§ The Committee met at four of the clock.
§ [The Deputy Chairman of Committees (Lord Ampthill) in the Chair.]
§ The Deputy Chairman of Committees (Lord Ampthill)
We shall adopt the usual procedure. Therefore, I think I may be excused for not reading it out. I move to the first Question that the Title be postponed.
§ Title postponed.
§ Clause 1 [Payment of Class 1 contributions: Great Britain]:
Lord Higgins moved Amendment No. 1:
Page 1, line 15, at end insert "but only in the next succeeding pay periods in which there are sufficient amounts of monetary earnings
§ The noble Lord said: In moving Amendment No. 1, I shall speak also to Amendment No. 2. Both amendments are in identical terms, but the second amendment is necessary to cover the situation in Northern Ireland.
§ The Bill has had a somewhat unusual history in that no amendments were moved in another place. The noble Lord, Lord McIntosh, commented on that at Second Reading. Even more remarkably—and I think probably totally without precedent—the proceedings were concluded in another place well within the limit set by the programming Motion; whereas nearly all other programming Motions have not allowed adequate time for full discussion and scrutiny in another place. One might perhaps express the hope that the days saved might be allocated to the Pensions Bill—or at any rate that the programming Motion for the Pensions Bill will give the other place time for such discussion and scrutiny, rather than leave your Lordships to straighten out various points which have not been considered.
§ Amendment No. 1 is in addition to measures discussed in another place. However, it is worthwhile spending a short time sorting out a few loose ends resulting from representations which we, and I imagine others, have had and which I think the Inland Revenue has had from the tax faculty of the Institute of Chartered Accountants.2GC
Perhaps I may ask the Minister about two points that arise from the Explanatory Notes. The Explanatory Notes are extremely helpful and most certainly necessary. Paragraph 6 deals with the liability for national insurance contributions. It states that this is a measure,
to simplify employers' administration"—
I think you could have fooled me. It goes on,
by: extending employers' ability to recover Class 1 contributions…by allowing the employer, with the agreement of the employee, to withhold an amount of the securities equal to the contribution liability".
I am slightly puzzled by the word "amount". I would have thought that it should be "value" of those securities rather than the amount, which I presume refers to some identifiable quality.
The other point that was not entirely clear is under paragraph 12 of the Explanatory Notes, which refers to the current position. It states:
The current limits on recovery from the employee may result in the employer being left unable to recover the primary contributions from his employee when the employer has paid them on the employee's behalf".
That brings me immediately to the amendment, which is essentially concerned with the question of timing.
§ The ability of the employer to recoup the payment that he has made on behalf of the employee, in the rather complicated circumstances described in the Bill, would appear to depend on him being able to secure a monetary amount within the same tax year. Consequently, if he is not able to obtain such a monetary amount from the employee, because the employee does not have any remaining monetary amounts that are due to be paid to him by the employer, it would seem that it would not be possible for the employer to recoup the amount from the employee.
Presumably there are two ways around that. One is to say that it does not have to be a monetary amount, in terms of an amount due from the employer to the employee, and another is simply to give a concession as regards timing, which is why the amendment reads:
but only in the next succeeding pay periods in which there are sufficient amounts of monetary earnings".
§ I have been provided with very elaborate arithmetical calculations on this matter but, as a blackboard is not provided on these occasions, I do not propose to go into them. It appears that such a situation can arise, so it would be true that the objectives of the Bill set out in the Explanatory Notes—namely, that the employer should be able to recoup the amount that he has paid on behalf of the employee—may be frustrated. I hope that the Minister agrees that this amendment and the one related to Northern Ireland are appropriate in these circumstances.
§ However, I was somewhat surprised when I looked at some of the examples that have been given to me. I assumed that the whole issue was related largely to stock options, and so on. I believe that it is common ground between ourselves and the Government that in particular circumstances that would be an appropriate 3GC way of incentivising employees. Apparently problems may also arise with regard to national insurance contributions in the circumstances that I have just described; namely, that the employer has paid them on behalf of the employee and recoups them from the employee. It would seem that that may also apply, for example, if the employer were to pay a telephone bill, which would count as his income, on behalf of an employee. The employee would be liable for national insurance contributions and the employer, having paid them on his behalf, would have difficulty in recouping them if there were a timing problem of the kind that I described earlier.
§ There may also be further complications if, for example, a pensions payment, properly known as FURBS—a funded unapproved retirement benefit scheme—were made immediately before the end of a tax year. If such a payment were made under FUR BS at the end of a tax year, which may not appear to be inappropriate timing from the company's point of view, it could run into the problems that I have just described in terms of recoupment.
§ These amendments are entirely consistent with the objectives that the Government have sought to set out. Alternatively, instead of the amendments, the Government could give a commitment that paragraph 7 of Schedule 4 to the Social Security (Contributions) Regulations 2001 would be reviewed to enable employers to reclaim from employees beyond the end of the year, and that could be achieved by way of a statutory instrument rather than these amendments. The amendments appear to be consistent with what the Government have in mind. There may be circumstances in which their objectives are frustrated if the amendments are not accepted. I beg to move.
§ The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Hollis of Heigham)
I am grateful to the noble Lord for explaining the purpose of his amendments. I gather that these are probing amendments essentially to try to put the situation on the record so that it is clear for the professionals involved as these matters are obviously very technical.
I shall try to explain some of the conceptual contexts and then seek to address the points that the noble Lord has raised. It may be useful to make clear how an employer can recover national insurance contributions that he has paid to the Inland Revenue on behalf of the employee. I hope to explain how recovery is made; why we limit the ability of the employer to recover; and why some specific forms of earnings have extended recovery provisions but others do not, about which the noble Lord was particularly concerned.
The employer is liable for secondary class 1 contributions and the employee is liable for primary class 1 contributions. However, the employer is liable to pay the primary contributions to the Inland Revenue on the employee's behalf in the first instance, although he may recover them from the employee subject to certain conditions. If an employer cannot 4GC recover the contributions from the employee under these conditions, he will have to bear the cost of the liability himself.
As the noble Lord will take for granted, in most cases recovery will not be a problem because the employer pays the employee in "cash". Contributions can therefore be deducted directly from these cash earnings before they are paid over. However, when an employer makes a payment of non-monetary earnings there is no cash directly to make the deduction from. This is where the issue arises.
It is convenient to turn to the issue of telephone charges in that situation. If an employee pays a telephone bill and is reimbursed by the employer, there is a class 1 A NICs charge—that is, the employer's charge—on the personal element of the telephone bill. This is an employer-only charge—a secondary NICs—so there is no problem with recovery of primary NICs from the employee. There may be other situations that the noble Lord has in mind, in which case perhaps he will reflect on them or write to me. Essentially the employer would be liable for the NICs only where there is a benefit in kind, which is the personal element of the telephone bill, because there is therefore no liability for the employee to pay.
At the time that the employer makes a payment of non-monetary earnings he will have to pay the primary contributions to the Inland Revenue. He can then choose to recover the primary contributions from the employee, within the limitations applying under the legislative framework.
It is necessary to apply some rules to the way in which an employer recovers primary contributions from employees to ensure employees are not subjected to hardship because of unreasonable deductions from their earnings. For example, if there were no restrictions an employer could deduct a year's worth of primary national insurance in one go, potentially leaving the employee with no take-home pay in that month.
To ensure that this does not happen the employer can only make "catch up" recoveries: from cash earnings; in the same year as the earnings are paid; and at an amount that is no more than the normal primary national insurance due on that month's earnings. In all cases with one exception, which I shall come to in a moment, recovery can be made only from an employee's subsequent cash earnings. In most circumstances this framework ensures that the employer will be able to recover the primary contributions while protecting the employee from economic hardship.
As the noble Lord explained, these "catch up" deductions are most commonly used for non-monetary earnings, where the deduction of the primary contributions cannot be made at the time the earnings are paid. The amendment would seek for extra flexibilities to extend the time even further when "catch up" deductions can be made. We could extend this time limit further in regulations—and we have done so for share-based earnings because we think these are a special case. Share-based earnings are often 5GC very large relative to cash earnings and can quite often make up the majority or a sizeable portion of an employee's annual remuneration package.
In such cases it may not be possible for the employer to recoup primary contributions on such earnings from subsequent cash earnings before the end of the financial year. Therefore, to ensure employers are able to recover contributions on such earnings in full, last year we amended regulations with respect to share-based earnings so that employers have an additional year in which they can deduct primary contributions from the employees' earnings—that is, in the year after payment of the share-based earnings. This is particularly helpful where the gain from the shares arises towards the end of the financial year. And the limit on the amount that can be recouped from the employees' future earnings is removed.
However, we did not think it appropriate then to apply this extension to other non-monetary earnings. We singled out share-based earnings for these additional recovery provisions for specific reasons. The value of earnings paid in the form of shares, and indeed the timing, is often not within the employer's control. For example, in the case of share options, there is usually a period of time during which the employee may exercise the option to acquire shares.
More significantly, the unpredictability of movements in share values means that the employer cannot, when the option is granted, predict the size of the employee's gain on exercise. And, as mentioned earlier, it is also not unusual for share-based earnings to form a very large proportion of cash earnings.
All those factors clearly distinguish share-based earnings from other non-monetary earnings in terms of the employer's control over the value and timing of the payment. In addition, share-based earnings, unlike other non-monetary earnings, give the employee a stake in his company, which we want to encourage, and allow him to share in its success. Evidence has shown that this acts as a great performance incentive and helps to increase the productivity of the economy and the company.
The Government are therefore keen to encourage employee share ownership. But our concern is that, if employers are unable fully to recover contributions paid on behalf of employees, they may decide not to use shares as a means of motivating employee performance. The Government have therefore amended regulations and are introducing Clauses 1 and 2 of the Bill so as to remove that potential disincentive to the use of employee share schemes.
The changes introduced by the Bill will be implemented by amending both primary and secondary legislation. There is flexibility and scope to extend the provisions to other forms of non-monetary earnings where appropriate without further primary legislation as the changes can be made by regulation. So amending the Bill is not necessary.
Furthermore, the amendment, as it stands, would actually prevent us extending the time period for recovery of contributions beyond the next available cash payment. As I explained earlier, we have already 6GC made regulations extending the time period for recovering primary contributions on share-based earnings to the next tax year. Those regulations would have to be remade to restrict employers' choices, thus completely defeating the objective of extending employers' ability to recoup primary contributions on share-based earnings.
I have listened to the noble Lord's argument and am not convinced that the problems that he believes exist for non-monetary earnings require this amendment to the Bill. I do not wish to restrict the Inland Revenue's ability to react to new types of payments by restricting the primary legislation, as he proposes in these probing amendments. I am also not sure that the case for extending recovery provisions in regulation, as has been done for share-based earnings, is justifiable for all forms of non-monetary earnings.
But—and I hope that this will be helpful—I am advised by Inland Revenue officials that they are ready to listen to particular concerns raised by employers' representatives about the regulations. The Inland Revenue wishes to review the provisions applying to the recovery of primary contributions by employers and, in doing so, will invite comments from employers and their representatives. The review will look at the regulations governing recovery at paragraph 7 of Schedule 4 to the Social Security (Contributions) Regulations 2001 and whether they could be more clearly set out; at the guidance given to employers about how and when they can recover contributions from their employees; and at problems that employers may be encountering in recovering primary contributions.
I hope that that addresses the general issues raised by the noble Lord. He asked in particular about "value" and "amount". Apparently, in drafting they are used interchangeably and they mean the same and so no weight should be attached to that.
The noble Lord also asked about FURBS—funded unapproved retirement benefit schemes. It is true that an employer, when making a payment of £30,000 into a funded unapproved retirement benefit scheme on the last day of the tax year would not be able to recover the £300 primary national insurance contribution from the employee. To ensure that that situation did not arise, the employer could conduct his pension review and payment in an earlier month. However, the review which the Inland Revenue will be carrying out, as I have mentioned, will look at the guidance issued by the department to employers on recover to see whether anything can be done to make it clearer and to ensure that such situations do not arise.
The noble Lord may be pleased to know that the Inland Revenue announced a consultative document on pensions issued in December 2003; and that there will be no national insurance liability on employer contributions to non-registered schemes—the successors to FURBS—in future. Therefore, the issue relating to the recovery of NICs will cease to be problematic.
I hope that I have addressed the noble Lord's points and that he will feel able to withdraw his amendment.
§ 4.15 p.m.
§ Lord Higgins
I thank the Minister for that extremely comprehensive and sympathetic reply. We are grateful. I was slightly puzzled by the argument that acceptance of the amendment would mean that the recoupment could take place only when the next cash payment was available rather than during the course of the year. I shall read carefully what she said about that. We are pleased that she is, prepared to review the problems we have raised and we are grateful for her clarification on telephone calls.
We tabled these proposals in relation to share options and share transactions, which we are all anxious to encourage. I am reassured on that by her answer both with regard to the statutory instrument amendment, which she mentioned, and on Clause 1, line 16,In sub-paragraph (4) (contributions in respect of ex-employees)".That covers the next tax year and relates only to ex-employers. I presume that the provisions relating to share options will be in statutory instruments. I shall read the Minister's answer carefully, but that was my understanding of it.
The FURBS issue may be important and I am grateful for her answer on that. It may be that at the end of the tax year a company has reasons for making a FURBS payment at the last minute. We would all want to encourage more pension provision and if that can be covered in the consultations she has kindly agreed to undertake, that, too, would be an advantage.
In the light of that, I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ Clause 1 agreed to.
§ Clause 2 [Payment of Class 1 contributions: Northern Ireland]:
§ [Amendment No. 2 not moved.]
§ Clause 2 agreed to.
§ Clause 3 [Agreements and joint elections: Great Britain]:
Lord Higgins moved Amendment No. 3:
Page 2, line 46, at end insert ", or
(d) a gain represented by the acquisition of securities which would fall within section 4(4)(a) above on the assumptions that the employee's earnings fell within section 15 (earnings for year when employee resident, ordinarily resident and domiciled in UK) or section 21 (earnings for year when employee resident and ordinarily resident, but not domiciled, in UK, except chargeable overseas earnings) of the Income Tax (Earnings and Pensions) Act 2003 (c. 1) when the right was granted and that the gain resulted from the exercise or satisfaction of a right to acquire securities."
§ The noble Lord said: In moving Amendment No. 3, I shall speak also to Amendment No. 4, which covers the situation in Northern Ireland. The measure is 8GC designed to simplify matters of somewhat mind-boggling complexity. I apologise if I tend to refer more copiously to my notes than normal, as I usually make it up as I go along—
§ Lord Higgins
On profound experiences, having survived 33 years of Finance Bills in the other place. I find this clause as difficult an example as I can remember coming across
. At all events, the amendment extends the election facility to employers with internationally mobile employees from abroad who are resident, but not ordinarily resident—those are terms of art within the tax legislation—who pay class 1 national insurance contributions. The Revenue is currently reviewing the tax treatment of share awards to such employees. The class 1 NICs liability was imposed last year. I forgot to say that this is all due to the appalling increase in national insurance contributions made by the Chancellor, but I would not have introduced an overtly partisan element into the matter. The liability to pay those contributions will not be removed, I presume, and it therefore seems appropriate to take this opportunity to introduce an election facility in the Bill. Owing to other pressures in the legislative timetable, it may not be possible to do so later on.
The Bill has been delayed for four years, following earlier changes, and obviously such a change requires primary legislation. It is desirable that we should do that now, rather than find that we must wait another three or four years before we can sort out the matter. The amendment is linked to Section 4(4)(a) of the Social Security Benefits and Contributions Act 1992 and while it uses the general language of Part 7 of the Income Tax (Earnings and Pensions) Act 2003, it does not refer to any specific part of it. We believe that the change we are proposing ought to go ahead, whatever the outcome of the review being undertaken by the Revenue.
The amendment applies only to the award of a right followed by subsequent acquisition of shares some time in the future—the situation of future uncertainty which the elections machinery in the Bill is designed to address. It would not, for example, apply when shares are immediately acquired and so forth.
The amendment would also apply only where the employee actually acquires shares. It would therefore operate where the share plan rules allow the employer the discretion to award cash in lieu of shares. However, in practice, the employer awards only shares. It is designed, in effect, to ensure that an election can be made in respect of restricted share plans and, as the Bill stands, some of those plans are covered and some are not. We see no justification for that. We believe that in all cases they should be made available in respect of shares acquired from a conversion of units on a later vesting date.
That meets the basic test of a contingent, but unascertainable, obligation of the employer to deliver the shares at a future date. The difficulty is knowing 9GC what value the shares will have when eventually the transaction is completed. It is a narrow point as it covers only people who are moving in and out of a country, who are resident but not ordinarily resident and who pay these contributions. It would be desirable to adopt the amendment as it would enable that group of people to operate within the framework and objectives which underlie the Bill. I beg to move.
§ 4.30 p.m.
§ Baroness Hollis of Heigham
Again, I thank the noble Lord. I shall again seek to put on the record what we are doing in this respect in the hope that no ambiguity will arise for the organisations most obviously affected by the technical detail.
The purpose of the noble Lord's two amendments appears to be to extend the scope of Clause 3 in two ways. First, it seeks to allow the transfer of secondary class 1 national insurance liabilities which may arise on payments of security-based earnings to persons who are internationally mobile but working temporarily in the U K. Secondly, it seeks to allow the transfer of any secondary class 1 national insurance liabilities which may arise on earnings derived from employment-related awards of restricted stock units.
On the first point, while the Government understand why that outcome is sought, we strongly believe that this is not the right way, or time, to address the issue. The amendment attempts to achieve its objective by introducing a statutory fiction that assumes, for national insurance purposes—this is usually where the noble Lord tells me that national insurance is a statutory fiction, too—that the earnings arise under statutory rules that simply do not apply to such earners. We do not believe that the amendment would work.
In addition—I believe, importantly—no evidence has been provided to suggest how widespread or significant is the problem that the amendment seeks to address. In fact, only one substantive representation has been received on this issue—from the Institute of Chartered Accountants of England and Wales. But they have provided no evidence of the scale of the problem in terms of numbers of employers and employees affected. I do not know whether the noble Lord has any such information that he can share with us.
As I am sure the Committee is aware, the Inland Revenue is already undertaking an extensive review of residence and domicile rules as they affect the taxation of individuals. The way in which the tax, and therefore national insurance, legislation applies to payments of security-based earnings to internationally mobile employees is clearly closely related to that work. Therefore, it would be inappropriate and premature to introduce unnecessary complexity and confusion—when we all want simplicity and transparency—by making piecemeal changes, such as that sought by the amendment, to the national insurance legislation in isolation and before any review has been completed.
Our objective, which I know the noble Lord will share, must be a coherent, well thought-through and clearly structured set of rules applying to this form of 10GC remuneration. That cannot be achieved by tinkering with legislation which is peripheral to, and follows from, the core set of tax rules applying to security-based earnings. However, I can assure the Committee that any review of the tax treatment of security-based earnings for internationally mobile employees will look carefully at the issues which this proposed amendment seeks to highlight.
In addition, in line with the Government's ongoing objective of aligning as far as possible the national insurance and tax treatment of earnings, any changes that may in the future be made to the tax rules applying to security-based earnings will continue to determine the national insurance treatment of such earnings.
On the second objective of the amendment, we do not consider that the amendment is necessary. The question of whether earnings from "restricted stock units" should be within the scope of the NIC transfer facility was addressed in the other place. As my right honourable friend the Paymaster General clearly explained, the term "restricted stock units" is used to refer to a variety of arrangements for paying earnings to employees by way of securities. Therefore, it is clear that the exact nature in which a restricted stock unit provides an employee with earnings will determine whether the employer's national insurance liability on those earnings may be passed to the employee.
If the earnings so received do not fall into one of the three categories of relevant employment income, as defined by Clauses 3 and 4 of the Bill, we do not believe that allowing the employer to pass his national insurance liability to the employee is justified. For example, if a restricted stock unit is a right to acquire securities, earnings derived from it may already be the subject of a national insurance transfer. But restricted stock units which are, in fact, rights to acquire cash rather than securities are not subject to the same tax and national insurance rules and may not, therefore, be the subject of a national insurance transfer.
The Government's policy objective in introducing the national insurance transfer facility, and the extension of that facility in Clauses 3 and 4, is to remove a barrier to wider employee share ownership, which, as I said earlier, research shows has a link to improved productivity. As the noble Lord accepts, that barrier is the requirement to account for the future unpredictable national insurance liability—an issue which, we understand, almost by definition, does not arise in respect of restricted stock units.
I must stress that the ability to transfer the employer's national insurance liability to the employee is an exception to the fundamental principles of the UK contributory system—that employers must pay their own national insurance liabilities rather than pass those costs on to employees.
It is an exception that is justified only in a small set of circumstances in which an employer wishes to award shares to motivate employees' performance, but faces real problems in terms of accounting for an unquantifiable national insurance liability that will arise on certain future chargeable events.
11GC Extending this facility to other forms of earnings where perhaps no such problem arises would allow employers to reduce their contribution to the cost of funding the NHS and contributory benefits system. That would be unjustifiable and unacceptable as it would significantly increase the financial burden on employees and undermine the fundamental basis for funding the NHS and the national contributory benefits system.
I hope that my explanation as to why we do not feel the amendment is appropriate will satisfy the noble Lord. I do not know that there is anything else I need to say in response to his amendment. If there is, I am sure he will come back to me. I hope that in the light of what I have said, the noble Lord will feel able, particularly when he has had the chance to scrutinise the words in Hansard, not to pursue the matter further after today.
§ Lord Higgins
We are most grateful to the noble Baroness for that reply. understand her to say that in the review of residence and domicile and so on currently being undertaken by the Revenue, the kind of point I have raised today on restrictive stock units will be considered so that an overall view of these issues is taken. As regards the narrow issue, the Minister's reply leads me to withdraw the amendment.
Having said that, I suddenly realised that we move from the enormous complexity of these issues into some wider philosophical issues. In a debate which followed the debate we had on the Floor of the House, the whole question of national insurance was discussed: whether there really was a National Insurance Fund; whether one should continue, given that the Chancellor himself has integrated the national insurance system—and indeed the Bill helps to integrate the national insurance system into the general tax structure of this country; and whether it is appropriate to retain the present structure other than by way of passporting benefits and so on.
However, when the noble Baroness was speaking, another point suddenly occurred to me. As I understand it, national insurance contributions are being paid by people from overseas who are resident—but who are not normally resident—in the UK; for example, a German working in a multi-national company who happens to be based in London. I think that is probably—
§ Lord Higgins
I was going to be really awkward and use a company like Shell which is based both in the UK 12GC and elsewhere in Europe. That may well be a case in point. However, I do not want to go into specific company situations because I am not familiar enough with the details of those extremely complex company structures.
I was taking an example to make a point. Let us take a German working in the UK who is normally resident in Germany, but at the moment is resident in this country. He is therefore liable for national insurance contributions. What does he get in exchange for those national insurance contributions? He certainly will not build up a sufficient contribution record, so it is a straight tax that he is paying. He does not get anything at all. The noble Baroness shakes her head.
§ Baroness Hollis of Heigham
A company's location will determine whether it pays contributions in the UK or in the country where the employee is working. Under accession there is, so to speak, a knock-forknock situation. Therefore, paying contributions here will add to an employee's contribution records at home. Employees will have such an entitlement. In that sense, a knock-for-knock situation on national insurance is part of worker rights. Therefore, in the same way that a worker can pay national insurance contributions and tax while working here, if he were sufficiently low paid he would be entitled, for example, to tax credits. Equally, he would be entitled to build up a contributory benefit towards a pension which he would not be able to draw, but it would allow him to have a complete record in terms of his ordinary residency in Germany. In that sense, the knock-for-knock situation is a consequence of the free migration of labour.
§ Lord Higgins
That is a very helpful comment. I am not sure that the use of the expression "knock-for-knock", which implies that there has been an accident, is necessarily appropriate. Be that as it may, in regard to my main point, the Minister's comment that the consultations will take these very difficult issues into account is extremely helpful. I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ Clause 3 agreed to.
§ Clause 4 [Agreements and joint elections: Northern Ireland]:
§ [Amendment No. 4 not moved.]
§ Clause 4 agreed to.
§ Remaining clauses and schedules agreed to.
§ Bill reported without amendment.
§ Committee adjourned at eighteen minutes before five o'clock.