National Insurance Contributions Bill

National Insurance Contributions Bill

DPRR/13-14/84

NATIONAL INSURANCE CONTRIBUTIONS BILL

Memorandum for the House of Lords Delegated Powers and Regulatory Reform Committee

INTRODUCTION

  1. This memorandum has been prepared by Her Majesty’s Revenue and Customs (HMRC) for the purposes of the House of Lords Delegated Powers and Regulatory Reform Committee. It identifies the provisions in the National Insurance Contributions Bill (the Bill) which confer powers to make delegated legislation. It explains the purpose of the delegated power proposed; why the matter is to be dealt with in delegated legislation; and the nature and justification for any parliamentary procedures which apply.

BACKGROUND

  1. The Bill takes forward a number of Government announcements. The provisions of the Bill where powers have been taken are those:
  • Creating an employment allowance for businesses, charities and Community Amateur Sports Clubs;
  • Introducing a reduced rate of secondary Class 1 National Insurance contributions (NICs) for all employers in respect of the earnings of a specified age group;
  • Applying the general anti-abuse rule (GAAR) to NICs;
  • Introducing a statutory mechanism as part of the Budget measure on Partnerships Review to tackle the tax issue arising from the interaction of the Alternative Investment Fund Managers Directive (AIFMD) and the existing partnerships rules;and
  • Treating certain individualsas employed earners of a Limited Liability Partnership (LLP).
  1. The Bill extends the extent of an existing vires for oil and gas workers on the UK Continental Shelf. It also amends the parliamentary procedure for an existing power in the Social Security Contributions and Benefits (Northern Ireland) Act 1992 (SSCB(NI)A) and makes it clear what form instruments made by the Secretary of State under the Social Security Administration (Northern Ireland) Act 1992 (SSA(NI)A) should take.

The Employment Allowance

  1. Employers have to pay NICs for each of their employees. The Chancellor announced at Budget 2013 that from 6 April 2014 every business, charity and Community Amateur Sports Club in the UK will be entitled to an employment allowance of up to £2,000 towards their employer NICs bill to reduce the cost of taking on new staff for small businesses.

Reduction of secondary class 1 NICs for under 21s

  1. In his Autumn Statement on 5 December 2013, the Chancellor of the Exchequer announced a zero rate of secondary Class 1 NICs for all employers in respect of the earnings of any employee under the age of 21. The measure will apply both to new and existing employees aged under 21 with effect from 6 April 2015. The provisions in the Bill giving effect to the announcement include a regulation-making power, exercisable by the Treasury, to extend a reduced rate of secondary Class 1 NICs to earnings of employees in other age groups.

General Anti-Abuse Rule (GAAR)

  1. The Government announced at Budget 2012 that it had accepted the recommendations of the Aaronson Report to introduce a GAAR targeted at abusive tax avoidance schemes. The Tax GAAR was introduced by the Finance Act 2013.
  1. The GAAR, as this Bill would apply it with modifications, is designed specifically to target only those NICs arrangements which are regarded as abusive. The rules will consider whether an arrangement is abusive, by considering whether the arrangement can reasonably be regarded as reasonable - and if it cannot, then any resulting NICs advantage would be counteracted by making adjustments to charge the right amount of NICs.

Oil and Gas Workers on the UK Continental Shelf

  1. At Budget 2013 the Chancellor announced that the Government would strengthen legislation in respect of offshore employment intermediaries.
  1. The Bill amends the power in section 120 of the Social Security Contribution Act 1992 (SSCBA) to enable the Treasury to make regulations to create a certification system so that, in the cases where the offshore employer of the relevant workers is fulfilling the filing and payment responsibilities as agent of the secondary contributor licensee, a certificate can be issued confirming payment.

Partnerships Review –new provision for deferred profits under the Alternative Investment Fund Managers Directive (AIFMD)

  1. As part of the partnerships review consultation carried out between May and August 2013, HMRC received further information about a tax issue that can arise from the interaction of the AIFMD and the existing partnership tax rules.For example, a hedge fund manager may under the requirements of the AIFMD only have access to partnership profits after a deferral period of three to five years, but would under existing rules be liable to tax on the profits in the year when they arise. HMRC has proposed to set up a new statutory mechanism to address this issue and changes are required to be made to Class 4 NICs legislation to facilitate the proposed introduction of the mechanism. New tax legislation will also be required and will be subject to the Finance Bill 2014 process.

Partnership Review – new provision for treating certain individuals as employed earners of the LLP

  1. At Budget 2013 the Chancellor announced that the Government would consult on removing the presumption of self-employment for LLP members, to tackle the disguising of employment relationships through LLPs in certain specified circumstances. Subsequent to this consultation HMRC was informed of a proposed scheme to avoid this measure.
  1. Changes to income tax legislation will be introduced in Finance Bill 14 and will take effect from April 2014. In order to implement this measure for NICs purposes in a way that will counteract the proposed avoidance scheme a power will be included in the NICs Bill to make the necessary statutory changes by way of regulations.

TERRITORIAL EXTENT

  1. NICs are a reserved matter (or an excepted matter in Northern Ireland) in each of the devolved administrations; hence the provisions in this Bill relating to NICs will extend to England, Scotland, Wales and Northern Ireland.
  1. Northern Ireland has separate sets of primary legislation that replicates the legislation for Great Britainalthough the Social Security (Contributions) Regulations 2001 cover both Great Britainand Northern Ireland, unless otherwise stated. The relevant Acts are the SSCB(NI)A and the SSA(NI)A. The Social Security Contributions (Transfer of Functions, etc) (Northern Ireland) Order 1999 transferred responsibility for NICs in Northern Ireland from the Department of Health and Social Security (Northern Ireland) (now the Department of Social Development) to Treasury Ministers and the Board of Inland Revenue (now HMRC). The Treasury and HMRC therefore have UK-wide responsibility for NICs.

PROVISIONS FOR DELEGATED LEGISLATION

Clause 4 – How does a person who qualifies for the employment allowance receive it?

  • Powers conferred on: HMRC
  • Powers exercisable by: administrative arrangements
  • Parliamentary procedure: none
  1. Clause 4(1) provides for arrangements to be made by HMRC for the purpose of administering deductions of the employment allowance.
  1. Subsection (4) provides some examples of the arrangements HMRC can provide for including that deductions must be made at the earliest opportunity in the tax year, the cases that deductions cannot be made, to place limits on the amount of deductions and the form, manner and information required by HMRC before deductions can be made. The arrangements will take the form of guidance published by HMRC.
  1. The arrangements will prescribe the process to be followed by persons wishing to claim the employment allowance, in particular that they must be made from a PAYE scheme, that where an employer operates more than one PAYE scheme the employer must nominate which scheme against which to make the deduction, and that only one PAYE scheme may be nominated in the tax year.
  1. It is appropriate to do this administratively as it sets out the procedure and the arrangements HMRC will put in place to enable employers to claim and deduct the allowance from their liability to pay secondary Class 1 NICs. The power does not allow HMRC to override any provisions in the primary legislation and it will not affect the eligibility for the allowance, the amount of the allowance nor the design of the scheme. It is therefore considered unnecessary for them to be subjected to Parliamentary control.
  1. A draft of the administrative arrangements was published on 21 November 2013 and was available during the Commons Committee stage of the Bill.

Clause 5 – Power to amend the employment allowance provisions

  • Powers conferred on: the Treasury
  • Powers exercisable by: regulations made by statutory instrument
  • Parliamentary procedure: affirmative resolution

Clause 5(1)(a)

  1. Clause 5(1)(a) enables the Treasury to make regulations to increase or decrease a person’s employment allowance for a tax year. Clause 1(2) provides that a person’s employment allowance for a tax year is either £2000; or if less, an amount equal to the total amount of secondary Class 1 contributions liabilitydue in that year.
  1. The amount of the employment allowance is set against the background of current economic considerations and the Government may wish to amend it to reflect changing circumstances. As the scheme is not part of the tax regime, there is not the regular opportunity to amend the allowance in the Finance Bill, so were this power not included in the Bill there would need to be additional primary legislation solely to cater for any increase or decrease of the amount.
  1. The Government does not consider that primary legislation solely to amend the allowance is justified but wants to ensure that Parliament has the opportunity to debate any change in the amount of the allowance.
  1. Where the regulations decrease a person’s employment allowance the regulations may not be made unless a draft of the instrument has been laid before and approved by a resolution of each House of Parliament (clause 5(5), the “draft affirmative procedure”).It is considered that this provides a suitable level of parliamentary scrutiny.
  1. Where the regulations increase a person’s employment allowance they will be subject to the affirmative procedure and will come into force when laid unless within the period of 40 days the instrument is not approved by a resolution of each House of Parliament (clause 5(6)). This ensures that any increase in the allowance, which is to the benefit of employers, can take effect whilst ensuring that there is properparliamentary scrutiny.

Clause 5(1)(b)

  1. Clause 5(1)(b) provides a power exercisable by the Treasury to make regulations to add, reduce or modify the cases in which a person cannot qualify for an employment allowance or in which liabilities to pay secondary Class 1 NICs are excluded liabilities. It will enable the Treasury to make changes to sections 2 and 3 and Schedule 1 of the Act.
  1. Clause 2 sets out cases in which a person cannot qualify for an employment allowance for a tax year and the cases in which liabilities to pay secondary Class 1 NICs are “excluded liabilities” i.e. liabilities that cannot be taken into account when considering the total amount of liability to secondary Class 1 NICs which counts towards the allowance.
  1. Clause 3 provides that where two or more companies or two or more charities are connected with one another, only one may qualify for the employment allowance. Schedule 1 sets out the rules for determining if two or more companies or two or more charities are connected. The connected persons rule is aimed at preventing abuse of the maximum employment allowance for a tax year.
  1. Clause 3 and Schedule 1 have been drafted to take account of the particular circumstances in which persons may be connected with each other. It contains detailed rules, largely based on a modified application of the main connected rule for income tax, but also contains a specific rule for charitable trusts to reflect the large number of charities which are trusts, based on section 5 of the Small Charitable Donations Act 2012. Nevertheless, it remains possible that some persons may exploit the rules by using companies and charities which are in fact connected and managed by a small number of individuals, yet find a way round the connected persons rule as drafted. Conversely, it may be that the rules prove to be too harsh in practice. It will only be possible to identify whether the rules as drafted meet their aim once the scheme is running and HMRC has been able to monitor companies’ and charities’ behaviour. The power will enable the Treasury to adjust the rules to ensure they are set at the right level.
  1. Regulations under clause 5(1)(b) are subject to the draft affirmative procedure (clause 5(5)). It is considered appropriate because the effect of regulations could limit those who are eligible for the allowance or the amount of secondary liability that can be taken into account for the purposes of the allowance and any tightening or loosening of the connected persons rules will have consequences for companies and charities andtheir eligibility for the allowance, so that the draft affirmative procedure is justified.

Clause 5(2) and (3)

  1. Clause 5(2) and (3) prescribe that section 175(3) to (5) of the SSCBA applies to the powers to make regulations conferred by clause 5. Section 175(3) provides for regulations to make either the same provision for all cases or different provision for different cases or classes of case. Section 175(4) provides that any power to make regulations includes a power to make incidental, supplementary, consequential or transitional provisions as appear expedient.
  1. The purpose of subsections (2) and (3) is to allow for provision to be made to have different rates of the employment allowance for different groups of employers, if necessary. It is considered appropriate that the general regulation powers in the SSCBA apply to the employment allowance to enable the allowance to be fully integrated into the NICs scheme.

Clause 7 – Retention of records

  • Amendment to powers conferred on: the Treasury
  • Powers exercisable by: regulations made by statutory instrument
  • Parliamentary procedure: negative resolution
  1. Clause 7 amends the power in paragraph 8(1) of Schedule 1 to the SSCBA and the SSCB(NI)A to make regulations relating to the retention of records to include purposes connected with the employment allowance.
  1. Regulations will not be made using the amended power as the amendments have been made in the Bill. However, as the employment allowance is a new feature of the NICs scheme it is important that the Treasury is able to manage the scheme and prescribe the records that must be maintained relating to the claim for the allowance. It is considered that the negative resolution procedure is appropriate as the power will be used to prescribe a practical arrangement of the employment allowance.

Clause 9(3) – New section 9A(4) SSCBA: Power to add an age group and specify the percentage rate of secondary Class 1 NICs which is to apply to them

  • Power conferred on: the Treasury
  • Power exercisable by: regulations made by statutory instrument
  • Parliamentary procedure: negative resolution
  1. Clause 9(3) introduces new section 9A to the SSCBA. New subsection 9A(4)(a) enables the Treasury to make regulations to add an age group to those in respect of whom a reduced rate of secondary Class 1 NICs applies (“the age-related secondary percentage”) and to specify what that reduced rate is. New subsection 9A(5) sets out that the percentage rate specified must be lower than the secondary percentage otherwise applying in respect of that age group.
  1. New subsection 9A(4)(b) enables the Treasury to make regulations to reduce, or further reduce the percentage rate specified in respect of an age group to whom the age-related secondary percentage applies.
  1. The age-related secondary percentage applying to earnings paid to or in respect of employees under the age of 21 has been set against the background of current economic considerations, and the Government may wish to extend the scope of the reduced rate to reflect changing circumstances. As NICs are not part of the tax regime, there is not the regular opportunity to amend the rate in the Finance Bill, so were this power not included in the Bill there would need to be additional primary legislation to reduce the rate of secondary class 1 NICs payable to specified age groups.
  1. As the effect of the power would be either to extend a relief from secondary Class 1 NICs to more employers or otherwise to reduce or further reduce the rate at which secondary Class 1 NICs are calculated, this being below such secondary percentage as would otherwise apply, the Government considers that the negative procedure is appropriate in these circumstances.

Clause 9(3)– New section 9A(7) SSCBA: Power to set an upper secondary threshold in relation to an age group in order to limit the amount of earnings to which the age-related secondary percentage will apply

  • Power conferred on: the Treasury
  • Power exercisable by: regulations made by statutory instrument
  • Parliamentary procedure: affirmative resolution
  1. Clause 9(3) introduces a new subsection 9A(7) to the SSCBA which provides a power exercisable by the Treasury to make regulations to set for every tax year an upper secondary threshold in relation to an age group to whom an age-related secondary percentage applies and to specify the amount of that threshold for a tax year. New subsection 9A(8) provides that subsections (4) to (6) of section 5 of the SSCBA are to apply to the power at new subsection 9A(7) for the purposes of prescribing equivalents to the upper secondary threshold for earners paid otherwise than weekly.
  1. New subsection 9A(9) provides that in so far as an upper secondary threshold has been provided in respect of an age group, and where earnings paid to or in respect of that age groupexceed that upper secondary threshold, the secondary percentage, which is currently 13.8%, will apply.
  1. As the level of an upper secondary threshold willbe used to determine to what extent the lower age-related secondary percentage will apply to the earnings of a specified age group, the Government may wish to alter the level at which a threshold is set to reflect changing circumstances. As NICs are not part of the tax regime, there is not the regular opportunity to amend the level of an upper secondary threshold in the Finance Bill, so were this power not included in the Bill there would need to be additional primary legislation to alter the amount of the threshold when required.
  1. In so far as it represents a decrease to an upper secondary threshold previously set,the use of the power at new subsection 9A(7) will limit the amount of earnings to which the age-related secondary percentage will apply and mean that employers will be liable to pay the higher secondary percentage rate on more earnings. It is thereforeconsidered that the draft affirmative procedure provides the appropriate level of parliamentary scrutiny, affording each House of Parliament the opportunity to debate the level at which an upper secondary percentage is set.

Clause 11 – Power to modify application of the GAAR to NICs

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