|National Insurance Contributions and Statutory Payments Bill
Norman Lamb: I, too, welcome you to the Chair, Sir John. I join the hon. Member for Hertford and Stortford in asking the Paymaster General to summarise the effect of the draft regulations that have been handed to us this morning. The explanatory notes include several references to what will be provided for in regulations in relation to clause 1. Do the draft regulations that have been prepared accurately reflect that?
My second point is about non-monetary earnings. I want to understand whether that term is defined anywhere. The Paymaster General is nodding, and I shall be interested to hear her full answer. I do not think that I need to develop the point, as she seems to be giving confirmation.
As I understand matters, existing regulations for the current more limited arrangements already provide protection to ensure that employees are not exploited by employers. I should be grateful if the Paymaster General could summarise that protection and explain how she has ensured that it remains, given that we are widening the scope for agreements between employers and employees.
Dawn Primarolo: I should perhaps make clear the difference between clauses 1 and 3. I should like to return to the question of election and the protection of the employee under clause 3. Clause 1 deals with the employer's ability to recoup the employee's class 1 national insurance liability. The election arises under clause 3, which deals with payment of employers' class 1 liability. In relation to clause 1, procedures have been established for some time.
On the point about non-money earnings, agreements can be made on all earnings classified as security-based earnings by section 420 of the Income Tax (Earnings and Pensions) Act 2003, as amended by schedule 22 to the Finance Act 2003, as hon. Members will remember. Schedule 22, as those who served on the Finance Bill Committee last year will remember, was the rewriting of all the share-based and share ownership schemes, in recognition by the Inland Revenue of certain schemes.
The majority of security-based earnings are paid in the form of shares. However, the legislation providing for income tax and national insurance treatment of earnings paid in the form of shares also applies to earnings paid in the following types of securities: debentures, debenture stock, loan stock, bonds,
Column Number: 9certificates of deposits, warrants entitling holders to subscribe the securities, units in a collective investment scheme, futures, rights under contracts for differences, or similar contracts.
As I tried to explain on Second Reading, the lead comes from the 2003 Act, as cross-referenced with the Finance Bill and tax legislation. As we discussed when considering the Finance Act 2003, this is a complicated area, in terms of the different types of remuneration that employers are providing to their employees in this category. That is the anchor. The Bill brings together our treatment of tax and national insurance, and deals particularly with employers' liability to national insurance.
Perhaps it would help if I gave an example of the changes that clause 1 will make and explain how they would help employees. In order to demonstrate that the matter pertains regardless of the 1 per cent., I have chosen an employee who earns less than the upper earnings limit for my example. [Interruption.] When the hon. Member for North Norfolk hears the example, he will see why.
One issue of share-based ownership is that, in order to be recognised it must be available to all employees in a company. Let us consider an employee who receives monthly cash-based earnings of £800, from which the employer deducts £45.65 in primary national insurance. One month, the employee receives a share-based earnings bonus payment of £15,000, on which primary national insurance of £327.90 is payablethe majority of which, £195.69, arises on the earnings below the upper earnings limit. As those earnings are not cash payments, the employer has nothing to deduct from in order to fund the contributions to the Inland Revenue that it must make on the employee's behalf. Currently, the employer would not be able to agree with the employee to withhold or sell shares equal to the £327.90 national insurance that it paid on the employee's behalf, as the employee is not ceasing to be employed. The only form of recovery open to the employer would be to recover the national insurance from the employee's future earnings. The employer could take that in one go, or a portion could be deducted each month, but if the employer deducted all the national insurance in one go, the employee would lose a significant part of his monthly salary and might suffer economic hardship.
With such a dynamic, employers may feel unable to award shares because of the problems that it might cause their employees, who might suffer even if employers deducted only a proportion each month, as those deductions, on top of the normal national insurance payments, could significantly reduce employees' incomes.
Norman Lamb: The example seems to demonstrate why the main purpose probably does relate to the 1 per cent., because it is such an extraordinarily unlikely scenario that someone earning £900 a month would suddenly receive £15,000 in shares and would suffer economic hardship from a deduction from the next month's pay, given that they had just received a bung of £15,000.
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Dawn Primarolo: If the hon. Gentleman cared to study the arrangements made in the provision of shares to employees, he would see that I have not chosen an unreasonable example. In any field, people are careful and are resistant to any reduction in their expected income per month, however small that reduction may be, unless they are given good cause and accept the provisions.
It will be in both parties' interests to enter into an agreement with the employer to retain an amount of shares equal to the national insurance liability of the £327.90. The employee will be able to repay the employer when he has the money to do so. The example demonstrates that cash can still be deducted in one month, but that there is another way of ensuring that an employer's desire to provide shares and an employee's desire to receive them are not impeded by the operation of the national insurance system. The liabilities of employer and employee can, however, still be made according to the principles of the national insurance system.
Mr. Prisk: I am sure that that fascinating example will enlighten the Committee. The Paymaster General's list defines the earnings meant by the clause and the Bill, and is helpful. It may be because it is early in the morning, but I am still unclear about what ''non-monetary earnings'' means. Does it include non-securities-related earnings?
Dawn Primarolo: The term relates to the sections of the securities and pensions legislation that I referred to and to schedule 22 of the Finance Act. It clearly sets out what would and would not be included.
The hon. Gentleman asked a series of slightly less detailed questions, the first of which was whether we had consulted on the secondary legislation. That is still in draft, rather than final, form because if other points arise during consultation, it may be necessary to make technical changes to the regulations so that they accurately amend all necessary legislation to give reality to the points that we are discussing this morning, which is exactly the point made by the hon. Gentleman and the hon. Member for North Norfolk.
The hon. Member for Hertford and Stortford also asked about employment status. He has told the House before that he was once self-employed, so I am sure that he is aware that in this case ''tax'' follows the normal meaning of the word. According to employment law, if an employee's contract ceases and they then work in a different capacity with the same employer, that employer no longer employs them, so they can be an ex-employee. That, however, absolutely depends on the facts of the employment relationship, as it always does.
The hon. Gentleman also asked what would happen if written consent was not agreed. If an employer was left with a liability that they could not recoup from their employeethe employer is liable to pay itpresumably the employer would have to reflect on whether they wanted or felt able to make the shares available if they believed that the liability they retained was too great. Indeed, in discussions held since 1998,
Column Number: 11employers have continually told the Government about the need to resolve this issue, because they believe that achieving the liability impedes their ability to make shares available for all employees.
The hon. Gentleman's final question related to owner-managers or spouses. I told him that the legislation dictating the grounds that the Inland Revenue will recognise for tax and now national insurance clearly sets out the employer's payment of shares to the employee to give him or her a stake in the company, and the necessary relationships between the employee and the employer.
Mr. Prisk: On the Paymaster General's latter point, there are obviously many instances in which a spouse can be an employee of an owner-managed business, so I am not entirely sure that she clarified that issue, and she may want to return to it.
On the point about ex-employees, there is often a significant dispute between an employer and an ex-employee, which is where the awkwardness may arise. Let us say that someone is an ex-employee who left under a cloud, and a legal dispute is in train. It could be in Aberystwyth, for all one knows, but let us say that it is in another legal jurisdiction such as Tokyo. I am trying to establish whether there is a mechanism by which that written consent can be secured. I heard what the Paymaster General said, which is that the employer may have retained certain shares in some instances, and will therefore have some leverage, but that will not be the case in other instances. Is it envisaged in the Bill what would happen in those circumstances?
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