National Insurance Contributions Bill

Public Bill Committee, 21 November 2013.

Gary Streeter (Conservative, South West Devon)

Welcome to our line-by-line consideration of the National Insurance Contributions Bill. Before we start, some brief explanation may be useful to those who are relatively new to Public Bill Committees, although I see a group of veterans in front of me.

The selection list for today’s sitting is available in the room. Only one new clause has been tabled and that has been grouped with the clause 1 stand part debate. Once we have debated the first group, we will proceed through the Bill clause by clause. Schedules will be debated after the clause that introduces them. A Member may speak more than once in a single debate. If no Members wish to speak to a clause or schedule, it can be agreed to formally.

I hope that explanation is helpful. We are now beginning the formal proceedings on the Bill; I remind Members that they may wish to consult the guide to the rules relating to the conduct of Members, particularly in relation to declarations of interest.

Clause 1 - Employment allowance for national insurance contributions

Gary Streeter (Conservative, South West Devon)

With this it will convenient to consider new clause 1—Report to Parliament —

‘(1) HMRC must prepare a bi-annual report on the employment allowance scheme which the Minister shall lay before Parliament.

(2) The bi-annual report must include information on HMRC’s assessment of the impact of the employment allowance on—

(a) the number of jobs created as a result of the employment allowance,

(b) the level of take-up of the employment allowance,

(c) the geographical locations of the businesses taking up the employment allowance,

(d) the number of charities and clubs taking up the employment allowance, and

(e) the overall cost to the Exchequer of the employment allowance and projected costs for future years.’.

Shabana Mahmood (Labour, Birmingham, Ladywood)

It is a pleasure to serve under your chairmanship, Mr Streeter, in my first Bill Committee speaking from the Front Bench. Please forgive me if I trip up on procedure; I am sure that you will correct me and that the Committee will bear with me if necessary.

We had two useful evidence sittings. They helped to illuminate some of the issues raised by the Bill and gave some indication as to the thinking behind the new clause, which I will speak to a little later. Clause 1 is the principal clause of the Bill. It introduces the employment allowance, which was first discussed by the Chancellor in the Budget. It is worth up to £2,000 for all businesses, charities and sports clubs and the Opposition support it. We had an interesting debate on Second Reading on that point.

Julian Smith (Conservative, Skipton and Ripon)

I welcome the fact that the Opposition support the measure. Would the hon. Lady add that that support is unqualified?

Shabana Mahmood (Labour, Birmingham, Ladywood)

Many of the issues that we raised in relation to a previous scheme introduced by the Government, which I will speak about at length in my remarks, are taken up in this employment allowance. We absolutely support the employment allowance. We have concerns about reviewing how it is working, which is the thinking behind new clause 1, but we think that the employment allowance is a good thing. In fact, we think that some change in the Government’s approach to national insurance contributions and businesses was long overdue, which leads me very nicely to the Government’s previous scheme.

Richard Fuller (Conservative, Bedford)

Before the hon. Lady moves on and to pick up on her last comment—that is quite a change from Labour’s position in 2010, is it not? Labour went into the election supporting an increase in national insurance charges on employment. Why has there been this flip-flop from the Labour party?

Shabana Mahmood (Labour, Birmingham, Ladywood)

I am pleased that the hon. Gentleman got in with his standard remark about the Labour party manifesto commitment. I knew that he would come in early with that point, and he certainly did not disappoint. He will not be surprised if this apple of a policy point is one that I refuse to bite.

We had a number of concerns about the conduct of the Government and their previous regional national insurance employer’s scheme. That is the point of the Bill. We have long called for changes to that regional three-year scheme. From the beginning we had concerns about aspects of it. We wanted the Government to change course very early on and we set out alternative ways for them to consider. We are pleased that they have finally moved. It is a shame that it took three years, with businesses continuing to struggle in the meantime, for us to get to this point.

The regional national insurance holiday scheme was a flagship policy of the Government’s first emergency Budget. It ran for three years, from September 2010 until September 2013, and applied only to new businesses created after 22 June 2010. Under that scheme, new businesses would not have to pay the first £5,000 in national insurance for each of their first 10 employees during the first year of business. Greater London, the south-east and the eastern region were all excluded from the scheme. The thinking was that it was explicitly designed to try to stimulate private sector growth in parts of the country where there was a suggested over-reliance on the public sector, and it was designed to stimulate jobs.

The Government believed that 400,000 businesses would benefit, equating to around 800,000 employees, at a total cost of about £940 million. In the end, the scheme helped 25,000 businesses—still, it is fair to say, a substantial number; no one would decry businesses that availed themselves of the assistance that the scheme provided. However, that number was very far off the 400,000 originally predicted—375,000 fewer than originally claimed. Of the £940 million set aside to pay for the scheme, only £60 million or so was ultimately paid out. That equates to about 6% of the total amount originally intended.

One of the first issues of debate around the original regional national insurance holiday scheme was its regionality element. It explicitly excluded three regions of the country. The Committee that considered the detail of that Bill had a huge amount of debate around that regionality element. The Member then speaking for the Opposition tabled a number of amendments trying to persuade the Minister—it was the same Minister, although the Opposition Front Bencher has changed. [Interruption.] They have all moved up, so I hope that bodes well for me, too. We tried to persuade the Minister to consider different ways of expanding the scheme so that, instead of being a regional scheme, it would become a national scheme.

Among the amendments considered were some focusing on constituencies that had particularly high rates of unemployment and others that would have dropped the regionality element altogether, making the scheme national in every way. The Government stuck to their regional plan and the low take-up is an indictment of the scheme’s regionality element, which was never going to work. It certainly did not help with one of the purposes of the scheme, which was to try to remedy some of the regional imbalances that we see in our economy.

It is also telling that, of the analysis that the Government published on the new employment allowance, 40% of the expected number of employers who will now not pay any national insurance contributions under the new employment allowance are based in regions that were previously excluded. That shows that the balance that the Government achieved with the original scheme was wholly wrong. They should have listened to the criticism around regionality and dropped that condition at the earliest opportunity.

The second issue debated at length in the previous Bill Committee considering the regional scheme related to including charities. Again, that has been included and brought within the scope of the employment allowance. That is a welcome step, but once again I put to the Minister that it would have been better if we had not allowed that scheme to last for the full three years. It was clear that it was failing almost from the off and the Government should have changed course a lot sooner than they did.

The previous policy had the specific intention of trying to stimulate private sector job growth and encourage new businesses to take on new staff. It is fair to say that it is hoped that the employment allowance will have the same impact, although that is not the explicit intention. The Minister has not put any figures behind what kinds of impact he hopes will be achieved, although he accepts that the allowance is a good thing. From the perspective of businesses, it is very welcome; the Federation of Small Businesses in particular is very happy and now has a clear campaign point for every Budget from now on, to try to push for the £2,000 limit to be increased. I am sure that we will all have to respond to those campaigns at some point.

There is not the same kind of explicit intention behind the measurement of the policy. That is an important point because it involves large expenditure by the Exchequer and a tax give-away to businesses. However, the Exchequer, and all of us parliamentarians, hope that it will stimulate particular effects in the economy. Those effects may relate to job creation and to slightly higher wages, given that employers would no longer have to pay the first £2,000 of their national insurance bill. The policy may also stimulate some addition investment by businesses. We would all agree that if we can get small and medium-sized businesses in particular to invest a little more in research and innovation, which may assist them with their business practices, that would be a good thing.

There are a number of things that we hope this employment allowance would achieve, but there is no way at present, unless the Minister disabuses me, of measuring how the policy is getting on. Given the experience of the regional national insurance holiday scheme, and all the issues associated with it, it is right and proper that we consider the thrust of new clause 1 and the idea of a post-implementation review of the employment allowance.

In the oral evidence session, both the Institute for Fiscal Studies and the Federation of Small Businesses indicated support for a post-implementation review of the employment allowance. I hope that the Minister will have taken that on board.

David Wright (Labour, Telford)

Did my hon. Friend also note from the evidence sessions that the Minister himself, good man that he is, said that organisations would be lobbying in future for an extension of the policy over time and particularly that groups such as the FSB would be lobbying for higher levels of support through the scheme? If that is true, we surely need to see whether the initial implementation is successful. I suggest that a review process would be welcome.

Shabana Mahmood (Labour, Birmingham, Ladywood)

My hon. Friend makes an important point, and I agree with it.

Richard Fuller (Conservative, Bedford)

We have just heard something interesting. Given that we are already aware of the Labour party’s flip-flop on national insurance since the last election, employers will be worried about whether new clause 1 is a Trojan horse and whether the party is going to change its mind again. Can the hon. Lady advise the Committee whether she can commit now that the Labour party will not reverse this change at the next election?

Shabana Mahmood (Labour, Birmingham, Ladywood)

The hon. Gentleman would not expect me to make any commitments ahead of the next general election, but let me make clear the intention of the post-implementation review. It is not designed to say that the scheme is failing; I was going to come to the point about effective communication and effective advertisement of the scheme to businesses.

Low take-up was a huge problem with the regional scheme, and the new clause looks particularly at take-up and where it is occurring. That is important because problems with take-up ought to be highlighted to the Government at the earliest opportunity, so that they can remedy them and all businesses can avail themselves of the employment allowance.

Nicholas Dakin (Labour, Scunthorpe)

It is a pleasure to serve under your chairmanship, Mr Streeter.

My hon. Friend is setting out her case very well. When the Minister gave evidence, he was positive about a review, but concerned about the formality and bureaucracy that that might involve. Can my hon. Friend give assurances that a review would tick the right boxes without becoming over-bureaucratic?

Shabana Mahmood (Labour, Birmingham, Ladywood)

My hon. Friend is right. It should not be beyond the wit of Government to create a post-implementation review that is not over-bureaucratic, but at least ensures that some of the problems with the previous scheme are not experienced when the new employment allowance is rolled out.

Julian Smith (Conservative, Skipton and Ripon)

Does the hon. Lady agree that we have to reduce the burden of red tape and box-ticking, both for business and with what we do in the House? There will be plenty of information about the success of the scheme, and that will be in the public domain anyway, so we do not need to overlay that with another reporting structure that could lead only to more work and more tick boxes.

Shabana Mahmood (Labour, Birmingham, Ladywood)

I note the hon. Gentleman’s point about trying not to overload people with more work just for the sake of a box-ticking exercise. However, the Minister was clear in his oral evidence that an assessment process would take place in HMRC. We had an interesting exchange about talking of things being constantly under review, but he was clear that there would be an assessment and that parliamentarians would play a part in that assessment. No doubt MPs who think that businesses in their constituency are not taking up the employment allowance will be vociferous in making sure that the Government hear that point and do something about it.

My point is that if the assessment is occurring in HMRC anyway, in some shape or form, it would not be improper—in fact, I would say it would be very proper—for parliamentarians to see what it looks like. The new clause would ensure that the direct problems with the regional scheme could not slip off the radar. I am sure that the Federation of Small Businesses will be very alive to the point about effective communication and will want to ensure that take-up is as high as possible. However, I do not think we can subcontract to the FSB the Government’s duty to ensure that they communicate about the policy effectively.

Julian Smith (Conservative, Skipton and Ripon)

On communication, will the hon. Lady confirm that she will be asking all Labour MPs to promote through the channels that they have available, such as their websites, this excellent Government scheme?

Shabana Mahmood (Labour, Birmingham, Ladywood)

I would expect all Members of Parliament from all parties to ensure that businesses are aware of the different allowances that are available to them. All responsible Members of Parliament do what they can to help businesses in their constituencies, and ensuring that people are aware of the employment allowance will be one way of doing that. However, that does not take away the Government’s responsibility for ensuring that they do their bit.

David Wright (Labour, Telford)

Perhaps this is something that could be discussed on small business Saturday. It is clear that my hon. Friend the Member for Streatham (Mr Umunna) has been the pioneer of that initiative in the UK and that the Prime Minister is playing catch-up. Labour Members are proud to be supporting the initiative, so perhaps we can discuss the allowance with businesses in the new few weeks.

Shabana Mahmood (Labour, Birmingham, Ladywood)

My hon. Friend takes an excellent opportunity to remind all hon. Members about the brilliant proposal that is small business Saturday. Of course, I was formerly a member of the team of my hon. Friend the Member for Streatham, so I was heavily involved in ensuring that we have a small business Saturday in this country to follow on from the excellent experiences of that programme in the United States. I know that many Members from both sides of the House are doing their bit for small business Saturday, and I hope that all members of the Committee will be doing so as well. I put on record that I commend my hon. Friend the Member for Streatham for taking the lead on that issue and recognising that it is a really positive way of putting the focus on small business. We should take pride in our small businesses and recognise the huge amount of work they do for the national economy.

Let me deal with the detail of new clause 1. I will return to the provision about job numbers later, as I appreciate that some of the oral evidence suggested that it might be difficult to work out the number of jobs created. The new clause suggests that other points to address in a report to Parliament would be

“the level of take-up of the employment allowance…the geographical locations of the businesses taking up the employment allowance…the number of charities and clubs taking up the…allowance, and…the overall cost to the Exchequer of the…allowance and projected costs for future years.”

Dealing with those points would require no more than collating data the Government already have. A report could then be presented to Parliament so that hon. Members could debate it.

Nicholas Dakin (Labour, Scunthorpe)

My hon. Friend makes a perfectly sensible request, because those points might be covered by questions that will be asked by MPs and answered by the Department anyway. Does she agree that having a formal report to Parliament would secure the initiative into the future, because it would give the opportunity to take stock, celebrate and think about what happens next?

Shabana Mahmood (Labour, Birmingham, Ladywood)

My hon. Friend is right that such a report would help to cement the employment allowance. It would also help parliamentarians to ensure that we do our bit to make the employment allowance a success.

Nick de Bois (Conservative, Enfield North)

I do not have a problem with several of the hon. Lady’s suggestions, but I am worried about trying to identify the number of jobs that are created as a result of the employment allowance. Like many hon. Members, I have employed people, so I know that the decision to employ someone is complex and that it can be taken for a multitude of reasons. Trying to identify what one specific measure has done to create jobs would be a bureaucratic and fruitless process, because it is not that simple.

Shabana Mahmood (Labour, Birmingham, Ladywood)

I will come on to the specific point about jobs. I accept that that aspect of the review process would not be as linear as some of the others proposed in the new clause.

Sheila Gilmore (Labour, Edinburgh East)

Notwithstanding the previous intervention, such a policy will be introduced with certain intentions, and in this case one of them is clearly to increase employment. Surely it is important to attempt to measure the success of that intention.

Shabana Mahmood (Labour, Birmingham, Ladywood)

I agree with my hon. Friend. That was why I included a provision about jobs in the new clause, and I shall explain why that is important in a moment.

The extent of take-up is directly connected with the question of the number of charities and clubs that will avail themselves of the employment allowance. The policy rightly focuses on business, but I worry that it will be more difficult for charities and especially small sports clubs to find out about it. They may not go on to the HMRC website each day, although they are clearly missing out if they do not, and it would not be their normal practice to check other Government communications to find out whether anything is happening that affects them. Ensuring that the communication of the policy filters down to charities and sports clubs will be an important factor in determining the success of the allowance.

During our evidence sessions, I pressed Mr Cherry from the Federation of Small Businesses about what his organisation meant by effective communication. It clearly thought that that took a number of different forms, such as a letter from the Government to businesses, or information on the HMRC website. However, Mr Cherry was somewhat disparaging of the HMRC website. He did not think it was easy to use and I have not found it the easiest website to find one’s way around. Has the Minister considered Mr Cherry’s remarks about the ease of using the HMRC website? Are there any plans to open it up a bit more? Government Members focused on how the Government communicate policies through a digital forum to help businesses, so I hope that the measure will be part of the Government’s constant review of their communication strategies.

It will be somewhat easier to get the message out to business than it will to charities and sports clubs. Can the Minister tell us about any specific ways in which the Government hope to assist charities and sports clubs to know what the allowance is and how it might help them? If we were able to collect the relevant information in a formal report, it would help Members to ensure that they play their part. If they knew of charities and clubs in their constituencies that were not taking up the allowance, the report would give them an opportunity to ensure that they could get the message out.

Finally, let me turn to how we work out whether the policy has had an impact on job creation. I accept at the outset that the process is not linear, as I said to the hon. Member for Enfield North a moment ago. The picture is much more complex than employers simply saying, “We now have an allowance, so I will create another job.” However, the clear intention of the policy is to stimulate the economy, and one way of doing that is to increase job numbers. Alternatively, businesses that take up the allowance might increase staff wages or, as I said earlier, make additional investment in new machines or equipment, or even small-scale research and development to improve their internal processes.

Ian Swales (Liberal Democrat, Redcar)

In a sense, it is right that new clause 1 focuses on jobs, but according to the FSB data we heard about in our evidence sessions, only 28% of firms say that they will increase jobs. In fact, a slightly higher percentage say that they will increase wages. Does the hon. Lady believe that her monitoring proposals, even if they were acceptable, are sufficiently comprehensive? Even though I do not believe that the Bill should provide for such monitoring, I still wonder why the proposal is not comprehensive.

Shabana Mahmood (Labour, Birmingham, Ladywood)

The hon. Gentleman is right to raise the FSB survey, which I was about to come on to. I accept that it is not possible for the Government to make a linear measurement on a direct link, but it is possible to ascertain the intentions of businesses, as the Federation of Small Businesses has done. Its survey has produced statistics that will help parliamentarians to assess the economic impact of the policy. It would be good to extend that survey process so that we find out in six months or a year whether businesses have undertaken the measures that they thought they would when the employment allowance was introduced. That would give parliamentarians important information with which we could judge whether the policy represented money well spent, and whether it was having the stimulating effect on the economy for which we had hoped.

In oral evidence, Mr Cherry implied that the FSB will carry out further surveys following the introduction of the allowance. I envisage the Government either working with the FSB on such surveys, or conducting a similar exercise. There would need to be an element of extrapolation following such surveys, but at least we would get enough information to judge whether the policy is having the impact we want.

Many firms will use the employment allowance to bolster their profits. There is nothing wrong with that in and of itself, but we would all hope that businesses also use some of the allowance, if not all of it, to do things that will help the economy, particularly regarding jobs and wages. It is important that we are able to take stock of any such action by reviewing the policy.

I hope that hon. Members understand that a post-implementation review is intended not to be over-bureaucratic exercise, but to provide helpful information. The suggestion should also be considered in the context of the previous regional scheme, which faced significant difficulties. Although all those difficulties were identified at an early stage through written and oral questions to the Minister, the scheme was still allowed to run for its full three years—it was not brought to an early end so that the Government could establish a new course. Given what happened before, it is entirely proper that we formally review the policy at a relatively early stage to ensure it is doing what we all want it to do.

I know that the Minister said in oral evidence that the new scheme will be much simpler than the previous one and that many of the problems that afflicted that previous scheme have been remedied. We recognise that the new scheme is much more straightforward, which could be described as a good thing in and of itself. However, a post-implementation review would give us the opportunity to assess the scheme’s impact on the economy, so I hope that the Minister will take that on board.

Richard Fuller (Conservative, Bedford)

It is a pleasure to serve under your chairmanship, Mr Streeter, and it is also a pleasure to follow the shadow Minister in speaking to clause 1 and new clause 1.

The hon. Lady did a very good job with a very bad argument in trying to persuade us about new clause 1. When I read it, I initially thought, “Is this not really the responsibility of the Treasury Committee?” We would normally expect a Select Committee to review such a policy on behalf of the legislature. I am not sure whether the Opposition intend somehow to usurp the Treasury Committee’s authority by trying to direct what it should or should not do.

As I moved beyond that general question about the new clause, however, I looked at some of the details. The hon. Lady initially skipped over subsection (2)(a) and spoke to subsection (2)(b) and the other presumed benefits of the new clause. She made a number of comments about how complicated it would be to take up the allowance and how important the management of that process would be. I am not sure how complicated it will be for businesses to claim the employment allowance. Does even the Minister know whether the process will be so complicated for businesses that we need a special report to tell them how to do it?

David Gauke (Conservative, South West Hertfordshire)

I do not want to pre-empt the remarks that I will make on clause 1, but I can reassure my hon. Friend and the Committee that the process will be very simple. As we heard when we were taking evidence, for the vast majority of employers, it will simply be a case of clicking on a box as they undertake their normal payroll process and the deduction for the employment allowance will then be made for them.

Richard Fuller (Conservative, Bedford)

I am extremely grateful for that intervention. The process really is just a matter of a company ticking a box in the payroll process, yet the position of the Labour party is that we need an annual review to determine whether our businesses are smart enough to do that. That is not an especially strong reason for spending more taxpayers’ money on creating a report.

Anne Marie Morris (Conservative, Newton Abbot)

Does my hon. Friend agree that an easy solution, which would certainly avoid any form of review, would simply be that, when the screen comes up, there is a note saying, “Do you know about this new allowance?”? That would not require a review or any further work. It would be automatic and built into the system, and it would remind the individual that the allowance is available.

Richard Fuller (Conservative, Bedford)

My hon. Friend makes an interesting point, but I think we are arguing at the 99.99th percentile of people’s ability to fill something in. My concern is that Labour Members seem to think that that process is too complicated and that they want to waste taxpayers’ money on working out whether people can tick a box.

Shabana Mahmood (Labour, Birmingham, Ladywood)

I know that the hon. Gentleman is not doing this wilfully, but he misunderstands the point of the review. It is not about employers clicking a button on a website; it is about looking at the overall national take-up of the scheme, the areas in which the scheme is being taken up and the cold spots where it is not being taken up sufficiently. A review would give us an opportunity to assess that formally. The Minister said in oral evidence that the assessment would be done by HMRC anyway; our proposal would simply ensure that the information was brought before Parliament.

Richard Fuller (Conservative, Bedford)

The hon. Lady has not persuaded me one iota with that intervention. I am simply taking the new clause as I read it. Subsection (2)(b) states that the report

“must include information on HMRC’s assessment of the impact of the employment allowance on…the level of take-up of the employment allowance”.

As we have heard from the Minister, take-up is a straightforward matter. Paragraph (c) simply states that the report must examine whether people in different parts of the country have taken it up. There is no prima facie reason why—

Chris Evans (Labour, Islwyn)

Will the hon. Gentleman give way?

Richard Fuller (Conservative, Bedford)

I will give way in a second. I know that the hon. Gentleman has just walked in, and I am keen to hear from him.

Chris Evans (Labour, Islwyn)

I have been here all morning.

Richard Fuller (Conservative, Bedford)

I am terribly sorry. I withdraw that remark completely. Allow me to make my point and then I will, with great humility, give way. If paragraph (b) fails the simplicity test, there is no reason why paragraph (c) should be required at all.

Chris Evans (Labour, Islwyn)

I am grateful to the hon. Gentleman for giving way. The point behind the new clause is the fact that take-up of the national insurance holiday was low in parts of the country such as Wales, Scotland and Northern Ireland, and we worry that the same might be the case for the employment allowance. How does he suggest that we monitor the scheme to ensure that we do not see a repeat of the situation with the national insurance holiday?

Richard Fuller (Conservative, Bedford)

I would allow the Treasury Committee to do its job. I do not think that the previous Labour Government were particular fans of having post-implementation reviews of all their policies. The employment allowance is a welcome policy, and it does not require such a review either. I do not see any soundness in the Labour party’s pushing of the new clause.

The more revealing aspect of the debate has been the fact that the hon. Member for Birmingham, Ladywood and other Labour Members made no commitment to continuing the employment allowance should they win the general election in 2015. The previous Labour Government were very keen to increase national insurance contributions. When they were in office, the Labour party saw national insurance as something it could increase and increase. It taxed jobs at every opportunity, increasing national insurance five times as quickly as it did with income tax. The Labour party’s lack of commitment to continuing with this welcome measure to support employment and the growth of wages and jobs will be viewed with alarm.

Sheila Gilmore (Labour, Edinburgh East)

Many parties said things in their 2010 manifestos on which they quickly changed their minds. I seem to remember that certain parties promised that there would be no increase in VAT.

Richard Fuller (Conservative, Bedford)

My point was about not what parties did after they made promises, but whether the Labour party would commit today to a measure that has been welcomed by hon. Members on both sides of the House. The hon. Member for Birmingham, Ladywood said that she hoped Labour Members would promote the allowance on their websites, but the Labour party has made no promise to continue with the policy should they ever be in office.

Shabana Mahmood (Labour, Birmingham, Ladywood)

We have offered unequivocal, unqualified support for the measure. The only amendment that we have tabled to the Bill is this new clause proposing a review. How much more vocal can we be in our support for the employment allowance? When the hon. Gentleman intervened during my speech, he tried to tempt me into making a manifesto commitment. I am sure that all businesses that might be listening will recognise that it is sensible that we set out our proposals on all our policies in our manifesto nearer the election. However, I am also sure that they will have noted our recent policy announcements on business rates and energy price freezes, which show a wider support for business.

Richard Fuller (Conservative, Bedford)

I will take the hon. Lady at her word about that. We shall wait to see the Labour party’s commitment to that in the next election. Until then, we will have a lot of doubt about what its post-2015 position on the matter will be.

Let me move on to the substantive part of my contribution on new clause 1 and clause 1. In the evidence sessions, I wanted to understand the impact on not necessarily the quantity of labour—how much the change will increase employment—but the wages of people in employment. As we heard from the hon. Member for Redcar, the review by the Federation of Small Businesses showed that businesses wanted to use the allowance to increase wages or increase employment in broadly similar proportions.

Chris Evans (Labour, Islwyn)

I welcomed the hon. Gentleman’s question to the FSB about a living wage. What is his view on the FSB’s opposition to a living wage, and how does he see the measure fitting in with promoting a living wage among small and medium-sized businesses, as well as large ones?

Gary Streeter (Conservative, South West Devon)

Order. Before that question is answered, it may be helpful if I point out that the living wage is not really an aspect of this clause. Everyone has been extremely well-behaved up to now—[ Interruption. ] I know it has been only half an hour, but let us stay focused on the clause and new clause 1.

Richard Fuller (Conservative, Bedford)

I am grateful for that direction, Mr Streeter, but there is an interesting deeper point about how the state intervenes in our labour markets through taxation on employment through national insurance and through the provision of working tax credits. The employment allowance is an innovative first strike in considering how state intervention in labour markets can be altered in future, so with your indulgence, Mr Streeter, I would like to refer to the living wage, because I think that it is pertinent to clause stand part.

If I can encourage you further on that point, Mr Streeter, back in 2010, Mr John Philpott of the Chartered Institute of Personnel and Development, when discussing an increase in employer’s national insurance contributions, which we debated a little while ago, said that, in his view, it was not a tax on jobs. He said:

“This is far too simplistic. Employers will shift the tax onto employees by way of lower pay increases. The tax will therefore eventually have a neutral effect on the cost of employment and should not be harmful to jobs”.

Experts in the area see that changing national insurance contributions has an impact on lowering or increasing wage rates, and that plays directly into the issue of changes in wage rates, two examples in relation to which I cited on Second Reading. One was of a married couple with two children, with one partner not in work. I put them in a reasonably priced house in Bedford with band B council tax. If the wage earner in that household is on the minimum wage, their headline pay will be £13,125 a year. If they are on the living wage, their headline pay will be £15,912, which is a headline increase in income of 21%. That all sounds very nice, but when one takes into account their tax and national insurance contributions, and changes to their tax credits, housing benefits and council tax benefit, the situation looks different. The net income for someone on the minimum wage of £13,125 in the circumstances that I outlined is £29,308. For someone on the living wage, it is £29,419. For the individual—I am happy to pass my calculations to the Treasury so that my maths can be corrected—the change in their take-home pay by moving to the living wage is just £112 a year, which is virtually 0%. For the employer, however, the labour costs increase by 23%, due to an increase in the salary paid and the increase in the employer’s national insurance contributions, from £750 to £1,134. For the Government, income tax increases and the employee’s national insurance increase. They pay less in tax credits, the employer’s national insurance contributions increase, and the amount spent on housing benefit and council tax support decreases. For that one individual moving to the living wage, the Government would contribute £3,059 a year less to their employment.

Sheila Gilmore rose—

Richard Fuller (Conservative, Bedford)

I will take an intervention but, if I may, I have more to say about this before coming directly back to the main point, because I know that I am straining your patience, Mr Streeter.

Gary Streeter (Conservative, South West Devon)

Order. It is important that the hon. Gentleman links his comments to clause 1 or new clause 1. I think that he is doing that, but he should reinforce the point whenever he can.

Richard Fuller (Conservative, Bedford)

I give way to the hon. Member for Edinburgh East.

Sheila Gilmore (Labour, Edinburgh East)

It is obviously important to look at the overall effect, but I understood that Conservative Members—if not the hon. Gentleman, certainly some of his colleagues—thought that reducing the amount spent on tax credits, for example, was a good thing, and that tax credits could be seen as subsidising very low wages.

Richard Fuller (Conservative, Bedford)

If I may, I shall respond in accordance with your wish, Mr Streeter, that I tie this to national insurance.

Nic Dakin rose—

Richard Fuller (Conservative, Bedford)

I will take another intervention, but then I must get back to the point.

Nicholas Dakin (Labour, Scunthorpe)

The hon. Gentleman’s points are pertinent to the clause, because they refer to how the Government use their money to incentivise positive changes in the employment market. He demonstrates that that may well be happening here, but we need to know its impact. His contribution today is helpful.

Richard Fuller (Conservative, Bedford)

I am grateful for that intervention, but I must point out that the Government do not have money; people and businesses have money and they contribute it to the Government through taxes. That is perhaps an important philosophical difference between Conservative and Labour Members. I appreciate, however, the hon. Gentleman’s broader point.

My point refers directly to the employer’s allowance, because if the Government want to achieve what all hon. Members want, which is increasing employment and people being more productive and having higher wages, we must look at how we can reduce the significant state intervention in labour markets in the low-wage part of the economy. Our main weapon is the employer’s national insurance contribution. In a shift from the minimum wage to the living wage, the benefit in take-home pay is not to the employee but to the Exchequer and the cost is to the employer. My strong support for the employment allowance that the Government propose today is not only due to it being an incredibly simple and well-timed support for small businesses, but because it has started to shine a light on how this Government and the next, hopefully Conservative, Government can look at creative ways to encourage employers, through further changes in the employment allowance, to achieve a real increase in take-home pay. People’s wages should be paid by the employer, rather than employers being partially paid by the state to employ such people.

Julian Smith (Conservative, Skipton and Ripon)

Does my hon. Friend agree that this is an appropriate point to put it on the record that the Minister worked exceptionally hard over the months prior to the policy’s announcement and that his personal effort on the change, which we all welcome, must be complimented?

Richard Fuller (Conservative, Bedford)

I am happy to associate myself with my hon. Friend’s endorsement and support for the Minister’s efforts.

The initiative in the clause is exceptionally important to encouraging employment. It is another stage in the effort by this Government to make work pay. The previous Government did a lot to undermine the work ethic and the way in which our labour markets worked effectively, so this is a welcome step forward. I thoroughly and fully support the clause.

Nicholas Dakin (Labour, Scunthorpe)

I rise to support new clause 1 in the name of my hon. Friend the Member for Birmingham, Ladywood, which would help to cement the measure in the clause and to protect it.

My impression from listening to evidence earlier in the week was that the general view of all the witnesses was that the employment allowance is a good thing and that it will have a good effect on the jobs market in a variety of ways, benefiting employers with a feel-good factor. People were more constrained when they came to how to measure the impact: how do we demonstrate whether what we believe to be a good thing is actually having the anticipated effect?

My perspective comes from a lifetime in post-16 education and from seeing the impact of the education maintenance allowance, which was a good thing. Without doubt, during my time, it was the one thing that transformed young people staying on and their performance in education. However, when the coalition Government came to power, they decided that in spite of the general view that EMA was a good thing, it was not performing as they might wish. They came up with the view that much of the finance spent on EMA was what they described as “dead-weight”—in other words, the results would have happened anyway.

According to Government estimates, only about 35% of the money expended on EMA impacted on the changed behaviour—at the time, the Institute for Fiscal Studies analysis took a different view, but that did not change the facts of what the Government were saying. The Government, in their wisdom, therefore withdrew that support and made significant changes. Whatever the rights or wrongs of that, the reason why I use EMA as an example is to illustrate the effect that an initiative by a Government at a particular time can have, whether it causes a permanent or temporary change, on something that is good for a particular community.

In this case, the community we are discussing is business, especially small business. It is pertinent that we are debating the measure in the run-up to small business Saturday on 7 December. It was good to hear the Prime Minister celebrate that event and encourage us all—we have added encouragement this morning—to get involved in that, and I am sure we will. None the less, unless we can demonstrate in future that something is having an impact and causing change, it will be vulnerable to having a Government—of whatever persuasion at a particular time—say that it has got an element of dead-weight cost and is therefore not worthy of continuance or, indeed, of extending, because as we heard earlier, the debate will be whether £2,000 is sufficient, or whether moving up the gas as it were, to £3,000 or £4,000, would have another impact.

The lesson to me from the way in which this Government behaved on EMA is that all the knowledge out there is irrelevant unless the people in this place have the evidence at their fingertips to assure them that they wish to continue with the investment of a significant amount of taxpayers’ money. That is why my hon. Friend’s new clause is helpful in securing the future of the initiative, because it would ensure proper reporting to Parliament of its impact. Such reporting would secure its future, because if, as we believe, it is a good thing, we would be able to see it reflected in the world out there. Our witnesses included the Exchequer Secretary, who said candidly that this would need to be kept under review, as everything needs to be, but he was anxious about formalising it. We will have the opportunity to hear more from him about why this is a problem. Most of new clause 1 is typical of the sort of written parliamentary questions which might be submitted, to which the Exchequer Secretary, in his good offices, would respond anyway. The new clause merely brings together in a formalised way a simple process that assists the measure and secures and protects it into the future.

The only issue that anybody in the debate so far has had difficulty with is the mechanism for assessing the number of jobs created as a result of the employment allowance. Nobody has raised any concerns about any of the other issues. In the exchange around that, it was clear that the good minds that support the processes in this place could well come up with a mechanism to make proper estimates, which would help Parliament and the taxpayers and public whom we serve.

Going back to the evidence, I asked Mr Cherry:

“How might we determine whether, after a period of time, the policy represents good value for money for the taxpayer?”

He replied that it was “incredibly difficult”, but thought that it was worthy of consideration. Mr Adam added:

“Clearly we would expect the policy to do something to increase employment and wages.”

There is a recognition there. At a later point, Mr Cherry made it clear that:

“As a colleague said, a review in a couple of years’ time might be useful”.––[Official Report, National Insurance Contributions Public Bill Committee, 19 November 2013; c. 12-15, Q22 and 32.]

He was pretty clear about his support for a review that would assist this policy and help to secure it in our national system of incentives. The hon. Member for Bedford helpfully spelled out the way we can use carrots as well as sticks to stimulate, and this might well be a better way of getting good value for the taxpayer, for business and for the communities we serve. A review not only secures the policy, but also allows us to determine how to move it forward, which is one of the issues that the witnesses were interested in. They wanted to build on what they thought would be a good thing.

That is all I wish to say on this new clause. It is helpful and, as this Bill goes forward, there is plenty of time for the Government to come back and engage with the points being made, so that we can stride forward consensually with a measure that everybody sees as positive for small businesses in the communities that we serve.

Sheila Gilmore (Labour, Edinburgh East)

It is a pleasure to serve under your chairmanship, Mr Streeter. Everyone pays lip service to policy making by evidence, yet at times it appears that we are not prepared to put the effort into creating that evidence and therefore deciding whether policies have worked or not. The hon. Member for Bedford suggested that this is a role for Select Committees. I certainly think that there is a role for Select Committees in evaluating policies, and we should probably be spending a lot more time doing that in Select Committees. However, it is also incumbent on the Government—on any Government —to gather the information, evaluate it and provide an opportunity for it to be properly debated and discussed.

I am not convinced that it is enough to say “Well, it has been gathered anyway, it’s there in the Treasury and therefore we, the Minister, the Treasury mandarins or whoever, know it and will use it when the time comes without giving the opportunity to the wider political body to see that.” It is not too difficult to do what we ask if the information is being gathered anyway. This is important because things are being said about this measure. In the evidence sessions and on Second Reading, it was said that some people see this as a first step towards making further changes in employers’ national insurance contributions. The case for that would have to be made when the time came, but it has to be made on evidence: on whether, as a measure, this does what everybody hopes for. It may do more, in which case there may well be an argument for looking at further changes, or it may do less.

There is a tendency on the part of the Government, and perhaps of previous Governments as well, to think that it is not necessary to wait for the results of research. For example, we saw that with the future jobs fund. It was declared a failure and abolished in advance of the research, which said something very different. There is a danger that we do not pay much attention to commissioned research.

When making major changes to national insurance contributions, we look very much through the prism of employment and, as has been suggested, NICs might be a lever for increasing earnings. Most people accept that there is a problem with earnings falling behind in recent years, and so if something of this sort worked to increase earnings, that could not be seen as a bad thing. That is why new clause 1(2)(e) is important, because it refers to

“the overall cost to the Exchequer of the employment allowance and projected costs for future years”.

Rightly or wrongly, the way that we have set up national insurance is that the contributions are specifically designed to help pay out contributory benefits. It is not funded, it is not put in a big pot and saved up somewhere, but year on year that money is earmarked and allocated for paying out those payments.

On top of that, there is the allocation made by the previous Government—and I understand that it is still retained—that some part of national insurance receipts go to the national health service. It is quite important, therefore, to the Government’s spending and to the things that people hold dear that the money is there to pay for retirement pensions and other contributory benefits. If the money was not there to pay for them, it would have to come from some other part of the tax pot.

There is a respectful argument that says we should look at the whole of that. There are pros and cons to doing that, and some strong cons to doing away with the concept of a separate national insurance contribution or, in effect, a national insurance tax, and the way it is used. It would be foolish to rush down the road of getting rid of that. It is self-evident that most Governments come to that conclusion in the end. A couple of Budgets ago, the Chancellor suggested he wanted to go down this road. But he has gone a bit silent on that. It is dangerous not to look at that wider picture as well and decide how we want to pay for these things, so it would be extremely useful to gather the evidence together and prepare a report that is put before the House and can be debated and used by a Select Committee.

Nick de Bois (Conservative, Enfield North)

Bearing in my mind what my hon. Friend the Member for Bedford said about Select Committees doing their job, how many post-legislative reports were required by Bills during the 13 years of Labour Government?

Sheila Gilmore (Labour, Edinburgh East)

I am afraid I cannot answer that question. We always get to the point in these debates where we are somehow static and never allowed to change our minds or even our practices. The hon. Member for Bedford rightly pointed out that the Government have no money of their own, only what they collect. Perhaps he should tell the Deputy Prime Minister that, as there is a reference in the transcript of his radio programme to the possibility of removing green levies from people’s fuel bills and passing them to the Government to pay. Nevertheless, it shows that what we do about the taxes that are collected, where they are collected from and what they are used for becomes so important that changes have to be looked at very carefully. Otherwise we could simply not know what is happening or the impact of our actions and that is not sensible.

It is easier nowadays to collect, store and use data than it ever was. Some of the arguments that were previously advanced about that being difficult no longer apply. However much people want to suggest that it will be done anyway so it is fine, I hope that it is put in the Bill, given that it is quite a major departure from the courses that both this and previous Governments have followed. It would give us an opportunity to come back here in two, three or four years’ time—when hopefully we will be sitting on the other side of the room—to evaluate the effectiveness of the Bill.

David Gauke (Conservative, South West Hertfordshire)

It is a great pleasure to serve under your chairmanship, Mr Streeter. I welcome all members of the Committee to this stage of scrutiny. I particularly welcome the hon. Member for Birmingham, Ladywood to her first Public Bill Committee in her current role, no doubt before she moves on to greater things, if anyone can believe that there is anything greater than scrutinising legislation on tax and national insurance contributions. I note that she continues the long-standing tradition of shadow Treasury Ministers of calling for a review. She will be aware that that was a regular feature of Finance Bills. It does not apply just to this Parliament but dates back beyond it. I speak as a former shadow Treasury Minister. The balance of amendments calling for reviews versus other substantive changes appears to be shifting.

In my experience, Public Bill Committees do not tend to be quite so universal in their support of a policy as we have seen today. I am delighted to hear the widespread support for the employment allowance. Clause 1 is the guts of the Bill: the section that relates to the employment allowance. It appears to have the support of all members of the Committee, for which I am grateful. Later, I will turn to the history of employers national insurance contributions and question the degree of consistency from certain parts of the Committee in supporting an employment allowance that will reduce the burden on employers, with the result being passed on in greater wages: either higher wages for existing employees or more people being employed. I believe that that will be a beneficial step.

The clause provides that employers will qualify for an employment allowance for a tax year if, in that year, they are liable to pay secondary class 1 national insurance contributions on the earnings of their employees. It sets the allowance for a tax year at £2,000 or, if less, an amount equal to the employer’s secondary class 1 liabilities, provided that those are not excluded liabilities.

The clause is subject to other measures, in particular clause 2, which lists the exceptions to entitlement; clause 3, which contains the connected persons rule; and schedule 1, which sets out the rules that decide whether employers are connected.

The clause also introduces clauses 2, 3 and 4, provides that references in the Bill to the employment allowance are to clauses 2 to 4 and schedule 1, and that terms used in the employment allowance legislation also used in part 1 of the Social Security Contributions and Benefits Act 1992 and the Social Security Contributions and Benefits (Northern Ireland) Act 1992, such as the term “tax year”, have the same meanings as in those Acts.

New clause 1, which has been tabled by the hon. Member for Birmingham, Ladywood, would require the Government to publish a biannual report including HMRC’s assessment of the employment allowance on a number of aspects, including the number of jobs created as a result of the allowance; take-up; the geographical locations of businesses that took it up; the number of charities and community amateur sports clubs that took it up; and its cost and the projected costs for future years. Let me explain why I do not believe that the new clause is necessary.

The tax information and impact note already commits the Government to keep the scheme under review through communication with taxpayers’ groups affected by the measure. As part of that review, HMRC, the Treasury and Ministers will speak to interested parties to gauge their views of the employment allowance and ascertain how it is being used. HMRC talked to various interested parties during the summer about the design and operation of the allowance in forums for software providers, charities and small and medium-sized enterprises. There is ongoing engagement between the Department and those groups on the guidance and the publicity, which will, of course, continue after the launch of the allowance next April.

There are, therefore, well-established lines of communication between HMRC and representative groups that will provide the basis for a continuous review of the allowance’s effect. I am sure that hon. Members will feed back to Ministers any concerns and thoughts on the allowance raised by businesses in their constituencies. The result of any such internal review will form part of the Treasury’s assessment of the allowance’s impact, and any decisions about its structure and value will be set out at future fiscal events in the normal way.

Nicholas Dakin (Labour, Scunthorpe)

The Minister is spelling out clearly how ongoing consultation will work with businesses and other people directly involved in implementing the allowance, but I would be interested in his response to what Paul Johnson of the Institute for Fiscal Studies said when the scheme was first announced:

“Given that it won’t be piloted and will be almost impossible to evaluate the sad truth is we are likely never to know whether this will be money well spent.”

Surely the taxpayer has a right to know whether it is money well spent.

David Gauke (Conservative, South West Hertfordshire)

There is a good reason for us not piloting the scheme—we want to bring it into operation as quickly as possible. The hon. Gentleman nods, so I see he appreciates that and is not calling for us to pilot the scheme.

The additional cash that the employment allowance will provide for businesses and charities will be used in a number of ways: perhaps for higher wages, additional staff or reinvestment in a business. As I have said, and as the Federation of Small Businesses said in evidence and as is shown by its surveys, those are all valuable and good in themselves, but it might be difficult to assess exactly which different purpose the cash will be used for. My hon. Friend the Member for Enfield North made a good point earlier: a lot is going on in this area and a number of factors will determine what a business does, so identifying that information in relation to one particular allowance is difficult.

To make one point that might raise an area of difference between Government and Opposition, the view among those on the Government Benches—certainly among Members from my party—is that, if we can afford it, cutting taxes to put more money in the hands of small businesses is a good thing in itself. That view might not be universal, but we certainly hold it where we can afford to do so.

Valerie Vaz (Labour, Walsall South)

Subsections (2)(b) and (c) of the new clause refer to take-up of the allowance and the geographical location of businesses taking it up. Does the Minister not agree that they contain eminently sensible propositions that go to the heart of transparency and fiscal responsibility?

David Gauke (Conservative, South West Hertfordshire)

I am drawing a distinction between how many jobs are created as a consequence of the employment allowance—it is difficult to assess that accurately, as a lot of factors come into play, but introducing the allowance will clearly help with job creation and wage increases—and the other areas that the hon. Lady has highlighted. Those are more factual points, and we can identify that type of information. I have no problem with that information being made available. As the hon. Member for Scunthorpe said, it can be provided through answers to parliamentary questions.

If it is helpful to the Committee, I have no problem with giving an undertaking that, in much the same way as we have done with other schemes, we will publish information about how many businesses have made use of the employment allowance, broken down by geographical location to the extent that we are able to do so—I suspect that will be by region—and put that information in the Library of the House of Commons. There is a legitimate desire to see what the take-up is and whether there are any particular geographical patterns, so publishing that information—let us say twice a year—is something we have no problem in doing, but there is a particular problem with including the new clause—assessing how many jobs are created as a result of the allowance, because of the inherent complexity in that matter.

Alan Reid (Liberal Democrat, Argyll and Bute)

I assure my hon. Friend that it is not just the Conservative half of the coalition that wants to put more money in the hands of small businesses. The Liberal Democrat half of the coalition is equally supportive of that.

David Gauke (Conservative, South West Hertfordshire)

I am grateful to hear that the liberal tradition continues to be strong among the Liberal Democrats. I hope we see more of that.

Shabana Mahmood (Labour, Birmingham, Ladywood)

I am grateful for the Minister’s indication that he is happy to publish a report on some of the information detailed in the new clause and to put it in the Library. I take his point in relation to jobs; he is making his argument about that at the moment. Is he saying that the information mentioned in paragraphs (b) to (e) of new clause 2(2) will be encompassed by what he hopes to publish or is he simply referring to take-up and geographical location, which are covered by paragraphs (b) and (c)?

David Gauke (Conservative, South West Hertfordshire)

I am happy to publish information on the take-up of the employment allowance. To the extent that we can do that geographically, I am also happy to do so. We are unable to provide information on the number of jobs created. On the number of charities and clubs taking up the allowance, I am not sure that we will be able to break the figure down in that way as it would not be easy to identify a distinction between businesses and charities. I am happy to consider that matter, but I do not want to make a commitment.

On the cost of the employment allowance to the Exchequer, together with projected costs for future years, the figures are already a matter of public record and were published at the time of the Budget in March 2013, having been certified by the Office for Budget Responsibility. The Budget policy costing document sets out the methodology behind all the measures. That was also introduced by this Government, which shows a commitment to transparency and sound public finances that we have never had before. Given that we can provide information on take-up, I will see what information can be provided on costings.

The hon. Member for Birmingham, Ladywood raised questions about take-up and a comparison was drawn with the employer’s NICs holiday. I was candid with the House on Second Reading in saying that the employer’s NICs holiday has benefited 26,000 employers and 90,000 employees; that is a significant sum. A number of people, as the hon. Lady acknowledged, pointed out the fact that the number was lower than we anticipated, and it is worth drawing some lessons from why that was the case. I would focus on the fact that anything that required an application process seemed to have an impact on take-up.

It is also worth running through the stages to be gone through before someone benefits from the employer’s NICs holiday. First, they needed to be aware of it. A lot was done to raise awareness—fliers providing information were sent to anybody registering for PAYE, for example—but a question clearly remains there. Secondly, it is necessary for the applicant to check that they are eligible. Thirdly, it is necessary to complete the form. Then there is an issue for HMRC in processing those forms.

One can criticise the employer’s NICs holiday that this Government introduced, but that process was also necessary for the policy that the Opposition advocated, which was targeted at small businesses. Again, there was a need to check that it applied to those businesses, and it was quite difficult to work out what constituted an additional employee, not least for HMRC in policing that, so if the Labour party wants to say that the previous scheme was flawed, it ought also to acknowledge that the scheme that it was advocating was flawed in much the same way. Therefore, something much simpler to operate that requires businesses just to click on a box as they use their ordinary payroll software and that does not require great consideration as to whether they are eligible is a much improved policy. That is why it has the support of both sides of the Committee. However, I want to make it clear that the policy is not the version that the Labour party advocated; it is newly designed and much simpler to operate, and therefore likely to have much higher take-up.

Shabana Mahmood (Labour, Birmingham, Ladywood)

I want to take the Minister back to his point about the Government’s previous, regional NICs scheme and the counter-suggestion made by the official Opposition. I made this point to him on Second Reading as well. Our national insurance proposals were a refinement of the Government’s then scheme, and it was a case of trying to achieve the same objectives as the Government set out for their scheme while opening up that scheme. The key point is that our suggestions were national in application, as opposed to regional, which was a big difference. The regional application has been dropped, which is why we wholeheartedly support the employment allowance. I hope he will acknowledge that.

David Gauke (Conservative, South West Hertfordshire)

I acknowledge that Labour’s scheme was national, but that regional aspect was not the fundamental driver behind lower-than-anticipated take-up rates. Perhaps the lesson for Labour is that it should have thought more radically about how to address the matter, but there we go—an opportunity missed for the Labour party. This Government, I am pleased to say, have done that.

I should also touch on the particular issue in relation to charities. Again, because the process is so easy, there is no reason for it not to be easy for charities as well, but I assure the Committee that HMRC has been in discussions with charity groups and there is a specific section on the HMRC website for charities. HMRC will use that to signpost all the latest information and guidance on the employment allowance.

I have set out the case for the employment allowance and provided a little history. I could be drawn into discussing the point raised by my hon. Friend the Member for Bedford that, at the time of the general election, Labour was in favour of increasing employer’s NICs, but in the interest of saving time I will not do that.

Labour was also predicting, when the NICs holiday Bill was going through, that private sector employment was likely to fall and that unemployment would rise by 1 million, but we will not go into that, either. In the interest of saving time, I simply urge the hon. Member for Birmingham, Ladywood, in the light of what I have said, not to press the new clause to a Division and ask the Committee to support clause 1.

Shabana Mahmood (Labour, Birmingham, Ladywood)

I, too, will not be drawn into discussing the Government’s predictions on how the deficit would be eliminated by the end of this Parliament and the fact that they will miss that target by at least five years. We will take the issue up another time.

I am grateful to the Minister for his indications on publishing some of the data envisaged in the new clause and hope that we can continue the discussion on jobs as the Bill progresses. I will perhaps look to return to that issue on Report, but for now I am happy to proceed.

Clause 2 - Exceptions

David Gauke (Conservative, South West Hertfordshire)

I do not intend to say much in my opening remarks, but I am keen to respond to any questions that might arise as the debate progresses.

Clause 2 lists the exceptions when an employer cannot qualify for an employment allowance for a tax year, and the liabilities to pay secondary class 1 contributions that are excluded for the purpose of the allowance. A number of groups are excluded, including public sector employers, such as Departments, local authorities and NHS bodies, unless that employer is a charity. That is in line with the Budget announcement that the purpose of the employment allowance is to help businesses and charities with the cost of employing people, rather than helping to boost funding across the public sector.

The second excluded category is domestic employers, which we discussed at some length in the evidence sessions. By domestic employers, we mean persons who employ personal or domestic staff at home, such as nannies, cooks and gardeners. Also excluded are personal service companies that are caught under IR35 rules; managed service companies on deemed payments of earnings to the worker; and persons carrying on a business as a result of the transfer of an existing business in the tax year in which the transfer takes place. A person will be excluded when they would qualify for employment allowance as a result of avoidance arrangements, including attempts to bring forward or delay an employee’s earnings. The term “avoidance arrangements” is given a wide meaning and includes any arrangements where the main purpose, or one of the main purposes, is to secure the benefit of, or an increased benefit from, the employment allowance.

Anne Marie Morris (Conservative, Newton Abbot)

We talked about this in the evidence sessions and I understand the reasons for the excluded groups, but I am concerned that a good lawyer looking at the Bill’s provisions might wonder how the terms will be properly interpreted. Public authority is defined in the Bill as

“any person whose activities involve, wholly or mainly, the performance of functions (whether or not in the United Kingdom) which are of a public nature.”

Will the Minister clarify whether there is any case law that would make the interpretation of that easy and beyond dispute?

Likewise, personal services are defined in the Bill as

“an employed earner who is employed (wholly or partly) for purposes connected with P’s personal, family or household affairs.”

Is that the subject of any case law? I am concerned about that. For example, someone might run their business from home and work at home, and they might employ an accountant to come into their home. Can the Minister give some clarity so that I do not need to be concerned about how the definition will be interpreted in practice?

David Gauke (Conservative, South West Hertfordshire)

I am grateful for my hon. Friend’s intervention. She brings her experience and background as a lawyer, if I remember correctly, to the Committee. That is obviously a good background for a legislator to have, and I suspect that that view might have cross-party agreement.

The Bill defines a public authority as

“any person whose activities involve, wholly or mainly, the performance of functions…which are of a public nature”,

as my hon. Friend has said. That broadly means that the organisation is providing a public service, rather than being a business providing a service to a public sector body. For example, functions of a public nature would include collecting household waste on behalf of a local authority, GP services, running a prison, collecting debt on behalf of a Department and providing meals on wheels on behalf of a local authority. The following examples, however, would not be regarded as functions of a public nature: providing security and cleaning services for a public building, such as Government or local authority offices, or supplying IT services for a Department or local authority.

My hon. Friend asked about personal service companies and gave the example of employing an accountant. First, one has to remember that the employment allowance relates to an employment relationship as opposed to a contractual relationship. One might use the phrase “employing an accountant” but in terms of contracting with an accountant to provide some support, the employment allowance would not be relevant. The measure applies only if employers’ national insurance contributions are going to be paid. The area of personal service companies has, over the years, attracted much interest in terms of legislation and there has been well developed treatment within the tax system of what constitutes a personal service company and what does not.

Personal and managed service companies, as my hon. Friend says, will be excluded from the entitlement to the employment allowance on secondary class 1 contributions due on deemed payments of earnings to the worker. There is a good reason for that. It would not be right to give them the benefit of a relief against aid contribution liability that arises as a result of anti-avoidance legislation—the so-called IR35 rules for personal service companies and the managed service company rules. However, where such companies pay the worker a regular wage or salary that attracts a liability for class 1 contributions, they will be able to claim the employment allowance on the secondary class 1 liability on those earnings. In that respect, the employment allowance is following the precedent of the regional secondary class 1 national insurance contributions holiday, which we discussed this morning. The question was whether there is a precedent, and there is a precedent in that particular.

I hope that those introductory remarks are helpful. I intended to let the debate progress and then pick up any questions that flow. I hope the clause will have the support of the Committee.

Shabana Mahmood (Labour, Birmingham, Ladywood)

I am grateful to the Minister for his introduction to clause 2. I shall take each of the exceptions in turn very quickly.

We had a very helpful evidence session on public authorities and a line of questioning was followed by my hon. Friend the Member for Scunthorpe in his exchanges with Mr Manclark, who is in the Public Gallery today. For the sake of clarity, I would like the Minister to respond when he winds up the debate on the clause to my questions. The situation is that set of employees work for a local authority. Their function is contracted out to company A, which is then taken over by company B—the normal TUPE regulations apply to the treatment of the employees. As long as company A does 50% or more work that is private in nature, it will be able to claim the employment allowance when the employees carrying out that public function move from the local authority to company A. Will the Minister confirm that that understanding is correct?

Mr Manclark has said that the 50% test for deciding whether somebody is wholly or mainly carrying out either a public or a private function is helpful. He clarified to my hon. Friend the very point the Minister has just made by giving the Committee examples of functions that would be considered to be public and those that would be considered to be private. We might consider the running of a prison or a cleaning contract for a set of government or public buildings that may or may not include a prison. Of course, it is often the case that one or two very large companies have contracts that encompass parts that would be considered public in function and others that would be considered private. I am interested in what the Minister has to say about the boundary close to and just over 50%. Presumably Her Majesty’s Revenue and Customs has some experience of policing that boundary and of applying tests to determine whether a company carries out a function in whole, in part or in the main. Will the Minister give us further details on how those boundaries are policed and the way in which that test is applied, perhaps with some real examples of previous HMRC experience? That would be very helpful to the Committee.

Even when Government buildings are cleaned by private companies, public money is used to pay them. For the benefit of the Committee, it would be helpful if the Minister could set out the rationale for allowing that set of transactions to be subject to the employment allowance. In contrast, it is easier to understand the rationale for allowing other types of businesses engaging in normal business activity to flourish, create jobs and, I hope, increase wages and so on by using the employment allowance in that way.

Will the Minister talk the Committee through what assessment HMRC has made of potential pressure points in the legislation? I appreciate that he probably will not want to tell us in detail what those pressure points are —he does not want to alert tax planners. Immediately having discussed something, he might close it down, but I leave that to his discretion and judgment. The point was raised in oral evidence that the Bill will be looked at from the point of view of efficient tax planning. It would be helpful to know what HMRC has done to try and pre-empt that and how that process works in practice when we have new legislation of this nature.

The legislation will stop an employer from claiming the allowance and transferring the business to another employer—the second employer will not be allowed to claim the allowance for the same employees in the same tax year. That is sensible and clearly necessary in the legislation. Was consideration given to a slightly different scenario in which company A transfers to company B in April 2014, just as the employment allowance kicks in, but company A had not claimed any part of the employment allowance? My reading of the Bill is that company B would still not be able to claim any allowance for that tax year, and it would be helpful if the Minister could clarify whether that is correct. Did he consider whether a partially claimed allowance from company A might be allowed to transfer to company B, so that the full £2,000 benefit can realised for one set of employees in a given tax year? Will he set out the Government’s thinking on that scenario?

David Gauke (Conservative, South West Hertfordshire)

I am grateful for the questions that have been raised on employment allowance. To provide some context, we are talking about a £2,000 allowance. It is unlikely that that sum will drive a great deal of avoidance behaviour. We believe £2,000 will make a substantial difference for a lot of businesses, but it is unlikely to motivate very complex structures. I suspect the Committee fully appreciates that point. It is worth considering—this is why we cannot be complacent—whether there is a way in which one could structure such arrangements so that one got paid £2,000 repeatedly. That is what we are seeking to address.

Shabana Mahmood (Labour, Birmingham, Ladywood)

Just to pick up on that point, I fully take on board that the allowance is not large enough to make wide scale avoidance behaviour likely. We discussed franchises in oral evidence and how each individual franchise could claim the allowance. Across a franchise it might be the norm to behave in a certain way in order for each of those individuals to get the £2,000 allowance.

David Gauke (Conservative, South West Hertfordshire)

Yes, I take that point, but there may be circumstances in which it is entirely justified—different franchises are run in different ways and that might be appropriate. Our concern in such circumstances is contrivance and artificiality. Given that there are costs in setting up a new company and time involved in debating contracts and so on, in the great scheme of things the measure is unlikely to be particularly high on the list of compliance risks that HMRC deals with. None the less, we should not be complacent. There are provisions in the Bill to prevent the artificial, contrived fragmentation of businesses in order to get the allowance several times over. That is why, in subsections (5) to (9), there are provisions to counter arrangements under which persons might seek to exploit the employment allowance by restructuring or fragmenting a business. In addition, the connected persons rules in clause 3 and part 1 of schedule 1 will ensure that, when companies control one another or are under the control of the same person or persons, they will receive just one employment allowance overall.

Ian Swales (Liberal Democrat, Redcar)

We will discuss limited liability partnerships later. I do not suppose that we expected LLPs to be used as a way of avoiding national insurance for low-paid workers, but that is one of the abuses that have arisen. May I press the Minister further on that? Does he see any threat that people’s employment status will be changed, because £2,000 for each individual is a lot of money? Does he see any potential loopholes that will mean people’s employment status is changed in some way? For example, they could become entities in themselves.

David Gauke (Conservative, South West Hertfordshire)

If anything, the employment allowance might put in place a countervailing pressure on what exists currently within the tax system. If looks through the various employment statuses that may be available, generally one tends to see the argument that the least tax efficient is standard employment status, whereby employers’ national insurance is paid. Legislation is often designed, for example, to prevent false self-employment, which is seen as a more favourable structure because of the treatment of employers’ NICs and NICs as a whole. I do not see the measure as one that is likely to drive behaviour whereby people put themselves into one employment status when they previously had another.

The Bill contains measures to prevent artificial or contrived behaviour. There will be no particular drive to incorporate because employers who are sole traders or partnerships will be able to benefit from the employment allowance in the same way as companies, so the measure has no effect.

The Bill prevents a second employment allowance being enjoyed in the same year when arrangements are in place to transfer a business, such as when a sole trader decides to incorporate and become a company. If the concern is the transitional point and status changing over the course of a year, which could conceivably be a problem, it is addressed in the Bill.

On the point about public bodies—we debated in the evidence session the phrase “wholly or mainly” in relation to functions of a public nature—the Government believe that a 50% test is appropriate. As Mr Manclark pointed out in the evidence session, a 50% test is in some respects easier to police than a 100% versus 0% test. I hope that that is properly appreciated.

The hon. Member for Birmingham, Ladywood, asked about pressure points and successfully anticipated my answer—we do not want to go into detail. However, I can assure the Committee that the appropriate anti-avoidance safeguards are in place. We have looked at the matter carefully. Notwithstanding the points I made about the allowance being £2,000—I said that that, in itself, is unlikely to justify complex restructuring arrangements—we have put in place provisions to provide some legislative protection. Of course, HMRC will take steps as and when necessary if the employment allowance provokes any avoidance behaviour. As I have said, that is in the context of a relatively small sum of money.

The connected persons rule is applied at the start of the tax year to see whether two companies are connected to each other. That sets the employment allowance treatment for the rest of the tax year. However, when there is a transfer of business, for example with a merger or de-merger, the allowance is enjoyed up to the point of the transfer, but not for the rest of that tax year. I hope that provides useful clarification to the Committee. With those answers, I hope that clause 2 can stand part of the Bill.

Clause 3 - Connected persons

David Gauke (Conservative, South West Hertfordshire)

Clause 3 and schedule 1 set out the connected persons rules for the purpose of the employment allowance where companies are linked in a group or are otherwise under common control. We want those companies as a whole to receive one employment allowance. That means there is no incentive for larger businesses to fragment to receive more than one employment allowance. Given that the allowance extends to the charitable sector, it is only fair that the connected persons rule should also apply to charities, albeit one that is tailored to the different forms and structures taken by charities compared with companies.

Clause 3 provides that if at the start of the tax year two or more companies which are not charities are connected with each other, or two or more charities are connected with each other, only one of those companies or charities which would otherwise each qualify for the employment allowance can qualify for the employment allowance for that year. It would be up to the companies and charities concerned to decide which one will qualify for and claim the employment allowance.

Schedule 1 sets out in more detail the rules for determining whether persons are connected with each other for the purpose of clause 3. Given the different legal forms and operational structures of companies and charities, it has been necessary for the schedule to be divided into two parts. In each case, however, we have adapted the provisions in existing tax legislation so that companies and charities will be familiar with them. I should also stress that where two companies are connected with each other only through the attribution of rights between certain associated persons—for example relatives—the connected persons rule will bite only if the companies in question are commercially interdependent. For example, when one company gives financial support to another, they have the same economic or commercial objectives and have common management, employees and premises.

Charities will be connected with each other for the purpose of the employment allowance only if their purposes and activities are the same, or substantially similar and they are controlled by the same or connected persons. Part 1 deals with companies and is similar to the associated companies rules at sections 25 and 27 to 30 of the Corporation Tax Act 2010. No doubt, members of the Committee will have already noticed that. The definition of a company for the purpose of the employment allowance is based on the definition in that Act, but it has been extended to include limited liability partnerships, given that those are also bodies corporate.

Part 2 deals with charities and is similar to the connected charities provisions in section 5 of the Small Charitable Donations Act 2012. I hope that that is of help to the Committee, but I am happy to answer any subsequent questions.

Shabana Mahmood (Labour, Birmingham, Ladywood)

The Minister answered my main question in his opening remarks, regarding the wording used in clause 3 and schedule 1 on connected persons, when he confirmed that the way in which the Bill seeks to decide whether two or more companies fall within the connected persons test is the usual way that businesses and charities are treated in tax legislation. Does anything in clause 3 or schedule 1 represent an innovation in how businesses and charities are treated for the purposes of deciding whether they are connected persons in the context of tax legislation?

David Gauke (Conservative, South West Hertfordshire)

I am delighted that I anticipated the hon. Lady’s question. The Bill leans heavily upon legislation elsewhere. To answer her question about whether anything constitutes a great innovation or change in terms of those definitions, the answer to that is no.

Clause 4 - How does a person who qualifies for an employment allowance receive it?

David Gauke (Conservative, South West Hertfordshire)

The clause explains how a deduction or repayment of the employment allowance will be made. The main way for a qualifying employer to obtain the benefit of the employment allowance will be by means of a deduction from their secondary class 1 contributions during the tax year. For the Committee’s convenience, HMRC produced a draft of the administrative arrangements that will govern the making of such deductions.

To summarise, to keep the process as simple as possible for employers and thus maximise take-up, the employment allowance will be delivered through standard payroll software. Employers will need to self-declare their eligibility through their regular payroll processes. That confirmation will ensure that up to £2,000 in any one tax year will be deducted from their secondary class 1 contributions liability over the course of the year’s payments under pay-as-you-earn. For example, if in a tax year an employer has a liability of £3,000 in secondary class 1 contributions, the employment allowance of £2,000 will be deducted from that liability, leaving £1,000 of secondary class 1 contributions to pay.

The employer, as part of their payroll process, will offset the employment allowance against each monthly secondary class 1 contributions payment that they are due to make to HMRC until such point as the allowance is fully claimed or the tax year ends. Using the example I have already given, and assuming an even distribution of secondary liability over the year, the employer would enjoy the employment allowance against NICs payments due in April to November. In December, the employer would recommence paying £250 in secondary class 1 NICs. The following year, the employer would again start deducting a fresh allowance of £2,000.

For those employers who still submit their returns to HMRC on paper, there will be a paper process that will mirror the IT procedures. We want employers to benefit from the employment allowance in real time, rather than wait for the end of the tax year to claim the repayment. Nevertheless, there are provisions to enable an employer who has not been able to do deduct the employment allowance, which he is entitled to during the tax year—perhaps because he has forgotten to claim or he was not aware of the availability of the allowance—to make an application to HMRC for a repayment after the end of the tax year. Applications for a repayment can be made up to four years after the tax year in which the employment allowance was due. For example, a repayment claim for the 2014-15 tax year, which ends on 5 April 2015, can be made up to 5 April 2019.

I hope that that is helpful and I know that this has been an area of considerable interest to the Committee, both at the evidence stage and before. However, I hope that the Committee will note that this is a simple process; the important thing is for employers to make sure that they click the necessary box which is part of their payroll system. Software providers will be working on exactly how that will be presented to them, but I hope that that provides some reassurance to the Committee on how this will be implemented.

Shabana Mahmood (Labour, Birmingham, Ladywood)

I thank the Minister again for his introduction to the clause. I absolutely accept his point that from an administrative perspective, this is a simple system to enable employers to claim the allowance. I have couple of points around the software. The software obviously needs to support the simplicity of the process. The Minister will be aware that real time information has had a few issues in relation to the accessing of employers’ records. In particular, there have been some stories in the press recently about difficulties with RTI, so will he update the Committee on how that is going and whether it poses any particular issues for the employment allowance?

We have had a lot of discussion in this Committee around effective communication of the allowance, and I am pleased that there is a procedure in the legislation to allow it to be claimed when somebody did not realise that they were entitled to it. I hope that that information will be easily and readily available on the relevant Government website, and that signposting to employers who may have forgotten or did not realise that they could claim will be as clear as it can be.

David Gauke (Conservative, South West Hertfordshire)

I am grateful for the comments and questions of the hon. Member for Birmingham, Ladywood. She is right to highlight real time information, but it is worth pointing out that delivering this particular policy would have been much more difficult for both employers and HMRC without RTI being in place. It is worth bearing that in mind when it comes to the question of why the employment allowance was not introduced earlier. It would have been extremely difficult to have done this without RTI being in place.

The hon. Lady asked how the introduction of RTI is going. Given the ambition that was involved when introducing RTI, which was the biggest change in the PAYE system since it was introduced in 1944, we are pleased with the progress that has been made. By the time that the employment allowance is introduced in April 2014, almost all employers will have been mandated into RTI. The roll-out of RTI continues to go well; over 90% of schemes are now reporting PAYE in real time for over 99% of individual PAYE records. HMRC is working closely with employers and their representatives while they are making the transition. Using the RTI platform for delivering the employment allowance will ensure that it will be simple to claim for employers. It will be a tick in the box once the employer payment summary, or EPS, is on their software. Those employers who do not have that facility on their software can use the free HMRC basic PAYE tools package.

For those eligible employers—around 2,000—who still submit their returns to HMRC on paper, there will be a paper process that will mirror the IT process, as I mentioned earlier. I hope that provides reassurance that we have got the PAYE infrastructure in place to implement the measure smoothly.

Clause 5 - Power to amend the employment allowance provisions

David Gauke (Conservative, South West Hertfordshire)

Clause 5 contains the regulation-making powers to increase or decrease the employment allowance for a tax year, and to amend the cases in which an employer cannot qualify for the allowance, and the list of secondary class 1 contributions liabilities that are excluded liabilities.

The clause also contains a power to make other incidental, supplementary, consequential or transitional provisions as might be necessary from time to time. All regulations made by virtue of the powers in the clause will be subject to the affirmative procedure and will thus be subject to approval by both Houses of Parliament.

I am happy to take the Committee through the clause subsection by subsection. However, I anticipate that the Committee would rather that I sat down and then answered questions.

Clause 6 - Decisions and appeals about entitlements to make deductions etc

David Gauke (Conservative, South West Hertfordshire)

Very briefly, the clause provides for a right of appeal. The standard appeal procedures for national insurance contributions apply to HMRC decisions about entitlement to, and the amount of, deductions or repayments of the employment allowance under clause 4.

Again, I am happy to take the Committee through the clause in detail, but I suspect I would do better just to respond to questions.

Gary Streeter (Conservative, South West Devon)

The Minister is catching the mood of the Committee.

Clause 7 - Retention of records etc

David Gauke (Conservative, South West Hertfordshire)

Very briefly again, the clause covers the record-keeping requirements for employers who are claiming the employment allowance. The employer will need to keep documents or records relating to whether he or she was entitled to the employment allowance, and the calculation of any amount that has been or could have been deducted or repaid, for not less than three years after the end of the relevant tax year. The powers available to HMRC to check tax and NICs compliance under schedule 36 of the Finance Act 2008 will extend to enable HMRC officers to check compliance with the employment allowance legislation.

That is not an exceptional requirement and I hope it will stand part of the Bill.

Clause 8 - Commencement of the employment allowance provisions etc

David Gauke (Conservative, South West Hertfordshire)

As the Government announced in the Budget earlier this year, the employment allowance will be introduced in April 2014. In keeping with that announcement, the clause provides that the employment allowance provisions in clauses 1 to 7 and schedule 1 will come into force on 6 April 2014.

Clause 9 - GAAR to apply to national insurance contributions

Gary Streeter (Conservative, South West Devon)

We are keeping the Minister busy.

David Gauke (Conservative, South West Hertfordshire)

Thank you, Mr Streeter. I would like to think that we could maintain the same pace, but I suspect we might not at this point.

Earlier this year the Government introduced the general anti-abuse rule, a major new development in UK tax law, and a key part of the Government’s drive to tackle tax avoidance. The Bill would complete the job by extending the GAAR to national insurance contributions.

The Government have made it clear that we will take a robust line in tackling tax avoidance. It is simply not acceptable that a small but persistent minority tries to find ways around our tax laws to avoid paying their fair share, especially when the public finances are under considerable pressure.

Julian Smith (Conservative, Skipton and Ripon)

When the Minister was looking at GAAR, did he come to any conclusion why a GAAR or a similar policy had not been introduced by the previous Government? We went so far and so long without having a GAAR under Labour.

David Gauke (Conservative, South West Hertfordshire)

My hon. Friend raises an interesting point. Perhaps I am not the proper person to answer. I hope that we may get an answer during the course of the afternoon.

I will talk a little bit about how we got to where we got to. I also make a wider point. Given the quite significant increases we are seeing in yield from HMRC, given the action taken by the Government to close many loopholes during the past three and a half years, and given the reinvestment into HMRC to address avoidance and evasion behaviour, I think we have a proud record as a Government. Indeed, I would go further and say that I do not believe that any UK Government have done as much as we have to address avoidance and evasion.

The GAAR is but one part of it. I do not suggest it is the solution to every problem in the tax system, but it is a useful contribution. It is a key part of our strategy to prevent avoidance from occurring at the outset and tackle it firmly where it persists. This is the culmination of a long and considered process, starting with the Aaronson review in 2011, the HMRC consultation in 2012, the 2013 Finance Act and now this Bill.

The Aaronson report advised against the introduction of a broad spectrum general anti-avoidance rule. The risk of a broadly based GAAR was that taxpayers and their advisers would have to look at what the GAAR might do in a large number of circumstances where the possible application of such a GAAR could arise. This would place a significant burden on business and would risk damaging investment, all of which we want to avoid. To answer my hon. Friend the Member for Skipton and Ripon, when the previous Government looked at this matter not long after they were elected to office, they looked at a general anti-avoidance rule, which was broader, and concluded that the difficulties of such a GAAR were pretty well insurmountable.

Graham Aaronson and his Committee put forward proposals for a general anti-abuse rule which targets only those avoidance schemes that are clearly abusive. By “abusive” we mean the sort of scheme that one can see from the outset is simply a highly contrived arrangement designed to get round the tax law and avoid paying tax. Where something is on the borderline, the GAAR may prompt some to question what is and is not abusive. But that is no bad thing as the uncertainty will be limited to activities that are tax avoidance and will not impact legitimate business.

We consulted widely on this measure following the Aaronson report, and I have been struck by the widespread consensus that this is the right way forward. The public was rightly shocked in summer 2012 by some of the news items about highly contrived schemes used to avoid paying tax, a number of which tried to avoid NICs as well as tax. At a time when we need to make sure that everyone is paying their fair share to help to reduce the deficit, abusing the tax system in this way at the expense of the majority has to stop. Representatives of business, individual taxpayers and the professions have all shown common cause in wanting to get rid of this problem, and I am very grateful to everybody who committed a lot of time and expertise to help us to get this right.

The GAAR is only one plank in our overall strategy to tackle avoidance. HMRC published “Levelling the tax playing field” alongside Budget 2013 to provide an update on the strategy and set out the full range of measures being taken to tackle tax avoidance. We have heard arguments that because the GAAR is tightly focused it will give a green light to all other forms of tax avoidance. Those who think that should take note of the range of actions we have taken in recent Budgets and Finance Bills. We have, for example, taken firm action to clamp down on stamp duty land tax avoidance, introduced the new annual tax on enveloped dwellings, and continued to close loopholes as quickly as possible after they emerge.

In the summer, we published a consultation called “Raising the stakes on tax avoidance” in which we sought views on proposals for a new set of obligations for promoters of high-risk tax avoidance schemes. HMRC does an excellent job defeating tax avoidance schemes in the courts and ensuring that people know that many of these schemes simply do not work, but we know that there is more to do. That was why the consultation also encouraged users of avoidance schemes to settle their tax affairs after similar cases had lost in court or tribunal. The GAAR is an important step to increase the pressure on the tax avoidance industry, but it is not the only step and we will continue to take action against all forms of tax avoidance. Clause 9 will apply the tax GAAR introduced in part 5 of the Finance Act 2013 to national insurance contributions, and I hope that it has the support of the whole Committee.

Shabana Mahmood (Labour, Birmingham, Ladywood)

The Minister and I will no doubt disagree on many occasions about the GAAR. Today is one such occasion, although its application to the Bill, such as it is, is uncontroversial. The problem that we have with the general anti-abuse rule as it stands is that it is so narrowly defined that the number of occasions on which it will be used will be few and far between. A question therefore arises of the extent to which it will prevent the kind of abuse that has caused the public such outrage in recent months. The rule requires the agreement of a panel of experts, all of whom are drawn from the tax avoidance industry, before it can be used by HMRC, and that consent is not unlikely in most cases.

David Gauke (Conservative, South West Hertfordshire)

May I urge a little caution from the hon. Lady? I know where her points about the tax avoidance industry arise from, but I think she should be a little cautious about suggesting that every tax advisor, whether lawyer or accountant—I declare a family interest in that my wife writes on tax law matters—is a member of that industry. I do not think that she would want to give that impression in this Committee or outside it.

Shabana Mahmood (Labour, Birmingham, Ladywood)

No, and I am grateful for the opportunity to clarify the position, but I believe that that impression is given to the public. The Minister knows that I am referring to the incident of a former member of the independent advisory panel on the GAAR who had to resign after he was caught at a tax planning conference advising people how to

“keep money out of the chancellor’s grubby mitts”.

That does not create a huge amount of confidence among the public about how the independent advisory panel and the GAAR might operate. I accept that the gentleman in question has resigned, but I hope that the Minister recognises that the policy must not only be effectively implemented, but send the right signals, and as signals go, that was a pretty bad one.

Julian Smith (Conservative, Skipton and Ripon)

I think that the hon. Lady had a very successful career at an accounting firm before she entered the House. Does she regret that the Labour Government did not do more to deal with tax avoidance? She has seen this from both sides—as a Member, and from an accountant’s point of view—so could more have been done?

Shabana Mahmood (Labour, Birmingham, Ladywood)

The hon. Gentleman says that I had a career in the accounting industry, but I did not— I was a barrister specialising in professional indemnity litigation. I hope he did not get his information from my Wikipedia entry, which also has me down as two years younger than I am.

Julian Smith (Conservative, Skipton and Ripon)

I admit that I did look at the hon. Lady’s Wikipedia entry yesterday, perhaps because her former boss, the shadow Business Secretary, has such a track record with Wikipedia—[ Interruption. ]

Gary Streeter (Conservative, South West Devon)

Order. Meanwhile, back to the Bill.

Shabana Mahmood (Labour, Birmingham, Ladywood)

I think that is quite enough discussion about Wikipedia, but I am grateful to the hon. Gentleman for giving me the opportunity to set the record straight.

I am sure the Minister did not mean to forget about the disclosure of tax avoidance schemes in his response to the hon. Member for Skipton and Ripon. I am sure his amnesia was only temporary and that he will remember that, in 2004, the Labour Government introduced that process to require disclosure. As a result of the information obtained from that, 90-odd changes to tax law were made. The Government are building on that process, which has led to a recovery of revenue in the range of £16 billion and has had a profound impact on tax avoidance in this country. It has certainly recovered a great deal more than the Government’s estimate of how much the GAAR will yield, which is only £85 million a year by 2017-18. In the context of the £16 billion raised by the disclosure of tax avoidance schemes, that is a very small amount. The thrust of the GAAR ought to be to close the tax gap, but given that that is in the £35 billion range, the GAAR’s contribution to that will be very small. One of our problems with the GAAR is that its scale is so small that it will not do enough to close the tax gap.

As the Minister knows, there are no penalties for using a scheme to which the rule might be applied, so there is little or no disincentive for anyone who seeks to avoid tax. The GAAR is in danger of becoming a mere fig leaf to which the Government can point to say they are doing something about tax abuse and avoidance. However, in reality, it will not change the picture profoundly. It will certainly not go as far as the disclosure process that we introduced in 2004, which made a much greater contribution to closing the tax gap.

As the Minister considers the GAAR, which I am sure, like everything else, he keeps under constant review, I hope he will take on board the points that have been made about its effectiveness. A Government scheme for closing down tax avoidance should do more to close the tax gap than he estimates his policy will.

David Gauke (Conservative, South West Hertfordshire)

We have moved into an area of great contention and I will try to deal with the hon. Lady’s points.

I return to the intervention of my hon. Friend the Member for Skipton and Ripon, who asked why a GAAR was not introduced by the previous Government. I am tempted to respond to the question of why the new GAAR is not raising more money by pointing out that it is raising a darn sight more than the old GAAR, because there was not an old GAAR. The GAAR is a new innovation in our tax system, and the previous Government did not introduce one.

To be fair—Committee members know that I always try to be fair to the Opposition—Labour did look at this proposal, but it concluded that a general anti-avoidance rule would to be too difficult, both administratively for HMRC, and for businesses, because it would create too much uncertainty. It was thought that the only way to address that uncertainty would be through some kind of clearance regime so that businesses and individuals would be able to take proposed arrangements to HMRC, which would determine whether they fell within the general anti-avoidance rule. The conclusion was that the proposal simply would not be workable, which was why the previous Government did not go forward with it.

There will always be a tension between creating uncertainty and administrative burdens on the one hand and, on the other hand, trying to deal with avoidance behaviour. However, the Aaronson review’s group of tax experts from the legal profession and academia, who had commercial experience, came up with a solution to try to deal with the worst of avoidance behaviour, while not creating wider uncertainties or greater problems for business or HMRC. That is why we are where we are with the general anti-abuse rule that tries—quite successfully—to square the circle.

What has been devised is quite ingenious, and it works because of the advisory panel. I want to caution the hon. Member for Birmingham, Ladywood about her remarks about the panel, which provides clarification and guidance, and effectively prevents the need for burdensome clearance procedures. If we are to have an advisory panel that assesses whether behaviour is egregious, abusive, or outside the normal scope of tax planning, it clearly makes sense that it has a broad spread of expertise covering tax and commercial knowledge. That is exactly what the advisory panel provides, so we should be cautious about criticising the fact that there are people who know about tax on a tax advisory panel, which is perfectly sensible.

I have set out the reasons why the GAAR is what it is and why the measure is targeted at the abusive end of things. I think that that is a pragmatic response, so I urge the Opposition to support the GAAR, which I think is a great step forward.

I take the hon. Lady’s point about penalties under the GAAR. This is a complex area, because if there are penalties under the general anti-abuse rule, should there not be penalties under targeted anti-avoidance rules and so on? I do not think there can be a glib answer, and any changes are likely to be quite fundamental to how our tax system works. It is important that the GAAR can be bedded in and that there is a period in which taxpayers and advisors can get to grips with it. We have not ruled out future action to strengthen the deterrent impact of the rule by attaching penalties, if necessary. We will keep that matter under review. I do not want to digress greatly today, but there are complexities in terms of what that reform would involve and its collateral impact on our tax system.

I fully acknowledge that the previous Government introduced disclosure of tax avoidance schemes. The hon. Lady rightly said that this Government have built on and extended that, and increased penalties and so on. None the less—I will not be drawn too far into this wider debate, Mr Streeter—if one looks across the piece, I can comfortably and confidently state that no previous Government have done as much as we have done on tax avoidance, and we will continue to do so. The GAAR plays a useful part in what we are doing, although that is not all of it.

Clause 11 - Oil and gas workers on the continental shelf: secondary contributors etc

David Gauke (Conservative, South West Hertfordshire)

The clause introduces a power for the Treasury to make regulations to ensure that national insurance contributions are paid where persons are working on the UK continental shelf and their employer is outside the UK. It allows the Treasury to make regulations for a certification scheme whereby someone other than the specified employer for NICs purposes accounts for all the NICs obligations in full.

The clause is part of a wider policy to prevent offshore employers from being used to avoid employment taxes when the workers are engaged in the UK. The wider policy and the clause will take effect from April 2014. The clause relates specifically to the oil and gas industry. It introduces a power for regulations to be made ensuring that national insurance contributions are paid in full when persons are working on the UK continental shelf and their employer is located outside the UK. It also introduces a system of certification whereby someone other than the person specified in legislation meets the national insurance obligations.

For oil and gas workers on the UK continental shelf, such avoidance is best targeted through tailored legislation, taking account of the many legitimate reasons why the employers are based outside the UK. Furthermore, the oil and gas industry has a uniquely complex structure for contracts that is not present in other sectors. This tailored legislative approach is in line with other legislation relating to the oil and gas industry in which there are specific oil and gas tax provisions.

We published the draft regulations associated with the clause for technical consultation on 19 November. At its simplest, the regulations will mean that if a UK continental shelf worker is employed by a company outside the UK, the employer’s UK associated company will be treated as the employer for national insurance purposes. The regulations will also mean that when there is no such UK associated company, the oilfield licensees will be treated as the employer for national insurance purposes. In such cases, a certificate can be applied for and issued to confirm that the offshore employer is making the correct national insurance payments.

For the certificate to remain valid, the non-UK employer will need to make all relevant national insurance payments, including those associated with statutory payments such as sick pay. The oilfield licensees will not be liable for any underpayments of national insurance by the non-UK employer while there is a valid certificate. In the case that the non-UK employer does not make all relevant payments, HMRC will withdraw the certificate and the oilfield licensees will be responsible for all future national insurance payments from the date they are notified that the certificate is withdrawn.

Representatives from the oil and gas industry have been consulted about the design of this measure. They have been broadly supportive that national insurance should be paid for workers on the UK continental shelf. The clause has support from the industry and allays many of the concerns that they presented during the consultation. In fact, the certification scheme introduced through the clause was requested by the industry. This change will allow the industry to gain assurances that when national insurance is due, it is being paid for those people engaged on their oilfields.

Ian Swales (Liberal Democrat, Redcar)

It is a pleasure to serve under your chairmanship, Mr Streeter. I support clause 11. I have a number of constituents who work offshore and there are many other such people around the country. As the Minister said, this is a uniquely complex area. The Library note on this is almost six closely-typed pages complete with diagrams—it takes quite a bit of getting through.

I make a plea on two issues to do with communication. First, there should be clear communication with employees themselves about their national insurance status. I know from constituency case work of offshore workers who, when they come to claim their pension, find to their shock that they were not in the national insurance scheme in the way that they expected. That is to do with the fact that a typical employee does not really get updated on their national insurance status unless they make special requests. As I said in the oral evidence sessions, I would ask HMRC to consider ensuring that employees are kept aware. Doing so will help to provide a check that the new system is working.

Another communication point is that the local payroll companies of which I am aware that deal with offshore workers do not always get clear help from HMRC. Even now, there are some internal inconsistencies on the HMRC website. Will the Minister pay special attention to training HMRC staff in the new arrangements to ensure that those who are involved in the administration of offshore workers get clear guidance and help when they need it?

Finally, the impact assessment shows that the value of the measure is £80 million to £90 million, which is a great deal of money. That prompts the question of whether there are any other avoidance techniques that might raise their head, given that such a sum appears to be at stake.

David Gauke (Conservative, South West Hertfordshire)

I am grateful to my hon. Friend for his questions. He raises an important point about clear communication with employees regarding their status and history of national insurance contributions, and I refer him back to what I said in the evidence session. Communication is a wider issue, but he is right to raise it in this context because a good example of where problems can arise is when people think that national insurance contributions have been paid, but they have not. The best way to address that is by looking more widely at how to make the tax system more up to date and suitable for the 21st century, with a more digital tax system through which we can provide additional information to taxpayers, in an easily accessible and digestible format, so that they can understand the taxes they have paid, the contributions they have made and how that money is being spent. As we move towards individuals having personal online tax accounts—similar to the way in which millions of people have online bank accounts—that is the type of information that we can cover.

On help for payroll companies and for HMRC in understanding everything, I can tell my hon. Friend that, on 10 December, HMRC will be publishing guidance on how everything will operate to ensure that people are aware. I am sure that will be of great interest to payroll companies in his constituency.

My hon. Friend also made a good point about how avoidance behaviour will change. As we try to address one artificial or contrived behaviour, we always need to think about the behavioural impact of that and how people will seek other areas in our tax code to exploit. I assure him that we are focused on that issue and are constantly looking for ways to address it. Again, one should look at the good record of our Government on that front, because our willingness and determination to try to address these difficulties is very strong.

I will be grateful for the Committee’s support for clause 11.

Clause 12 - Alternative investment fund managers

David Gauke (Conservative, South West Hertfordshire)

Clause 12 provides a power to modify the application of the Social Security Contributions and Benefits Act 1992 and its Northern Ireland equivalent in relation to class 4 national insurance contributions of individual partners who are members of FCA-related partnerships that apply the alternative investment fund managers directive requirements.

Under existing partnership tax rules, tax is charged to profits as they are earned, rather than when they are received. An unfunded tax charge can therefore arise to profits that are allocated to an individual partner of an AIFM partnership and then deferred in line with the regulatory requirements of the alternative investment fund managers directive. That is because the partner cannot access the deferred profits in the year when they arise.

The Government are committed to addressing the tax issue by introducing a new statutory mechanism, subject to parliamentary approval. The mechanism is designed in such a way that it will not compromise the Government’s objective for the partnerships review, which is to achieve fairer taxation by stopping tax planning through the use of mixed membership partnerships that include both individual and corporate members.

The new power introduced under the clause will support the introduction of the mechanism and will be used to change the relevant national insurance contributions legislation by regulation, once the related Finance Bill 2014 becomes law. I therefore commend the clause to the Committee.

Clause 13 - Members of limited liability partnerships

David Gauke (Conservative, South West Hertfordshire)

The clause disapplies section 4(4) of the Limited Liability Partnerships Act 2000 for the purposes of both the Social Security Contributions and Benefits Act 1992 and its Northern Ireland equivalent. That will enable the reclassification of certain limited liability partnership members as employed earners for the purposes of national insurance contributions.

Existing secondary legislation will be amended to ensure that members of an LLP who satisfy certain conditions will be treated for the purposes of national insurance contributions as employees rather than as self-employed. The conditions will broadly be that the individual member of the LLP has little or no real economic interest or risk in the LLP and instead has an entitlement to a fixed salary.

Treating members of LLPs as self-employed was designed to replicate the position of traditional partnerships. The clause ensures that the tax rules are not used to create a tax advantage and creates a level playing field between those partnerships that have not sought to misuse the tax rules for LLPs and those that have. I commend the clause to the Committee.

Shabana Mahmood (Labour, Birmingham, Ladywood)

The Minister’s introduction to the clause was helpful and answered some of the issues that arose from the final question I asked him when he gave evidence to the Committee. The impact of a complete disapplication of section 4(4) of the LLP Act was not originally clear. However, I note that the Minister returned to something originally raised in the consultation on conditionality for working out the actual status of a member of an LLP. He says that that will come through regulations, and we know that we must also wait for further legislation on partnerships, so could he set out to the Committee the sequence of those regulations and the legislation to come? How will that take the issue relating to LLPs further so that we reach a place of complete clarity about how members are to be treated and which definitions apply now that section 4(4) is disapplied? Are we looking at using the definitions from the 1992 Act permanently, or only until new regulations are introduced?

David Gauke (Conservative, South West Hertfordshire)

To help the hon. Lady, detailed proposals in the form of regulations will be published in draft in the autumn, when the new tax legislation will be introduced under the Finance Bill 2014. That will ensure that individuals have access to the full proposals on tax and national insurance contributions at the same time. It is also worth pointing out that I wrote to the Committee yesterday to confirm that point.

The legislation will take effect on 6 April 2014, so individuals who are affected will be treated as if they are employees from the beginning of the next tax year. That is consistent for both tax and national insurance contributions. I hope that that clarification is helpful to the hon. Lady and to the Committee.

Clause 14 - Office holders who receive “earnings” to be employed earners

David Gauke (Conservative, South West Hertfordshire)

Clause 14 will correct certain changes made by the 2003 tax law rewrite project, which introduced a new term—general earnings for tax—which led to consequential changes to national insurance contributions legislation. The clause will ensure that all office holders are included in the definition of employed earners for national insurance contributions purposes, provided that they receive earnings as defined by either the Social Security Contributions and Benefits Act 1992 or the Social Security Contributions and Benefits (Northern Ireland) Act 1992.

Schedule 2 to the Bill will introduce consequential changes to the legislation resulting from the correction.

I hope that those clarifications and corrections will gain the support of the Committee and that the clause stands part of the Bill.

Clause 15 - Armed Forces early departure payments retrospectively disregarded

David Gauke (Conservative, South West Hertfordshire)

The early departure payments scheme is operated by the Ministry of Defence and provides a framework for making payments to qualifying service personnel who leave the armed forces between the age of 40 and the pension age for MOD personnel specified in the armed forces pension scheme, provided that they have sufficient years of service in the forces.

The EDPs came into existence on 6 April 2005. At that time, there was no liability for national insurance contributions. It has been the intention of successive Governments since the introduction of EDPs not to subject them to class 1 national insurance contributions. However, because of an interaction with the changes to the taxation of pensions in 2006, and the MOD providing further information on the nature of EDPs, such payments have been liable for class 1 NICs since the start of the 2005-06 tax year.

Clause 16 will provide for payments made under the Armed Forces Early Departure Payments Scheme Order 2005 to be disregarded for NICs purposes for the tax years 2005-06 to 2012-13 inclusive.

Clause 16 - Repeal of certain redundant reliefs relating to Class 4 contributions

David Gauke (Conservative, South West Hertfordshire)

There is not a lot to say on this clause. I could, of course, say a lot, but I am not inclined to.

Clause 16 will repeal two redundant class 4 national insurance contributions reliefs. As I am on my feet, I am sure the Committee will be keen to know what they are.

The first is the repeal of paragraph 3(3) of schedule 2 to the Social Security Contributions and Benefits Act 1992 and its Northern Ireland equivalent. It is an obsolete provision that dates from the introduction of independent taxation of spouses from 1990-91. Changes were made for 1990-91 onwards, so that only the losses of the self-employed person, and not their spouse, could be deducted for the purposes of calculating profits on which class 4 NICs are payable.

Paragraph 3(3) of schedule 2 to the 1992 Acts provides that any losses incurred under the previous rules could be carried forward and used against the class 4 NICs liability. The relief was a transitional provision, which the Office of Tax Simplification, in its review of reliefs, identified as no longer necessary and should be repealed.

The second repeal is that of paragraph 9 of schedule 2 to the 1992 Acts. This is another obsolete relief that provides that where a husband or wife has elected to be assessed separately for income tax purposes or a husband and wife have jointly elected that the wife’s earned income should be taxed as though she was a single person, the election is to operate for class 4 NICs purposes only. The effect was that wives would be assessed on their own class 4 income and would pay an appropriate contribution. Where an application has not been made for separate assessment or an election for the separate taxation of a wife’s earnings, the husband will be liable to pay any class 4 contributions due in respect of his wife’s income. The aggregation of income, which treated the income of a woman living with her husband as his income for income tax purposes, was abolished with effect from the tax year 1990-91 onwards, so the relief is redundant and is to be repealed.

David Gauke (Conservative, South West Hertfordshire)

May I take this opportunity, given that we have rapidly come to the end of scrutiny in Committee, to thank one or two people? I thank all hon. Members for their contributions over the day. I am used to making such a speech at the end of consideration in Committee of the Finance Bill, which tends to begin in April and proceed through May, with a break, and then into June. If we are unfortunate, it may well conclude in July, so to complete consideration in Committee in a single day is a novel experience, but not unwelcome.

Given that matters have not been contentious, I thank the hon. Member for Birmingham, Ladywood for her appropriate and well-judged scrutiny. I do not need to warn her that it is not always quite like this. The Finance Bill Committee, which she will no doubt experience next summer, is much more of a slog. I am none the less grateful for her questions and interventions.

I thank the Whips—my hon. Friend the Member for Hastings and Rye on the Government side—for keeping everything in order, and my hon. Friend the Member for Macclesfield, who stood in as Parliamentary Private Secretary.

I thank you, Mr Streeter, for your calm chairing of proceedings. I do not believe that this has been one of the more difficult Committees to chair. I also thank Sir Alan for chairing the evidence sessions on Tuesday and the witnesses who gave evidence. I thank the Hansard writers and the Clerks. I thank the police for controlling the hordes of members of the public wanting to view proceedings, and the officials for the support that they have provided me.

The Bill is useful and will help to put in place an environment that is friendly for smaller businesses and good for increasing employment and wages. It also includes important measures regarding tax avoidance. It has been a great pleasure to consider the Bill, and a particular pleasure to have considered it so quickly. I look forward to consideration on Report, when we might be able to progress at a similar rate of knots.

Shabana Mahmood (Labour, Birmingham, Ladywood)

I am grateful to the Minister for his comments and echo almost all his remarks. I have to say that it is somewhat disconcerting to start my career in the shadow Treasury team agreeing with quite so much of what he has to say. I look forward to being thoroughly disabused of that position soon.

In my first outing against the Minister, we considered a piece of delegated legislation that involved a huge amount from my previous role as shadow spokesperson on universities and science. He said, “It’s not always like this,” but he is having to say that to me again. I look forward to taking a different approach when we consider the Finance Bill.

I thank you, Mr Streeter, for your chairmanship of the Committee, and your help in guiding me through the procedure. I also want to put on record my thanks to Sir Alan for his chairmanship of the evidence sessions. I echo the Minister’s thanks to Hansard, the Clerks, police, officials, the Whips on both sides of the Committee and all Members who contributed to scrutinising the Bill. See it as an early Christmas present from me to everyone that we have finished so early.

I hope that the Minister will reciprocate. I remind him that I am a Muslim and our equivalent to Christmas is Eid, which is celebrated twice a year, so I hope he will be doubly generous at some appropriate moment and keep things to good time.