Select Committee on Delegated Powers and Deregulation Seventeenth Report





394. The powers in the clause are intended to ensure that, where a relationship between the client and the worker has the characteristics of employment, payments made by the client in respect of the work the worker performs for the client are to be regarded as earnings paid to him. The clause provides for regulations to ensure that the relevant payments made in respect of the worker will be regarded as paid to the worker for the purposes of primary Class 1 National Insurance contributions and the client will be liable for the corresponding secondary Class 1 National Insurance contributions.

395. With a view to minimising any risk of administrative burden, the Chancellor announced that certain details of the new rules would be finalised following discussion with representative bodies. An outline of the proposed new rules has been circulated to those who have expressed an interest in this measure and these discussions are being taken forward. The clause has been drawn up so as to allow for National Insurance contributions regulations to take effect at the same time as the proposed new tax rules without recourse to retrospection and without pre-empting the outcome of the work on some of the detailed issues.

STRUCTURE OF THE CLAUSE

396. The legislative framework is provided on the face of the Bill with powers to cover the technical detail in regulations. This approach is consistent with current social security legislation. For example, section 4(6) of the Social Security Contributions and Benefits Act 1992 (the Contributions and Benefits Act) enables regulations to be made for the purpose of treating as earnings certain forms of employee shares (conditional and convertible shares) and the Social Security (Contributions) Regulations 1979 (S.I. 1979/591) ("the Contributions Regulations") provides all the consequential technical detail. Regulation 18 of the Contributions Regulations provides the basis on which the amount of earnings comprised in a payment of conditional or convertible shares is to be ascertained and regulation 19 provides when such shares are to be disregarded from earnings. This clause takes the same approach, which also has the advantage that it provides the flexibility to enable changes to be made more easily should the parallel tax proposals or business practice change in the future.

397. Subsection (1) sets out the circumstances in which the regulation-making power is to operate. Subsection (3) then provides specific, but non-exhaustive, illustrations of what the regulations made under the clause may provide.

398. Subsection (1) enables regulations to specify (i) what 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, and (ii) the extent to which they are to be so treated. It is intended that regulations described at (i) above will provide that in addition to payments which are earnings by virtue of section 3 of the Contributions and Benefits Act, payments treated as earnings by virtue of section 4 of that Act, for instance, conditional and convertible shares referred to above, will be treated as earnings for the purposes of the clause. It is intended that the regulations described at (ii) above will prescribe how the amount of earnings comprised in payments which are to be treated as earnings paid to the worker for the purposes of the section is to be calculated, and the extent to which such payments are to be excluded for that purpose. This follows the existing practice whereby regulations made under section 3(2) of the Contributions and Benefits Act provide for the calculation of the amount of earnings comprised in specified payments (see regulation 18 of the Contributions Regulations) and regulations made under section 3(3) of that Act specify what payments that are to be exempt from that calculation (see regulation 19 of the Contributions Regulations). For instance, regulation 18 (11) to (15) of the Contributions Regulations provides for the calculation of the amount of earnings comprised in any payment of earnings by way of conditional and convertible shares and regulation 19(1)(zd) to (zf) specifies when payments by way of such shares are to be excluded from the computation of a person's earnings.

399. Subsection (2) provides for regulations to apply even though the contractual relationship between client and worker is indirect.

400. Subsection (3)(a) and (b) enables 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.

401. It is recognised that it is vital for the tests set out in regulations to be easy to apply to ensure that they have the minimum impact on those who do not disguise employment in this way.

402. The proposed tests will draw upon the control tests that are currently used successfully for determining whether an employment agency should be treated as the employer for the purposes of income tax and National Insurance contributions. The intended regulations will set out a test that looks at the degree of supervision, direction and control he is subject to. This proposal is currently being discussed with business and those discussions may, therefore, effect the final detail of the regulations.

403. Subsection (3)(c)(i) enables regulations to specify what deductions are to be made by the client in accounting for National Insurance contributions on the payments that are treated as earnings paid to the worker in respect of the services provided to the client. For example, in addition to the payments referred to in respect of subsection (1) above, regulations would allow for the deduction of certain allowable expenses currently exempt for the purposes of other parts of the Act. An example of this is found in regulation 18(4)(b) of the Contributions Regulations where distinct payments towards expenses incurred by an employee in carrying out his employment are exempted from National Insurance contributions.

404. Subsection (3)(c)(ii) enables regulations to specify how the amount of earnings comprised in relevant payments or benefits that the worker is to be treated as having been paid is to be calculated or estimated. At present, regulations made under section 3(2) of the Contributions and Benefits Act provide for the calculation of the amount of earnings comprised in specified payments (see regulation 18 of the Contributions Regulations) and regulations made under section 3(3) of that Act specify what payments that are to be exempt from that calculation (see regulation 19 of the Contributions Regulations). For instance, regulation 18 (11) to (15) of the Contributions Regulations provides for the calculation of the amount of earnings comprised in any payment of earnings by way of conditional and convertible shares and regulation 19(1)(zd) to (zf) specifies when payments by way of such shares are to be excluded from the computation of a person's earnings. As it is intended that payments which are currently treated as earnings for the purposes of the Contributions and Benefits Act will be treated as relevant payments and benefits for the purposes of regulations made under this clause, it is further intended that regulations made in accordance with subsection (3)(c)(ii) will follow the existing practice.

405. Subsection (3)(d) enables regulations to specify how relevant payments and benefits are to be apportioned. It is intended to specify in regulations how an aggregate payment to two or more workers is to be apportioned (including 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 made under the clause). In the rare circumstances where, at the time of payment, it is not possible for the client to identify the amount to be attributable to each worker/individual it is proposed that the regulations will provide for apportionment on a just and reasonable basis and for contributions to be calculated on the "apportioned" earnings. This is consistent with the approach which operates for the purposes of determining the amount of earnings on which contributions are to be paid for the purposes of the Contributions and Benefits Act and which is found in regulation 18 of the Contributions Regulations. Regulation 18 already includes an apportionment calculation following section 48 of the Social Security Act 1998 (which amended section 3 of the Contributions and Benefits Act by inserting a new subsection (2A)). Paragraph (21) and (24) of regulation 18 of the Contributions Regulations, which were made under the power in the new subsection (2A), specify the basis of apportionment in respect of payments to two or more employed earners in the form of a contribution to an unapproved retirement benefit scheme and a non-cash voucher (paragraphs (21) and (24) respectively).

406. Subsection (3)(e) will enable the worker's employment with a third party or otherwise to be disregarded for National Insurance contribution purposes. This will be used where, for instance, the worker also has a contract with their own service company to perform the services in question for the client. For the purposes of the clause that contract can be ignored. One consequence of so doing will be that the service company in that case will not be liable for secondary Class 1 contributions except to the extent that it pays the worker more than it receives from the client.

407. 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. The intention is to use the power when National Insurance contributions are paid by the client and the worker on the payment made in respect of the provision of the worker's services to the client, to ensure that National Insurance contributions will not fall due for a second time on that payment when it is passed on to the worker by the third party. This is illustrated by way of an example:

Client

¯  (Amount A)

Third party

¯  (Amount B)

Worker

what the client pays to the third party - the agreed price - will be net of tax and National Insurance contributions (Amount A), and no further deduction of tax or National Insurance contributions will be made in respect of the net payment that the third party pays on to the worker (Amount B).

408. 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. This is necessary, for example, to deal with cases where a worker is engaged to work for the client via a connected party, such as an associate company, (within the meaning of section 839 of the Income and Corporation Taxes Act 1988) and no contract exists between the client and the associate for the worker's services. It is intended that regulations will determine whether the client and the associate are treated as connected persons and consequently, whether the provisions of this clause should apply to them. For example, where a spouse of the client (which would fall within the definition given in section 839 of connected persons) contracts with a third party such as a service company to provide the services of a worker to the client, regulations will ensure that the client and spouse are treated as a single person. The client, as a consequence will be liable for secondary National Insurance contributions on the payments made for the worker's services. Regulations described at subsection (3)(h) will similarly ensure that contracts between the third party and a party other than a "connected person" for the provisions of the workers services to the client will be treated as paid by the client and the client shall consequently be the secondary contributor.

409. The proposed 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 this clause such as certified employment agencies (see subsection (5) below).

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

411. Subsection (5) allows regulations made in pursuance of subsection (3)(i) to refer to an agency certification scheme. An Inland Revenue certification scheme is proposed for agencies. 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 National Insurance contributions 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 National Insurance contributions from the payment that they make to the certified agency in respect of the worker. It is proposed that the certification scheme will be running prior to the commencement of this measure. The certified Agency will have to deduct tax and National Insurance contributions. Those who will have contracts running at 6 April 2000 who wish to seek certification will need to do so by the 6 April 2000 if they are to have the exemption made under subsection (3) referred to above. However, the tax legislation will not be in place on the 6 April and so it is proposed to define the agency certification scheme in regulations made under this clause to provide certainty for business. Those regulations will then be amended to plead direct into the income tax provisions once the latter is in force. The regulations made under section 2(2) (affecting employment status) and section 7(2) (definition of the secondary contributor) of the Contributions and Benefits Act may also make reference to the certification scheme.

412. This measure will come into force on the 6 April 2000 and will parallel the tax clauses that it is intended to present to Parliament in the next Finance Bill. In order to ensure the simplest possible systems for business to operate it is necessary to keep the tax and National Insurance contribution rules in alignment. Subsection (9) therefore proposes a Henry VIII power that will enable adaptation of this clause by Order in the event of any modification of the statutory provisions relating to income tax. In line with previous precedents, this power will enable changes to the clause to be made by Order only in the event that the parallel tax proposals change.

413. There are a number of precedents for a use of this type of power. One example of the modification of primary legislation by Order is found in section 10 to the Contributions and Benefits Act. Section 10 provides for a Class 1A contribution to be paid annually by an employer in respect of the provision of a car or fuel to an employee. The Class 1A charge applies where, for any tax year, an income tax benefit is chargeable under Schedule E by virtue of sections 157 and 158 Income and Corporation Taxes Act 1988 (ICTA) in respect of the provision of the car and/or fuel. Class 1A contributions were introduced with effect from 6 April 1991 by way of amendment to the Social Security Act 1975. It included a modification power at subsection (7) to enable the Secretary of State to make regulations modifying section 10 where it is necessary or expedient to do so in consequence of any alteration to section 157 and 158 ICTA. The annual Finance Bill means that changes to the tax legislation could occur annually, subject to Parliamentary approval. There is no equivalent annual legislation available to make changes to primary legislation covering National Insurance contributions. Consequently, it would be difficult to amend the Contributions and Benefits Act to mirror changes to the Finance Act without this clause and this will bring difficulties for employers. This clause is, therefore, proposed to ensure that alignment with the income tax clauses that will parallel this measure.

CLAUSE 74 - MEASURES TO REDUCE UNDER-OCCUPATION BY HOUSING BENEFIT CLAIMANTS

414. Clause 74 enables regulations to provide that tenants living in the social rented sector who receive Housing Benefit may keep part of any benefit saving generated by moving to suitable, smaller and cheaper accommodation.

415. Clause 74 provides, in particular, that regulations may specify:

  • the circumstances in which a tenant will be entitled to receive a payment;
  • how that payment will be calculated;
  • which local authority will make the payment if the tenant moves into another area;
  • sums owed by the tenant to the local authority which may be deducted from the payment; and
  • the tenant's right to appeal against decisions made under the scheme.

416. The Department's view is that the technical detail of these pilot schemes is best provided for in regulations. This is in line with the approach taken in the Housing Benefit scheme, where the detailed rules are provided for in regulations. In addition, this both enables lessons learned from the pilots of this measure to be reflected in any further application and provides the flexibility to make any necessary changes arising from the pilots swiftly.

417. It is intended that the regulations made under subsection (1)(a) and in pursuance of subsection (3)(b) will provide that the payment to which a qualifying tenant will be entitled is calculated as half the difference between three years worth of rent on the tenant's old and new home. For example, if the rent on a person's existing home is £50 a week and he moves to a smaller new home with a weekly rent of £40 he will receive £780 ((£50 - £40) x ½ x 156 weeks). Rent can include a range of services which are not covered by Housing Benefit, so the regulations the Government intends to make in pursuance of subsection (3)(b) will disregard from the contractual rent of either the new or the former home any charges for additional services such as meals and laundry that fall into this category. This will allow the lump-sum to be calculated using rents which are eligible for Housing Benefit. (Eligible rent is a well established term in Housing Benefit which will be followed in the under-occupation pilots.) This will be easier for the tenant to understand and the local authority to administer.

418. The Government intends to base the size criteria for the scheme on the size definition already used in the Housing Benefit scheme. These are the criteria applied by Rent Officers when determining the eligible rent for Housing Benefit for private sector tenants. They are as follows: one bedroom for each of the following occupiers: a couple; an adult (a person aged 16 or over), two children of the same sex, two children who are aged 9 or younger; and an only child. Plus: one living room if there are up to three people living in the house, two living rooms if there are between four and six people in the house and three living rooms if the family exceeds six people.

419. Subsection (2) enables regulations to set out that the tenant's new home will be treated as smaller for the purposes of the scheme if it has fewer rooms than the vacated property, even if it has more rooms than the size criteria set out above. The intended regulations will allow, for example, a single tenant who lives alone to move from a three bedroom house to a two bedroom house with a lower rent and receive a payment under the scheme or allow someone who needs an extra room for a carer to receive a payment.

420. Subsection (3) enables regulations to set out that a tenant will be treated as under-occupying a property where the number of rooms he occupies exceeds the size criteria (subsection (3)(a)). It is important to note that no tenant who meets these criteria will be obliged to move home: it will simply mean he may be entitled to receive payment if he does move to a smaller home.

421. The intention is that regulations will provide for the administrative procedure for making a payment to a tenant who moves from one local authority area to another (subsection (3) (c)). The payment will be made by the authority from whose area the tenant moves.

422. It is further proposed that regulations under subsection (4) will prescribe that arrears of rent payable by the tenant to the local authority or social landlord may be deducted from the sum payable to that tenant. In due course the Department will be consulting with local authorities and housing groups on the detail of all the regulations it intends to make under clause 74 in the normal way. However, the Department is keen to obtain their early views on precisely how rent arrears should affect the sum payable to the tenant as calculating the rent arrears owing may not always be a straightforward matter of fact.

423. Regulations under subsection (4) will also provide that Housing Benefit which has been overpaid to the tenant, and which is recoverable under the Housing Benefit (General) Regulations 1987 (S.I. No 1987/1971), may be deducted from the payment.

424. It is intended that regulations under subsection (5) will provide for appeals against decisions made under the scheme to be heard by the County Court, or should the provisions be enacted in Scotland, the Sheriff's Court.

425. It is intended that regulations under subsection (6) will provide for the scheme to be operated in prescribed areas for a defined period of time. The Government plans to run the scheme on a pilot basis for a period of three years in a small number of local authorities - namely the London Boroughs of Haringey, Croydon and Newham. The proposed regulations will ensure that a tenant who instigated a move whilst this scheme was running, but who completed their move after the scheme had closed would be entitled to receive the payment. This is necessary because claimants will not be entitled to receive payment until completion of the move.

426. Subsection (8) contains provisions allowing local authorities to be reimbursed, by the Department of Social Security, for payments made by them under the scheme. It is intended that regulations will require local authorities who wish to claim reimbursement to make a claim for the payments and to record and retain information necessary for payments to be audited. Local authorities will be reimbursed in full for the sum owed to the tenants before any rent arrears and/or overpaid Housing Benefit have been deducted. This ensures that any rent or Housing Benefit debt owed by the tenant to the local authority will be met by the payment made under this scheme so that the rent or debt is reduced or met in full.

427. Subsection (9) provides that, subject to any prescribed exceptions or modifications, the provisions of the Administration Act will have the same effect in relation to payments made under this scheme as they have for Housing Benefit. It is intended that regulations will set out the exceptions. The Government's intention is that appeals under this scheme will be heard by the County Court or Sheriff's Court in Scotland and regulations will provide for this. This is the procedure for handling disputes about, amongst other things, rent arrears and local housing authority allocations. The intention is that regulations may also prescribe that the tenants entitled to payments under the scheme will not have to make a claim for that payment.


 
previous page contents next page

House of Lords home page Parliament home page House of Commons home page search page enquiries

© Parliamentary copyright 1999