Clause 5

Part of National Insurance Contributions Bill – in a Public Bill Committee at 5:30 pm on 7th December 2010.

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Photo of David Hanson David Hanson Shadow Minister (Treasury) 5:30 pm, 7th December 2010

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.