to maximise the relief?

Priyen Patel: Yes is my answer, but I can understand the complexity for both the applicant—the business—and HMRC. If that can be overcome, yes, it should be, because head count is what really matters. However, I can envisage there being quite a lot of complication in doing that.

Steve Hughes: I would echo that. Compliance costs of dealing with tax affairs takes time away from core business activity and if, as you outlined, that could be designed in such a way to cope with that issue, it could be an option.

Q 16

Photo of Matthew Hancock Matthew Hancock Conservative, West Suffolk

Does the fact that this scheme is designed to apply to new businesses mean that communicating it—and, I think we all agree that communicating this is an important part—would, in a sense, be easier? That is because when a new business comes to interact with the tax system for the first time, the scheme applies, which is rather unlike the minimum wage legislation, where you have to talk to existing businesses that have already been implementing the bureaucracy in a certain way. The first time a business asks, “How do I have to comply with the tax system?” is the point at which the Bill will have an impact on it.

Steve Hughes: First, not all start-ups will be people entering the business world for the first time. People may have preconceived ideas because of how they have set up previous businesses, and they may try to apply them. There is a different make-up of the base of the start-ups that exist in the UK, but I agree that there is potential for the lines of communication to be easier if those businesses are going to Business Link, for example, and that kind of thing. Then again, that all depends on the quality of advice that is given.

One of the problems with the enterprise finance guarantee was that the communication down through bank hierarchies was not as good as it should have been, so business advisers with the banks did not necessarily have the information to give to businesses on the option of that scheme. Therefore, if the Business Link representative or other representative does not have the knowledge of the scheme, the interaction will not work.

Priyen Patel: It is that point of HMRC being a bit creative with this, because targeting existing businesses is not easy, but it is easier than targeting those businesses that have just started, or are in the process of starting. Looking at current Government policy, one of the new initiatives is the mentoring scheme. Have HMRC and BIS been communicating about that? As Steve mentioned, banks are a port of call when a business starts up. The business goes to a bank and it usually gets the small and medium-sized enterprises start-up box. The question is what communication has happened between HMRC and the banks within that box, to ensure that that information covers the initiative as well.

Q 17

Photo of Matthew Hancock Matthew Hancock Conservative, West Suffolk

My other question is on the savings on administration. Both of you have mentioned how complex it is to comply with the tax regime. Have you made any estimates of the positive impact that this will have in terms of reduced bureaucracy for start-up companies? I appreciate that they will still have to pay some taxes.

Priyen Patel: We have not done any analysis yet.

Steve Hughes: In terms of the cost of compliance, it relates to different elements, such as familiarisation with the scheme and making deductions separately from what they would normally do for NI anyway. There is an administrative burden for those companies. Obviously, when they come to research the scheme and decide whether to apply for it, that time constraint will factor into their decision.

Q 18

Photo of Matthew Hancock Matthew Hancock Conservative, West Suffolk

So you do not think that it will make it easier for new businesses to comply with the tax system, because this is one less tax that they will have to comply with.

Steve Hughes: No. Ultimately, you have a situation where there are so many different reliefs and allowances that, if you are a start-up business, you will still have to learn about compliance with the tax system. You may have payroll software that does it for you, but as Priyen said, if you are a start-up you generally have an accountant who should be able to do it for you.

Q 19

Photo of Gavin Shuker Gavin Shuker Labour, Luton South

Mr Patel, you said that the previous plans before the election would have cost 57,000 jobs. Do you have that information by region?

Priyen Patel: We have that information by turnover of business, and I think that we have it by region—yes, we do.

Q 20

Photo of Gavin Shuker Gavin Shuker Labour, Luton South

Okay. How many jobs would this cost in the east, the south-east and London?

Priyen Patel: I can provide that data back to the Committee.

Q 21

Photo of Gavin Shuker Gavin Shuker Labour, Luton South

But you would accept that it is a proportion of that 57,000?

Priyen Patel: Yes, it is. That information, however, was based on a 1% increase in NICs, not on any other policy.

Q 22

Photo of Gavin Shuker Gavin Shuker Labour, Luton South

Would you accept that this policy would be detrimental to new businesses starting up in the east, the south-east and London?

Priyen Patel: It would not be detrimental, because they are not losing anything. It would obviously impact on a business when it is starting up, and when it is looking at employing its first person. It would have a behavioural impact on where it locates and what employment intentions it has. It comes back to the point that this proposal could be for £5,000 or £15,000, but the business will only employ someone if there is demand. You can incentivise quite a lot, and that will have an impact on employment intentions, but the biggest driver to employment—or loss of employment—is business activity and demand coming into the business. When demand drops off, that has an impact on employment intentions.

Steve Hughes: In terms of firms being at a disadvantage and the exempted areas, I go to chambers of commerce all over the country, and given the make-up of the businesses that I see operating in those communities, I struggle to see necessarily how the holiday as designed will act to put one firm at a massive competitive advantage over another. That is unless, as we say, those effects become more concentrated and acute as you get closer to the boundaries, as I imagine they would.

Q 23

Photo of Gavin Shuker Gavin Shuker Labour, Luton South

Assuming that the whole country cannot benefit from a blanket holiday, at what level should the exemption apply? Should it be at regional level, LEP level, constituency level or local authority level?

Priyen Patel: As I have said, I do not know of any other fiscal measure that is broken down in this way—in the old RDA way, if you like. It is quite an experiment, and I am not sure whether we would want to go a step further without looking, perhaps a year or two years into this, at what the uptake and the usage are and at what the advantages or comparative disadvantages have been to businesses in the area and outside it. Would I  want it to go below hand? I will take the chicken’s answer and reserve my judgment until this is a couple of years in.

Steve Hughes: Yes, my view is pretty similar. As we keep saying, this is setting a new precedent in terms of regional policy in a sense. If you are going to try to foster growth and to rebalance—that is obviously a bit of a buzz word at the minute—towards those regions that struggle in comparison with the ones that are exempted, you have to come up with ever-more radical policies, which may require differentiation in fiscal policy and other policies, such as regulatory policy.

Q 24

Photo of Gavin Shuker Gavin Shuker Labour, Luton South

Do you think that all the measures before us will have a significant effect in terms of rebalancing the economy in areas with high public sector employment?

Steve Hughes: I can answer that. I think that this is one of a number of measures that need to be taken. If you take it in the context of, say, things such as corporation tax reform, an essentially pro-business message is being given out. Possibly, we need to go further and to look at exemptions on elements of the regulatory regime—planning, for example. We could look at new-generation enterprise zones in areas that struggle to generate private sector employment. That is why I go back to what I said before, which is that when you talk about rebalancing, it has to be ever-more radical; there is not necessarily an easy answer under existing policy mechanisms.

Priyen Patel: Hopefully, that will lead to the Treasury and the Government as a whole becoming slightly more creative and slightly more innovative in policy making. One thing that the Prime Minister before the election said when he visited Northern Ireland was that we could look at making it an enterprise zone. That would obviously imply different criteria for regulation, planning, the tax regime and perhaps capital investment, which would be slightly different from other regions of the UK. This is a creative policy, and being a bit creative, without being too creative, let us say, is welcomed, but because it is very new and very different, it needs some analysis after it has had some run.

Q 25

Photo of Gavin Shuker Gavin Shuker Labour, Luton South

Are you confident from what you have heard from the Government and from your previous experience of other schemes that we have seen in recent years that there will be effective analysis of the data as the scheme goes through?

Steve Hughes: I have worked on regulation policy for quite a while now, and something called post-implementation review is not necessarily carried out as a matter of course by Government Departments when it should be. There needs to be more robust implementation of that approach of analysing policy, its suitability, how it can be developed and how it can go forward. Without that, what is the point really? The whole point of the impact assessment process in the first place is to ascertain the cost and benefit of each policy. Again, we are going slightly blind into this because it is unprecedented, so it obviously requires some analysis.

Priyen Patel: As I said, we need analysis—probably quite a lot of analysis—a year or two years into the scheme. In a meeting that I had, a Treasury official, who I think is sitting somewhere behind me, said that they will be looking at this a year in. We will be doing an  independent piece of research looking at this—probably a year from now as well—to see what the uptake has been and what the advantages and disadvantages have been, and we will share that with the Treasury. Hopefully, they will be doing the same.

Q 26

Photo of Gavin Shuker Gavin Shuker Labour, Luton South

Finally, it sounds from your answers as if you believe that these initiatives can be welcomed, but will not make a significant difference to rebalancing the economy in the affected areas.

Priyen Patel: One policy on its own is never going to do that. There needs to be a package of policies. As Steve mentioned, there needs to be capital investment and work on regulation and planning. The fiscal policy regime is obviously very important as well. It is a package, and in his autumn statement, the Chancellor announced that he would go away and look at the other barriers to growth and what incentives and measures can be taken. That is very welcome. It is a package; it cannot be one policy on its own.

Q 27

Photo of Mel Stride Mel Stride Conservative, Central Devon

I want to go back to the issue of the potential complexity of the scheme’s administration for employers that take it up. The impact assessment suggests there will be £75 million of cost across the companies that might be expected to take this up. Do you feel that, in the context of the various things that companies are doing in terms of tax administration, and so on, this is potentially a highly administratively onerous scheme? Or is it at a low level? Where would you place it? To the extent that it is onerous, how might it be made less so?

Priyen Patel: I can understand from businesses’ point of view that they would probably want this policy done automatically. A business takes on a member of staff, puts their files into HMRC and it is done magically by HMRC. I can understand why that cannot be done and why the complexity for HMRC would be too great—the costs for HMRC would probably be too great. On a scale of other things compared with this, I do not see it being overly burdensome to a business. There are certainly other things that are much more burdensome.

Steve Hughes: Businesses will take the administrative burden into account when they decide whether to adopt the scheme. I cannot see that burden acting as a disincentive to companies.

Priyen Patel: I should have mentioned one other thing, which is the retention of records from previous years. Most businesses would, I hope, do that anyway, and their accountants would ensure that such systems are in place. If it leads to businesses having to keep records on file or on computer, it is good business practice, even though it may be a slight burden.

Q 28

Photo of Mel Stride Mel Stride Conservative, Central Devon

As I understand it, the Bill creates a need for employers to establish that there is no contravention of EU regulations in terms of regional subsidies being applied. No company is allowed to have more than £200,000 over a three-year period as a result of being in one region rather than another. Can you comment on that? Do you think many companies will be caught up in that? Do you think it is something that all companies will have to think about and, therefore, will be onerous in terms of the administration?

Priyen Patel: In terms of EU state aid rules, £200,000 would be a huge amount for a business to receive, especially a new business, unless it was getting a huge  sum from another Government-funded source. I do not think that it will be a problem for many businesses. Many businesses will not know about it, so they will do what they are doing and, at some point, will be told, “You can’t have this for X reason.” It is a lot of money—so much that I do not think the rule will affect many small businesses in this scheme.

Q 29

Photo of Mel Stride Mel Stride Conservative, Central Devon

Do you suspect that it may be a sort of tick-box form that states that such businesses do not need that particular scenario?

Priyen Patel: Yes.

Q 30

Photo of Richard Harrington Richard Harrington Conservative, Watford

I am sure that hon. Members on both sides of this table would agree that both of your organisations help business a lot, and they also help us, in Parliament and in our constituencies, to understand small businesses. I refer to those of us who have not spent most of our career in business—I have, by the way.

Would I be fair in summarising both of your positions on the national insurance holiday as thinking that it is a good thing, which would provide a boost in certain regions, but that for someone wanting to set up a small business, it would be just one of a number of factors? Those include rent, business rates—a huge burden on anyone considering opening a shop or any other form of business—national insurance, income tax, corporation tax and a whole series of taxes and obstacles to business. Is it your view that the national insurance holiday would be only a small part of the total decision—not a fundamental consideration—for somebody looking to set up a business? So in an area that does not have it—which would include my constituency, because it is in the eastern region—it will not have the effect of making people decide not to set up a business.

Steve Hughes: Principally, the policy is about employment, not necessarily start-up. If you are going to start a business, I do not think that it will come into the equation. If you are thinking about taking on your first member of staff, however, then it will come into play. As you rightly say, it will be within the context of other matters such as employment regulation, the tax system and so on.

Q 31

Photo of Richard Harrington Richard Harrington Conservative, Watford

Obviously, I hope that, in the future, significant reductions in other taxes and bureaucracy will be a major boost to small businesses.

The hon. Member for Luton South asked you several questions, and you mentioned the modelling that you have done of the number of jobs—I think it was 57,000 or 53,000—that would have been lost under the employer tax regime as proposed by the previous Government. I understand how you can model that from existing businesses, but the hon. Gentleman went on to ask you whether you could model the number of jobs that would be lost in regions that did not have the new national insurance holiday—the east and London, for example. I cannot see how that would work, because it is trying to predict who would not set up new businesses. You kindly offered to send him the figures, but I do not understand how you could do that—[Interruption.]

Photo of Jim Sheridan Jim Sheridan Labour, Paisley and Renfrewshire North

Order. Mobile phones are interfering with the sound. They may be on silent, but please take them away from the microphone.

Priyen Patel: The research that we did before the election was on the 1% rise in national insurance contributions: it was not on this policy. We found that 57,000 jobs would be lost in the SME sector from the 1% rise. We have not done any modelling on this issue, but we have done work that shows that it would have an impact on the behaviour of businesses in those regions that do not have it—where they start up and what their employment intentions are.

In answer to your first question, we do think that it is a good thing, but hopefully as part of a package of policies that reduces regulation and tax burdens and looks at other key areas such as infrastructure, broadband and business rates. All those things have an impact on what a business does and where. The most important thing is where the demand is, and where the marketplace for that business is. The business will want to be as close to that demand and marketplace as possible.

Q 32

Photo of Andrew Bingham Andrew Bingham Conservative, High Peak

You said earlier that business would only employ on demand, and that you do not actually think this would make them employ somebody. Have you not had any feedback from members suggesting that if it was a marginal decision as to whether they would employ somebody or not, this would give them the little bit extra that would make them employ somebody—for instance, if a new business wanted to employ a new salesman or wanted to expand?

Priyen Patel: It is what I call the trigger moment. What would trigger somebody to employ someone? This would do that, but only if there is a business return on that employment. You have mentioned a salesperson: a business may benefit from paying up to £5,000 less NICs on the cost of that employee, but will that employee bring something to the game? If it is a salesperson, will they make that £5,000 plus whatever the average sales return is for salespeople in that business? It is a trigger moment of sorts, but the main issue is demand. If the business sees a demand and wants to tap into it—and employ someone to do that or to help that business—the NICs holiday will help them.

Q 33

Photo of Andrew Bingham Andrew Bingham Conservative, High Peak

Yes, that is exactly what I mean—a trigger. We are talking about getting the message out, which a few of us are concerned about. I am not sure how closely your organisations work with smaller accountants. Business start-ups do not go to the big boys—the PKFs of this world—but to Mr Bloggs accountants in the high street, and they are the key people to get this message across. As someone said earlier, the first person every new business probably needs, apart from a sympathetic bank manager, is an accountant. Do you work closely with accountants in your organisations to make them the message carriers?

Steve Hughes: From the chambers of commerce point of view, we have accountants within our membership. We have close links to the accountancy bodies as well.

I would like to make a further point on this. I talked earlier about the communication and stakeholder engagement through Departments and people dedicated to that. I do not understand how it can be so difficult for them to get this message out. From my point of view, you just take a blanket approach. There are lines of communication and you can go through trade bodies  and through Government bodies. All you have to do is have somebody sorting it out, but somehow that gets lost along the way in certain policy implementation.

Q 34

Photo of Andrew Bingham Andrew Bingham Conservative, High Peak

I take your point, but a micro-business—as they are called now—may not have time to read the trade press and so on. The two people they always see are the bank manager and the accountant, who is often part of a small business himself.

Steve Hughes: Fair point. What I am talking about is getting that message to the accountants and through the banks as they are the people those small businesses interact with first.

Q 35

Photo of Heidi Alexander Heidi Alexander Labour, Lewisham East

I have a brief question relating to survival rates of small businesses. My constituency in south-east London has a higher than average number of firms going out of business within the first year or the first two to three years. What information do you have about regional variations in survival rates and how do you assess the exclusion of London, the south-east and the east from the proposals? Do you see connections between this national insurance holiday and survival rates?

Steve Hughes: I would not say that there was initially too much of a relationship between the two. Ultimately, if a business sets up in an excluded area and does not survive its first two years, the maximum that it could claim over the first year would be £50,000. Would that £50,000 really put it out of business? I do not think so.

Priyen Patel: I agree. I do not see a relationship between the two. I would echo what Steve says.

Steve Hughes: In addition, if a business is failing, why would it take on 10 people anyway?

Q 36

Photo of Heidi Alexander Heidi Alexander Labour, Lewisham East

I would not have thought that those businesses would necessarily be employing 10 people in their first couple of years. But I know how close to the breadline very small businesses in parts of London can be when they are setting up. I also recognised what the chairman of the Federation of Small Businesses said previously about many businesses in the south-east working below capacity—which was what was driving my question—and the calculations that businesses make about whether they can continue. I just wondered whether the national insurance holiday would have some effect.

Priyen Patel: John was talking about businesses running under capacity, and we have noticed nationwide that businesses have been running under capacity for the last three, maybe four quarters or so. But that is existing businesses. To use the same statistics for new businesses is probably quite dangerous. I keep going back to the point that a business will know it is in danger if demand just is not there. That is the most important thing.

Q 37

Photo of Heidi Alexander Heidi Alexander Labour, Lewisham East

But surely new businesses become existing businesses at some point?

Priyen Patel: Yes, but the work that we have done on businesses running under capacity was primarily on existing businesses, not on just new and very young businesses, which I assume would have different statistical results. I cannot say that they would be different, but I cannot guarantee that they would be the same.

Q 38

Photo of Kelvin Hopkins Kelvin Hopkins Labour, Luton North

You have heard from my colleague, my hon. Friend the Member for Luton South, about Luton being a special case. It is an area that has significant economic difficulties in a region that is relatively prosperous, so the boundary problem affects us.

I am more concerned about the point that you made earlier about demand and that what really matters, above all, is the level of demand for the services from small businesses. They depend on individual consumers, other larger companies and, indeed, the public sector for their demand. They are all going to be cut and, as of yesterday, I understand, bankruptcies are up and consumption is down, and you will be much more savagely affected by that than can be compensated for by marginal changes in the tax regime. Is that a fair assessment?

Priyen Patel: The reduction in demand energies of the public sector will obviously have an impact on businesses. There is no doubt about that. Where this policy could come in is in helping a business that already has an employment structure or plan to take somebody on and maybe cushion a loss in demand for a short period of time. That is quite a dangerous business plan to lead on, because you are taking somebody on who may not be as productive, in terms of achieving demand levels, as other employees would have been in the past.

It is important that, where demand or invoices from all sorts of places reduce, businesses look at where else they may go, what else can they do and at diversification. That is the key thing for most of our members, which are small and predominantly micro businesses. A lot of our members don’t have regular contracts with big Government Departments or big local public agencies—a lot of it is business to business—but a proportion will be dealing in one-off contracts with the local primary care trust, the local authority, fire brigade or whomever.

Q 39

Photo of Kelvin Hopkins Kelvin Hopkins Labour, Luton North

Would it help if whatever scheme is put in place was better targeted? Rather than on a simple regional basis, it could be targeted, perhaps, on a local authority basis, so that somewhere like Luton could be more fairly treated, and a more prosperous area of the south-east—the Surrey heartlands or whatever—would not get the same cash benefit.

Steve Hughes: Where do you draw the line, though? As I said before, we can all point to areas within these regions that suffer from higher rates of unemployment and that are more reliant on the public sector than those areas that are included within the scheme. Ultimately, all you do by trying to drill down into those areas in the exempted regions is increase the complexity of the scheme. I know it is not necessarily ideal, but the straightforward nature of the scheme in the regions where it exists far outweighs the complexity of implementing it at a very targeted sub-regional level.

Q 40

Photo of Kelvin Hopkins Kelvin Hopkins Labour, Luton North

In the 1970s, and possibly before, Labour Governments had much more substantial and generously funded regional policies than have existed ever since. Is it not in your interests to lobby Government to introduce much more regional assistance of the kind that was produced by former Labour Governments, which would help business and moderate unemployment, particularly in those areas of highest unemployment?

Steve Hughes: As I said earlier, the approach to lobbying or representation for organisations such as ourselves has fundamentally changed in the past two years. It used to be the case that you could go into a Government Department and request what you wanted without any kind of comeback on how you costed or implemented it. Now, it has got down to the nitty-gritty of where you would find the money and the practical policy implementation. Fundamentally, if you don’t have an answer to that, you may lose credibility as an organisation. Resourced as it is, as business or as representatives, you have to concentrate on those areas where you can have the most impact, which, for us, is infrastructure spending, the tax system, etc.

Photo of Jim Sheridan Jim Sheridan Labour, Paisley and Renfrewshire North

If colleagues have no further questions, it just leaves me to thank our witnesses for coming along. I’m sure your evidence will be very much appreciated in the forthcoming sessions. Have a safe journey home.

Photo of Jim Sheridan Jim Sheridan Labour, Paisley and Renfrewshire North

I invite our next witness, the representative from Wenta, to take a seat. For the record, will you introduce yourself to the Committee?

Chris Pichon: I am Chris Pichon, and I am the chief executive of Wenta, which is the enterprise agency acting across Hertfordshire and Bedfordshire.

Q 41

Photo of David Hanson David Hanson Shadow Minister (Treasury)

Thank you, Mr Pichon, for your memorandum and for coming to the Committee today. I want to focus on the issue of the national insurance holiday, which is my main concern. In your memorandum you said:

“this is a divisive and almost unworkable scheme that will be expensive to introduce and to monitor.”

Would you like to expand on that for us?

Chris Pichon: I wrote the paper on Monday, so I have not had masses of time to go through all the detail. The paper is very much my understanding of the proposals and how they are viewed by my organisation and generally in the area that I represent.

My general view is that, if you are going to apply a scheme such as this, it should be fairly applied across the country. When you start to draw lines and say that the scheme applies only to certain areas—I stand by the paper—it is divisive and it is unfair for those areas that are unable to gain the benefit, if any benefit comes from the scheme. Just to draw a line and say that it is not going to be applied across London, the south-east or the east is unfair. Kelvin said just now that areas in Luton definitely needed help, and there are always pockets that need such assistance. So when you just draw a line arbitrarily and say that a scheme will apply to only one area of the country, I cannot see any fairness in that.

Q 42

Photo of David Hanson David Hanson Shadow Minister (Treasury)

There will be a range of discussions on a number of alternative models for the distribution of the scheme, as opposed to the current model before the Committee. There will be, for example, the model of a universal scheme across the whole United Kingdom. There will be the model of a scheme that applies to specific local authorities. There will be a model that applies across the country in areas of high public sector employment that might lose jobs. There is the  model that applies across the country in areas of high unemployment. Amendments have been tabled that reflect that. Do you have a particular view on whether or how the Committee should approach any of those potential solutions, as opposed to the current model?

Chris Pichon: In my view, if you want to make something work, you have to make it workable and you have to understand it. I have read through the documentation and listened to your explanation and your differentiation between what is a business and how the scheme would and would not apply, and I have to say that it is incredibly complicated, which is why I commented in my evidence that you are making a scheme that is very complicated to understand. For people who are running their businesses, who are bombarded with information and bureaucracy, this is, frankly, just another turn-off.

Q 43

Photo of David Hanson David Hanson Shadow Minister (Treasury)

If you were the Minister—I would not want to impose such burdens on you—would you simply extend the scheme to cover every region of the United Kingdom?

Chris Pichon: I have also commented on the figures or the estimates as to what it would cost, or what have you. Just reading them, I was bemused as to how you can estimate those costs. If you are going to run such a scheme, it should apply across the country; you either do it as a whole or not at all. I am not sure that it will do a great deal of good, in a sense, or achieve its objectives if it applies only to certain areas.

Q 44

Photo of Gavin Shuker Gavin Shuker Labour, Luton South

First, I congratulate you on being from Bedfordshire and Hertfordshire; it is a very nice part of the world, as I understand it. One reason why we want to speak to experts in their field is to get a picture of what it is like locally, where they are. Can you explain to the Committee what kind of variation there is between different areas of Bedfordshire and Hertfordshire, in terms of public sector employment, unemployment and that kind of thing?

Chris Pichon: Yes. We have offices and operate across Hertfordshire, in diverse areas, from Watford to areas in Potters Bar. We cover areas that have very low unemployment, such as Chorleywood but, on the other hand, you can go to a place such as Borehamwood, which has very high unemployment. We work in Luton, and I agree with what Kelvin was saying—there are areas with real pockets of deprivation. We run the innovation centre in Hertfordshire. It is based in Stevenage, which has a very high level of deprivation in an area called Bedwell. We see areas of deprivation, and we have delivered programmes that try to target such areas—frankly, it is very difficult. For example, the SRB programme was very targeted, but it is difficult to achieve long-lasting results where you try and do it by postcode, or whatever. It does not work.

Q 45

Photo of Gavin Shuker Gavin Shuker Labour, Luton South

Will these proposals help new businesses to start up in the areas of deprivation that you have talked about?

Chris Pichon: I think I have commented that I do not see a business starting just because there is a bit of a national insurance tax advantage. I have also commented that, in our experience, very few start-up businesses actually employ people. Most, or almost all of them,  operate from home in the early months. You only get employment when they are actually getting into growth and to a point where they are trading up and employing somebody becomes an option. It certainly does not happen in the early months.

Q 46

Photo of Gavin Shuker Gavin Shuker Labour, Luton South

You have differentiated between certain local contexts within Bedfordshire and Hertfordshire. Would you say that that remains broadly true across the entire east of England, and that there is a lot of diversity?

Chris Pichon: Absolutely. The eastern region is very diverse. Up in Norfolk, you have a vast area of only green space and yet, down in Essex, in Basildon and Southend, there are areas where it is the complete opposite. So, across the whole of the east, there are areas of high deprivation. Just to ignore them, saying, “You are not going to cover that area with a scheme such as this,” is unfair.

Q 47

Photo of Gavin Shuker Gavin Shuker Labour, Luton South

What kind of proposal do you believe would really help those areas? Is it a national insurance holiday?

Chris Pichon: My honest opinion is that there should be a consistent and long-term programme, which is not changed by the whim of whatever every year, or every two years. One of my criticisms about Business Link, which was a good idea in its original concept, was that its objectives were changed so frequently that it did not always meet the criteria that it was set up to achieve. The problem is that we are overburdened in our area by “initivative-itis”. You get set up to run one programme, which runs for a short time and suddenly, before you know it, it has gone and there is something else to be set up. That sort of thing is disruptive, and unless there is a long-term programme of support, I cannot see it having a massive impact or effect.

Q 48

Photo of Gavin Shuker Gavin Shuker Labour, Luton South

Looking at the proposals we are considering in this Committee, do you believe they fulfil the criteria of a long-term and consistent approach to taxation for business, national insurance and so on?

Chris Pichon: Not really.

Q 49

Photo of Matthew Hancock Matthew Hancock Conservative, West Suffolk

I have a couple of brief questions. You said that you did not think any new businesses employed anybody. You say in your written evidence that that is in the first few months, but this proposal is for the first few years. Do you therefore reject the analysis that was just confirmed by the British Chambers of Commerce and the Federation of Small Businesses that 800,000 employees will be positively affected by the proposal?

Chris Pichon: I can only go by our experience of operating across an area the size of Herts and Beds, where we have helped hundreds and hundreds of people to start up. Very few actually get into employment.

Q 50

Photo of Matthew Hancock Matthew Hancock Conservative, West Suffolk

But you don’t dispute the number across the country?

Chris Pichon: I am not in a position to dispute that. If that’s what they are giving you, then they’ve obviously got that. It’s not our business to get into that.

Q 51

Photo of Matthew Hancock Matthew Hancock Conservative, West Suffolk

Okay. In your written submission you said that the best thing would be to abolish employers’ national insurance contributions completely.

Chris Pichon: That’s a personal view. I have shared it with some of my colleagues at work. I have tried to explain very briefly and just given a picture. I understand it collects a lot of money, but there are downsides to that particular element of taxation. It could be used for other things. I have given a demonstration of where I think it could be applied.

Q 52

Photo of Matthew Hancock Matthew Hancock Conservative, West Suffolk

National insurance raises £95.5 billion. How would you square that circle?

Chris Pichon: How do you mean?

Q 53

Photo of Matthew Hancock Matthew Hancock Conservative, West Suffolk

If you were to abolish it completely then you would have rather a large hole in the finances.

Chris Pichon: There are other ways in which the Government can get income back such as income tax, corporation tax and other taxes and by encouraging and getting growth in the economy, which will bring benefit, and by reducing unemployment.

Q 54

Photo of Matthew Hancock Matthew Hancock Conservative, West Suffolk

So we should treble corporation tax in order to abolish national insurance?

Chris Pichon: I am not saying that you should treble it. I am saying that there are alternatives. When I first started running my business back in the ’80s, national insurance was not at the level it is today. To be honest with you, it is being used on a political basis to avoid publicity around income tax.

Q 55

Photo of Matthew Hancock Matthew Hancock Conservative, West Suffolk

You have said that employers’ national insurance should be abolished, and here is a proposal to do so in a limited area. But then you describe that proposal as a turn-off. How do you square that circle?

Chris Pichon: There are different elements of it. First, I believe there is an unfairness if you apply it only to certain areas and not across the country. But as an overall statement, I think employers’ national insurance is an unfair tax on employment. It actually has a detrimental effect within the economy. An organisation like ours, on our income and the moneys that we generate through our operation, paid back to the Government last year about £110,000 in employers’ national insurance. As a not-for-profit company, if we were not paying that we could do an awful lot of good with that money and a lot of other organisations could do the same. That is what I am saying in that statement.

Q 56

Photo of Richard Harrington Richard Harrington Conservative, Watford

Chris, thank you very much for this paper. Unfortunately, some of us received it quite late. Having just read through it, I feel I should press you on what I fear is a major inconsistency in it. I am not arguing for or against it, but half your paper calls for the abolition of the employers’ contribution to national insurance. We referred to it during the election as a job tax, and I accept the basic premise of this. But the other half of your paper refers to organisations in Watford, which I am familiar with, and elsewhere that you sit on. The main complainants seem to be people who rely on public funds to operate, CVS being a good example. I feel there is an inconsistency there. That links with the holiday that the Government have announced, because many people in Government—in fact, many people on both sides of the House—would, in principle, be in favour of reducing taxes as much as possible to incentivise business.

The Government, as you know, were faced with the biggest debt in history, and all of the other problems. There is already a big tax burden on business, and it would seem to me that, although the holiday has imperfections—regional imperfections being one of them, which we are discussing today—fundamentally, in the short term, it was all that could be done, because of our burden of debt. Do you agree with that statement?

Chris Pichon: I agree that the state of the country’s finances is dreadful. I wrote the paper to be thought-provoking, if you like. I was saying that there are other ways that you might want to think about in the longer term. It is not possible to do it now, but I did not write it with the intention of saying that it has to be done now. It is about getting people to think that there are other ways of creating taxation. You have different objectives, do you not? You have, as I said in my evidence, a problem between the minimum wage and social benefits, and you have difficulties with the levels of business taxation. I wrote it to be a little provocative and suggest that we should consider such things. There might be an inconsistency, but I accept that it is not a perfect document—I had very little time to write it.

Q 57

Photo of Richard Harrington Richard Harrington Conservative, Watford

On the narrow example of the holiday, the established figure is that to extend it to the whole country would have cost an extra £650 million. That money would have come, if I can localise it, from those very organisations—such as CVS and the others —that you mentioned. That is the problem that the Government had.

Chris Pichon: Okay, I am not going to sit here and argue about it.

Q 58

Photo of Kelvin Hopkins Kelvin Hopkins Labour, Luton North

First, I found your paper really interesting. It was one of the most interesting papers I have read for a long time. I agreed with much of it, and, as you say, it was thought-provoking. The point that you make is that shifting the burden of taxation from employment to profits and to incomes would help generate employment. Generating employment would reduce the level of benefits paid out and increase the level of tax paid in, which would help reduce the deficit and boost the economy in many ways. That is very helpful, and I must say that I do not find much with which to disagree. Is your basic argument that marginal tax incentives unfairly distributed across the country will not help very much?

Chris Pichon: Yes.

Q 59

Photo of Kelvin Hopkins Kelvin Hopkins Labour, Luton North

You also make the point—this is a point that I made—that the voluntary sector is currently in a state of meltdown. That is not going to do much for the big society, is it?

Chris Pichon: I made that comment because, over the past two or three months, everywhere I go I have heard about what the voluntary sector is feeling at the moment, which I virtually quoted verbatim. I have mentioned all the various local strategic partnerships with which we are involved and with which I am involved. I do not want to get political, because we are a non-political organisation, but I am relaying the view that the voluntary sector is going to struggle immensely from April next year, which is a pity.

Q 60

Photo of Kelvin Hopkins Kelvin Hopkins Labour, Luton North

The voluntary sector is akin to small business in many ways, because voluntary organisations operate like small businesses in many ways.

Chris Pichon: The voluntary offers employment prospects. I am talking about it as an employment area rather than as a small business. It also makes contributions through employers’ national insurance.

Q 61

Photo of Kelvin Hopkins Kelvin Hopkins Labour, Luton North

Have you looked at what other countries do in terms of taxation? The successful ones, such as Scandinavia, probably do it very differently to us.

Chris Pichon: I am sure that there are plenty of examples everywhere if we look hard enough. There is always somebody doing something well that we could learn from.

Q 62

Photo of Stella Creasy Stella Creasy Labour, Walthamstow

I want to follow up on the discussion about the voluntary sector, because one of the things that we are also expecting in the next couple of years is for some new voluntary sector organisations to be organised—the talk of the big society is about exactly that. Could you talk us through your experience of what makes voluntary organisations develop, and whether you think any of these proposals will help or hinder that?

Chris Pichon: That is not a question, is it? Let us start with what makes them work. I would think that it is out of need. They spring up because there is a need, and people form together—

Q 63

Photo of Stella Creasy Stella Creasy Labour, Walthamstow

To be clear, I meant the practical aspects of actually setting up a voluntary sector organisation to work in a local community, in terms of having staff, managing budgets and things like that. Do you think that some of these proposals will help or hinder that?

Chris Pichon: I am not sure that I am actually in a position to answer that. I think they will find it very difficult. We have operated with a social enterprise adviser, and we have been providing support and help to social enterprises as they start. It is difficult, because of the nature of what they are trying to do, to get them to understand the elements of business in terms of their survival and that they need to create surpluses. They cannot just survive on grants.

Q 64

Photo of Stella Creasy Stella Creasy Labour, Walthamstow

Do you think that if this proposal for an NIC holiday were applied to new voluntary organisations and new charities, that would be beneficial?

Chris Pichon: Well, it would be, assuming that they would employ enough people to get that benefit. They still have to exist and get started in the first place. I do not think that you start a social enterprise on the back of a tax benefit.

Q 65

Photo of Stella Creasy Stella Creasy Labour, Walthamstow

What about a not-for-profit voluntary organisation?

Chris Pichon: The same applies.

Q 66

Photo of Stella Creasy Stella Creasy Labour, Walthamstow

You would not see any difference?

Chris Pichon: Not a lot, no.

Q 67

Photo of Stella Creasy Stella Creasy Labour, Walthamstow

You would not differentiate between the private sector and the voluntary sector in this capacity, in terms of whether it will have an impact on employment rate?

Chris Pichon: I do not think that you can differentiate between them. If you have employment costs, you have employment costs, and are they different between a small business and a voluntary sector organisation? It may have more impact on how that voluntary organisation organises its funding, but I don’t think there is any difference.

Q 68

Photo of Stella Creasy Stella Creasy Labour, Walthamstow

The other thing that your note says is that:

“There are many businesses that are on the brink of closure”.

What do you think we could be doing to support those businesses that are on the brink of closure? Are there things that we could do on national insurance that might help or hinder them?

Chris Pichon: I just made that point as an additional point. We hear about the difficulties of access to finance through banks. We see that regularly. We have a number of business centres across Hertfordshire, and we have nearly 300 businesses operating between those centres, so we are in contact with small businesses all the time. There is no question but that access to finance for those businesses is very difficult at the bottom end.

I was with Barclays bank at a function the other evening, and even people employed there were saying that they recognise that, at the lower end, it can be more difficult to access finance than at a corporate level. From the businesses that we’ve seen in difficulty, I really do believe that funding is a major issue for them. If there were ways of raising money other than through taxing businesses on jobs, it would be a significant help to them.

Q 69

Photo of Stella Creasy Stella Creasy Labour, Walthamstow

What are the sizes of the firms that you are talking about? On average, how many employees do they have?

Chris Pichon: Well, the vast majority of businesses in the country, as you will know, employ fewer than 10 people. I think 96% of all businesses operating employ fewer than that number. It is a vast number.

Q 70

Photo of Stella Creasy Stella Creasy Labour, Walthamstow

So they are the sorts of businesses that this new start-up holiday would apply to if they were new, but because they are existing, it will not. In terms of the jobs in your local area and the small businesses that you are working with, do you think that it is more likely that we would be able to generate jobs within those organisations or by saying, “Let’s start again”?

Chris Pichon: I don’t know. Are you saying that this holiday is actually going to be a job creation scheme? Is that what you’re saying?

Q 71

Photo of Stella Creasy Stella Creasy Labour, Walthamstow

No, I’m trying to understand from you. One of the ideas behind this proposal is that it will encourage businesses to take on employees in new start-ups. I am trying to understand the other areas where we might be losing employees.

Chris Pichon: I listened to the last bit of the questioning of the two previous witnesses, and they were both saying that employment is not driven by that. I agree with that.

Q 72

Photo of Stella Creasy Stella Creasy Labour, Walthamstow

I am trying to get your sense of this as well.

Chris Pichon: I agree with what they were saying. I think employment is driven by business need rather than just by tax advantage, and I do not think the policy will make any difference. It will not come into their thinking: it would not come into my thinking that I should employ someone because I have that benefit. It is about asking whether the business needs them, and whether there is a need within the business. If there is a benefit to it, I would probably do it.

Q 73

Photo of Mel Stride Mel Stride Conservative, Central Devon

You mentioned that you felt that this policy was unfair, because it is treating different regions of the country differently. There is some element of consensus across the various parties here in Westminster that regional policy is important, and that parts of the country need a bit of extra help compared with others. Inherent in that approach of regional policy is the fact that by definition you will treat some parts of the country differently from others. Are you, therefore, against regional policy per se? Is that fundamentally what is driving your objection to this policy?

Chris Pichon: In some ways, yes, I am, because I don’t think there is any fairness to it. I think that if you are going to run a scheme it should apply to everyone. I do not think that it is fair to select certain areas and omit others.

Q 74

Photo of Mel Stride Mel Stride Conservative, Central Devon

So you would be against any form of regional policy—this or any other. It would make no difference how it was framed: it would fundamentally be wrong.

Chris Pichon: I have been involved with Wenta for nearly 16 years and I mix with colleagues from other parts of the country, particularly from the north and the north-east. We often banter that we have to be far more enterprising because we do not get anything. We have not benefited from objective 1 or objective 2 funding, or local enterprise growth initiative funding, or whatever has been given out. We have had to create the opportunities from our own resources. In some respects, by throwing money at it you disincentivise innovation and the like. If you are going to have a policy, I think it should apply to everyone, and our company believes that too.

Q 75

Photo of Mel Stride Mel Stride Conservative, Central Devon

One thing that has confused me is that on the one hand you seem to be arguing that this particular policy in the Bill is not going to make a huge difference to employers—in other words, it is not really conferring any particular benefit, as such—but you seem to be extremely keen to have it along with everybody else. Why would you want something that is not actually—

Chris Pichon: If you are going to do it, and if you feel there is a need to do it—I have said that I have not had a massive amount of time to spend going through every detail of it, but I was asked to come down and make a comment, and that is what I am doing—introduce it for the long term. Otherwise, what real benefits do you expect to get out of it? Programmes that are not there for the long term will not have much impact anyway.

Q 76

Photo of Martin Vickers Martin Vickers Conservative, Cleethorpes

My thoughts are similar to those of my colleague Mr Stride, and to some extent you have answered the point I was going  to make. I am still slightly confused about your views on whether it should apply to the whole country or only to certain regions. It is interesting to note that you would gladly take anything that is on offer, even if you think it is of minimal value. You have mentioned LEGI and objective 1; over the years we have had enterprise zones, assisted area status and endless initiatives from Governments since pre-war days, all of which have distorted the market to some extent. Are you actually saying that you want a complete free market and you do not want any handouts at all?

Chris Pichon: My belief is that there should be support for start-ups and I have thought that for a long time. It does not matter whether it is a start-up in Surrey or in Barrow-in-Furness, if it is a new business it may need some help, and, if it is there, it should be available for all. I have never thought it fair to be so selective about where such schemes apply. My view is that you should apply them across the piece or not at all.

Photo of Jim Sheridan Jim Sheridan Labour, Paisley and Renfrewshire North

If there are no further questions, I thank our witness for coming along. If your objective was to be thought provoking, you have certainly achieved it. So thank you for bashing through the weather to come here and have a safe journey home.

Q 77

Photo of Jim Sheridan Jim Sheridan Labour, Paisley and Renfrewshire North

I now invite representatives from the Treasury and HMRC to take their seats. Thank you for coming along and being so patient. Again, just for the record, could you introduce yourselves?

Mr Gauke: David Gauke, Exchequer Secretary to the Treasury.

Sam Mitha: Sam Mitha, assistant director, HMRC.

David Owen: David Owen, head of national insurance policy at the Treasury.

Q 78

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Good afternoon, gentlemen. Thank you for coming to the Committee. Mr Owen, am I right in my understanding that, for the annual changes to national insurance—the indexation for employers— the indexation amounts are typically publicised and announced, roughly speaking, in the autumn period?

David Owen: Yes, that is right.

Q 79

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Have we had that announcement in the autumn forecast issued by the Chancellor last Monday?

David Owen: The confirmation of the indexation has not yet been announced.

Q 80

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Is there a plan for the date when it will be announced?

David Owen: I would expect it to be very shortly.

Q 81

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Could the Minister confirm when shortly will be?

Mr Gauke: We anticipate it to be any day in the next two or three parliamentary days, which is consistent with the usual timing.

Q 82

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Do I need to wait till we get into the Bill proper next Tuesday to know whether you are planning to pursue the normal practice of the Rooker-Wise  amendment? I know that is more related to personal income tax indexation, but that was a retail prices index tradition. I think it was written into statute, was it not?

Mr Gauke: I think that is right. I believe it was one of the Finance Acts in the late 1970s. The details will be revealed by next Tuesday. I anticipate that you will have all that information, which will answer your questions.

Q 83

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Mr Owen—actually I do not know whether this question is to you or Mr Mitha, but I ask it of the relevant person—the regulatory impact assessment of the Bill suggests that 240 extra staff will be taken on to implement the national insurance holiday. Is that figure correct?

Sam Mitha: The figure is correct, but they are not additional staff. Staff are being redeployed from existing work to undertake work on the national insurance holiday.

Q 84

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

From where will they be taken? What tasks?

Sam Mitha: They belong to the national insurance and employers office, where they deal with national insurance and employers issues.

Q 85

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

So 240 staff out of how many will deal with this?

Sam Mitha: About 4,000.

Q 86

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

So quite a chunk. Which specific elements of response to employers will be diminished in order to create that unit of 240?

Sam Mitha: The office that they have been drawn from deals with a large number of things. When the national insurance holiday was created, we set up a dedicated team which drew staff from across the piece, but mainly staff experienced in dealing with employers’ national insurance contributions. Given the size of the office, it was simply a case of making sure that the people who are most suitable for the task were drawn for this activity and that other work was appropriately reprioritised.

Q 87

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

But it would be impossible to take 240 people into this new task without adversely affecting some of the responsiveness to employers on other NI inquiries, would it not?

Sam Mitha: Well, the normal response to reallocating staff is to make sure that we avoid any kind of adverse impact on dealing with customer relations.

Q 88

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

So how will you measure whether there will be any adverse impacts?

Sam Mitha: We keep indices of levels of customer satisfaction and customer response. With the launch of the holiday, it has not been necessary to redeploy all those staff to this work straight away.

Q 89

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

So over the three years of this scheme you will be able to track employer satisfaction and that information will be published?

Sam Mitha: Some of it will be published, although I do not know whether it will go down to the level of detail of measuring the impact of the redeployment of up to 240 staff.

Q 90

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

But Mr Gauke, you are happy to publish that tracking information so that we can see the impact of the redeployment on employer NI satisfaction issues generally?

Mr Gauke: Well, HMRC is being much more transparent on the information that it is producing across the board, and we will continue that. HMRC will continue to reveal more information as to the service it provides and service satisfaction. I can confirm that the thresholds were announced earlier today.

Q 91

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Were they uprated by the consumer price index or retail price index?

Mr Gauke: They continued in the usual practice.

Q 92

David Owen: Ordinarily the retail price index is used when there has been no policy announcement that differs from that.

Q 93

Mr Gauke: In a written ministerial statement today.

Q 94

Mr Gauke: I knew I had cleared it, but I wanted to make sure that it had been announced.

Q 95

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

In terms of the application process and the new unit that is being created, what will be your target for turning round a decision when a new business applies and for letting it know that it qualifies?

Sam Mitha: At the moment we are able to turn them round almost immediately because, as you can imagine, businesses are still getting to hear about the holiday.

Q 96

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

How many have you turned round so far?

Sam Mitha: So far it is 1,100.

Q 97

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

And your aim over the lifetime of this holiday is how many?

Sam Mitha: The forecast number of likely applications is 400,000.

Q 98

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

So you are not really on course to reach that 400,000 level?

Sam Mitha: We always expected that we would get the applications when new businesses started preparing their tax returns or their accounts. Setting up a new business is obviously a very hectic activity and tax is not always foremost in people’s minds. This is almost certainly something on which they would be relying on help and support from their tax advisers.

Q 99

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Would it be out of order to set yourself a three-month target for guaranteeing a turnaround of an application to a decision?

Sam Mitha: In terms of responding to applications, I would be disappointed if we were not able to turn them around far more quickly than three months. As I say, at the moment we are turning them around almost immediately on receipt because we have not had a very large number of them so far.  

Q 100

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

What are your plans for advertising and disseminating information on this scheme?

Sam Mitha: We have been doing quite a lot of work on communicating and marketing the new scheme. Obviously our preliminary focus has been on making sure we have the legislation ready. But now that we have the legislation and the guidance ready this is the range of the kind of things that we have done: we have a new employers’ helpline and anybody phoning that gets to hear a recorded message telling them about the NICs holiday from the time that it was announced. All new employers receive fliers together with the material they need to set up a pay-as-you-earn scheme telling them about the holiday. We have been in discussion with employer representatives to ensure that they pass this information through their trade bodies and other groups to people who might be in contact with new employers. Other more specific activities have included the fact that some HMRC offices run seminars for new businesses to tell them about what their responsibilities are going to be. Since September, those seminars have included details of the holiday. Occasionally, Companies House runs events for newly incorporated companies and again, since September, we have made sure that the holiday has been mentioned to such companies.

We communicate with employers through a bulletin, which is sent out regularly by HMRC and has included material on the NICs holiday. One of the key groups of people with whom we would want to work with any new tax initiative or with any new NICs initiative is agents, and a very large proportion of new businesses are professionally represented. So, in our regular newsletters to agents—and one in particular called Working Together—there is material on the NICs holiday. We have seen that the leading tax advisers and NICs advisers tend to publish articles on new initiatives; the latest issue of Taxation includes an article by Peter Arrowsmith, a leading authority on national insurance, in which he describes the holiday and draws attention to it for professional advisers.

We have been in touch with the British Bankers Association, and we have had contact with the Department for Business, Innovation and Skills, which has special responsibility for small businesses. Following one of the expert witnesses, we will also follow up the reference to the BIS mentoring scheme to ensure that we highlight the holiday for people who might have an interest in it.

Q 101

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I know that some of the team at the Institute of Chartered Accountants in England and Wales have recently written about another national insurance holiday or similar schemes in the past in quite sceptical terms, particularly when thinking about the fact that a lot of hurdles have to be jumped. Are there echoes of such a scheme? Are you confident that your 400,000 will be reached? Are you confident, for instance, that by the end of this calendar year, you will have reached a certain proportion? What will that figure be, and what lessons do you think can be learnt from the scheme that ran in the past?

Sam Mitha: Obviously, when the new Government came in and said that they wanted to introduce the NICs holiday, we looked very closely at the past experience of running a holiday. The present NICs holiday is quite different from the original scheme, which was confined to people who had been unemployed. It included a  number of features which are obviously not replicated in the present arrangements, because they had had an impact on people’s individual national insurance liabilities. This scheme was designed with a view to being operational very quickly, because as you know, it was announced in the emergency Budget. We were able to have guidance on the new scheme ready by 6 September, so that new employers were able to take advantage of the scheme almost immediately.

The new scheme does not require employers to do much more than make a number of very simple decisions, for example: is it really a new business? Is it located outside one of the excluded regions? And, has it actually taken on an employee after the 22 June? So, in terms of simplicity, the new scheme is a completely different kettle of fish from the scheme that was operated in the mid-1980s, which, as I have said, had an unhappy record.

On levels of take-up, the scheme will effectively last for three years. Although we can bring the scheme to the attention of new employers, there is very little we can do, because it is a scheme that people have to apply for. We cannot actually force them to apply for it. We know from experience that new businesses have a pretty hard time keeping their head above water, without having to worry about whether they are claiming everything that they might be entitled to. We are fairly sure, however, that the employer NICs holiday will be something that professional advisers will be bringing to the attention of their clients, because it is definitely something that will relieve them of additional liability. It is also something that we are hopeful will influence them when it comes to making decisions about whether, and, if so, when, they take on employees, because they will know for a fact that the level of employer NICs that will be payable when taking on a new employee will be mitigated if they are in one of the targeted regions.

Q 102

Photo of Matthew Hancock Matthew Hancock Conservative, West Suffolk

Earlier, we heard from two of the country’s leading business organisations—the British Chambers of Commerce and the Federation of Small Businesses. One said, “I have no doubt some start-ups will be incentivised to take on new people.” The other said that, in some of their work, “60% of small and new companies had said that a cut in employer taxation would trigger them to take on more people.” Mr Gauke, could you explain what impact you think that the national insurance holiday will have on generating new jobs?

Mr Gauke: Well, the estimate that we have made is that there will be, as we have heard, something like 400,000 businesses that will make use of the holiday. Our estimate is that that will average out at two employees per employer.

Q 103

Photo of Matthew Hancock Matthew Hancock Conservative, West Suffolk

Is that two extra employees per employer?

Mr Gauke: No, that is two who will make use of it. The analysis of the behavioural impact, the value-added that is at the heart of your question, is quite difficult to make an assessment of at this point. That is the two per employer that we estimate at the moment. On behavioural impact, we will see. A common-sense approach would suggest that it will have an impact, but, of course, what we are looking at here is bringing through a dynamic  impact of a tax cut. There is always a degree of uncertainty about that, so we have been relatively cautious. We are not making bold or unsubstantiated claims as to what the behavioural impact will be, but we will be keen to study this and see what the impact is. Common sense would suggest that it must be helpful for a new business, at a time when, perhaps, it will be vulnerable, to have greater confidence to take on staff when they are not having to pay employer’s national insurance contributions as well, which is a cost on labour and one that is likely to deter them taking on employees.

Q 104

Photo of Matthew Hancock Matthew Hancock Conservative, West Suffolk

The flip side of more jobs being created through tax breaks, of course, is that if you put taxes on employers up, they might take on fewer people. The FSB mentioned their estimate that the so-called jobs tax would have cost 57,000 jobs, and the Bill is part of the process of trying to reverse that. Do you agree with that assessment? If not, do you have a separate Treasury assessment?