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Lord Phillips of Sudbury: My Lords, will the noble Baroness address a question that I raised in relation to the Community Legal Service (Scope) Regulations, which are before the House later this week? If passed, they will pre-empt the very debate that she was looking forward to with the noble and learned Lord the Lord Chancellor in relation to legal aid matters.

Baroness Scotland of Asthal: My Lords, the noble Lord will know that such matters usually have to be dealt with through the usual channels. Noble Lords will see that the debate is listed in the Forthcoming Business. I have had no indication that the Government are minded to remove it therefrom, but all will obviously have heard the comments that he and others have made. They will be able to make whatever decisions are deemed appropriate.

On Question, Bill read a second time, and committed to a Committee of the Whole House.

15 Mar 2004 : Column GC1

Official Report of the Grand Committee on the

National Insurance Contributions and Statutory Payments Bill

Monday, 15 March 2004.

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.

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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

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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 FURBS 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

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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 1A 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

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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

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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.

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4.15 p.m.


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