National Insurance Contributions Bill

Public Bill Committee, 15 November 2005.

National Insurance Contributions Bill - Standing Committee D

National Insurance Contributions Bill

Mark Field (Conservative, Cities of London and Westminster)

I do not wish to detain the Committee, especially as the programme motion has already been agreed by the Whips. However, I wish to make a minor point about a written statement listed in yesterday’s Order Paper in the name of the Chancellor of the Exchequer. Unfortunately, the Library did not receive that written statement yesterday until some moments after 5.30 pm. It referred to draft regulations that to my knowledge—I was there earlier this morning—still have not been placed in the Library, and they are not yet available on the website of Her Majesty’s Revenue and Customs.

I should point out that the Paymaster General did me the courtesy of writing to me with a list of the draft regulations that were to assist us in our consideration of the Bill, which I received this morning. I appreciate that time is often tight, but it is now some 12 days after Second Reading. It is therefore a little disappointing that we could not have had the draft regulations earlier.

Likewise, I appreciate that the regulations will be subject to statutory instrument proceedings, but they are important as they represent the first use of the power to backdate national insurance liability, reflecting the provisions of the Finance (No. 2) Act 2005. I shall not try, now or later, to relive the Committee’s debates on the matter in June. However, one important factor was the prescription of an additional statement to be contained in future forms for national insurance elections making it clear that such elections could not transfer backdated employers’ national insurance liabilities to employees. It would have been useful to have had that in advance.

If documents are to be sent to Committee members, it is a matter of courtesy to Opposition parties to give us time to prepare our response. Although the programme motion lists four sittings, the Committee is likely to be truncated. It would have been slightly more helpful to have had the regulations in advance, so that my colleagues and I could have made a more sensible contribution to the debate.

The matter will clearly go to another place, and we still have the opportunity of Third Reading to debate the matter further should the Committee find it a matter of great concern. I hope that you, Sir John, will not find me out of order if I say that, although we heartily agree with the programme motion—we partly negotiated it—such discourtesies should not be tolerated, particularly given the relatively short time that we have to debate the matter.

Dawn Primarolo (Labour, Bristol South)

May I first apologise to the hon. Gentleman? There is no question of discourtesy; I shall try to find out why the draft regulations are not in the Library. I shall reflect on whether I might send papers directly to him rather than through normal distribution system of the House.

Whenever I can, it is my practice to ensure that regulations are available to assist debate. It is not required, but it helps. It has certainly been my practice, although it was not the practice of the Conservative Government. The point raised by the hon. Gentleman is touched upon in amendments, so we may deal with it then. I was seeking to assist him by underlining the point that I would make in reply to the amendments.

Clause 1 - Earnings: power to make provision in consequence of retrospective tax legislation: Great Britain

Mark Field (Conservative, Cities of London and Westminster)

I beg to move amendment No. 7, in clause 1, page 2, line 14, leave out ‘2nd December 2004’ and insert—

‘(a)2nd December 2004, or

(b)the date on which a Minister has made a public announcement that such regulations are required,

whichever is the later.’.

John Butterfill (Conservative, Bournemouth West)

With this it will be convenient to discuss amendment No. 8, in clause 1, page 3, line 41, leave out ‘2nd December 2004’ and insert—

‘(a)2nd December 2004, or

(b)the date on which a Minister has made a public announcement that such regulations are required,

whichever is the later.’.

Mark Field (Conservative, Cities of London and Westminster)

I will be fairly brief, because much of the subject was covered on Second Reading, and the Paymaster General and her team will be aware of some of the concerns that we Conservative Members have.

In bringing forward this sort of regulation, we need, above all, to promote commercial certainty as far as possible, and therefore to limit to an absolute minimum the potential downside of retrospection. That, of course, is at the heart of our concerns with the entire Bill.

We understand that there are deep misgivings among taxation specialists about the potentially open-ended time frame, which we do not feel is appropriate. It is with that in mind that we tabled amendments Nos. 7 and 8. I should say that amendments Nos. 9 and 10 to clauses 5 and 6 are consequential on amendments Nos. 7 and 8, so when the time comes we may not need to debate amendments Nos. 9 and 10 in great detail.

Ministers of any Government should not have the capacity to impose regulations bringing in retrospective tax legislation on an earlier date than that on which a public statement about the forbidden contrivance was made. That is the aim of the amendments. Effectively, they mean that the public announcement will be the trigger date, rather than the whole matter being pushed back to 2 December 2004, the date on which the Paymaster General made it clear that there was to be action on contrived schemes in relation to employment securities. That would clearly have an effect on income tax, something that was debated during proceedings on the Finance Bill, and also under this Bill.

I give notice, Sir John, that we will want a reasonably detailed stand part debate on the clause. That will be a more appropriate point at which to bring up some of the issues on retrospection. We have grave concerns about the whole retrospection issue, but we will go into that later. I hope that the Paymaster General can give us some comfort that there is not to be an all-embracing power in the hands of Ministers, whether current Ministers or those from some other party in future. The proposals set a dangerous precedent with regard to retrospection. I accept that that is not entirely unknown—to our party, too—but the approach must be utilised in a focused manner. The worry is that the Government are proposing an open-ended approach, and I suspect that it will be used as a precedent for other retrospective taxation action by Ministers.

On contrivance, one of the concerns that we have expressed, and will express again later, is that there seems to be relatively little evidence of the more outlandish contrivance schemes that made the newspaper headlines in the 1990s, it has to be said, on an annual basis. However, the outgoing Conservative Administration took the trouble to ensure that those contrivance schemes were closed off at the earliest possible opportunity.

We still have relatively little evidence of the precise nature of the contrived schemes that the Bill is trying to clamp down on. That is all the more reason why we have grave concerns about such an overwhelming power, which might be exercised in an arbitrary manner. I hope that the Paymaster General will give some thought to that, and I look forward to hearing her response.

Dawn Primarolo (Labour, Bristol South)

I hope that my response to the hon. Gentleman can be as brief as his introduction to the amendment.

The amendment would limit the application of the regulation powers to after a public announcement had been made. If the amendment were made—if it is pressed to a Division, I will ask my hon. Friends to oppose it—it would completely neuter the legislation, with an estimated cost of £240 million a year to the national insurance fund. We are talking about moneys that should go into the national insurance fund, because national insurance should be applied to earnings. The point of the legislation is that, unfortunately, there are those, small in number but very well off, who continue, year in, year out, to market and to use highly complex schemes, particularly for bonuses, that seek to prevent the collection of tax and national insurance. We are dealing with the national insurance part of that.

Mark Field (Conservative, Cities of London and Westminster)

The Paymaster General uses the phrase “neutering the legislation” and bandies around the figure of £240 million, which, I understand, is the entirety of the money that is likely to go into the national insurance scheme. All we are saying is that a specific date needs to be put in place. That would not necessarily take away all the moneys either this year, or, with the understanding that it will be an annual sum, in the years ahead. All we are saying is that we want a specific announcement rather than this catch-all announcement and the backdating of all the concerns to 2 December 2004. I hope that she will appreciate that by no means would the entirety of the sum be at risk, from the Revenue’s point of view. It is simply a matter of saying that there must be a specific contrivance and a specific announcement in relation to that.

Dawn Primarolo (Labour, Bristol South)

I will come back to the specific trigger date of 2 December 2004 and why that stands. However, the legislation needs to deal with a number of points that continue to frustrate the House. First, in order to target highly contrived and specific anti-avoidance schemes, it is necessary to have highly complex and specific legislation that closes off that particular loophole. What we have seen in this narrow area, and what the previous Government saw, is that year in, year out, specific, highly targeted plans and schemes are followed by highly complex and specific anti-avoidance measures.

Brooks Newmark (Conservative, Braintree)

Will the Minister give way?

Dawn Primarolo (Labour, Bristol South)

May I first answer the two points put to me by the hon. Member for Cities of London and Westminster (Mr. Field), and then I will be happy to give way? Otherwise, I will lose my train of thought. I am trying to be helpful to the Committee.

The House of Commons and members of its Committees are, like the profession, constantly faced with highly complex legislation. Bonuses are salary. Tax and national insurance are paid on salaries. We need to take away the complexities that hon. Members and the profession are normally complaining about—the need for highly complex anti-avoidance legislation. The scheme has to be seen, drafted against and then stopped. In that period, the avoidance continues. As soon as it is closed off, another scheme appears and revenue is lost.

There is a simple proposition for the hon. Gentleman and his hon. Friends. Does he agree that salaries are subject to tax and national insurance? It is a simple proposition. The answer is yes, of course they are. If that is the case, the trigger point was in the statement made on 2 December 2004. To paraphrase, it said that we are closing off the schemes we know and if any other scheme subsequently appears that delivers exactly the same avoidance mechanism it will be dealt with back to that date. That is the trigger point.

These are not the type of schemes that anybody in the Room—officials, Members of Parliament, members of the public—easily stumbles into. They are specific and marketed. People know what they are doing, but should not be doing it.

The proposition is simple. If people do not use such highly contrived schemes, the legislation need not be used. Therefore, all the misgivings about certainty or uncertainty do not materialise. What is central is whether we agree that those who seek to pay themselves a salary in a form that they think will not be subject to national insurance and tax, when it should be, should be prevented from doing so. Such a scheme cheats the national insurance fund, which is for all of us, and prevents the Exchequer from treating all taxpayers fairly.

Brooks Newmark (Conservative, Braintree)

I feel that I am in a revival of “The Rocky Horror Show”, with the right hon. Lady singing, “Let’s do the time warp again”. She has alluded to the fact that the previous Government got rid of all the schemes almost 10 years ago. My request to her is simply to be given examples of two schemes—out of the 100 she told us about on Second Reading—that are so offensive that they must be stopped retrospectively. That would be helpful.

Dawn Primarolo (Labour, Bristol South)

We are closing these schemes off every year; it did not happen just 10 years ago. On Second Reading, I had a long list, which I do not have to hand now. I did not think that I would need to read it out again, but I will provide it to the hon. Gentleman and to every member of the Committee to remind them. The hon. Member for Cities of London and Westminster well knows that he conceded that point in the Second Reading debate.

Mark Field (Conservative, Cities of London and Westminster)

Will the right hon. Lady give way?

Dawn Primarolo (Labour, Bristol South)

I will in a moment.

The question is not that that happened only in the past; it has happened since. The Government are still doing that. The specific response, set out in December 2004, is on the basis that those schemes continued, despite successive Governments saying that bonuses are salary and therefore that they should pay tax and national insurance, and despite the constant cat and mouse game of closing down schemes and the House having to deal with them. They must be dealt with.

Mark Field (Conservative, Cities of London and Westminster)

The record will prove or disprove this, but as far as I recall the Paymaster General went into specific detail. However, all those details were of schemes that were closed down between about 1991 and 1996—fine wine and the like. I do not think she will be able to answer the issue raised by my hon. Friend the Member for Braintree (Mr. Newmark) about specific examples.

The Paymaster General referred to the closure of a scheme that might be brought into place now, but which was exactly the same as one already highlighted for closure in December 2004. She will be well aware that some of the brightest minds within the employee benefits community are always working at new schemes and new variations of schemes. A notion wide of the mark is that, at some point in the future, a scheme can be closed down for being exactly the same, and having exactly the same effect and operation as an earlier scheme. Whether a particular scheme is the same or not is a matter of interpretation by HMRC or Ministers. The scheme is likely to be somewhat different—perhaps tailored in a different way, but none the less different as a scheme. As a result, for the provisions to be backdated that far would be wrong—

John Butterfill (Conservative, Bournemouth West)

Order. The hon. Gentleman is making a long intervention.

Mark Field (Conservative, Cities of London and Westminster)

I am grateful for your indulgence, Sir John.

Dawn Primarolo (Labour, Bristol South)

The Government also closed off schemes under the last Finance Bill, and my belief is that the statement made at the time of the pre-Budget report on 2 December 2004 is holding. That is why it is important to make sure that the House now delivers on that statement and gives itself the ability to backdate in cases where a scheme can be shown to have been operational from 2 December 2004.

There are several points to make about what the hon. Gentleman said, and the first relates to retrospection. In serious circumstances, where the loss to the Treasury from repeated attacks required a strong signal to be sent, the previous Government also used retrospection to deal with particular schemes. Hon. Members might be worried about the powers, but it is important for the House to understand that, if people do not engage in such schemes, the powers need not be used. They relate to a specific practice, which has caused substantial amounts of revenue to be lost over a long period, and it is necessary to deal with those who constantly challenge the basic proposition that bonuses are salary and subject to tax and insurance. We are talking about a small number of individuals, compared with the total taxpayer population, but it is entirely right that the House deal with them.

Nowhere in the consultation or in the contributions from Conservative Members, has there been a contradiction of the central proposition that bonuses paid as part of salary are salary and therefore subject to tax and national insurance.

When that proposition was discussed during proceedings on the Finance Bill, it was accepted. Hon. Members rightly expressed their concerns about whether the use of retrospection had become a general principle, and I made it absolutely clear why the power was needed to tackle these issues. The national insurance provisions before us do the same as the Finance Bill provisions to which the House has already agreed.

Michael Fabricant (Conservative, Lichfield)

The right hon. Lady makes the point quite well that this is question of principle. We all agree that, in principle, when a salary is paid, it must be subject to tax and national insurance. If that is the case, however, why does she stop the retrospection at December last year? If this is a matter of principle, one could argue that the provisions should be backdated indefinitely. Clearly, she thinks that that would be wholly inappropriate, which is why we think that it is inappropriate to backdate them at all.

Dawn Primarolo (Labour, Bristol South)

The hon. Member for Cities of London and Westminster referred to 2 December 2004 as the trigger date—the warning date, on which we had the statement clearly saying, “From now on”. The Government are still applying that rule. I would be interested to see not only an amendment that gave the powers that the hon. Member for Lichfield (Michael Fabricant) suggested but how many of his hon. Friends rushed to support it. He is taking the principles behind the Bill in a direction they do not go. The hon. Member for Cities of London and Westminster said that he wanted the provision to apply from the date of announcement, and I am telling him that the date of announcement was 2 December 2004, when a clear statement was made in the House. That is why the provision starts at that date.

Christopher Huhne (Liberal Democrat, Eastleigh)

The right hon. Lady obviously recognises that there is an important principle as regards retrospection. My colleagues and I share the concerns of the hon. Members for Cities of London and Westminster and for Lichfield. For a long time, it has been a fundamental principle of our system of justice that things that are not specifically disallowed should be allowed—that is the principle upon which we are trespassing. What practical difference is there between the Paymaster General’s proposal and the proposal that taxation should apply from the point when a specific announcement is made about a scheme? We are doing some violence to an underlying principle. The amount of tax revenue at issue should be very great to justify our doing that violence. I seek an answer to a specific question. What will be the practical revenue consequences of using the December date rather than the date of a specific announcement on a specific scheme?

Dawn Primarolo (Labour, Bristol South)

At the moment, this legislation allows us to trace back to 2 December 2004 any attempt that is made not to pay national insurance on income that is subject to national insurance for the purposes of this Bill. Thus we can recover taxation on revenue that might have escaped from 2004 to date. That applies to any scheme that seeks to frustrate the basic principle. The approach of the hon. Member for Cities of London and Westminster would be to use the named day on which a scheme begins. In that case, the money relating to the time between 2004 and the date of publication of the scheme would be lost to the Exchequer. That cannot be right. The central proposition must be that either money is subject to national insurance or it is not. This House cannot allow a cat and mouse game that enables people to conceal their activities for a period after which the Government cannot recover the money.

Christopher Huhne (Liberal Democrat, Eastleigh)

The right hon. Lady is making a point that every member of the Committee has taken on board. I asked a specific question. I hope that Treasury Ministers are not so unacquainted with the numbers involved that they cannot give us an estimate. My question is, what is the practical consequence for revenue of the difference between the approach advocated by the hon. Member for Cities of London and Westminster and that proposed by Ministers?

Dawn Primarolo (Labour, Bristol South)

It could be £240 million, as I said in my opening remarks, because there would be a period during which the Government would not be able to receive the tax. I turn the question round to the hon. Gentleman: if tax and national insurance should be paid, why would any hon. Member support an operational date that is different from the one that the Government propose, on the basis that it might let revenue that should be in the national insurance fund remain in somebody else’s pockets?

The hon. Gentleman accepts that the money should be in the national insurance fund, but by introducing a separate operational date, he would create the opportunity for some to pocket the money and to deny this House the opportunity to ensure that it is paid. That cannot be right as a central proposition.

I understand hon. Members’ concerns about retrospection, but they have not provided an answer to the simple question. They have asked for technical issues to be clarified, and those certainly have to be dealt with. However, the central proposition is that there are those who do not pay their tax and national insurance, and who use the fact that we design legislation on an anti-avoidance specific basis in order to gain financial advantage. That cannot be right.

Christopher Huhne (Liberal Democrat, Eastleigh)

In her earlier remarks the right hon. Lady was careful to point out that we are discussing only income that is subject to national insurance. The definition of income for the purposes of national insurance is one about which reasonable people will continue to disagree. To take a draconian power that does some violence to the principles on which we have based legislation for a long time is a substantial matter, yet she has not told us what scale we are discussing. It cannot be all of the £240 million, because if she announced the end of a particular scheme today the whole financial year would not be covered. Will she give us a rough estimate? I accept that the provision will be of enormous use to the bureaucrats in the Treasury and HMRC, because its powers are draconian, but how much revenue is at stake? Does she agree with my point about the definition of income?

Dawn Primarolo (Labour, Bristol South)

My answer to the hon. Gentleman was about anticipating the specific shape of an anti-avoidance scheme and stating clearly why it was complex and contrived. Under the amendment, the date that the announcement was made would be the operation date. I am saying something different. There has been a shift because of the specific, systematic year-in, year-out process of City bonuses, as a result of which hundreds of millions of pounds are lost to the national insurance scheme each year. The clear statement is that contrived schemes of the type that are payable on bonuses will be subject to national insurance from 2 December 2004, if appropriate. Why does the hon. Gentleman think that the national insurance fund should do without some of the money to which it is legitimately entitled from moneys paid to individuals? That question has still not been answered.

The amendment proposed by the hon. Member for Cities of London and Westminster would result in continued loss to the national insurance fund when there is no justification for it. The statement of 2 December 2004 is clear: if the schemes are not used, the legislation will not bite. The simple remedy is not to attempt to avoid national insurance. If people attempt to do that, the powers under the Bill will be triggered. Unless members of the Committee can demonstrate clearly why that central proposition is not correct, I shall ask my hon. Friends to vote against the amendment if it were put to the vote.

Mark Field (Conservative, Cities of London and Westminster)

The debate has been worth while. I thank the hon. Member for Eastleigh (Chris Huhne) for his contribution about the principles underlying our concern about retrospection.

The Paymaster General will not be surprised to know that I am not entirely satisfied with her response. Perhaps better than anyone else, because she has been a Treasury Minister throughout his time in office, she understands that the complexity of the British taxation system has been encouraged and nurtured by the present Chancellor of the Exchequer. That complexity has encouraged the scenes that are seeing.

Dawn Primarolo (Labour, Bristol South)

I remind the hon. Gentleman that we are discussing national insurance. When it is liable, when it is not liable and at what rate it should be paid by employers or employees are not complex concepts to grasp.

Mark Field (Conservative, Cities of London and Westminster)

When national insurance gets bumped up, it does not count as an increase in income tax. That happened two or three years ago in direct contravention to an election pledge, but perhaps I am covering some painful old ground.

The aim of Nigel Lawson, now Lord Lawson—one of the great reforming Chancellors of the post-war era—was to simplify the tax system and to cut away a lot of its complexity. I fear that much of the complexity that has been introduced in the past seven or eight years has triggered an equal and opposite reaction from the taxation industry, which has found ways to use complexity and obscurity for its own benefit. That is one of the reasons why a number of the schemes that we have been discussing have been created.

I am still dissatisfied with the response that we have had. I am most concerned about retrospection and particularly about having, in effect, an open-ended power. We had no response to the points raised by my hon. Friend the Member for Braintree on precisely how much money was likely to be lost to the Revenue—the answer is anything between none and £240 million—and on some specifics about contrivance schemes. Accordingly, I would like to press the matter to a Division. I encourage not only my Conservative colleagues, but some of the thoughtful Members on the Labour Benches—I am sure there are some—to support our amendment.

Mark Field (Conservative, Cities of London and Westminster)

I beg to move amendment No. 1, in clause 1, page 2, line 37, at end insert—

‘(8A)Any primary and secondary national insurance contributions that have been overpaid shall be refunded to the primary and secondary contributor respectively.’.

After discussing amendments Nos. 7 and 8 we come rather incongruously to amendment No.1. I do not in any way blame the Clerks; I blame myself for tabling some amendments later on, right at the end of last week. I thank the Clerk. I understand that this is her first Bill. She might have some trickier times ahead but she has dealt with this extremely well.

Amendment No. 1 proposes a new subsection (8A) in new section 4B of the Social Security Contributions and Benefits Act 1992. Under new subsection (8), where the earning is for a period and the national insurance contribution liability is therefore revised to a lower figure, amounts of national insurance that have been overpaid should be repaid without the need for a claim to be submitted. Her Majesty’s Revenue and Customs will naturally highlight where more national insurance should be paid retrospectively, so we believe it is right that those who will gain retrospectively should not have to revisit their affairs and take time to claim.

In essence, the amendment is fairly straightforward. We are trying to support a level playing field between national insurance contributors and HMRC. It is always worth remembering that the power of the Treasury as a tax gatherer carries with it significant penalties and the weight of law. It is quite different to the role of companies or individuals. One hopes that that Treasury power will only ever be used in a sensible way and not in a draconian one, but it is a significant power. All we are asking for is a level playing field between contributors and the all-powerful HMRC under the auspices of the Treasury.

I hope that the Paymaster General will at least give some thought to the amendment, in part because it would make administration easier. Given that an NIC overpayment would be repaid without the need for a claim to be submitted, it is sensible to make a parallel arrangement.

Dawn Primarolo (Labour, Bristol South)

Overpayment of primary and secondary national insurance is an important matter, but the amendment is unnecessary. The Government intend any overpaid primary and secondary national insurance to be repaid to the primary or secondary contributor. That will be set out clearly in regulations in due course.

In the majority cases where refunds apply, they will be made by employers calculating the refunds and reflecting them in the same supplementary returns that will record a national insurance underpayment. It would be impractical to state on the face of the Bill that HMRC should do that because the refund can be made only with all the knowledge that employers have. A huge amount of information would have to be transferred from employers to HMRC if HMRC rather than the employers, who will have the powers to do it, were to make the refund. That would be totally unnecessary in the overwhelming majority of cases, because employers already have the mechanisms to make refunds.

Employers are best placed to identify the consequences of the legislation, as they already do in the case of overpayments and underpayments. They will also have regard to the terms of employment and the nature of the earnings paid. The hon. Gentleman makes an important point, but the amendment is unnecessary; the matter will be very clearly covered. He is quite right to say that an overpayment should be refunded. It will be through the mechanisms that are already in place. With those assurances, I hope that he will agree to withdraw his amendment.

Mark Field (Conservative, Cities of London and Westminster)

There was great agitation behind the Paymaster General during her contribution. The hon. Member for Colne Valley (Kali Mountford) realised that a drought threatened on the Back Benches and started waving to obtain more water. I thought that she might be waving to suggest that she agreed with much of what the Opposition had to say.

I am comforted by the points made by the Paymaster General. I note that several of the aspects mentioned were catered for in the draft regulations, which we received so belatedly. With that in mind and with the Paymaster General’s assurance, I shall be happy to withdraw the amendment.

Dawn Primarolo (Labour, Bristol South)

I hope that the hon. Gentleman will now acknowledge that when I give my word in Committee that something will happen, it happens. I also hope that he will accept the rest of the proceedings on that basis.

Mark Field (Conservative, Cities of London and Westminster)

Sadly, something seems to happen only in the 59th minute of the eleventh hour, which is a worry for those of us with a tendency to be control freaks. With no further delay, I beg to ask leave to withdraw the amendment.

Mark Field (Conservative, Cities of London and Westminster)

I beg to move amendment No. 2, in clause 1, page 2, line 48, at end insert—

‘(9A)For the purposes of this section, “original determination” means the amount of earnings on which the employer originally determined that he would pay national insurance contributions or to decisions made by Officers of the Board of Her Majesty’s Revenue and Customs under section 8 of the Social Security Contributions (Transfer of Functions, etc.) Act 1999 and excludes matters determined by Commissioners, a tribunal or a court.’.

The term “original determination” is used in new section 4B(9). Several bodies, particularly accounting bodies, who have helped me to prepare for the debate suggest that the term needs to be clarified in the Bill. Does it refer simply to the amount of earnings on which the employer originally determined that he would pay the national insurance contribution, or to decisions taken by the officers of the board of HMRC under section 8 of the Social Security Contributions (Transfer of Functions, etc.) Act 1999, or to decisions taken by a tribunal or court?

The view of the professional communities is that “original determination” should not refer to a court or a tribunal decision, as the Government should not seek to erode the authority and independence of the courts and tribunals by overruling their judgments retrospectively. There would be no legal certainty. Much of the debate on the Bill has hinged on the issue of certainty. Commercial certainty is obviously important, but some sense of legal certainty is also required in this case. Certainty is one of the most fundamental requirements of a good tax system. It was much on the mind of Adam Smith more than 230 years ago that certainty was part of the great canons of a taxation system. It would be most regrettable—not only in relation to this measure, but generally in relation to tax—if there were so much uncertainty that it became necessary always to run off to court to get a determination.

That is one reason why we went into some detail earlier about pre-determination clearance schemes. Our aim was not to give a charter to contrivers but to ensure that the certainty we want is established. The Paymaster General raised concerns on Second Reading and during the passage of the Finance (No. 2) Act 2005 about the idea of clearance, but in an increasingly complicated taxation system it seems that we need to reopen the lines of communication between Her Majesty’s Revenue and Customs and the professional advisers who are trying to sort out a scheme. Now that amendment No. 7 has been defeated there is little doubt that there is even more need for that level of predetermination and clearance. I hope that the Paymaster General will give some thought to the true meaning of “original determination”. We brought the matter up on Second Reading and it lies at the heart of some of our concerns.

I appreciate that the last thing the Paymaster General wants is to give an open door to contrivance schemes by allowing a protracted pre-clearance process, during which time, potentially, moneys that would otherwise rightly go into HMRC’s coffers would not go that way. Equally, however, we must accept that lack of certainty is one result of the complexity coupled with the potentially draconian powers that are in the hands of officials and Ministers now that the long-stop date of 2 December 2004 has been set in stone. That is not a healthy situation and we risk innocent people being caught up because of the absence of certainty. I hope that the Paymaster General will give us some assurance of the meaning of the phrase “original determination” and how it will work in the Bill.

Dawn Primarolo (Labour, Bristol South)

I hope to be able to reassure the hon. Gentleman that his amendment is unnecessary. The area is rather complex. It should be borne in mind that commissioners’ decisions are also about individuals’ entitlement and not just about whether a particular scheme worked. Commissioners’ decisions on avoidance schemes would not normally arise because HMRC would not seek to litigate on contrived avoidance schemes that it accepted successfully avoided liability under existing law. It is therefore unlikely that there would be a commissioners’ decision on a contrived avoidance case in the period before the making of the retrospective NICs regulations. If such decisions were taken, however, HMRC does not contemplate asking Parliament to approve regulations that would overturn decisions made by commissioners, tribunals or courts that clearly addressed the effectiveness of the relevant avoidance scheme.

There is a problem with the amendment tending in the other direction. The amendment would exclude all decisions of commissioners, courts or tribunals from the effects of the backdated national insurance contributions regulation. That would mean that a court or tribunal decision would stand even if not revisiting the decision would be detrimental to the contributor. Decisions on benefit entitlement or refunds would similarly be excluded under the amendment, and I am sure that that is not the hon. Gentleman’s intention. If that position were allowed to stand, there is a risk that some employers would be given an absolute safeguard—commissioners’ decisions would be incapable of being overturned. Although such cases are few in number, some unscrupulous employers might try to manipulate the appeals process in furtherance of their avoidance. I hope that that is clear.

I repeat: HMRC does not contemplate asking Parliament to approve regulations that would overturn decisions made by the commissioners, tribunals or courtsthat had clearly addressed the effectiveness of the relevant avoidance scheme. That is the point that the hon. Gentleman wants to get to, and I hope that with that reassurance he will ask leave to withdraw his amendment.

Mark Field (Conservative, Cities of London and Westminster)

The Minister has given us plenty of food for thought and reassurance. I am glad that our small debate outlining our concerns is on the record. I am satisfied that there has at least been clarification of the meaning of the clause.

Although I appreciate that the Paymaster General is concerned about our own drafting, it is unlikely that people will lose out. I accept that she is making a debating point in relation to such people, but I am sure that rewriting the clause would be relatively straightforward. However, as she rightly said, we were looking for reassurance and clarification of the precise nature of “original determination”, and with that in mind I am happy to beg to ask leave to withdraw the amendment.

Mark Field (Conservative, Cities of London and Westminster)

I beg to move amendment No. 3, in clause 1, page 3, line 4, at end insert—

‘(10A)The secondary contributor may recover by any available and feasible means the additional primary contributions arising as a result of regulations being given retrospective effect.’.

John Butterfill (Conservative, Bournemouth West)

With this it will be convenient to discuss the following amendments: No. 5, in clause 5, page 12, line 32, after ‘legislation)’, insert

‘where the earnings on which the contributions arise were paid before the coming into force of the regulations in question.’.

No. 6, in clause 5, page 12, line 42, after ‘legislation)’, insert

‘where the earnings on which the contributions arise were paid before the coming into force of the regulations in question.’.

Mark Field (Conservative, Cities of London and Westminster)

I appreciate that part of this probing amendment may be superseded by the draft regulation. I am sure that the Paymaster General will say if that is so.

It seems to be intended that the additional primary national insurance contributor liability cannot be reclaimed by employers from employees. Some would consider that a penalty in respect of an action that was legitimate at the time it was undertaken. That goes back to the heart of our debate on amendments Nos. 7 and 8 in relation to certainty, with legitimacy being voided and pushed back to a date such as 2 December 2004. We believe that the legislation should make it possible for employers to recover their national insurance contribution from employees, especially if we are correct in our understanding that employees’ contribution records are to be amended where the level of earnings makes it appropriate to take account of the additional primary national insurance contribution that is paid.

The primary national insurance contribution is deducted from the employee’s earnings and accounted for by the employer to HMRC. A mechanism is needed to enable the employer to recover from the employee’s additional primary national insurance contribution that arises as a result of the earnings being revised for past years. Given how this system may operate, there may be a number of relevant past tax years. Other concerns will arise, such as the practicability of reclaiming overdue moneys from the estate of a deceased former employee, or where there has been a falling out or a termination of a contract between an employer and an employee. We appreciate that even in the confines of this probing amendment, there are some major potential problems at stake.

Employers are currently able to enter into agreements or joint elections with their employees with the aim of making them responsible for the payment of certain secondary national insurance liabilities. That option will generally be restricted to national insurance contribution liabilities relating to certain securities-based incentivisation, including gains from employment related security options, restricted securities and convertible securities in circumstances where the employers might face unpredictable liabilities in the future. It seems to us that the Bill changes existing legislation with the effect that any such agreements or joint elections will be deemed void when liabilities to secondary national insurance contributions arise wholly or partly in consequence of an avoidance scheme that is retrospectively closed down. It is important to note that there is no cut-off date: agreements in joint elections may be disapplied even if they were entered into before 2 December 2004. From the employers’ perspective, the worry is that they could find themselves lumbered with an extremely large bill for national insurance contributions when they thought that there had been an agreement for their employees to take that risk.

I hope that the Paymaster General will give some thought to what we have said. We appreciate that there are significant problems in the relationship between an employer and employee—particularly a former employee. However, by the same token, it seems to us that the proposal in the Bill would undermine and override joint elections. That may not be an entirely sensible way forward.

Dawn Primarolo (Labour, Bristol South)

I shall deal with amendment No. 3 first; amendments Nos. 5 and 6 go together.

Amendment No. 3 is not necessary. The Government intend employers to have the right of recovery of additional primary contributions from their employees; that will be set out in the regulations. However, as I am sure the hon. Gentleman will agree—we discussed this issue in another debate about shares some years ago—it is important to restrict the employer’s right of recovery in order to balance the rights of employees; that is how the system operates elsewhere. The amendment would give employers unlimited rights of recovery, which would be wholly inappropriate and might well lead to employees’ financial hardship. There will be a right of recovery, but it will be balanced fairly in the regulations to make sure that there is a fair reflection of employees’ rights as well.

Amendments Nos. 5 and 6 would add nothing new, nor would they change how the clause will work; they are therefore not necessary. Referring to clause 5 will put the amendments in context. The clause is very clear about which national insurance liability will be prevented from being transferred or recovered from the employee. Those are the secondary or employers’ national insurance contributions from a liability that arises as a result of regulations being given retrospective effect. National insurance liabilities that arise after the regulations are made cannot be as a result of the retrospective effect and can, if within the scope of the legislation governing agreements and elections, be transferred to the employees.

Let me make it absolutely clear: clause 5, which provides the protection that the hon. Gentleman seeks, makes changes to paragraphs 3A(2A) and 3B(7B) of schedule 1 of the Social Security Contributions and Benefits Act 1992 to prevent the use of agreements and elections to recover from employees backdated national insurance liabilities brought in under regulations made under new section 4B(2). The change will apply to agreements and joint elections made before or on or after the day on which the Bill receives Royal Assent. That will include agreements and joint elections entered into or made before 2 December 2004—[Interruption.]

John Butterfill (Conservative, Bournemouth West)

Order. It is not permitted to use electronic devices in Committee, especially electronic communications devices. Will hon. Members please observe that rule and will those who have bleepers or other devices make sure that they are silent?

Dawn Primarolo (Labour, Bristol South)

As I said, the changes will apply to agreements and joint elections made before, on or after the day on which the Bill receives Royal Assent, and that will include agreements and joint elections entered into or made before 2 December 2004. However, that will only apply to liabilities arising after that date or the period specified by the regulations made under new section 4B(2).

The rights of employers and employees need to be balanced. That is important, and it is what we will seek to do in regulations. Lower paid employees will be most affected by the recovery of primary national insurance, and it is important that they do not suffer financial hardship as a result of their employers’ decision to pay earnings in a manner that seeks to avoid national insurance. The clear way through this would be for that not to be done.

Brooks Newmark (Conservative, Braintree)

Will the right hon. Lady give way?

Dawn Primarolo (Labour, Bristol South)

The hon. Gentleman can make a contribution to the debate.

Brooks Newmark (Conservative, Braintree)

I hear loud and clear what the right hon. Lady says, and she is making some excellent points. However, it would help Opposition Members if she clarified what impact the Bill will have on share-based incentive schemes that seek to offer legitimate rewards to employees who contribute to business growth.

Dawn Primarolo (Labour, Bristol South)

None.

John Butterfill (Conservative, Bournemouth West)

Has the Minister completed her contribution?

Dawn Primarolo (Labour, Bristol South)

Yes. I gave a succinct answer, and I do not want there to be any confusion about this point. The answer to the hon. Gentleman’s question is none.

Stephen Hammond (Conservative, Wimbledon)

(Wimbledon) (Con): May I then respond to the Minister by asking her to provide us with clear examples of schemes that she would regard as legitimate, as opposed to illegitimate? The tax profession is asking for clear guidance on that NIC point.

Dawn Primarolo (Labour, Bristol South)

I am not in the habit of giving tax advice in House of Commons Committees. I have made it clear that the arrangements for legitimate schemes will not be affected, but that contrived schemes will be. If advisers do not want to be caught by the regulations directed at contrived schemes, they should not engage in such schemes.

Mark Field (Conservative, Cities of London and Westminster)

That was a slightly unsatisfactory conclusion. The reality is that there needs to be a clearance procedure. It cannot make sense for us to bandy around words such as “legitimate” and “contrived”, because we all know that ultimately a lot of concerns will involve grey areas. There will be issues that are not entirely black and white. They will not be about a lot of wine or gold bullion being used as payment to avoid national insurance contributions. They will be about tax advice that appeared to be spot on, but which in fact is in a grey area.

It is part of the nature of proceedings in Parliament and of cases that go before the courts that the matters that are dealt with are not entirely black and white. That fact, and the complexities and uncertainties referred to, highlight why there needs to be a proper clearance system that allows tax professionals to be able to get guidance in advance, so that they are aware of the facts before they put schemes together.

From what the Minister has said, the reality of the situation seems to be that anybody who is thinking of putting together any new employee benefit scheme will have to assume that it is, almost by its very nature, a contrivance. As a result, they will be unlikely to put it together. That cannot be a sensible way to proceed, particularly for small and growing businesses, as my hon. Friends the Members for Braintree and for Wimbledon (Stephen Hammond) said. I assume that we want to encourage people to remain in companies and to take on some of the benefits of share option schemes. It cannot be a sensible way forward to apply the burden and the label of contrivance to every one of these schemes.

I worked for a short time in a company that had share option schemes, before setting up a business on my own. I know that a small business’s most important asset is its human capital—its present and future employees. Businesses will inevitably want to take advice on introducing share option schemes as they look to the future, but that future might involve a sale, an amalgamation or a range of different outcomes. It is difficult at the outset for a small business man to understand what those outcomes will be, although whenever I see the business plans of small businesses, I am always impressed by the fact that they seem to be cascading figures within a few months. That is the reality of commercial life, and the worry here is that any scheme that is put in place will be easily branded as a contrivance. That is at the heart of the debate on amendment No. 3.

Michael Fabricant (Conservative, Lichfield)

Will my hon. Friend concede that it is not just smaller businesses that find this lack of clarity difficult? John Lewis Partnership plc, which employs 63,000 people, finds that there is a lack of clarity in the tax system regarding the way in which it operates its bonus provisions.

Mark Field (Conservative, Cities of London and Westminster)

My hon. Friend is right that that has been a concern not only for schemes that could be described as relatively recent contrivances, but for some long-standing schemes.

The Paymaster General said that she did not want to give employers unlimited rights of recovery, and nor do we. Through the amendments, we seek to achieve a balance in relation to joint elections between employers and employees, so that an undue burden is not put on employers. I am heartened by her comments that we are likely to see some clarification of these matters in the draft regulations, and we look forward to them. Unless she has some notes to read out, I beg to ask leave to withdraw the amendment.

Mark Field (Conservative, Cities of London and Westminster)

I beg to move amendment No. 4, in clause 1, page 5, line 12, leave out from the second ‘before’ to ‘the’ in line 13.

I thank the Institute of Chartered Accountants for its assistance in making some headway on the amendment, which relates to a slightly complicated issue, although the principle that we wish to address is fairly straightforward and important. New subsection (2A) provides that a draft statutory instrument can apply retrospectively for up to 12 months before the date on which it is laid, but a 12-month limbo between primary legislation and the laying of secondary legislation is too long. Employers need to know what the national insurance contribution rules will be and the Government will presumably want any additional national insurance contributions to be accounted for as early as possible. Accordingly, we consider that the statutory instrument should be laid at the same time as the primary legislation, or as soon as practically possible thereafter, subject of course to democratic requirements and particularly to proper parliamentary scrutiny.

The point is that, if the tax and national insurance provisions are to come into effect from the same date, the legislation for both should be laid on the same day, rather than the tax legislation being enacted and there then being a gap of up to 12 months before the NIC legislation is laid. An employer will know from the changed tax legislation what is likely to follow for national insurance purposes, but until the new NIC regulations are passed, he or she will have no legal obligation to account for national insurance contributions, other than in accordance with the law, which will mean the old, rather than the new rules. There will also be no legal right to make deductions from employees’ pay, other than in accordance with the law, which, again, will mean under the old rules.

That takes us back to the debate on amendment No. 3. In effect, we will be expecting some sort of clawback. The Paymaster General characterised that as giving unlimited rights of recovery. It will perhaps not be unlimited, but there surely should be rights of recovery. It is not a deterrent but it is an inconvenience, especially if an employer has to revisit calculations when, eventually, the new national insurance contribution rules are made.

Another issue that we raised on Second Reading was proper parliamentary scrutiny, not just of the statutory instrument but in a full debate, of what, constitutionally, amounts to retrospective action. We accept that the rules are complex. They are unlikely to capture the imagination of hoards of parliamentary colleagues at the best of times, but crucial issues of principle are at stake. The hon. Member for Wolverhampton, South-West (Rob Marris)—the doyen of the explanatory notes—is nodding. He is reading something, and it is probably just as well that it is outside my sight line. The entire debate about contrivance and the Government’s desire to close loopholes and to bring in tax receipts galore hinges on retrospection as a primitive tool to achieve that end.

This is a matter of principle for Conservative Members. I appreciate that there needs to be some practical delay between legislation and any statutory instrument coming into force, but being in limbo for 12 months is far too long, especially in view of our recent debates on the employer’s power to recoup moneys being so restrained.

I hope that the Paymaster General will give us some guidance and perhaps even agree with what we propose, because an important issue of principle is at stake.

Dawn Primarolo (Labour, Bristol South)

The end of the 12-month period is the latest that regulations can be laid. I will explain the Government’s intention and then ask the hon. Gentleman to withdraw the amendment. It is the Government’s intention to do all that they can to implement the changes in national insurance, the second trigger for action, as closely as possible after the tax changes in the Finance Bill. There will always be an interval between tax and national insurance changes taking effect because regulations need to be agreed by both Houses. Therefore, the Government will need to ensure that we implement those regulations as closely as possible to the Finance Bill, allowing 12 weeks for consultation, which we are obliged to do. Royal Assent to the Finance Bill will be required as that proceeds. It is the Government’s intention to ensure that that is done as quickly as possible.

It would be an error on the hon. Gentleman’s part to prevent the bringing together of the two processes if that were not completed within 12 months. In those circumstances, there would be a gap between provisions. The Finance Bill would state that for tax purposes that was avoidance and we would not have tidied up the matter with the national insurance provision on the same scheme. Insisting that it be done within 12 months is unnecessary. It depends on the procedure of the House. However, employers would have the certainty of the Finance Bill provisions having been thoroughly debated, with a clear indication of why the trigger was being used, and the national insurance provision would follow that.

It is my intention—and, I assume, that of any other Minister responsible for such matters—to try to ensure that, when the Finance Bill debate on the relevant tax takes place, the draft national insurance provisions will be ready, even though those cannot be part of that debate. However, I simply cannot give guarantees about parliamentary procedures, through both Houses, in a specific period. That is not within my gift; nor should it be.

I hope that the hon. Gentleman accepts my reassurances about timeliness and ensuring that all relevant information is available. There will be two opportunities for debate. The regulations will be in draft, and are therefore subject to consultation. They could thus reflect points that might be made about the tax regulations. That gives the best possible fit in ensuring that the contrived schemes will be dealt with. I hope that he will therefore withdraw the amendment.

Mark Field (Conservative, Cities of London and Westminster)

We consider this to be an important matter of principle. I appreciate the practical issues that the Paymaster General has raised. She is right, in one sense: we are mere passengers and there are better minds than ours who work out how parliamentary business can be done. Delays may be inevitable between the debate on a Finance Bill and that on a national insurance contributions measure. However, we have had a recess, and the Third Reading of the Finance Bill was only a few parliamentary weeks ago.

We remain concerned about the idea of being in limbo for 12 months between primary and secondary legislation, adding to all the uncertainty. I appreciate that the Minister has said that she would want to accelerate the process as far as possible and that 12 months is a longstop date. However, as it is a matter of principle, we want to put the question to the vote. Twelve months is an overly long time. We hope that in future the Treasury will give serious thought to how to concertina the time frame. I offer my apologies, because we have had a reasonable debate, and I do not wish to suggest that I did not understand the Paymaster General’s points, but an issue of principle should be put to the vote.

John Butterfill (Conservative, Bournemouth West)

I am prepared to allow a short debate on stand part, but I would prefer it if Members did not reiterate what they have already said about the amendments.

Mark Field (Conservative, Cities of London and Westminster)

If only we had been able to stop the votes after only two Members’ names had been called out, we would have won. There must be something about the latter half of the alphabet that has particular appeal to Labour Members.

The assumption that underlies the Bill is that contrivance is a big problem. On Second Reading, the Paymaster General could only recite examples from the early 1990s—all loopholes that were comprehensively closed by the Conservative Government as soon as they became evident. There would have been a hue and cry from her and her colleagues in the press at that time about such schemes being in place in the first place.

In the commentary accompanying the frequently asked questions, specific claims are made that require some clarification. The final sentence of the first paragraph of the answer to question 2 states:

“It should secure total tax and NICs yield of £200m in 2004-05 and £500m per annum thereafter for essential public services.”

Anyone would welcome clarification of the methodology that underlies those figures, as well as the figure of £240 million that has been bandied around this morning. On what basis have they been calculated, what statistics do they include and to what extent do they include estimates? Has any objective research been carried out and how up to date are the figures for money lost to the Inland Revenue for the purposes of essential public services?

Rob Marris (Labour, Wolverhampton South West)

In the explanatory notes, paragraph 79 on the bottom of page 11 shows how the calculation has been done.

Mark Field (Conservative, Cities of London and Westminster)

I was testing to see whether the Paymaster General had an equally fingertip approach to the provisions.

Stephen Hammond (Conservative, Wimbledon)

The hon. Member for Wolverhampton, South-West made a point about the explanatory notes, but if he had been listening to my hon. Friend he would have spotted that the explanatory notes give a calculation that includes £90 million for this year and then £240 million per annum, which is one figure that is bandied around. However, the frequently asked questions give another number. The hon. Gentleman’s comment on the explanatory notes, although it pointed out that calculation, surely does not help with what my hon. Friend was asking.

Mark Field (Conservative, Cities of London and Westminster)

Precisely. Different figures get bandied about. One of our concerns is about the use of emotive language, which was used by the Paymaster General again this morning, about essential public services and the idea that hard-working taxpayers are being ripped off via contrivance-related schemes. We need an objective analysis and an explanation of why the measures are considered necessary. It is easy to make a strong emotional case about moneys seemingly seeping away, but we should not allow that to override the reason why rules have to be made in as certain a manner as possible, so that loopholes are closed without bringing injustice to others.

Question 6 of the frequently asked questions refers to the new time limits following a retrospective change in such legislation. Without any doubt, we need sufficient time for employers to make, in an orderly manner, any necessary changes to systems and procedures. It will be interesting to see what the Paymaster General has to say about that.

I come to the heart of the debate on clause 1, and I hope you will give me a wee bit of indulgence, Sir John. The other clauses appear to be consequential, and so this is likely to be the only clause on which we will have a substantial debate. My hon. Friends the Members for Braintree and for Wimbledon may want to make a contribution when we come to clause 5 but, as I have mentioned, those amendments are consequential to the amendments that we have discussed. However, the heart of the question is what constitutes tax avoidance.

The Paymaster General referred to a number of avoidance schemes when employees were paid bonuses in gold bullion, diamonds, fine wines and, more recently, through sophisticated financial instruments and securities. Her view was that any such schemes would be permanently closed down as reprehensible. However, she also took the view on Second Reading that

“genuine employee share schemes and share option plans will not be affected.”—[Official Report, 27 October 2005; Vol. 438, c. 473.]

The difficulty is establishing where legitimacy ends and contrivance begins, but we have had no answer to that debate, although one may be forthcoming from the hon. Gentleman.

Rob Marris (Labour, Wolverhampton South West)

I am dredging the depths of my memory, and refer the hon. Gentleman to the Ramsay case, which was, I believe, decided by the Court of Appeal in 1985, and which lays out the answer quite clearly.

Mark Field (Conservative, Cities of London and Westminster)

I feel even more guilty because in 1985 I was an undergraduate reading law, so I should perhaps know far more about that. Of course, ignorance is no excuse. However, I suspect that other matters have gone on in the past 20 years, and hope that we will get some up-to-date guidance, as things change.

The debate prompts us to ask what constitutes avoidance and where the line between avoidance schemes and innocent schemes should be drawn. There is no definition of tax avoidance, as opposed to tax planning. Similarly, there is no simple, stark, clear-cut division between legitimacy and illegitimacy. We are, inevitably, dealing with a grey area. We can all find absurd contrivance schemes that would clearly fall foul of measures, and employee share schemes that have been drawn up in such a moderate and beautiful way that there is no way one could accuse their creators of trying to avoid the payment of tax or national insurance, but there is often a grey area.

Complicated avoidance schemes are merely at one extreme of a spectrum of behaviour. At the other extreme are tax incentives introduced by the Government to achieve certain results, such as their enhanced capital allowance scheme, which was introduced to reward those who invest in the most innovative energy-saving technologies. Between those two extremes is a range of activities in which people try to pay as little tax as possible within the grounds permitted by the law, which is a legitimate goal.

I fear, from our debates on this issue over the past six months, that if an individual, company or partnership decides that the primary aim of a scheme is that as little tax as possible should be paid, that scheme will be struck out as being a contrivance scheme. As we have discussed, the Treasury is concerned about ensuring that as much money as possible comes into its coffers—I appreciate its worries in that regard—but it is quite wrong for every scheme that is designed to avoid paying as much tax as possible simply to be struck out as being contrived. That prompts the question: who should be the proper judge of what is unacceptable avoidance?

Under the Bill, retrospective regulations may be passed where that appears to the Treasury to be appropriate. That introduces quite an arbitrary element into the taxation system that is in stark contrast to long-standing constitutional principles. The issue is further complicated by the fact that the Treasury’s judgment appears to be based on morality and making sure that essential public services are catered for, rather than on practicability. The language used by the Paymaster General and the Economic Secretary to the Treasury revolved around what is fair and right rather than what is just. I am a great believer in the British concept of fair play, but it is not easy to define. Justice, however, can be defined in the constructs of the law. Obviously, the common law considers fair play, but there needs to be greater certainty with statutory instruments and legislation.

One man or woman’s tax avoidance is another’s tax planning. The Government seem to regard the Bill as a natural progression from the Paymaster General’s announcement on 2 December 2004 that any tax avoidance activities would be permanently closed down. The Bill should therefore be non-controversial, say the Government, as it is surely a continuation of the policy of the pre-1997 Government, which was to close down avoidance schemes as they emerged, but I do not think that that is the case. If we were in government, we would close down schemes as and when they emerged, but the proposals go one step further towards retrospection.

The Bill’s promoters have made it clear that, in their view, dealing with tax and national insurance contributions avoidance is somehow a moral issue. In the words of the Treasury, the Bill is

“an appropriate, proportionate and effective response to ... avoidance”.—[Official Report, 27 October 2005; Vol. 438, c. 475.]

The Treasury also said that the changes would not affect most employers and employees who pay their fair share of tax and national insurance, but would affect only a small minority of people who fail to do so to the detriment of everyone else.

As the Paymaster General and the Economic Secretary pointed out on Second Reading on 27 October, the list of

“complex and contrived arrangements designed to avoid income tax and national insurance on the rewards from employment”

is long. Some 10 years ago, employers could avoid national insurance contributions by rewarding their employees with bonuses of

“gold bullion, diamonds and fine wine”,—[Official Report, 27 October 2005; Vol. 438, c. 471.]

as the Paymaster General said. As I pointed out only a few moments ago, the then Conservative Government stopped that.

The Government say that more recently, malign tax avoiders have moved on to schemes based on share rewards, share options and employee benefit trusts. The Government intend to put a stop to such activity by retrospectively removing any benefits of tax and national insurance contributions avoidance.

In short, avoidance schemes will no longer be worth while once the Bill has become law. Indeed, no schemes will be worth creating. One must ask whether these schemes are avoidance schemes at all. Clearly there used to be contrivances, but surely share incentivisation should not be such an obvious target of contrivance. When did share incentivisation, which traditionally meant capital investments rather than income, become contrived tax avoidance?

The Opposition’s fear is that the Government often attack schemes that are not contrivance schemes but a sort of tax planning. Buying one’s home and living in it, for example, is tax planning. The Bill is really about the Government’s dislike of incentivisation in cases in which the return is to be paid in capital form, because the tax take is potentially only 10 per cent. with taper relief rather than a possible 50 per cent. plus when both national insurance contributions and income tax at the higher level are taken into account.

One must return to the core issue and ask why we are discussing what constitutes tax avoidance in this case simply because the Government have introduced business asset taper relief, which makes it worth ensuring that a particular asset can be articulated and characterised as capital, as most share incentivisation schemes have traditionally been, rather than income.

The whole mess and the reason for the legislation is, to a large extent, of the Government’s making.

Stephen Hammond (Conservative, Wimbledon)

I am aware, Sir John, of your strictures about not repeating the clause and what we have already discussed.

There are two key points to the clause: the element of retrospection, and the contrived scheme. I shall not rehearse the arguments about retrospection that were advanced on Second Reading and in debates on amendments Nos. 7 and 8, except to make the point that retrospective tax changes are usually made from the date of an announcement, but this change is different because it is clearly from a date set as 2 December 2004.

We should recognise two important points. First, despite the explanatory notes, the Institute of Chartered Accountants continues to say:

“Member States are legally bound to protect the principles of legitimate expectation and legal certainty, which may only be disregarded in exceptional circumstances.”

In the run-up to the clause stand part vote, will the Paymaster General clarify that that is actually so, and that the Government have taken legal advice on that?

Secondly, when we discuss retrospection under clause 5, I will ask the Paymaster General about the date of 2 December 2004, because it does not seem to apply in that clause.

My hon. Friend the Member for Cities of London and Westminster said a lot about contrived schemes and what defines them. I would have wanted to say much of what he said. Earlier this morning, however, the Paymaster General said that she was not in the business of giving tax advice. Two points stem from that. First, many people in the tax profession, such as partners at KPMG and the ICA, are not as clear as she appears to be about what a legitimate national scheme is exactly and what it is not. Many of them also say that her announcement of the 2 December 2004 date moves the Government from a disclosure regime to a general anti-avoidance regime. Given that they have moved to such a regime, there should be a hand-in-hand move to binding tax and national insurance scheme clearance.

Given the change in the nature of the anti-avoidance being put in by the Government, it is not inappropriate that HMRC should offer specific advice about specific schemes when asked. When various practitioners have come to the Government for that advice, it would seem entirely appropriate that when HMRC has given such advice it should be binding. Will the Minister clarify that for us?

Dawn Primarolo (Labour, Bristol South)

There are two points that have not been covered which I should perhaps address. To remind members of the Committee—although I do not think that they need the reminder—we are talking about national insurance and the money that goes into the national insurance fund, which pays for pensions and contributory benefits to individuals. That is what is being cheated by those who seek not to pay their national insurance and that is what the Government are seeking to restore to the fund.

Mark Field (Conservative, Cities of London and Westminster)

That is, of course, the biggest contrivance of the lot: the notion that this is a ring-fenced fund that pays for all these matters. We well know that our national pensions, particularly in the public sector, are well oversubscribed. There is a notion that people paying their national insurance stamp will somehow cover the health service, unemployment benefit and the like; it is important that there is a national insurance fund, but it is absolute nonsense to suggest—and it has been one of the great fictions of life since the schemes were put in place some 58 years ago—that all the things I mentioned are covered from that alone. They are covered from a lot of other Government expenditure as well.

It is high time that there was more transparency and openness about the entirety of the tax system, rather than our continuing with the idea that the national insurance fund is ring-fenced both internally and externally as far the moneys that are paid out to those who contribute are concerned.

Dawn Primarolo (Labour, Bristol South)

I am inclined to let the hon. Gentleman keep digging. We have just heard an absolute broadside against the principles of the national insurance fund. That is a first; I have not heard a Front Bench spokesperson from the Conservative party say, “Scrap the national insurance fund. Pay it all from central taxation.” The current arrangements for the national insurance fund are that we pay national insurance.

Michael Fabricant (Conservative, Lichfield)

On a point of order, Sir John. Can you confirm that there will be a Hansard publication for this Committee? If so, I am sure that the clarity of the comments made by my hon. Friend the Member for Cities of London and Westminster will be obvious. I hope that the Paymaster General will read it, because she is distorting what my hon. Friend said.

John Butterfill (Conservative, Bournemouth West)

I am not entirely sure that that is a legitimate point of order. The hon. Gentleman knows full well that there will be a Hansard record.

Dawn Primarolo (Labour, Bristol South)

I think that I touched a raw nerve there. Perhaps their tax commission is examining this. Let us move on.

I am sure that members of the public will be fascinated to hear that the Conservatives do not think that everybody who should be paying national insurance into the national insurance fund should be required to do so by this Parliament. The first question that was raised was about when companies reward their employees for services, and, in particular, the concept of the share incentive schemes. Companies that reward their employees for their services should take note that if there is a specific relief provided—I do not know why I need to tell the big four this because I know that they know it well—they will reward their employees accordingly. In the absence of that relief applying, national insurance is liable.

Four approved share incentive schemes provide such specific reliefs, tailored to particular business needs and designed to provide incentives in targeted and focused ways, in line with the Government’s fairness and enterprise agenda.

I would be happy to hear if anyone in the Committee or outside the House has proposals for how the share incentive schemes could be improved around such objectives. However, as a Minister, I am not attracted to the idea that we should leave caveats in our legislation, so that tax planners can design schemes that they think might improve the schemes. Clearly, unless the reliefs apply, national insurance should be paid.

The question on Community law principles and whether the legislation was compatible was also raised on Second Reading. I have been asked to confirm that compatibility, and I do so, having legal advice to that effect.

The final point was on having a pre-clearance system, which is not part of the Bill. I reiterate what I have said on record before and following on from the comments that I have just made on where there are specific reliefs in legislation that make it clear that national insurance is not paid on the same terms as elsewhere. Understanding the point about national insurance is not complicated. There is no need for a procedure. The anti-avoidance provisions are there to discourage manipulation and transactions. As long as companies are in accordance with the reliefs and with the law, they do not require pre-clearance, because they know that they are within the legislation.

The Bill provides for the same powers as those in the tax regulations already discussed in the Finance Act (No. 2) 2005. I have still not heard an explanation in Committee that makes a case for some people being allowed to use contrived schemes not to pay their national insurance, when the vast majority pay on our earnings. The clause and the Bill to which it is central ensure that that will happen. I commend the clause to the Committee.

Clause 5 - Agreements and joint elections: Great Britain

John Butterfill (Conservative, Bournemouth West)

Does Mr. Field wish to press amendments Nos. 5 or 6 to a Division?

Mark Field (Conservative, Cities of London and Westminster)

May I briefly explain? We did not wish to ignore the Northern Ireland Members when debating clauses 3 and 4, but those clauses are obviously directly relevant to clauses 1 and 2, and there was no necessity to debate them so fully.

I said earlier that amendments Nos. 9 and 10 are consequential on amendments Nos. 7 and 8 to clause 1, which we debated in some detail—and it has to be said that we were narrowly defeated. I shall therefore withdraw those amendments.

John Butterfill (Conservative, Bournemouth West)

Does the hon. Gentleman mean amendments Nos. 5 and 6?

Mark Field (Conservative, Cities of London and Westminster)

Amendments Nos. 9 and 10.

John Butterfill (Conservative, Bournemouth West)

We have not yet come to those. I was asking whether the hon. Gentleman wished to press amendments Nos. 5 and 6, which were debated earlier.

Mark Field (Conservative, Cities of London and Westminster)

I am sorry for that misunderstanding. Perhaps we can spool the tape back: we do not wish to press amendments Nos. 5 and 6 to a Division.

John Butterfill (Conservative, Bournemouth West)

Amendments Nos. 9 and 10 do not need to be withdrawn, as they have not been moved.

12.15 pm

Brooks Newmark (Conservative, Braintree)

As we all know, joint elections protect employers from the potential escalation of NIC liability by passing on the employer’s component of the NIC to the employee, which in turn protects the employer from being liable for large sums as a consequence of the increased value of shares awarded to employees under incentivisation schemes. However, the retrospective nature of clause 5 has the effect of breaking all joint elections, whether they were entered into before or after 2 December 2004—the date of the Paymaster General’s statement to the House. If joint elections entered into for the purpose of transferring the employer’s NIC are automatically invalidated, will joint elections entered into for other purposes ever be valid?

On Second Reading, the Paymaster General maintained that the legislation was not targeted at what might be called honest schemes. She drew attention to the difference between genuine employee share schemes and share option plans and the range and complexity of those already contrived schemes. Perhaps the right hon. Lady can help the Committee to appreciate the distinction between a genuine and a contrived scheme by providing an example of each. If she cannot, I will remain extremely concerned about the knock-on effect such uncertainty will have on honest share option schemes.

The Bill ought to tackle the cause of the disease in the tax system, not one of its many symptoms—the disease being the complexity of taxation and the lack of a clear response to legitimate tax planning. There is a continuum between the legitimate tax planning that we all undertake and the actions of a few people who behave illegally or illegitimately in order to escape their fair share of the burden of taxation. The Bill does nothing to deal with the undoubted uncertainty about the frontiers of legitimate activity. The Bill, in particular the unlimited retrospection of clause 5, will compound that uncertainty rather than resolve it.

There is still no definition of tax avoidance and attempts to develop a general anti-avoidance rule have been shelved. In answer to a written question that sought to elicit the distinction between legitimate and illegitimate avoidance, the Paymaster General stated:

“The Government take steps to close down tax avoidance schemes as they become aware of them”.—[Official Report, 1 April 2004; Vol. 419, c. 1697W.]

That and similar statements demonstrate a commitment to tackling the problem of tax avoidance—none of us disputes the sincerity of that intention—but without a clear statement of the difference between legitimate tax planning and illegitimate tax avoidance, the Bill will in all probability be merely another iteration in the conflict between the financial services industry and the Government, particularly given unlimited retrospective measures such as those in clause 5.

Rob Marris (Labour, Wolverhampton South West)

I refer the hon. Gentleman to the Ramsay case of 1985. He will find the definitions there.

Brooks Newmark (Conservative, Braintree)

The hon. Gentleman is referring back to ancient history. I understand that he practises law, and I have no doubt that he is aware that we have got rid of the more deceitful schemes of the past 20 years. I am simply looking for clarification.

I draw the Committee’s attention to the fact that if our concerns on clause 5 are not dealt with, we will have failed to live up Adam Smith’s simple maxim in “Wealth of Nations”. He wrote:

“the tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, and the quantity to be paid ought to be clear and plain to the contributor and to every other person.”

Dawn Primarolo (Labour, Bristol South)

This topic has been covered in debates, so I shall not read the example into the record again. On Second Reading, I gave an example of the type of contrived schemes that have been used. I also pointed out earlier in this debate that legitimate schemes are those for which the Government provide reliefs for a specific activity. Anything outside of that is not legitimate. I am struggling to understand why accountants outside the House find that so difficult to comprehend. In fact, I do not believe that they find it difficult to understand, although that has been suggested here.

Let me make it clear: employers and employees cannot use an agreement or election arrangements to support schemes or arrangements one of whose main purposes is to avoid the payment of national insurance. Employers and employees who enter into genuine agreements and elections, as provided for by the reliefs, to cover unpredicted national insurance liabilities on certain types of share awards will not be affected by the changes and have nothing to worry about.

I thought that the hon. Member for Braintree was in the Room when we debated amendments Nos. 5 and 6. If agreements and elections predate 2 December 2004, only the backdated national insurance liabilities from that date arising from the regulations that will follow the Bill will be affected. Reliefs are provided, and they are clear about the different arrangements for national insurance and elections. They are untouched by the Bill. That is straightforward and not difficult to understand. Everything else is subject to national insurance, as it should be.

Stephen Hammond (Conservative, Wimbledon)

The Paymaster General says that the requirements are straightforward and that the measure applies from 2 December 2004. That is certainly true in respect of clause 1, but subsection (4) of clause 5, which deals with agreements and joint elections, clearly states

“including those entered into or made before 2nd December 2004”.

For the sake of clarity in Hansard, is she saying that the Bill will apply to joint elections only from 2 December 2004?

Dawn Primarolo (Labour, Bristol South)

I was clear. If agreements and elections predate—that means come before—2 December 2004, only the backdated national insurance liabilities from 2 December 2004 arising from the regulations that will follow the Bill will be affected. That is now on the record three times. When we avidly study the Hansard report of this Committee, we will see that that has been said clearly throughout the debate.

Dawn Primarolo (Labour, Bristol South)

Before you make the final statements for this morning’s proceedings, Sir John, I would like to say a few words to thank you, the Clerk, the Hansard reporters and those who have helped during today’s proceedings for a businesslike and succinct scrutiny of the Bill. I thank the hon. Member for Cities of London and Westminster and his hon. Friends for the direct way in which they have dealt with the Bill, ensuring that points of concern to those outside this place have been properly scrutinised.

I thank my hon. Friends for their undying support. I am greatly encouraged to know that they are sitting behind me and supporting me. I also thank the hon. Member for Eastleigh for his attendance during most of the sitting and for his participation.

Mark Field (Conservative, Cities of London and Westminster)

I shall be generous and associate myself with all of the Paymaster General’s words, even about that lot behind her. I thank you, Sir John, for your chairmanship and the indulgence you gave me and one or two of my colleagues when our interventions seemed more like long ministerial statements. That was very helpful. I congratulate Mrs. Challenger on her work—

John Butterfill (Conservative, Bournemouth West)

Commander.

Mark Field (Conservative, Cities of London and Westminster)

Sorry. We have had too many challengers in the Conservative party, but we need commanders. That was obviously a slip of the tongue. Thank you, Mrs. Commander, for breaking your duck in relation to Committees and I thank the rest of the team.

Christopher Huhne (Liberal Democrat, Eastleigh)

I associate myself with the kind remarks made by the Paymaster General and the hon. Member for Cities of London and Westminster. I thank you, Sir John, for your expert chairmanship in the dispatch and efficiency of this morning’s business, and the Clerk and her staff.