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Dawn Primarolo: I have tried to explain that, unlike shares, earnings paid in other non-monetary forms do not necessarily provide employees with a real stake in the company that they work for and are not therefore a form of earnings that the Government want to encourage through special provisions, because of the dangers—this does occur—of payments being designed to reduce tax and national insurance liability. Of course, the national insurance fund, and therefore all of us, would lose out in those circumstances.
I am trying to steer a delicate path through recognising a possible change in environment and putting in place a method to respond by regulation, while explaining clearly that we will need to judge whether the forms of payment provide employees with a real stake. Therefore, a general sweep through all non-monetary forms of reward would be a step too far.
It may help the House if I move on to the series of points that the Institute of Chartered Accountants made on clauses 3 and 4. It also wanted us to go further in those clauses, which extend provisions for joint elections and agreements to transfer secondary national insurance liability to employees when gains arise on restricted and convertible shares. It asked for the measure to be extended to other forms of securities-based earnings, such as restricted stock units.
The Government argue that the tax and national insurance treatment of earnings from restricted stock units will depend on the nature of the award. In some cases, therefore, such earnings might already fall within the scope of the legislation and thus allow the transfer of employers' class 1 national insurance to the employee. In others cases, that would not be appropriate because there is no unpredictable liability—that is the test—which is what the measure is designed to address. I am trying to respond by recognising that if something is not in the Bill, it does not satisfy the unpredictable liability test.
Secondly, the institute wanted the clauses to extend to national insurance liabilities that arise on the discharge of an amount treated as a notional loan, which is a form of earnings that arises when someone who is not ordinarily resident is granted an employment-related share option. As the hon. Members for Hertford and Stortford and for North Norfolk are probably aware, officials in the Treasury and Inland Revenue are currently conducting an extensive review of the tax rules surrounding residence and domicile. They are aware of, and are continuing to examine, problems with securities-based payments for internationally mobile workers, and they will examine that issue as part of the review. I think that that is a more appropriate way to consider such issues, because of the difficulty of the challenges.
Mr. Prisk: Will the Paymaster General confirm, therefore, that it is the intention of the Treasury, and the Government in general, to have as broad an input from business and industry as possible in that review? The
professional impact of the measures will have a significant impact on the mobility of workers, which is a crucial part of this country's competitiveness.
Dawn Primarolo: I confirm to the hon. Gentleman that such a broad view and access to wider consultation are at the heart of the consideration of residence and domicile. It is important for the system to be fair and for the rules to be clear. The system should not undermine our competitiveness, yet we must ensure that the rules of the United Kingdom are not used in ways that would be detrimental to the vast majority of taxpayers in this country. The regulations can deal with such points.
I have outlined the principles underpinning how we would assess representations about suggestions made by the Institute of Chartered Accountants. We would welcome it if employers or their representative groups contacted the Inland Revenue if they had specific difficulties that arose from the Bill. The overall support for the Bill demonstrates that the Inland Revenue is working well with employers' representatives and others to identify real areas of concern and find sensible ways of addressing them, while keeping the rules clear, easy to operate and fair to all taxpayers.
On Second Reading, my hon. Friend the Member for Dumbarton (Mr. McFall) referred to working with business representatives, which relates to the point recently made by the hon. Member for Hertford and Stortford. That is relevant not only to the Bill, but, frankly, throughout the Inland Revenue's areas of interest. I shall again spell out the routes available. On employer-related matters, the Inland Revenue meets representatives from the Federation of Small Businesses, the Institute of Directors, the Confederation of British Industry and payroll practitioners, among others. That umbrella group provides a forum for the discussion of, and consultation on, policy changes and their operational impact on the taxation of employment income and related matters that might impact directly or indirectly on employers. It acts as a confidential sounding board for proposed policy initiatives and as an avenue for the discussion of representatives' concerns and proposals for change. That clearly provides a route through which discussions on the Bill may be taken forward, should they be required after it has become operational.
The Inland Revenue has an excellent working relationship with many share scheme interest groups, such as ProShare and the share scheme lawyers group. There are regular discussions between the Inland Revenue and groups interested in the promotion of employee share ownership, to ensure that concerns about the administration and technical interpretation of share scheme legislation are brought to the Government's attention. Regular dialogue not only allows areas of difficulty to be properly understood, but helps officials to develop clear and helpful guidance about the operation of share scheme legislation. When it came to putting together the measures in the Bill, the Inland Revenue was already in a good position to
understand what employers wanted. Every measure was drawn up with an eye to representations or other forms of consultation.
Mr. John McFall (Dumbarton) (Lab/Co-op): I thank the Paymaster General for referring to a point that I made on Second Reading. She will know that income tax officials have come to the Treasury Sub-Committee to help with our inquiry on the administrative cost of tax compliance. I must say, in support of what she is saying, that they have acquitted themselves well. Lessons have been learned from the past and officials are communicating with business. Given the criticism that they have received in the past, it is only fair to put that on record.
Dawn Primarolo: I thank my hon. Friend for his generous comments. Everyone in the House understands that we require tax inspectors and tax officials to pursue a dual role on behalf not only of the House, but of all our communities. We require them to operate a tax system that is fair to all and ensures that everyone pays their rightful amount, and to design and develop a tax system in consultation with all interested parties so that employers and employees can understand legislation, and so that it is operational. The delivery of that set of principles is difficult, but the Inland Revenue acquits itself extremely well.
I have said that the Bill was not contentious. No amendments were tabled, and there was broad support both inside and outside the House for the measures that it contains. However, that is not to say our debates in the House and Committee were without rigour. Indeed, the discussion of the clauses in Committee entailed a thorough scrutiny of their details, and relevant details that are to be set out in the regulations. I pay tribute to the hon. Members for North Norfolk and for Hertford and Stortford for the positive way in which they conducted their discussions in Committee to ensure not only that the Bill received proper scrutiny, but that the record showed clear indications about how the Government wish to proceed.
I am pleased to be able to conclude that the Bill has received thorough scrutiny, both in the House and as a result of extensive preparation with interested parties outside. As I said, I have been helped greatly by constructive contributions from Members of all parties who were involved in discussions on the Bill, for which I thank them. Finally, I reiterate that the purpose of the Bill is to fulfil our commitment that the Inland Revenue will work with employers' representatives and others to reduce technical differences in the administration of tax and national insurance. It extends employers' options for meeting their national insurance liabilities when paying earnings in the form of shares or other securities. It also helps to protect employees' rights to statutory sick and maternity pay by improving measures to tackle the very few employers who fail to meet their obligations. It is a technical Bill, but a useful one, and I commend it to the House.
1.30 pm
Mr. Prisk: I thank the Paymaster General for her opening remarks, particularly her detailed and thorough exposition of the submission by the Institute of Chartered Accountants in England and Wales.
As the Paymaster General said, the Bill is a technical measure, and is therefore complex both in form and purpose. I suspect, however, that on this occasion that is not the reason why we do not have the full attention of the House. The Paymaster General, other hon. Members and I are performing what may best be described as the parliamentary equivalent of an intermission. We may be unwatched and unseen, but nevertheless we are providing a convenient filling-in moment between two exciting instalments of a political drama. Normal service will be resumed as soon as possible.
The Bill and the measures that it contains are important because they affect both employers and employees, and a number of clauses are directly relevant to people's working situation. For example, clauses 1 to 4 will help to remove a potential barrier to widening share ownership. Some people may say that other aspects of the Bill are inconsequential. For example, clauses 5 and 6 apply to only about 4 per cent. of the national insurance fund, and some people will argue that that is of little consequence. That may be true, but for tens of thousands of self-employed people it represents 100 per cent. of their contributions. Given the fact that the self-employed are usually treated poorly by the Government, the change deserves our attention and, on this occasion, our support.
Following our various debates on the Bill, it is clear that it consists of two distinct parts. First, it seeks to amend the way in which employers administer national insurance contributions for securities-based earnings. We have touched on the question of non-monetary earnings and how broad that definition is, but the Bill deals specifically with securities-based earnings. That follows the Chancellor's ill-considered decision to impose an additional 1 per cent. on employees' primary contributions over the upper earnings limit. The second part of the Bill, as we learned in Committee, is intended to align the administration of statutory payments for maternity and sickness pay with that for national insurance contributions. The changes seek to tidy up previous incomplete legislation dating back, in some cases, more than five years. The two principal features of the Bill therefore arise from past errors and oversights by the Government. It is a refreshing change for the Government to accept their past failings. On behalf of Her Majesty's loyal Opposition, I have no hesitation in welcoming that admission of failure and the improvements introduced by the legislation. I only hope that that governmental contrition will set the tone for rest of the day, although I suspect that we shall be disappointed.
My party has, throughout the passage of the Bill, sought to provide constructive scrutiny. Where we have differences with the Government we shall express them, and I am sure that the Paymaster General will understand that I shall continue to do so firmly and persistently. However, in this case the measure is corrective and largely beneficial, so we shall not oppose it for the sake of partisanship. However, our ability to fulfil our important parliamentary role has been hampered by the fact that the regulations underpinning much of the Bill were not made available to the House until the morning of the day on which the Committee sat. For the benefit of Members who did not serve on the Committee, the regulations are extensive. They are 22
pages long—five pages longer than the Bill itself—and affect six of the 10 principal clauses. Following the Minister's promise that the draft orders would be ready in time for the Committee stage, I accept that there was an administrative error by officials, which resulted in the draft orders arriving on the day of the Committee's deliberations. Indeed, I received my copy as I arrived at Standing Committee D. I accept that the Paymaster General intended to try to get the orders to us, and I know that she will share my disappointment at the error that resulted in their delay.I should like to challenge something else that has arisen in our debates, particularly in Committee. Significant measures in the Bill will be brought into effect based on details in the 22 pages of statutory instruments. The Bill is a framework, and it lacks detail about the exact way in which the rules will operate. The Paymaster General commented in response to an intervention that, as the Bill was a technical measure, the omission of the details was less important. In fact, the reverse is true. In a technical Bill, the detail is the most important part of the legislation. The broad policy is not in question—it is the practicalities and minutiae that matter. I suspect that most hon. Members would share that view and I hope that on reflection so will the Minister.
We have learned much during the passage of the Bill. It has emerged, for example, that the roots of the changes set out in clauses 5 and 6 go back as far as the 1998 Budget and the accompanying Taylor report. Indeed, the Government denounced the dual systems of income tax and national insurance as unduly onerous for the 1 million or so employers who had to operate them simultaneously. On 8 February 1999, the then Secretary of State for Social Security, the right hon. Member for Edinburgh, Central (Mr. Darling), spoke of the two sets of rules and the two Departments with which businesses had to deal and concluded that the case for change was "overwhelming". Nearly five years later, the Government are seeking to complete the task. I fully accept that it took up to two years for the original changes to bed down, systems to be established and training to be completed. However, a delay of five years is deeply disappointing. I know that the wheels of Whitehall grind slow, but to take five years is to progress at less than a snail's pace.
In Committee and on Second Reading, I raised the many concerns of business and professionals about the poor administration of national insurance. The Paymaster General, true to form, rose to the challenge and proudly declared that things were improving. If that is the case, that is welcome. However, she did not answer my basic question, although I trust that she will in reply to this debate. Are the standards of performance better now than they were before the merger, as promised by the Chancellor? I am not asking whether they are better than they were in 2002, when the Institute of Chartered Accountants complained, but better than the pre-merger performance. That was the promise made by the Chancellor—has it been kept?
During our deliberations, we learned of the unintended impact of the Chancellor's decision to impose an additional 1 per cent. of the national insurance charge on employees' earnings over the upper earnings limit. When an employer makes a securities-
based payment of earnings, there is no national insurance liability until those payments are realised—for example, when options are exercised to acquire shares. At that point, the employer is liable to pay both primary and secondary national insurance contributions due on the employee's gain. Until 5 April last year, most employees would already have paid their contributions up to the upper earnings limit through the usual PAYE system. However, from 6 April 2003, there has been an additional 1 per cent. due on earnings that exceed that limit, so employers now face serious difficulties in recovering those additional primary contributions payable by employees.As the Paymaster General mentioned today and in Committee, the Bill is designed to enable employers to recover those contributions through new agreements or through joint elections. We touched on the suggestion that these might be amended in the future, subject to the comments from the Institute of Chartered Accountants. The decision to enable employers to recover these contributions is generally welcomed by employers and outside organisations.
Our debates have also revealed a welcome Damascene conversion by the Labour party on share ownership. Gone are the old days of Bennite adherence to state ownership. Instead, we have the Blairite passion for share ownership. We will have to see whether that survives any future leadership change. The amendments in clauses 1 to 4 will remove a potentially serious barrier to employee share ownership. Now, promoting wider share ownership is a Conservative value. Indeed, more employees bought and owned shares under the last Conservative Government than ever before. That is why we on the Opposition Benches welcome the correction, as do those in business—including ProShare, the independent organisation whose purpose is to widen share ownership.
The Bill seeks to correct the omissions and errors of the Government's previous actions. As such, and rare as that is, it is to be welcomed. During our debates we heard of the five-year failure to align correctly the administration of national insurance contributions and statutory payments, and the burden that that delay has placed in particular on the self-employed. We have learned about the worsening administrative burden since the Government legislated in 1999, despite the Chancellor's original promises. We have heard how the decision by the Chancellor to increase employees' primary contributions over the upper earnings limit has had serious unintended consequences for promoting wider share ownership, which are corrected in the Bill.
Consideration of the Bill, although constrained by the absence of the details in secondary form, has nevertheless been constructive and purposeful. Given the benefit of the various measures that the Bill seeks to implement, I can confirm that it has our support and that it is not our intention to oppose it in the Lobbies at the end of the debate.
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