Clause 5

National Insurance Contributions Bill – in a Public Bill Committee at 4:30 pm on 7 December 2010.

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Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury) 4:30, 7 December 2010

I beg to move amendment 9, in clause 5, page 3, line 33, at end add—

Good afternoon, Mr Howarth, and may I say how pleased I am that you are in the Chair? The Committee always seems much warmer when you are presiding over our proceedings; I do not know why that might be.

Photo of George Howarth George Howarth Labour, Knowsley

I think that might have been because I forgot to unlock the doors.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I notice that certain members of the Committee have slightly changed their attire to fit the occasion, and perhaps the extra heat in the room has made that an unwise choice.

Amendment 9 probes the Minister on the design of clause 5 in respect of the exclusion of charities from the national insurance holiday, and the reason why the Minister has chosen to do that. The Minister said during the evidence session last Thursday that the Bill

“would not include charities that do not have a business element…It is not specifically designed to help charities, but to help the wealth-creation sector”.––[Official Report, National Insurance Contributions Public Bill Committee, 2 December 2010; c. 47, Q167.]

I am slightly surprised that the Minister has taken that line, because charities are important players in our economy. Although they may not be out to make a profit, they are often enterprising institutions—and employing institutions, hiring various staff in many different cases—and they deserve our support and encouragement.

Photo of Kelvin Hopkins Kelvin Hopkins Labour, Luton North

That is of particular concern in my constituency, where I have had meetings with charities that are under considerable pressure at the moment. Whatever one thinks of the big society proposed by the Government, if it ever comes to pass, charities would expect to play a big role in it. They are, however, going to be discriminated against, because they would not have the lower employment costs advantage of small businesses.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Indeed, and it would be quite useful if the Minister would elaborate on the specific wording of clause 5(6), because there are certain definitions of “new business” that are allowed to qualify for the national insurance holiday. To what extent are charities able to be defined within that particular categorisation?  I am told that there are some 140,000 charities in the UK. Of course, existing enterprises and endeavours would not qualify for the national insurance holiday: it would be new start-ups. I tried to find out how many new charities might start up in our constituencies, because there are not many detailed records to hand. I was not able to find particular figures in the Library, but I was able to discover that, for instance, some 13,000 staff are employed by charities in Wales —6,300 in full-time employment and 6,500 in part-time employment.

We have some 140,000 charities in the UK as a whole, and I am told that some 5,000 new charities start up each year, so something in the order of 2 or 3% of the total quantum of charitable institutions are new start-ups, which could mean that there are several thousand charities nationwide that might feel that they could benefit from the national insurance holiday arrangement, but are not evidently able to do so from the provisions as set out in the Bill.

Charities have, as I have said, a clear social benefit, as we can all obviously understand, but there is an economic benefit to their work as well. Many young people will find that the first step on the career ladder, either through work experience, training or some other activity, might be through a charitable gateway. We should be encouraging charities to start up, and it would be wise to frame the legislation in such a way that would benefit the voluntary and charitable sectors. It is a shame, as my hon. Friend has said, that charities, which are already suffering the rather sinister ironies of the Prime Minister’s big society, are having their funding slashed by local authorities up and down the land and, unless I am mistaken in my interpretation, probably will not be included much in the scope of the Bill.

Photo of Richard Harrington Richard Harrington Conservative, Watford

I am grateful to the hon. Gentleman for giving way and for his usual erudition. He has, however, probably not had that much experience in the charitable sector—I hope that I am wrong. From what the hon. Gentleman is saying, one could argue that what we are doing here is, in a way, in the charitable sector, because it has great social benefits, as he has said. Having worked in the charitable sector, I know that charities receive many other benefits such as tax-free status and that most charitable start-ups do not actually have employees at all. Many of the employees that the hon. Gentleman has mentioned—work experience people, for example—do not work the hours or receive the salary to attract national insurance. His point is very much a red herring. Given that everything is about money, and that the Government are helping charities in many other ways, it is not relevant to include the charitable sector within the Bill.

Photo of George Howarth George Howarth Labour, Knowsley

Order. Before the hon. Gentleman continues, let me say that interventions should be brief and to the point. They are not an opportunity to make a mini-speech. I would be grateful if Members would bear that in mind before they consider further interventions.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury) 4:45, 7 December 2010

It was an interesting intervention. I had not actually thought about new Members, and whether they would be classed as new start-up businesses in some circumstances. I suspect that our constituents  would not regard it as necessary for newly elected Members to qualify for a national insurance holiday. That is not least because, unless there is a by-election, even recently elected Members would have taken up their vocations before the provisions of the clause came into force—even though we did not have the Second Reading until late in the day.

However, I disagree with the hon. Gentleman’s point that charities do not, by and large, take on some of those characteristics. As with new start-up companies, a new start-up charity may have a number of part-time or full-time employees, and the national insurance holiday may make a big difference. I am not so sure about other tax benefits that charities have. As I understand it, charity shops, for instance, may get tax benefits relating to exemption from non-domestic rates. There are, of course, VAT provisions—sometimes charities have the capability to reclaim elements of VAT—but I think that they have to cover some of the costs on certain purchases. I accept, however, that tax benefits are available to the charitable sector.

Photo of Richard Harrington Richard Harrington Conservative, Watford

Corporation tax is a major tax that charitable institutions do not pay.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Indeed, and I am grateful for that point. Nevertheless, most new start-up charities that employ a small number of individuals would probably say, “Yes, please” to the national insurance holiday, were it available to them. Charities that are thinking about starting up, and that are looking at the costs and expense of staffing their activities, could be deterred from hiring the desirable number of extra staff. I presume that the national insurance holiday is partly designed to act as a carrot that draws new endeavours into employing new people, but that may no longer be the case.

I want to ask the Minister the following specific questions. What is the logic of excluding the not-for-profit sector in this way? Is there a reason why he has focused only on the “wealth-creating sector”—as he defines it—as, supposedly, the for-profit sector? In many ways, I think that the not-for-profit sector can also help with the general prosperity and wealth of the country at large, but that is a bit of a moot point. In the Minister’s view, if we were to accept the amendment and the clause were to be extended to charities, what would be the cost? Has the Treasury been able to put a broad estimate in place about that? Cost may be one reason why the Minister does not want to extend the parameters of the clause. If so, what would that cost be? My most specific question is that, as I understand it, in charity law, a charity is either a trust, an association, or a company limited by guarantee. In the latter case, would that third form of charity find itself eligible under the Bill as drafted, particularly under clause 5(6)(a)? Obviously, the provisions of the income tax Acts and corporation tax Acts may well apply to a charity which is a company limited by guarantee.

Photo of Gavin Shuker Gavin Shuker Labour, Luton South

I declare an interest because I am a trustee of a charity called City Life Church Luton. In the past five or six years, I have been struck by the number of charities that have considered whether they should move to being a company limited by guarantee as part, or for all, of their working. Surely the Bill could have a knock-on effect on that.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Indeed. My hon. Friend makes a very good point, not least because he declared an interest. I am not sure that he needs to declare an interest unless he is to be involved with a new established charity, but it reminds me that I ought to declare an interest as a trustee of Credit Action, a charity that provides debt advice and education, and of the Consumer Credit Counselling Service. Neither is a new charity, so that may be slightly otiose, but it would be helpful if the Minister addressed those points.

Photo of David Gauke David Gauke The Exchequer Secretary

I am grateful to the hon. Gentleman for tabling this amendment.

New charities in qualifying areas are eligible for the holiday if carrying on a trade, vocation or business. Amendment 9 would extend eligibility to new non-trading charities in qualifying areas. That would not support our objective of encouraging new entrepreneurs to set up in business in areas with a high proportion of public sector employment.

The Government value the contribution that charities make to society, and they preside over £3 billion-worth of support for charities each year. We have heard one example from my hon. Friend the Member for Watford, gift aid, which is very substantial and is worth £1 billion a year to charities. There are various other reliefs and exemptions. To extend the policy to charities would complicate the scheme and would impose additional administrative costs. Any ensuing benefit is likely to be limited since we estimate that relatively few non-trading charities employing staff are likely to be set up over the holiday period. That point, again, was made by my hon. Friend the Member for Watford. We expect the costs to be relatively modest—I am clear with the Committee about that—but that is not the objective of the scheme. We help charities in other ways.

We recognise the valuable contributions made by charities, but we do not think that extending the NICs holiday is the best way to achieve our objective. The policy is focused on promoting enterprise. Adding complexity to the scheme by extending it to non-trading organisations would provide little benefit to charities, and we do not believe that it would be a sensible option. There are other, better things that we can do to help charities.

One point that I should make is that charities are employers, and they will, therefore, benefit from the increase in the employers’ national insurance contribution threshold. As we discussed this morning, we will do that for 2011-12. That is an example of the Government reducing the tax burden on charities from the position that we inherited.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I am listening carefully to the Minister, but I am not sure that I agree with him. He implies that charities are not part of the enterprise sector of the economy. I am sure that he did not mean to say that; and I am sure that he, like me, believes that charities can be enterprising, too. Has he given any consideration to other parts of government—whether it be the Ministry of Justice, the Cabinet Office or elsewhere—which are encouraging charities, social enterprises and other new not-for-profit enterprises to come forward and take on various public sector activities? Those may well involve new start-ups, and yet, for some reason of which I am not clear, they are excluded from the definitions that might entitle them to the national insurance holiday.

Photo of David Gauke David Gauke The Exchequer Secretary

The hon. Gentleman disagrees with something that I am not entirely sure that I said. I did not say that charities are not enterprising; I said that this policy would support entrepreneurs in those regions where public sector employment is high or, to put it another way, where the private sector is weakest. We are trying to help the private sector in those areas where it is weakest. That is what this is about. Of course, charities play a valuable role, which, as constituency MPs, we all recognise, but we do not believe that such a policy would be the right way forward, especially as the Committee has endorsed a regional approach.

The test of whether an organisation can benefit is set in clause 5(6)(a), which refers to

“a trade, profession or vocation”.

That is the test, as opposed to the legal structure that applies to the charity. I do not claim by any means to be an expert in charity law, but as long as the charity, whether it is a trust, an association, or a company limited by guarantee, is a trade, profession or vocation, it would qualify.

I see that the hon. Gentleman wants to come back in. I suspect he may be an expert on charity law, so I look forward to his intervention.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Not at all. I am wondering about the 240 staff waiting to pick up the phone at the HMRC call centre while the steady trickle of applications comes through. If they receive a telephone call from a charity that says that it is a company limited by guarantee, does that charity need to provide extra evidence that it is also a trade, profession or vocation? I doubt very much that a normal business would have to provide that evidence. Its simple existence as a start-up would be sufficient. Is there a separate burden that would fall upon a charity if it disclosed its charitable status that would not necessarily fall on a for-profit company? It is a genuine question.

Photo of David Gauke David Gauke The Exchequer Secretary

I take the question in the spirit in which the hon. Gentleman asks it. I can understand that if a charity rang HMRC and said, “We are a charity” as opposed to, “We are a company that is set up to make a profit”, the test I described earlier about being a trade, profession or vocation, would clearly be applicable. HMRC and the charity would have to establish whether the activity itself constituted a trade, profession or vocation. I do not think that that is particularly unusual. It runs throughout the tax system, and HMRC officials will be very familiar with it. I suspect that charities will be familiar with it from having trading and non-trading arms. I suspect that the hon. Gentleman may be more familiar with the matter than I am. Indeed, the hon. Member for Luton South may be an expert, given his position as a trustee.

Photo of Gavin Shuker Gavin Shuker Labour, Luton South

During our evidence session we heard that there had been 1,100 applications so far and that there would be initial compliance checks. Mr Mitha said:

“My colleague has just passed me the information—we have rejected 54 of the 1,100-plus applications that we have received so far.”––[Official Report, National Insurance Contributions Public Bill Committee, 2 December 2010; c. 39, Q131.]

Were any of those 54 rejected because of ambiguity about whether they were a charity or a company limited by guarantee?

Photo of David Gauke David Gauke The Exchequer Secretary

It is a fair question. My understanding is that they were all rejected either because they were created before 22 June or they were in one of the excluded regions. If I am wrong about that, I will make sure that I correct the record. The information I have seen suggests that that was the reason. Who knows? Inspiration may come to me soon if I am wrong. Subject to those points, I hope that I have provided some useful clarification and that the hon. Gentleman will withdraw his amendment.

Photo of Stella Creasy Stella Creasy Labour, Walthamstow

I wanted to speak on this amendment as someone with quite a lot of experience of the charitable and voluntary sector both locally and nationally. I know I am not alone among Members on either side of the House in being involved in this and not necessarily sharing the view that the hon. Member for Watford takes. My concern about the amendment, and the reason why I think it is important, goes to the heart of the Bill and what it is there to do.

If we are talking about a job creation scheme, we need to look at where jobs are created within our economy. My contention is that the Government are missing a trick by excluding any sector that we know has a capacity for job creation. In fact, over the past seven or eight years, the sector in question has shown a tremendous capacity for job creation. That is why, going back to my earlier comments, it is so important to get the evidence on which the proposals have been put together and why I am so disappointed that today we have not had the evidence on how the modelling of behaviour was undertaken. Behaviour varies in different sectors of the economy, and any other economist doing modelling on behavioural work would agree. My professional background is in psychology, which is why I am particularly interested in behaviour models. There are further complexities that Governments could and should look at when dealing with such technical policies.

There is also the question of the model of take-up. I would like to point out to the Minister that on Thursday I was given the commitment that I would get more details on the background of the model relating to the 400,000 businesses that he thought the policy would affect. I have looked at the impact assessment and the information I requested is not in there. Although it will have to be done after the debate today, I again ask for that information to be supplied. All of us want good evidence-based policy making, rather than policy-based evidence making; that has perhaps been a critique of policies in the past.

The charitable sector is important because charities in Britain have done a tremendous amount over the past 10 years to grow. Members said earlier that they were unsure about the issue, so it will be helpful in making the case for not ignoring the voluntary sector to look at some of the evidence. Evidence from the “UK Civil Society Almanac” tells us that nearly 700,000 people work as paid employees in the voluntary sector, so it clearly creates jobs. The sector accounts for two out of every 100 employees. If we compare that with the 7 million employees in the public sector and the 21 million in the private sector, it is a comparatively smaller amount of people, but it is no less important an area at which to look. It has also grown tremendously; the almanac tells  us that between 1999 and 2008, the voluntary sector work force increased by 124,000, which is higher than the increase in the public or the private sector over the same period. That is why it is so important that we do not say that employment costs are a secondary concern. For any industry with that many people working in it, employment costs will obviously be a consideration when starting up or expanding.

The almanac also tells us that staff are 20% of the costs of small charities, which are comparable with the businesses that we are talking about in the Bill. Those costs include national insurance. Critically for the provisions of the Bill, the average wage of those working in the voluntary sector is around £22,000, so any changes to national insurance contributions would make a substantial impact.

Photo of Heidi Alexander Heidi Alexander Labour, Lewisham East 5:00, 7 December 2010

My hon. Friend has spoken eloquently about the growth over the past few years in the charitable sector. Does she agree that if the current Government’s policies on the big society are successful, employment in the charitable sector should increase? With the new models of public service delivery, one might think that the services that the public sector provides would go out to community and voluntary groups. Would an NIC holiday be important for those new organisations’ viability in their first few years?

Photo of Stella Creasy Stella Creasy Labour, Walthamstow

My hon. Friend makes a good point, which I want to come on to, because if nothing were to change, ceteris paribus, what would happen with the voluntary sector’s long-term growth trajectories and why would the policy impact on them? I also want to look at the impact that the big society might have on some of the figures. The most crucial thing about what my hon. Friend has just said is that the majority of people who work in the voluntary sector are women, and the majority of people who will be affected by public service cuts will be women. The voluntary sector, therefore, is a growth area of the economy, and one in which some of those who will lose their jobs in the public sector may well seek employment. That is why looking at how we can make taking on those people an attractive proposition for charities is a crucial issue for our economy and, indeed, for the families of those concerned.

To return to a point that I made this morning, many of the people who live in Walthamstow who will be disproportionately affected by the Government’s cuts work in the public sector and, judging by my surgeries and the people who come to see me on an almost daily basis now, they are women. Only yesterday, the entire inclusion support service for the speech and language therapy centre in Waltham Forest came to see me about the fact that they have all been put on redundancy notices. My conversation with them was not only about how they represent themselves within that employment process, but about whether they could set themselves up to provide that service, which is what the big society at its best may mean. That is why excluding such people and organisations is a remission that the Government should correct by supporting the amendment. If they agree to the amendment and state clearly that they want charities involved in the start-up business, the Government would put down a marker on the importance of the voluntary and community sector for job creation.

It is worth looking at the figures for the birth and death of businesses—my right hon. Friend the Member for Delyn gave some earlier—and putting them in the context of the charitable sector. Last year alone, 51,000 new businesses were put together in London, but 55,000 fell. Considering that 5,000 new charities are created and registered every year, albeit nationally, and that many of them are small organisations with two or three employees at most, the impact of working with the charitable sector to increase employment could be substantial. That is another reason why I return to the question of the evidence. I am disappointed that the documents to which we have had access—I accept that we may not have seen some of the modelling—show that the role of the voluntary and community sector has not been analysed and that its impact has not been understood.

I have, however, asked the National Council for Voluntary Organisations for its opinion. It is keen for the amendment to be agreed to, and with good reason. Its model of the possible impact of extending the national insurance holiday to new charities—I return to ceteris paribus and what we know at the moment, as opposed to the impact and incentive that policies based on the big society could create for charitable start-ups—estimates that the amendment could generate an additional 2,500 or so charities. Obviously, its estimations are based on models of rough data, but looking at the charitable almanac and at what organisations are setting up in what sectors, the NCVO thinks that there could be a national insurance bill of about £1.7 million. Crucially, that excludes London and the south-east, and one of the reasons that we are so keen to see London and the south-east benefit from some of the proposals is that nearly 40% of the charitable and voluntary sector is based in London and the south-east.

The Minister mentioned bodies in the charitable and voluntary sector that may be trading bodies. I want to say a little bit about the concept of what it means to be a trading body, because having worked in charitable and voluntary organisations, I know that that is a complicated question to ask of them, and with good reason—because of they way in which they operate. Some 40% of charitable and voluntary organisations that he may want to benefit will actually be excluded by his geographical divisions, so I ask him to think about that. If he included London and the south-east, NCVO calculates that that would mean an additional 1,200 new charities every year. They would be start-ups, not existing charities. It would also mean two to three more jobs per organisation.

The amendment is not a sideline issue. It is fundamental to how such schemes could generate jobs, and that is even before we get to the impact of the big society. If the big society is about rolling back the state and allowing communities to organise services and suggest proposals for how they are not only run but delivered, helping the voluntary and community sector to take advantage of it will be absolutely key. I am concerned that under the current proposals, deliverers from the private and voluntary sectors could compete to run services, with private sector delivery organisations having an edge over the voluntary sector because of the costs that they deal with as a result of being able to access the exemption. Voluntary and community organisations would not necessarily be able to do that.

One challenge is about what constitutes a trading body. Again, that point concerns how voluntary and community organisations work. I appreciate what the  Minister said about how constituency MPs spend a lot of time with different community and voluntary groups. However, if those MPs reflect on that experience, they will recognise that such groups are a mishmash of volunteers and paid employees, and that both services and advice may be provided.

As someone who comes from a community and co-operative background, I welcome the potential behind the ideas that surround the big society to enable co-operatives—such as the one that I mentioned earlier when I spoke about inclusion services—to be set up and to involve employees as well as users in the direct delivery of services. However, that would create a complicated model for how things are done, and unless the legislation makes it clear that those organisations would be able to access the scheme, and that the national insurance holiday would apply to them, they will not apply for it. It would be confusing for those 240 employees, in terms of whether or not those organisations would be eligible.

Such a move would have the unintended consequence of pushing charities and voluntary sector organisations to be more commercial, rather than encouraging the charitable and voluntary aspects that the big society, at its best, tries to tap into. This is about a collaborative approach. When organisations work with the people they serve and with the local public sector—whatever might be left of it—they can deliver all sorts of benefits to a community.

I urge the Minister to include the amendment and avoid such complications, and make it easier for charities and voluntary organisations to be part of both job creation and public service delivery. If he does not, the risk is that the over-complexity of the scheme will mean that those organisations that other Departments are desperately encouraging into service delivery will not get a starting handle. Those of us who care about the charitable and voluntary sector are sympathetic to the need to make it easier, rather than harder, for charities to contribute to service delivery in a local community. I hope that the Minister will look again at the concept of a non-trading organisation, and at the nature of the voluntary sector and how it is expected to grow in years ahead. I hope that he will accept the amendment.

Photo of Gavin Shuker Gavin Shuker Labour, Luton South

To be frank, I looked through the amendments to the Bill and this one did not seem the most compelling. However, as I have listened to the debate, I have swung behind the amendment: it is potentially a crucial aspect of the Bill, and we must provide more light on the matter and explore it in greater detail.

Put simply, we do not come to the House to administer schemes: we come to legislate, to change the way that the country is governed, and to make a difference to individual communities. We explored that matter earlier. Across the country, charities are making a real difference in their own way. We would struggle to find anyone who would want to say that there are terrible aspects to charities. However, a charity is an employer. Many charities across the country employ staff, and they have to comply with health and safety regulations and ensure that proper procedures are in place. We require that in the legislation that we have laid down over successive years and successive Parliaments. Often, we require charities to go through a pay-as-you-earn scheme. We take taxes from employees, and require employers to  pay national insurance on their employees. The fact that an organisation is a charity does not affect the fact that it is also an employer, although many charities start to be an employer from a less confident base.

As has been said, this legislation will offer perverse incentives. Imagine, for example, a local council looking to outsource services. It regrets doing that, but it accepts that that is part of the current landscape. Potentially, commercial companies could have a significant advantage over a charity that has been set up to provide the same services. There will also be changes in behaviour. I will speak from my own experience: my right hon. Friend suggested that I did not necessarily need to declare an interest, but I realised that, because of a change in the way in which our charity is structured, we would be included in the legislation if the amendment were passed, so I will just declare that more fully.

One of the key growing pains of the charity of which I have been a trustee is that—as budgets have increased and we have been able to take on more staff time—we have had to take the plunge and make the transition from having someone who was self-employed, and providing services to the charity at a time of their choosing without a set number of hours, to employing that person and paying employers’ national insurance. There is currently a disincentive to move to that arrangement, because it involves a significant step up. On top of the money that the charity pays to an employee, it must pay a significant chunk—12 or 13%— of employers’ national insurance on top of that.

I believe that the legislation could change behaviour. For a new charitable organisation setting up, having that initial period where staff can be moved into new roles without the organisation having to pay a whole load of national insurance up front, and being able to plan for the bumps that are inevitable when it comes to setting up a new venture, would be really beneficial. As a trustee of a charity, I have spent a lot of time poring over charitable budgets and trying to work out what is possible. If there is an increase in the dead-weight costs to charities as employers, they cannot go and sell more product to cover them, because that option is not available to charities. The only option is to trim somewhere else.

As someone who has been employed by a charity, in some years I have reduced my pay in order to make a more sustainable budget for the charity. I have taken a pay cut to cover the additional costs arising from the change of employment. It is not the case that if a charity takes on an increase in national insurance contributions, that will not have a knock-on effect for its employees. They may very well have to step up and take a cut in order to cover the additional cost. When we are looking at setting up new charitable organisations—let us be honest, we all fully expect to see more of them in the coming years—we need to be able to tell a strong story about our notion of the social good that comes from the charitable sector, and I believe that the amendment would do that.

I also have concerns about the ambiguity over what is a charitable body or organisation. None of us immediately jumped up to say that we were experts in charity law when that issue was discussed previously, but we are the Committee that is looking at how we word the legislation  specifically to incorporate or exclude different bodies. The level of ambiguity will increase over the coming years. Where does the charitable sector stop and become the public sector? If a charity and a company limited by guarantee exist side by side in the same kind of governance framework, where do we draw the line there? Although I was pleased to hear from the Minister that to the best of his knowledge none of the 54 applications that have so far been rejected under the scheme was rejected because there was ambiguity over whether it was a charity, if we hit the targets for the scheme there will be a small but significant number of cases where it is not clear. By accepting the amendment, we will deal with that ambiguity clearly, without having to refer to subsections of subsections of various Bills.

One of the other points that the Minister made was that the charitable organisations that would be included would be few in number, and therefore there was no particular reason to include them in the legislation. In many ways, that argument serves another purpose, which is to prove that, while the additional costs may not be great, the additional benefits for a new charitable venture that is starting out could be great.

I declared an interest before as a trustee of a charity. We are coming up to our budget-setting period for 2011 and we are looking at how we employ our staff and the amount of money that is available. I can tell the Minister and coalition Members that these are tough times, not just for business but for the charitable sector as we look at how we respond to rising costs, including the VAT that we pay on the things that we have to buy and consume as a charity, the additional costs of inflation—many employees will not receive an inflation-related pay rise this year—and additional needs caused by the cuts that are coming to our public services.

In the charitable sector, part of our core identity is to step up and serve even when there is no direct financial benefit to the organisation for doing so. In fact, it is quite the opposite—it is 180° in the other direction. At a time when pressures on budgets are very tight, we hope that the charitable sector will expand to provide new and innovative models for delivering public services—for example, in working with offenders, patients and people with drug and alcohol problems—and, more broadly, to be the social glue that holds together individuals and societies as the Government pull out of local communities. I do not believe that the Bill necessarily sends the right signs in that regard.

The amendment is very sensible. I said at the start that it was not necessarily the one that jumped out at me, but it is the one that I feel very strongly about. It would make a real difference to our charitable sector and we would do ourselves a huge service to include it in the Bill.

Photo of Richard Harrington Richard Harrington Conservative, Watford 5:15, 7 December 2010

You correctly reprimanded me before, Mr Howarth, for making an intervention the size of a speech. I shall now try to make a speech the size of an intervention to balance things up.

There were one or two points in previous speeches that I felt I should comment on, and perhaps explain the reason why I do not feel that the amendment is a good thing. First, I congratulate the hon. Member for Walthamstow on quoting Latin. It is the first time that I have heard that done in these proceedings, although—to be a bit pompous about it—we were actually taught  that the “c” in ceteris paribus should be pronounced as an “s”, although that was 31 years ago. The hon. Lady made a very important point about the complexities of setting up a trading business compared with a charity. I have tried both, and it is a lot easier for a charity to set up a trading company than it is to go through all the Charity Commission’s paperwork to become a charity—that is actually the hard bit. It is quite easy to separate commercial activities, which would get the benefits of the holiday if they were in the right area, from the charitable institution.

The hon. Member for Luton South made the point that that many charities have changed dramatically and become part of the public sector. That is certainly true in my constituency of Watford, much known and loved by the right hon. Member for Delyn, who seems to enjoy mentioning it on any occasion—I am very grateful for that. Mencap is a very good example. When my late father was in charge of it some 30 years ago, 95% of its income came from voluntary contributions and 5% from different organs of state. That has completely reversed. However much we all support charities, and for all that they are excellent institutions with social benefits—and are, actually, a very efficient way of spending public money—they get plenty of benefits.

Photo of Gavin Shuker Gavin Shuker Labour, Luton South

Does the hon. Gentleman accept that under the proposals, if two new enterprises—one a company and one a charity—were established within the qualifying period and fulfilled all the other criteria, the company would be at an advantage over the charity for, say, bidding for a contract for local public services delivery?

Photo of Richard Harrington Richard Harrington Conservative, Watford

I am tempted to say ceteris paribus, but all other things being equal and in an ideal world the hon. Gentleman would be right. Unfortunately, it is not an ideal world, and all institutions have to make choices. There are plenty of advantages to being a charity. I hope that there will be more in the future, and I am sure that the Government are looking at that. The national insurance holiday is specifically targeted at individuals setting up small businesses, and no one has ever set up a charity with the same motives for setting up a business. The thought process is not about labour costs at the beginning being lower: it is about the good cause.

Photo of Stella Creasy Stella Creasy Labour, Walthamstow

I am little confused by the hon. Gentleman’s assessment of how charities operate, how they start and how they start delivering services. Does he not see that within the big society agenda, which is very much about voluntary and community organisations starting up as businesses to deliver services, the £2,000 that they might save, which is the average given in the explanatory notes, could be fundamental as to whether they are able to bid for a contract and deliver it?

Photo of Richard Harrington Richard Harrington Conservative, Watford

That is a valid point, but there are many other reasons why charities would be set up, and there are other advantages of having the status of a charity, such as corporation tax, VAT, rates and many others. The £950 million national insurance holiday programme is a different kind of project. It deals with the situation we have at the moment and with getting people to set up small businesses. It is not a particularly important point for charities in deciding whether to go ahead or not.

Photo of Gavin Shuker Gavin Shuker Labour, Luton South

The hon. Gentleman says that the national insurance holiday would not be a factor in setting up a new charity. Would he concede that it might be a factor in determining whether to take on new employees of a charity or in choosing the structure for employing someone within a charity?

Photo of Richard Harrington Richard Harrington Conservative, Watford

That is not a relevant point, because the holiday is for establishing new businesses rather than for existing businesses.

Photo of Kelvin Hopkins Kelvin Hopkins Labour, Luton North

I apologise for not being here for all of the debate—I unavoidably had to leave the room—but there are some points that I wish to make.

I am indebted to my hon. Friend the Member for Walthamstow who told me that one third of all voluntary organisations have fewer than 10 employees, so there is a vast number of organisations that could qualify were they within the Government definition. I should, perhaps, declare an interest as I am a non-executive director of a small training organisation that would certainly fit into that category. Such organisations are often working on small margins. They have difficulty in sustaining themselves financially, but they do valuable work. Any assistance that they can get in difficult times such as these would be valuable. I strongly support the amendment tabled by my hon. Friends on the Front Bench.

I was, for eight years, a member of the Public Administration Committee, and charities and the third sector were a big interest. I and others argued that there are some supposed charities that are not really charities. I am talking about private—public—schools, which have always had charitable status essentially to give them a public subsidy. That is not appropriate. If they were deemed to be purely business organisations, which is what they really are, that subsidy could easily be used to help genuine charities. That is a controversial view, and it is obviously not the official policy of my party. I only wish that it were, and I shall continue to press that point. Support of that kind for small organisations that do immensely valuable work is important.

The hon. Member for Watford made the strong point that these days many supposed charities are heavily dependent on public money—on local authority grants, and so on—much of which is non-statutory. Local authorities are under pressure and they will withdraw some of those grants, thereby putting those small bodies under pressure. I have a general scepticism about the big society taking over from professional public services in any case, but that will make the situation even worse. I have had meetings with voluntary sector and third sector organisations in my constituency and in the constituency of my hon. Friend the Member for Luton South, and they are seriously worried about their future, because of cuts to their funding coming from pressure on local authorities. Any assistance that can be given to small organisations that are starting up would be right.

Photo of Stella Creasy Stella Creasy Labour, Walthamstow 5:30, 7 December 2010

On that point, does my hon. Friend agree that, for small groups of former public sector employees clubbing together to create social enterprises to bid for services, such as the women who came to see me at my surgery yesterday, such measures could be precisely the thing that makes a difference to the contracts  that they can bid for and the tenders that they could put forward, the cost-effectiveness of their proposals and, frankly, the success of their proposals?

Photo of Kelvin Hopkins Kelvin Hopkins Labour, Luton North

My hon. Friend makes a first-class point. In these difficult times in which small groups of people are doing precisely that and trying to set up organisations to fill gaps in social provision, she is absolutely right—in the best of all possible worlds there would be public provision, but such things are not being provided by public authorities. For people setting up such groups, something of that sort will be the difference between success and failure.

My final point is on the constant reference to the wealth-producing sector. I do not accept that dichotomy. All organisations may produce social value of some kind. It is suggested that a burger bar, or something even less health-promoting, is somehow wealth-producing, whereas a charity that looks after people with, say, drug problems is not. Which is the more valuable to society? I suggest that the voluntary sector one is more valuable. We have far too many burger bars and, in fact, we are the fattest people in Europe, partly because we eat too many burgers. I do not personally, although I could do with losing a pound or two. I do not accept that dichotomy—voluntary organisations and public services produce value for society, be it in material terms or in service terms. They also produce employment, which is fundamental, and the income from that employment goes into society and produces demand for other goods and services, too. So I do not accept the idea that there is a wealth-producing sector on which the rest of us somehow depend.

Photo of David Gauke David Gauke The Exchequer Secretary

I shall briefly respond to the debate for a second time. We have had a number of interesting contributions. The hon. Member for Luton South said that initially he was not attracted by the amendment and that he was more persuaded as he heard the arguments. I fear that he may have provoked some competition on the Opposition Front Bench. The hon. Member for Nottingham East felt that he was one up on the right hon. Member for Delyn as a consequence of that. I may be being unfair: I suspect that he was more persuaded by the hon. Member for Walthamstow, regardless of the Latin content, and that it had nothing to do with either of them.

We all want to help charities in our constituencies, and I understand why hon. Members would argue that charities are employers, but so are local authorities, so is the public sector and so are individuals when they employee a nanny, a chauffeur or a butler.I suspect that not many of us here do that. [Interruption.] I can only think of one right hon. Member who employs a butler, and he is not on our side any more. We have to think about the purpose of the scheme and what we are trying to achieve: strengthening the private sector in those regions where it is not as strong as we need it to be if we are to have private sector-led growth in the years ahead.

We all want to help charities. There are other things that we are doing for charities, some of which are long standing, such as gift aid, but we are looking at ways in which we can improve that. There is a transitional fund to help charities and so on that we have announced. The Government remain committed to finding ways to help charities. The question is not, “Do we want to help charities?” but, “Is this the right mechanism for doing  so?” We believe that we need to create new start-up private sector employers, particularly in those regions where that is not happening and has not happened over the last few years as much as we would like. That is why we are bringing in this scheme. The purpose is not to discriminate against charities: there are other policies specifically for charities, but this scheme is not about that.

Photo of Gavin Shuker Gavin Shuker Labour, Luton South

Rather than charities being helped, the real issue is that they should not be disadvantaged by the Bill.

Photo of David Gauke David Gauke The Exchequer Secretary

As my hon. Friend the Member for Watford pointed out, we have to look at this in the round. There are various policies that advantage charities, and rightly so. The policy under discussion is aimed specifically at private sector employers. The circumstances involved will be very limited. I am saying not that it will never happen, but that we would see direct competition between the two in pretty limited circumstances. Even then, there is a host of other things that we do for charities that we do not do for private sector businesses. Consequently, although I appreciate the nature and the intention behind the amendment, I urge the hon. Gentleman to withdraw it because it is not consistent with what we are trying to do in the Bill.

Photo of George Howarth George Howarth Labour, Knowsley

Order. The Minister has taken his seat.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I heard what the Minister said. I am glad that we have had a good debate. I am not convinced that he has satisfactorily described the test as set out in subsection (6) and how it will or will not apply to certain charities. That is an important point. I also feel that the provisions in the Bill discriminate against charities. That is the kernel of the argument that my hon. Friends have put. We may wish to return to the matter, but I now press the amendment to a vote.

Question put, That the amendment be made:—

The Committee divided: Ayes 7, Noes 8.

Division number 2 Decision Time — Clause 5

Aye: 7 MPs

No: 8 MPs

Aye: A-Z by last name

No: A-Z by last name

Question accordingly negatived.

Question proposed, That the clause stand part of the Bill.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

Although we broadly support the clause, I want to ask a few questions, because this is the only opportunity I will have to raise these issues.

Clause 5 provides the definition of “starting a new business”, and, helpfully, the Bill’s explanatory notes cover a range of issues relating to how that would be applied. From the evidence sessions and the explanatory notes, we know that HMRC will undertake the policy and operate it manually, and it also intends to allocate around 240 members of staff for the scheme’s operation.

Broadly, the key issues I want to test the Minister on are, compliance, enforcement, and what happens if there is fraudulent use of the term “starting a new business”, which escapes both compliance and enforcement. However simple we make the scheme—and we are making it simple—it is still complex in relation to assessment of eligibility and ensuring that people who complete the forms and applications do so in a way that is not fraudulent, either by accident or by design. There is also the issue of ensuring that circumstances do not change once the scheme is up and running.

I will deal with applications first. The explanatory notes give several examples of individuals who could apply for the scheme and would be ruled as either accepted under clause 5, or not accepted. I will briefly read out two such examples:

“Roy carries on a business as a carpenter with two employees. He is offered a job working for a larger business and accepts, closing his own business and releasing his employees. He doesn’t enjoy his new job and leaves after 3 months. He begins to carry on his old business as a carpenter, and re-hires his former employees. This is not a new business as, within the six months prior to it starting, Roy carried on another business consisting of the activities of which the business consists.”

That is simple to understand, but it is quite complex to assess initially, and to enforce as we proceed during the period. Here is a similar example:

“Sam is a publican, running a pub in a small village. He wishes to retire and sells the pub as a going concern to Tom, who takes over the trade and continues to employ the pub’s staff. Tom is not carrying on a new business, as the whole of the trade he is now carrying on was previously carried on by Sam.”

Again, it is a simple task, but in terms of enforcement and compliance, it is complex.

The Minister expects 400,000 businesses to apply for the scheme over the period of three years, and he has said that of the 1,100 businesses that have been brought into play, 54 have been rejected so far. I accept that the scheme is new and there may have been some rejections because of its novelty, but if I project that percentage on to the 400,000 businesses, we are talking about a 5% rejection rate. Therefore, over the three years, on the Minister’s current projections, about 20,000 businesses will be rejected. That assumes that the staff of 240, who will be processing the approved schemes and approving schemes based on information that they have received, will also be working quite hard to look at rejected schemes or schemes that are likely to be rejected because people have misunderstood the scheme’s application. They may have applied either because they have misunderstood it, or—in a small minority of cases—because they think that it might be a way of getting this information fraudulently.

I am interested in the Minister’s assessment of the likely level of rejections over the three years, and whether he believes that 20,000 is an appropriate ballpark figure based on experience to date. What does he believe will  be the element of potential fraudulent applications? As a former Prisons Minister, I know that there are people who try to undertake things fraudulently, and who believe that the workload of the agencies monitoring them will allow them to get away with it. It is up to those agencies to ensure that such people do not get away with it. I am interested in exploring that issue.

This may be somewhere in the mists of the Bill, and I may have missed it, but I hope that the Minister can help. Let us suppose that a fraudulent application is made and the scheme operates under clause 5, and HMRC subsequently discovers on compliance checks—the other important point—that a fraudulent application has been made. I cannot see in the Bill the level of penalty for a fraudulent application to the scheme. What would the level of tariff be in the event of a fraudulent application? Normally, a Bill will contain tariffs that are applicable to fraudulent applications.

I mention that because there are three stages. In addition to the initial application and the initial rejection, there could—this is not a slur on HMRC—be occasions when individuals slip through the net and an application that seemed correct on paper does not seem correct in operation. My question concerns not only the Minister’s assessment of the workload, of the rejection rate and of the level of detail of the scrutiny of initial applications among the 400,000 based on the rejection rate to date, but what the compliance activity will be with the 240 staff in HMRC. How often and under what circumstances will HMRC revisit a business to ensure that it is what it says on the tin and that it operates accordingly? With 240 staff and 400,000 applications—matters could be dealt with, as it says in the explanatory notes, “manually”. Does “manually” mean visits to the businesses, paper assessment, or returning to a select few businesses three months or six months afterwards to ensure that they are doing what they said in relation to the new employee? Does the Minister want to consider restrictions on that in due course? If a business is found to be fraudulent, what are the penalties?

In the event of an application being made for a business, and HMRC rejecting the application I am not clear what the appeal mechanism is for companies who might, within this very complex but simple pattern of eligibility, feel that they are eligible and feel aggrieved at HMRC’s decision. What is the appeal mechanism outside HMRC?

Those matters essentially concern the definition of a new business. They are not strictly issues that we are amending; they are more about the implementation of the scheme. Before we endorse the clause, it is important to have some clarity from the Minister on those three key issues and on the penalties that might apply in the event of an individual acting fraudulently.

Photo of David Gauke David Gauke The Exchequer Secretary 5:45, 7 December 2010

The right hon. Gentleman is right to highlight that issue. When we are developing policy in such areas it is all too easy to forget the realities of administration, how the scheme will work in practice and how HMRC will be able to cope with that. There is a temptation in a Committee such as this to address great issues of policy, which may be relevant but which do not get to grips with the administration side. We must administer this scheme properly, which is one of the reasons why we are keen to keep the provisions as simple as possible. We have debated various matters today, but we intend to keep the scheme simple and  avoid complications. There is always a temptation to meet further policy objectives and include additional complexities, but we are keen to resist that.

We must look at how businesses or potential applicants might seek to abuse the system. There may be innocent applications or misunderstandings about how the system works, and we are keen to keep such problems to a minimum. We want genuine new businesses to take advantage of the holiday if they are eligible, and we do not want them to be deterred by a complicated process. Where possible, HMRC will take account of the fact that new employers have many other duties and obligations. It will seek to operate the scheme through a compliance regime that is not unnecessarily intrusive and does not discourage genuine applicants.

More generally, our strategy is to use a “check now, pay later” approach to stop error and fraud throughout the tax system. We are keen to ensure compliance and to stop error and fraud in the most cost-effective way. Assistance will be given in the early pre-return stages to help with simple errors. Where people are tempted to break the rules, HMRC’s strategy will be to address those who are not taking enough care through targeted risk assessments and the use of profiling, to ensure that serious abuse and manipulation are identified and acted on. An individual employer can benefit only for the first 10 employees and by up to £5,000 per employee. That cap is to prevent large sums being made available and providing an incentive for fraud.

It is possible, indeed likely, that there will be some fraudulent applications. If someone incorrectly applies for the national insurance holiday and makes an incorrect return, at the end of the year they will be liable for that, based on the understatement of their national insurance contributions. A regime exists for national insurance contributions, and this scheme would fall within that. The penalties for an incorrect return will be no different to those that apply within the general workings of the national insurance contribution regime. That is how it will work, and I hope that the right hon. Gentleman takes some comfort from that. There is no separate penalties regime in the Bill because the scheme fits with an existing regime. However, he was right to highlight that point. We seek to keep the scheme as simple as possible and discourage fraudulent claims from being made on the basis that large sums of money will be available.

The right hon. Gentleman also asked about the appeals regime for the scheme. [Interruption.] To be fair, it is not as clear as it might be for those who are not familiar with the Social Security Contributions (Transfer of Functions, etc.) Act 1999 and the equivalent Act in Northern Ireland. I understand that clause 8(6) and (7) deals with the appeals process although, as I say, the right hon. Gentleman could be forgiven for not appreciating that. That, however, provides a mechanism that I hope is helpful to him.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

I shall resist the temptation to ask the Minister whether he can explain to the Committee what that appeals procedure is, and I will perhaps look up the 1999 Act and the mechanism in due course.

Photo of David Gauke David Gauke The Exchequer Secretary

I can tell the right hon. Gentleman that it provides the standard national insurance contributions appeals procedure, which applies to decisions about  deductions or refunds under the clause. Of course, as we are all familiar with the standard appeals procedure for national insurance contributions, I will not detain the Committee by speaking at length on that subject.

Question put and agreed to.

Clause 5accordingly ordered to stand part of the Bill.