Examination of Witness

National Insurance Contributions(Rate Ceilings) Bill – in a Public Bill Committee at 9:27 am on 27 October 2015.

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John Whiting gave evidence.

Q 1

Photo of Andrew Rosindell Andrew Rosindell Conservative, Romford

Ladies and gentlemen, good morning to everyone, including members of the public, officials and the Minister, who have just arrived.

We will now hear oral evidence from the Office of Tax Simplification. Before calling the first Member to ask a question, I should like to remind all Members that questions should be limited to matters within the scope of the Bill and that we must stick to the timings in the programme motion that the Committee has agreed. For this session, we have until 10 am. Could the witness please introduce himself for the record?

John Whiting: Thank you. I am John Whiting, tax director of the Office of Tax Simplification. I am also a non-executive director of Her Majesty’s Revenue and Customs and a board member of Revenue Scotland.

Q 2

Photo of Rebecca Long-Bailey Rebecca Long-Bailey Shadow Minister (Treasury), Member, Labour Party National Executive Committee

The Bill legislates to prevent rises in the current rates of class 1 and secondary class 1 national insurance contributions, but says nothing about the thresholds. In your opinion, are changes to thresholds absolutely ruled out for the duration of the Parliament?

John Whiting: From a simplification point of view, we tend to leave rates and thresholds as a policy matter for Ministers, but naturally, one of the main projects we have on our agenda is looking at closer alignment of income tax and national insurance. As part of that review, we are inevitably considering the impact of thresholds and other factors about the structure of national insurance, and whether bringing them into closer alignment with income tax in some way would bring some simplification. As I read the Bill, it is all about capping rates rather than thresholds, but I stress that how those are treated is really a matter for Ministers.

Q 3

Photo of John McNally John McNally Scottish National Party, Falkirk

You will know that there has been a lot of speculation in the past two days regarding the possibility of changing the national insurance contribution because of the tax credit cuts. Have you any comment to make on that as a possibility?

John Whiting: Again, Mr Mc Nally, I have to say that the actual rates of national insurance are something that we at the Office of Tax Simplification steer clear of, other than to consider whether they add complexity or simplification. To give an example away from national insurance, we drew attention to having two rates of corporation tax. Obviously, that was a complexity, as they have now been harmonised on one rate. That is an obvious simplification and easier for business. That is about as far as we tend to go with rates, but in terms of absolute rate setting, I cannot comment, other than to say that, whenever you make a change to the tax system, it adds a measure of complexity and confusion.

Q 4

Photo of Wendy Morton Wendy Morton Conservative, Aldridge-Brownhills

The balance of the national insurance fund has continued to fall sharply in spite of the modest economic recovery. Is not legislating to prevent even small rises in national insurance contributions throughout the Parliament irresponsible under those circumstances?

John Whiting: The national insurance fund is obviously something that I am aware of, and how it operates is an interesting question. It is certainly something that we, with our current review, want to look at. What I can say is that we want to examine how much people really understand about how the fund operates and whether they really appreciate, in effect, what national insurance pays for and where it goes. For me to come up with an  opinion about where the fund sits at the moment is a little premature. However, I can say that just how it operates is something we want to examine, and, as I say, there is the fairly crucial question of how much people really understand about national insurance and how it operates.

Q 5

Photo of Rebecca Long-Bailey Rebecca Long-Bailey Shadow Minister (Treasury), Member, Labour Party National Executive Committee

This is linked to the previous question. In the light of the response that you just provided, how would you say the fund would cope if there were an unforeseen crisis, given the restrictions that are placed upon it?

John Whiting: I know that the mechanics of the fund are such that the balance on the fund is assessed every year by the Government Actuary’s Department, and of course, if it looks as if the fund is too low, or if there is not sufficient coverage for its likely liabilities, as happened earlier this year, the Treasury will make a grant to the fund to keep it at the level that the Government Actuary’s Department feels is appropriate. I suspect that in terms of a sudden crisis—given that the fund’s main function is pensions and similar outgoings, hopefully there will not be a sudden crisis; it is a demographic trend that we can see or not—or a problem with the funding, it is over to the Treasury to make a grant and I have no doubt that Committees such as yours would have a view on such matters.

Q 6

Photo of Huw Merriman Huw Merriman Conservative, Bexhill and Battle

This question is linked to previous questions on the fund. Perhaps using your expertise, would you tell us what steps have been taken to ensure that the fund’s 16.7% threshold is maintained?

John Whiting: It really is down to the Government Actuary looking at how adequate that is and preparing reports for Her Majesty’s Revenue and Customs and Ministers on the balance of the fund. That leads to decisions as to whether the fund is adequate or whether supplementary grants are needed and will, I presume, influence Treasury Ministers’ minds on what level of contributions is appropriate. However, without wishing to duck the question, I have to say that we are getting into matters of rates, which is beyond matters of the OTS.

Q 7

Photo of Huw Merriman Huw Merriman Conservative, Bexhill and Battle

May I further ask whether you agree with the Government Actuary that a subsidy from the Treasury will be required this year? If you do agree, do you have a view on how big this would need to be?

John Whiting: From figures I have seen, a grant will probably be needed this year. I do not have the figures to hand, but I believe that a grant will be needed. I believe an amount has already been tabled and discussed.

Q 8

Photo of Huw Merriman Huw Merriman Conservative, Bexhill and Battle

In a way, you have just touched on this, but to be absolutely clear, how much money from the fund do you think will be required to maintain it above the threshold for the remainder of the Parliament? I know that is perhaps a little more into the future.

John Whiting: It is. I am not an actuary—I can only refer you to the Actuary’s reports that have been published. The annual reports of the national insurance fund will shortly be laid. I believe that the Comptroller and Auditor General, Sir Amyas Morse, has just signed them off on behalf of the NAO, so they will shortly be tabled.

Q 9

Photo of Phil Boswell Phil Boswell Scottish National Party, Coatbridge, Chryston and Bellshill

I was wondering what the process is for determining the 16.7% threshold and when was the last review.

John Whiting: The honest answer to that is I do not know. I am afraid I have to say, again, I am not an actuary. It is the figure that I believe has been set for a while as a prudent level of funding, but it is for the actuaries to determine. As far as I am aware, the Government Actuary looks at the funding of the national insurance fund annually and makes appropriate recommendations.

Q 10

Photo of Rebecca Long-Bailey Rebecca Long-Bailey Shadow Minister (Treasury), Member, Labour Party National Executive Committee

Are you aware of what steps the Government have put in place to reverse or amend this legislation in the future, and do you believe that there are any specific triggers that should lead to its suspension?

John Whiting: I have no knowledge of any plans the Government have to reverse this legislation, nor should I. As I read it—and I come back to the job that I have in hand, which is to look at alignment of income tax and national insurance—clearly, the areas that we are looking at could produce recommendations to make some structural changes to national insurance. Those recommendations would go to the Chancellor and Treasury Ministers, and it would then be up to them to consider them and to bring them forward. They would come before Parliament in the normal way and would no doubt lead to a full debate. Could that lead to an amendment to the Bill? I presume that it could, but that is for Parliament to decide. What I would stress is that our recommendations will no doubt be subject to an awful lot of scrutiny and debate. If we come up with recommendations, they will be long-term and it would be highly appropriate to have a full debate on them.

Q 11

Photo of Alan Mak Alan Mak Conservative, Havant

The Government have said that the Bill has no financial implications. If a grant is needed from the Treasury to maintain the mandated threshold of 16.7% of expenditure, do you think that this constitutes a financial implication?

John Whiting: I think that, in those terms, the nature of the national insurance fund, certainly as I have seen it over the years, inevitably goes up and down with the economy to a certain extent. The fact that there is a grant perhaps this year is not of itself exceptional. We are back to attempting predictions, which actuaries are very good at in this area, and seeing what the trends are. This is governed by such things as employment, because if more people are employed, earning more, there is more national insurance going into the fund, so potentially less need for a grant. Of itself, if we take the Bill as it stands, the question of a grant or whatever, is subject, as I said earlier, to what the Government Actuary is going to say about the likely outcome and the likely balances on the fund, which will have to take into account economic circumstances and the general position of contributions.

Q 12

Photo of Matt Warman Matt Warman Conservative, Boston and Skegness

Given the fall in the national insurance fund, are there implications for continued NHS funding from the fund?

John Whiting: We are back to the question of what the fund is for. It is predicated on paying out benefits, particularly pensions. It is really a question you should  address to the Treasury, with respect, because it determines where the money comes from. On an entirely personal level, I do not see a direct connection between the balance on the fund and funding for the NHS, but we are going into areas well beyond my compass with the OTS.

Q 13

Photo of Matt Warman Matt Warman Conservative, Boston and Skegness

From your perspective, you are not anticipating making any cuts to NHS funding, or NHS funding going down overall?

John Whiting: I am afraid that I do not have the power to change the tax system, far less make cuts. My role is to make recommendations and it is for Ministers and Parliament to decide on such weighty matters. I know my place.

Q 14

Photo of Lucy Frazer Lucy Frazer Conservative, South East Cambridgeshire

The Bill is part of the Government’s commitment to simplifying the tax system, but might the freeze on rates and on other taxes lead to complicated attempts to raise taxes in other areas? You have already mentioned that there might be a grant, which might necessitate raising taxes in other areas. Does that, in your opinion, exacerbate the problem of simplifying the tax system?

John Whiting: The fact that rates are kept stable is of itself a simplifying measure, because work we have done in the past has shown that the greatest source of complexity is change. It is as simple as that: the more changes you make to the tax system, the more businesses in particular and individuals to a lesser extent are confused and have difficulty with the tax system. Simply keeping rates stable is of itself a simplifying point. Your question, could this lead to more complexity elsewhere, is a very good one. I hope that, whether or not the rates are kept the same, that still leaves plenty of scope for us to bring forward recommendations about simplifying the structure of the tax system, making it easier to run.

We are looking at things such as the definition of earnings—although, conceptually, income tax and national insurance both broadly apply to earnings, the definitions are subtly different. Should those be harmonised? Should national insurance perhaps run on an annual, cumulative basis, rather than on a week-by-week basis as it does now, with parallel PAYE? Considering those areas, which could lead to simplification, is not in any sense affected by the tax rates, the ceilings that we have on this. As one or two people have pointed out, these ceilings do not preclude reductions in rates but, either way, as I read it, this does not hamper at all our work in looking at how the system will work and whether we can find areas that would simplify its operation for employers, individuals and, indeed, HMRC.

Photo of Andrew Rosindell Andrew Rosindell Conservative, Romford

That concludes the questions of which I have been given notice. Does any Member wish to ask any further or additional questions? No. I thank Mr Whiting for his evidence. We will now move on to the next panel.