House of Lords - Explanatory Note
Welfare Reform And Pensions Bill - continued          House of Lords

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Commentary

Part I

The first Part of Schedule 9 restates sections 5, 6, 8 and 9 of the Contributions and Benefits Act, and inserts a new section 6A. References below are to sections of the Act.

Section 5 sets the limits and thresholds for National Insurance contributions and is largely restated. The main change is in subsection (1).

    Subsection (1)(a) adds to the existing lower and upper earnings limits a new "primary threshold". This is to be the point at which employees begin to pay NICs and will be increased over two years to the level of the single person's tax allowance.

    The employer earnings threshold introduced last year as the starting point for employers' NICs - and currently at the weekly equivalent of the single person's tax allowance - is renamed the "secondary threshold" in subsection (1)(b).

The section provides that these limits and thresholds are to be set each year by regulations, subject to specified conditions:

    through subsection (2) the LEL will continue to be tied to the level of the basic state pension;

    the UEL is currently set as a multiple of the LEL. It is not possible to raise the UEL to the level the Chancellor has announced whilst keeping to this formula. So subsection (3)(a) is modified to require the UEL to be calculated as a multiple of the new primary threshold.

Subsections (4) and (5) rationalise the existing provisions for defining non-weekly equivalents of the limits and thresholds for those paid otherwise than weekly.

Section 6 establishes when liability arises for Class 1 NICs. The only change is to subsection (1). This makes the starting point for primary (employee) contributions the new primary threshold, rather than the LEL. Subsection (1)(b) is updated to reflect the renamed secondary threshold.

Section 6A is completely new. It provides that contributions are to be treated as having been paid on earnings which are not less than the LEL and not more than the primary threshold. This enables such earnings to be protected for the purposes of building entitlement to contributory benefits.

    Subsection (2) ensures that people earning at or over the LEL do not lose access to contributory benefits and pensions because of the increase in the level of earnings at which employees start to pay NICs. It has the result that earnings from the LEL up to and including the primary threshold will be treated for benefit purposes (defined in subsection (3)) in exactly the same way as earnings on which contributions have actually been paid- i.e. by treating them as notionally paid. The section also ensures that the change to the structure of employee contributions does not reduce the earnings used for calculating entitlement to SERPS (the "earnings factor").

    Subsection (4) provides a regulation-making power to enable provisions of the Act to be applied with modifications in relation to people who fall within the scope of the section. This will enable it to be ensured that benefit rights of such people are not enhanced as a result of the "notional payment".

    For instance, liability for Class 1 NICs at present depends on satisfying conditions relating to residence and presence in Great Britain. The regulations would be used to make sure that the same conditions apply before someone could take advantage of the new deeming provision in section 6A.

Sections 8 and 9 contain the rules for calculating the amount of NICs payable. Section 8 deals with primary (employee) Class 1 contributions; section 9 relates to secondary (employer) NICs. Both sections are modified in line with the changes above.

    As now, section 8(1)(a) provides for the amount of primary Class 1 contribution to be the "primary percentage" (currently 10%) of the earnings between the starting point for NICs liability and the UEL. The change is that the starting point is now the primary threshold rather than the LEL.

    Section 9(1) makes the starting point for secondary NICs the renamed secondary threshold.

Part II

The second Part of Schedule 9 amends the Pension Schemes Act 1993, to deal with the effect of the NICs changes on contracted-out pensions. Paragraph 6 amends the rules for salary related schemes; paragraph 7 applies to money purchase schemes.

In the same way that benefit entitlement is protected from the rise in the starting point for NICs, so is entitlement to NI rebates. Current provisions set the employee and employer rebates by reference to percentages of earnings in excess of the LEL. The new provisions will enable the rebate to continue to be calculated by reference to earnings between the LEL and the UEL. But with the introduction of a higher starting point for payment of primary NICs, namely the primary threshold, there will be a narrower range of earnings over which the NICs liability will arise.

This raises the possibility that the amount employers can recover in rebates may be higher than their total NICs liability. However, paragraphs 6 and 7 make arrangements for the Revenue to pay any outstanding balance to the employer and recover any overpayments from him (new sections 41(1D) and (1E) and 42A(2C) and (2D)).

Part III

Paragraph 9 of Schedule 9 amends section 162 of the Social Security Administration Act 1992. This ensures that the proportion of contribution revenue allocated to the National Health Service remains broadly unchanged when the starting point for employee contributions is increased to the primary threshold.

Clauses 70-71: Earnings of workers supplied by service companies etc.

Summary and background

In the 1999 Budget the Chancellor of the Exchequer announced that changes would be introduced to counter tax and National Insurance avoidance where services are provided through an intermediary. There has been an increase in the practice of hiring people through intermediaries such as service companies; using a corporate structure can offer financial advantages. For example, it is possible for an indirectly engaged worker to do the same job as an employee, but pay substantially reduced tax and National Insurance contributions (NICs).

Most employers engage staff direct under a contract of service and will pay Class 1 NICs and operate Pay As You Earn (PAYE) for income tax. They may also hire staff under a contract for services where the person being hired is self-employed. The changes are not aimed at redefining the existing boundary between employment and self-employment.

Clause70 concerns the situation where an individual (the worker) is engaged by a business (the client) through a third party (such as a service company). In the absence of such a third party, the relationship between a client and a worker would determine the employment status for the purposes of both tax and National Insurance. The liability would then be assessed according to whether the person was employed or self-employed. However, where a worker is engaged through one or more third parties that have separate legal identities, it is possible to escape any direct contractual relationship between client and worker. This provides scope for avoiding tax and National Insurance.

The powers in this clause are intended to enable payments made in respect of a worker hired by a client through an intermediary to be treated in the same way as earnings paid to an employee - so long as the underlying relationship between the client and the worker has the characteristics of employment. To achieve this, tests will be applied to examine the substance of the relationship. Where they indicate that the relationship has the characteristics of employment, the new provisions will apply.

Payments by the client may then be regarded as earnings paid to the worker for the purposes of primary Class 1 NICs, and the client will be liable for the corresponding secondary NICs, unless the intermediary is a certified agency (see below).

Matching tax provisions are intended to be included in the Finance Bill 2000 to require the client to operate Pay As You Earn (PAYE) on payments made to, or in respect of, the worker. Changing the tax and NI systems together will ensure alignment.

In order to minimise any administrative burden, the Chancellor announced that the details of the new rules would only be finalised after consultation with representative bodies. The clause has been drawn up so as to allow for NICs regulations to take effect at the same time as the proposed new tax rules (i.e. from 6April 2000) without recourse to retrospection and without pre-empting the outcome of consultation on issues of detail.

The clause sets out the general powers on the face of the Bill and allows for the technical detail to be contained in regulations. This will enable changes to be made more easily if the parallel tax proposals, or business practice, change in the future.

Commentary

Subsection (1) enables regulations to specify that relevant payments and benefits are to be treated as earnings paid to the worker in respect of employed earner's employment for the purposes of the Contributions and Benefits Act. It is intended that the regulations will specify what are relevant payments and benefits, and define the extent to which they are to be treated as earnings. For example, it is intended that the regulations will specify conditional and convertible shares as payments that can be treated as earnings.

Subsection (2) provides for regulations to apply even though the worker is, for example, a director of a third party company or indeed a director of the client company.

Subsection (3)(a) and (b) enable regulations to specify when a worker is to be treated as employed in employed earner's employment for the purposes of the Contributions and Benefits Act in respect of relevant payments and benefits made or provided in connection with the services the worker performs for the client. These provisions will enable the tests for determining whether the relationship between the client and the worker has the characteristics of employment to be specified. It is intended that the tests will be applied to the substance of the relationship between the client and the worker.

It is not intended that the current case law basis for determining whether an individual would be employed or self-employed should be used. It is recognised that the tests need to be easy if they are to have the minimum impact on businesses that are not intended to be covered by the new provisions. So, it is proposed to build on the current tests for determining whether an agency (being a third party) should be treated as the secondary contributor for the purposes of Class 1 NICs. The details of this proposal are currently being discussed with business and will only be finalised when consultation is complete.

Subsection (3)(c)(i) enables regulations to specify what deductions are to be made by the client in accounting for NICs on the payments that are treated as earnings paid to the worker in respect of the services provided to the client.

Subsection (3)(c)(ii) enables regulations to specify how the amount of earnings that the worker is to be treated as having been paid is to be calculated or estimated. It is intended that payments that are currently treated as earnings for the purposes of the Contributions and Benefits Act will be treated as relevant payments for the purposes of the regulations.

Subsection (3)(d) enables regulations to specify how relevant payments and benefits are to be apportioned. It is proposed to specify in regulations how an aggregate payment to two or more workers is to be apportioned. It is intended that this will include apportionment in cases where one or more of that number would be regarded as in employed earner's employment with the client other than by virtue of the regulations. Where, at the time of payment, it is not possible for the client to identify the amount attributable to each worker/individual it is proposed that the regulations will provide for apportionment on a just and reasonable basis.

Subsection (3)(e) will enable the worker's employment with a third party or otherwise to be disregarded for NIC purposes and subsection (3)(f) enables regulations to be made to ensure that a relevant payment or benefit is not subject to a double National Insurance liability. It is proposed to use the power for dealing with cases where NICs might otherwise be payable by both the client and the worker on the payment made in respect of the provision of the worker's services to the client. Such an exercise of the power would ensure that NICs would not fall due for a second time on so much of that payment as is passed on to the worker by the third party. In that event, the amount the client pays to the third party (the agreed price) will be net of tax and NICs, and no further deduction of tax or NICs will be made in respect of what the third party pays to the worker.

Subsection (3)(g) enables regulations to specify the extent to which two or more connected persons should be treated as a single person for the purposes of any regulations made under this clause.

    An example of when this will be used is where a worker is engaged for the client via a contract between an associate of the client and a third party in a case where no contract exists between the client and the associate for the worker's services. Connected persons are defined in section 839 of the Income and Corporation Taxes Act 1988 and include, for example, an associate company or spouse. The regulations will determine, for example, whether the client and the associate are connected persons and consequently, whether the new rules should apply to them.

Subsection (3)(h) will similarly ensure that a contract between the third party and a party other than a "connected person" for the provision of the worker's services to the client will be treated as a contract with the client, and the client will consequently be the secondary contributor.

Subsection (3)(i) enables the regulations made under the clause to be modified or excluded in respect of specified cases, payment or benefits. It is intended to rely on such a power to exempt certain cases from the application of the new rules, such as workers engaged by certified employment agencies (see commentary on subsection(5) below). As a further example, if a school hires a coach firm to take a class on a week's field trip, the provision of the driver is incidental to the hire of the coach, and the new rules will not apply.

Subsection (4) enables regulations to specify terms and conditions of a contract or arrangement that are to be disregarded for the purposes of applying the provisions of regulations made under the clause. It is intended to use the power to ensure that the substance of the relationship will determine whether the worker should be treated as being in employed earner's employment for the purposes of the Contributions and Benefits Act.

    For example, a head chef at a small hotel is engaged through her own personal service company. The hotel does not tell the chef how to cook but is able to veto menus suggested by the chef and can tell her to lay on particular buffets, children's menus, themed nights etc. This arrangement should be caught by the new rules regardless of the fact that the actual contract held by the hotel is with the service company and thus not in the chef's name.

Subsection (5) concerns the Inland Revenue certification scheme which is it proposed to establish for the purposes of the parallel tax provisions. Certification will only be given where an agency agrees to operate PAYE in respect of payments it makes to the worker and there is no possibility of tax and NIC avoidance taking place. As a consequence of this, clients that engage a worker through a certified agency will not be required to deduct tax and NICs from the payment that they make to the certified agency in respect of the worker. The certified Agency will have to deduct tax and NICs.

Those who will seek certification will need to do so by 6 April 2000 if they are to have the exemption under subsection (3) referred to above. However, the tax legislation will not be in place on the 6 April. So, it is proposed to provide for an interim agency certification scheme through regulations under subsection (5). The regulations will then be amended to refer directly to the certification scheme established under the tax provisions once these are in force. Regulations made under section2(2) (affecting employment status) and section 7(2) (definition of the secondary contributor) may also make reference to the certification scheme.

The regulations under the clause will come into force on 6 April 2000 and are intended to parallel the tax clauses due to be introduced in the Finance Bill 2000. However, discussions are continuing with business on the practical application of this measure, and, as a result of these, the proposed parallel tax provisions may change.

Subsection (9) gives a power to enable this clause to be adapted by order if the parallel tax provisions change. The annual Finance Bill means that changes to the tax legislation can occur every year, subject to Parliamentary approval. But there is no equivalent annual legislation available for the National Insurance legislation. So, without this subsection, it would be difficult to amend the Contributions and Benefits Act to mirror the changes to the Finance Act.

Clause 71 makes parallel provision for Northern Ireland.

Clauses 72 and 73: National Insurance Class 1B contributions

Clause 72 ties the National Insurance Class 1B rate to the rate of 'secondary' (employer) Class 1 contributions, thus preventing the Class 1B rate from being raised independently by regulations. Both rates are currently set at 12.2%.

It amends section 10A of the Contributions and Benefits Act which deals with Class 1B contributions, replacing subsection (6) (which provides that the percentage rate is to be 12.2%, but enables it to be altered under section 143A of the Administration Act) with a provision to tie it to the rate of the secondary contribution, as specified in section 9(2) of the Contributions and Benefits Act.

Background

Measures introduced in the Social Security Act 1998 provide that, from 6 April 1999, employers can settle the National Insurance liability on a Pay As You Earn Settlement Agreement (PSA) for tax purposes. This introduced a new class of National Insurance contributions known as Class 1B.

The percentage rate of Class 1B NICs was initially set at the same level as the rate of secondary (employer) contributions, but was capable of being varied independently of the secondary Class 1 rate.

This clause ties the rate of Class 1B directly to the rate of secondary (employer) contributions, thus taking away the ability for it to be varied independently of that rate.

Clause 73 makes corresponding provision for Northern Ireland.

Schedule 13 Parts VI and VII: Repeals : National Insurance contributions

Parts VI and VII contain repeals which are consequential on clauses 68, 69, 72 and 73. The repeal of Schedule 1 paragraphs 8(2) and (3) of the Contributions and Benefits Act updates the legislation by removing reference to the payment of National Insurance contributions by adhesive stamps, to reflect the current methods of payment available.

Background

Before April 1993, flat rate National Insurance contributions payable by the self-employed (Class 2) or paid on a voluntary basis (Class 3) could be made by affixing a stamp of appropriate value to a contribution card in respect of each contribution week. Since then, it has been possible to:

    make a payment of the amount of contributions specified in a written notice issued within 14 days of the end of the quarter in question; or

    pay by direct debit.

Adhesive stamps ceased to be sold by the Post Office soon afterwards, and could not therefore be used as a method of paying National Insurance contributions. The references in Schedule 1 paragraph 8(2) and (3) are therefore redundant.

Parts VI and VII of Schedule 13 also include repeals consequential on clause 76 and Schedule11.

CHAPTER III: MISCELLANEOUS

Clause 74: measures to reduce under-occupation by housing benefit claimants

This clause will allow tenants living in the social rented sector (typically, property owned or managed by a local authority or a housing association), who are in receipt of Housing Benefit (HB), to keep part of any benefit saving generated by moving to cheaper and smaller accommodation.

The scheme to be made under this clause will encourage tenants who are "under-occupying" accommodation in the public or social rented sector (that is, living in accommodation that is considered large in relation to their number and needs) to move to smaller and cheaper accommodation. On completion of the move, HB claimants will be rewarded with a lump-sum payment equivalent to half the difference between their old and new weekly rent, multiplied by 156. Since HB usually meets 100% of rental costs in the social rented sector, this is roughly half of the benefit savings expected over three years. It is intended that the lump sum will be disregarded as capital in the calculation of entitlement to income-related benefits, such as Income Support or the Working Families Tax Credit.

    Regulations under subsections (1) and (3) would define exactly how the sum paid to claimants should be calculated, and in what circumstances a dwelling would be regarded as "under-occupied" (for example, a 3-bedroom house could be regarded as exceeding the requirements of a couple).

    Subsection (4) gives power to make deductions from the lump-sum payment for any arrears of rent owed by the tenant, or for any overpayment of HB which is recoverable from the claimant. Other debts to the local authority or to the DSS (e.g. the Social Fund) are not to be deducted; deductions are to be strictly limited to the two items mentioned.

    Regulations under subsection (5) would provide for a right of appeal against decisions made under the scheme.

    The power would allow the under-occupation scheme to be applied nation-wide, though subsection (7) makes clear that no local authority would be obliged to take part in the scheme. However, the intention is to pilot the scheme in three local authorities; therefore subsection (6) allows the power to be used for a limited time and in certain areas only, and for any necessary transitional arrangements to be made.

    Subsection (9) provides that the under-occupation scheme payments should be administered under the rules and powers for Housing Benefit (which are set out in the Administration Act)-but allows for exceptions to be specified.

    Among these HB rules is the procedure for the DSS to reimburse local authorities for the money they pay in benefits. Normally this happens through a subsidy system; the subsidy rules mean that an authority may not always receive the full amount it pays out. However, subsection (8) provides the power to prescribe a different claims and payments mechanism. The intention is that, under the scheme, authorities should be reimbursed in full for the lump-sum payments they make.

Clause 75: Supply of information for child support purposes

This provision allows the Inland Revenue, on a discretionary basis, to supply tax information it holds in respect of self-employed non-resident parents to the Child Support Agency (CSA). This is intended to enable the CSA to build up a financial picture of non-resident parents whose earnings either are not known or need to be verified.

Background

The CSA is required by law to assess maintenance liability when a valid application is received. To make this assessment, it needs details of the non-resident parent's earnings. This information is sometimes difficult to obtain directly from the non-resident parent, who may deliberately withhold information with a view to delaying a demand for maintenance or may simply be unable to locate the relevant documentation. Whilst this is less significant for employed earners, where the CSA can approach the employer direct, non-resident parents who are self-employed, and who refuse to supply details of their profits, are extremely difficult to assess.

The Agency therefore needs to be in a position to build up a financial picture of a non-resident parent who does not provide details of his income, using as wide as possible a range of alternative sources of information. Tax information held by the Inland Revenue may offer the only alternative source of such information for the self-employed. However, the intention is that this will be a last resort measure, where the CSA has asked the non-resident parent for information, and issued a reminder, but there is still inadequate detail to make an assessment.

Access to tax information relating to self-employed non-resident parents is necessary to ensure that more non-resident parents pay the maintenance they owe. Given the Revenue's confidentiality provisions, the CSA can only gain access to this information if there is a specific statutory gateway. This provision provides this gateway and allows direct access, at the Revenue's discretion, to any tax information about self-employed non-resident parents held by the Inland Revenue.

Schedule 2 to the Child Support Act 1991 already allows the Secretary of State to request the Inland Revenue to provide information for the purposes of tracing non-resident parents. This information is restricted to the current address of the non-resident parent and his current employer. The CSA has access, via the Contributions Agency, to earnings information recorded on end-of-year tax returns that employers currently submit to the Inland Revenue. There is currently no provision, however, for other tax information to be used in assessing child support liability.

Commentary

The clause inserts a new paragraph 1A into Schedule 2 to the Child Support Act 1991.

    Sub-paragraph (1) limits the power to obtaining tax information about self-employed non-resident parents, not all non-resident parents. It allows access to information for any tax year in which the non-resident parent was or is self-employed.

    Sub-paragraph (2) exempts the Revenue from its confidentiality rules when providing this particular information.

    Sub-paragraph(3) ensures that the paragraph only applies to disclosures made to the CSA by, or under the authority of, the Commissioners of the Inland Revenue.

    Sub-paragraph (4) prevents any tax information disclosed to the CSA under this power from being disclosed further. (For example, this overrides the power in section 3 of the Social Security Act 1998, which allows child support information to be used for the purposes of administering social security benefits.) The exception in sub-paragraph (4)(b) allows the information to be used in civil and criminal court cases brought under the Child Support Act. For example, if a non-resident parent is served with a liability order, it may be possible to use information covered by this provision to satisfy the court that there is income to meet the liability.

PART VI: GENERAL

This Part of the Bill contains a number of general provisions, which will determine, for example, how regulations are used, and how the different measures in the Bill will be brought into force.

It also introduces a power to incur expenditure on proposed new services (clause 77).

Clause 76: Contributions and pensions administration

Clause 76 introduces Schedule 11, which makes a number of amendments of the Social Security Contributions (Transfer of Functions, etc.) Act 1999, and contains other provisions relating to the transfer of functions. That Act transferred responsibility for National Insurance contributions and other matters from the DSS to the Inland Revenue and the Treasury, from 1 April 1999. The clause and Schedule were added to this Bill during Commons Committee stage (Hansard: Standing Committee D col. 1031), after the Social Security Contributions (Transfer of Functions, etc.) Bill had received Royal Assent.

The provisions consist mainly of:

    consequential amendments not made by that Act; and

    minor adjustments in the allocation of functions between the Departments.

Where appropriate, the Schedule includes broadly parallel changes to the Northern Ireland legislation.

Most of the Schedule is purely technical, but there are three points to note.

    Paragraphs 7 and 8 make clear that the Inland Revenue can pass information held mainly in relation to contracting-out of SERPS to the Benefits Agency for social security and other purposes; and, conversely, that the Agency can pass information about social security and other matters (and in particular, SERPS information), to the Revenue for, principally, contracting-out purposes. This is not a new practice. In the past, specific powers were not needed for that transfer because the DSS could share information within the Department. The provision is now needed because the contracting-out functions have been transferred to the Revenue.

    Paragraph 18 further amends section 170 of the Pension Schemes Act 1993, which confers power to make regulations concerning, among other things, contracting-out matters. This amendment slightly extends that power so that it covers first instance decisions. Paragraph 28 makes a similar change for the equivalent Northern Ireland legislation.

    Paragraph 24 repeals section 3(3)(c) of the Social Security Contributions (Transfer of Functions, etc.) Act. That subsection was not commenced so that section 27 of the Inland Revenue Act 1890 (officers may conduct proceedings before justices) would apply to contributions as to tax, and is now superfluous. Paragraph 5 makes a related amendment to remove an overlap with section116(5A).

 
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Prepared: 24 May 1999