PARLIAMENTARY DEBATES HOUSE OF COMMONS OFFICIAL REPORT GENERAL COMMITTEES

Public Bill Committee

NATIONAL INSURANCE CONTRIBUTIONS BILL

First Sitting Thursday 2 December 2010

CONTENTS Programme motion, as amended, agreed to. Written evidence (Reporting to the House) motion agreed to. Motion to sit in private agreed to. Examination of witnesses. Adjourned till Tuesday 7 December at half-past Ten o’clock.

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© Parliamentary Copyright House of Commons 2010 This publication may be reproduced under the terms of the Parliamentary Click-Use Licence, available online through the Office of Public Sector Information website at www.opsi.gov.uk/click-use/ Enquiries to the Office of Public Sector Information, Kew, Richmond, Surrey TW9 4DU; e-mail: [email protected] Public Bill Committee2 DECEMBER 2010 National Insurance Contributions Bill

The Committee consisted of the following Members:

Chairs: MR GRAHAM BRADY,MR GEORGE HOWARTH,†JIM SHERIDAN

† Alexander, Heidi (Lewisham East) (Lab) † Harrington, Richard (Watford) (Con) † Bingham, Andrew (High Peak) (Con) † Hopkins, Kelvin (Luton North) (Lab) † Birtwistle, Gordon (Burnley) (LD) † Leslie, Chris (Nottingham East) (Lab/Co-op) † Brown, Lyn (West Ham) (Lab) Opperman, Guy (Hexham) (Con) Campbell, Mr Gregory (East Londonderry) (DUP) † Shuker, Gavin (Luton South) (Lab/Co-op) † Creasy, Stella (Walthamstow) (Lab/Co-op) † Stride, Mel (Central Devon) (Con) † Gauke, Mr David (Exchequer Secretary to the † Vickers, Martin (Cleethorpes) (Con) Treasury) † Williams, Stephen (Bristol West) (LD) † Goodwill, Mr Robert (Scarborough and Whitby) (Con) Simon Patrick Committee Clerk † Hancock, Matthew (West Suffolk) (Con) † Hanson, Mr David (Delyn) (Lab) † attended the Committee

Witnesses

David Gauke MP, Exchequer Secretary, Her Majesty’s Treasury

Steve Hughes, Economic Adviser, British Chambers of Commerce

Sam Mitha, Assistant Director, Her Majesty’s Revenue and Customs

David Owen, Head of National Insurance Policy, Her Majesty’s Treasury

Priyen Patel, Policy Adviser, Federation of Small Businesses

Chris Pichon, Chief Executive, Wenta 1 Public Bill CommitteeHOUSE OF COMMONS National Insurance Contributions Bill 2

(2) the Committee shall hear evidence in accordance with the Public Bill Committee following table: TABLE

Thursday 2 December 2010 Date Time Witness

[JIM SHERIDAN in the Chair] Thursday Until no British Chamber of Commerce; 2 December later than Federation of Small Businesses; National Insurance Contributions Bill 2.30 pm London Councils Thursday Until no Cambridgeshire Chamber of 1pm 2 December later than Commerce; Southampton The Chair: Before we begin, I shall read out a brief 3.30 pm Chamber of Commerce; Portsmouth Chamber of introductory statement and make a few preliminary Commerce; London First; East announcements. London Small Business Centre; Members, if they so wish, can remove their jackets Wenta during the Committee meetings. Would all Members Thursday Until no Treasury; HM Revenue and please ensure that mobile phones, pagers, etc. are turned 2 December later than Customs off, or switched to silent mode, during the Committee 4.00 pm meetings? As a general rule, I and my fellow Chairs do not (3) the proceedings on the Bill shall (so far as not previously intend to call starred amendments that have not been concluded) be brought to a conclusion at 4.00 pm on Thursday tabled with adequate notice. The required notice period 9 December.—(Mr Goodwill.) in Public Bill Committees is three working days. Therefore, amendments should be tabled by the rise of the House Amendment made: (a), in the table, in the third column, on Monday for consideration on Thursday and by the leave out “; London Councils”.—(Mr Goodwill.) rise of the House on Thursday for consideration on Amendment proposed: (b) in the table, in the third Tuesday. column, leave out Not everyone is familiar with the process of taking “Cambridgeshire Chamber of Commerce; Southampton Chamber oral evidence in Public Bill Committees, so it might help of Commerce; Portsmouth Chamber of Commerce; London if I briefly explain how we will proceed. The Committee First; East London Small Business Centre;”.—(Mr Goodwill.) will first be asked to consider a programme motion on Mr David Hanson (Delyn) (Lab): May I welcome you the amendment paper, debate about which is limited to to the Chair, Mr Sheridan? The Opposition are content half an hour. We will then proceed to a motion to report with the proposed amendment. written evidence and then to a motion to permit the Committee to deliberate in private in advance of the Amendment agreed to. oral evidence sessions, which I hope we can take formally. Main Question, as amended, put and agreed to. Assuming that the second of those motions has been Ordered, agreed to, the Committee will then move into private session. Once the Committee has deliberated, the witnesses That— and members of the public will be invited back into (1) the Committee shall (in addition to its first meeting at the room, and our oral evidence session will begin. If 1 00 pm on Thursday 2 December) meet— the Committee agrees to the programme motion, the (a) at 10.30 am and 4.00 pm on Tuesday 7 December; Committee will hear oral evidence this afternoon. On the question of the programme motion, the (b) at 9.00 am and 1.00 pm on Thursday 9 December; amendments tabled in the name of the hon. Member (2) the Committee shall hear evidence in accordance with the for Scarborough and Whitby (Mr Goodwill) are intended following table: to remove the names of organisations that are not able TABLE to send representatives. Since the amendments were tabled, two further witnesses have had to drop out Date Time Witness because of the bad weather: Hampshire Chamber of Commerce, which was due to replace Southampton Thursday Until no British Chamber of Commerce; Chamber of Commerce in the original list; and the East 2 December later than Federation of Small Businesses 2.30 pm London Small Business Centre. That leaves Wenta alone in the second panel. Thursday Until no Wenta 2 December later than Therefore, in order that amendment (b) on the 3.30 pm amendment paper should reflect the current situation, I Thursday Until no Treasury; HM Revenue and suggest that the Whip moves it in amended form—namely, 2 December later than Customs leaving out Cambridgeshire Chamber of Commerce, 4.00 pm Southampton Chamber of Commerce, Portsmouth Chamber of Commerce, London First and East London (3) the proceedings on the Bill shall (so far as not previously Small Business Centre. concluded) be brought to a conclusion at 4.00 pm on Thursday Motion made, and Question proposed, 9 December. That— (1) the Committee shall (in addition to its first meeting at Resolved, 1 00 pm on Thursday 2 December) meet— That, subject to the discretion of the Chair, any written evidence (a) at 10.30 am and 4.00 pm on Tuesday 7 December; received by the Committee shall be reported to the House for (b) at 9.00 am and 1.00 pm on Thursday 9 December; publication.—(Mr Goodwill.) 3 Public Bill Committee2 DECEMBER 2010 National Insurance Contributions Bill 4

Written evidence to be reported to the Q2 Mr Hanson: Do you have a view as to whether the House absence of London, the south-east and the eastern region is positive or detrimental to the overall acceptability NI 01 Wenta of the scheme and the positive nature of the scheme NI 02 Thames Gateway London Partnership that you have expressed for both your organisations? NI 03 Her Majesty’s Treasury Priyen Patel: As I said, in a perfect world we would NI 04 East London Small Business Centre have liked this policy to be applied to all of the UK, including the south-west, the east of England and London, NI 05 Hampshire Chamber of Commerce because there are pockets within those regions that Resolved, obviously have high unemployment, or could do with a That, at this and any subsequent meeting at which oral evidence boost to the private sector. Secondly, we would have is to be heard, the Committee shall sit in private until the gone a little bit further and seen what the capability and witnesses are admitted.—(Mr Goodwill.) capacity was to extend it to microbusinesses, businesses that are currently trading, and may have experience of 1.5 pm hiring and are in the marketplace at the moment. But The Committee deliberated in private. that is in a perfect world. At the moment is it detrimental to those areas? I am not sure it is, but in a perfect world 1.7 pm it would obviously be very beneficial if it had been rolled out to those three excluded areas. On resuming— Steve Hughes: The fiscal impact of the measure is the crux of the problem. If you extend it to those regions, The Chair: Good afternoon. Thank you for coming there is a fiscal impact of around £650 million. The along. We will now hear oral evidence from the British problem associated with any area of policy is that we Chambers of Commerce and the Federation of Small have to keep a tight rein on these things at the moment. Businesses. For the record, please introduce yourselves It is all very well saying £650 million here or another to the Committee. policy area taking a fiscal impact of another few million Steve Hughes: I am Steve Hughes, and I am an pounds there, but given the situation with the deficit economic adviser at the British Chambers of Commerce. and certainly the approach adopted by the coalition Government, these are the regions that can better absorb Priyen Patel: I am Priyen Patel, a policy adviser at the economic shocks, have greater economic activity and Federation of Small Businesses. greater capacity for private sector employment, so it seems natural that if any areas were to be excluded The Chair: Before calling the first Member to ask a it would be those. question, I remind all Members that questions should be limited to matters within the scope of the Bill and we Q3 Mr Hanson: The Government have argued that must stick strictly to the timings of the programme this scheme is to support areas where there are high motion that the Committee has agreed. I hope that I do levels of public sector employment that will be hit by not have to interrupt mid-sentence, but I will do so if redundancies and job losses. Statistics show that 23 of need be. the top 100 constituencies for public sector employment are in London, the south-east and east. How do you think your members in those areas will react when they Q1 Mr Hanson: I welcome both witnesses to the are defined, according to the Government’s own definition, Committee. as a high public sector area yet they will not be able to My opening question is to Mr Patel and Mr Hughes apply to a scheme that will help with deprivation and in turn. Do you feel that a payment holiday for new advance the Government’s stated objective. Do you businesses and, generally, for businesses with fewer than have any views on that? 10 employees is a good idea? Steve Hughes: Yes, certainly. We can all point to areas Priyen Patel: The principle of the idea is to promote where there are higher levels of public sector employment job creation in new, young and small enterprises. It is and where the scheme does not apply. In policy terms obviously a very good idea, and we supported it when it context is everything and if you look at the regions was announced by the Conservative party before the outside the south-east, the eastern region and London, general election. In a perfect world we would have those are the areas that are most dependent on public tweaked it and we would have probably gone a little sector money, first and foremost. It is not just about the further, which you would probably expect us to say. For narrow definition of pure employment. The figures for the time we are in, and with the fiscal constraints that the contribution to gross value added in those areas of the Treasury is working under, we think the Bill is very public sector employment to which the scheme applies good. The principle of the idea is very good. are much higher than in the three regions that are Steve Hughes: There is not much to add to that. If exempted. you are in a situation in which you are trying to engender Priyen Patel: I would just add one point. Our members, a culture of employment, you have to look at ideas that and Steve’s members too, do not define themselves as a are, in essence, a little experimental and perhaps more business in a certain area. They define themselves as radical than normal. There are, as Priyen said, issues businesses that are providing goods to their marketplace, surrounding the establishment of businesses, the age of essentially. Their marketplace could be in one area. It businesses the scheme applies to and also the geographical could be in one region. It could be in one constituency. areas it applies to. The fundamental principle of trying But for many businesses, their market footprint is actually to encourage employment among our businesses is a quite large and will cover perhaps two or three regions good one. and numerous constituencies. 5 Public Bill CommitteeHOUSE OF COMMONS National Insurance Contributions Bill 6

Q4 Mr Hanson: Doyouhaveanyviewastothe Q7 Mr Hanson: Just out of interest, have you made competitive nature of the proposal in relation to those any representations to the Government in the development regions, particularly on the borders of regions where of the scheme about those issues? Have you put them there could be companies on one side of the border that on the table? qualify and companies on the other that do not but Priyen Patel: Before the general election we spoke to which are operating in the same market? advisers and shadow Ministers. Afterwards we did the Steve Hughes: I think there is a potential behavioural same, and we have spoken to a Treasury official about it effect. Ultimately the policy is in part experimental. as well. When the Treasury comes to analyse what happened with the policy and the jobs it created and its behavioural Q8 Mel Stride (Central Devon) (Con): May I clarify effects, that is something that clearly needs to be looked something that I think you both said earlier? You at. There are competition issues around that. We fully recognised that to roll the scheme out to the other three recognise that there is a potential issue around whether regions, which are currently proposed to be exempted, companies locate in a certain area rather than another would cost about £650 million out of a scheme that will because of the holiday. But again it is about the not easy cost about £940 million in total. Are you saying that in decision of cost versus benefit. You may have to take as your view, taking into account the fact that we have to part of the policy cost potential competition issues at a get the deficit down and the needs of those three local, sub-regional level. regions, it would not be a good idea to spend that Priyen Patel: It will obviously have some behavioural additional £650 million in that way? impact on people who are looking to start up a business Steve Hughes: I would return to what I touched on and looking to employ people almost from the first day. earlier, which was essentially that if you, as a representative The other thing businesses will look at when they are group such as we are, talk to civil servants and officials looking to start up a business is where they can start about policy implementation that costs money the question up—where they should start up. That could be now comes back—quite rightly so—“How are you going infrastructure or a skills base. This obviously provides to pay for it?” If we were to use that £650 million for this an incentive for them to start up a business that will scheme, it would not be available for possible infrastructure employ people very quickly, in a certain area or not in a spending, capital spending or other elements of the certain area. business policy world that we see as vital and as part of Businesses tend to employ people when there is added the package that will help economic recovery. Again, it demand to the company—when invoices are becoming goes back to the point that, taking the behavioural greater in volume and when they are looking to expand. effects of the boundaries of the exemption into account That is obviously something that will provide a fiscal and looking at household spending statistics, birth and incentive, but it is a fiscal incentive that is, as Steve has death rates and the business statistics that were released mentioned, quite experimental. I do not know of any yesterday, those three regions were historically, and still other tax, or incentive in the form of tax, that is are, the main drivers of UK growth. They will be able to regionally based. Most taxes cover most of the country. absorb economic shocks in a more robust manner than It is an interesting experiment, but I think it will have the other regions, which are more dependent on public some behavioural impact on businesses. sector spending, and they will continue to do so. They will drive recovery and drive out of the recession or downturn quicker than those other regions. When there Q5 Mr Hanson: Just one final question from me, are limited resources, it is better to focus them on the because I know that other colleagues want to come in. regions most in need. Do you have any current awareness of the total amount of resource the Government have put into the scheme Priyen Patel: I do not have a great deal to add to what for your members as a whole? I am interested in whether, Steve has said. As you can imagine, all businesses—small, if you had that awareness, you would use that resource medium or large and wherever they are based—are in a different way to help support your members. competitive by nature. Business people are like that. If a business is based in London or the south-east and a Priyen Patel: By resource do you mean just money? policy like this is presented to them, the first two questions they will ask are, “Why am I not eligible?” Q6 Mr Hanson: The scheme will cost an amount of and, “Why is my region not eligible?” As Steve said, money; the Government have estimated between about GVA records and historical factors show that private £900 million and £1 billion. The potential amendments sector growth and drivers in these areas are quite strong. that we have included could increase the resource and The principle behind the Bill is obviously to boost divide it in different ways. If that resource was available private sector economic activity in the other regions. to you to plan for supporting small businesses and chambers of commerce generally, would you would Q9 Mel Stride: The national insurance holiday is think of using it in a different way? basically permissive, in a sense, rather than prescriptive. Priyen Patel: I think that £900 million would be a In other words, companies have to actively apply for it, good amount to give. Looking at a policy such as this, rather than being given it when they set up, which then we might have looked at reducing the number from brings into play this whole issue of how it is advertised 10 to maybe five, and then stipulating that for businesses and marketed as a scheme. My concern, or one of the that are already in existence—maybe for just a number concerns that I might have, is that we don’t get the of years—the next three employees or the first three message out effectively, so I would very much value employees they hire would also receive this type of help. comments from both of you on how you think we The principles are still the same; it is just a little tweak should ensure that new start-ups are very aware of what to the policy. That is the only difference I would make. is on offer here. 7 Public Bill Committee2 DECEMBER 2010 National Insurance Contributions Bill 8

Steve Hughes: It is a very important point. I can Q11 Chris Leslie (Nottingham East) (Lab/Co-op): point to examples throughout the stimulus package Thank you for your comments so far. I am interested in where recession-specific measures such as the enterprise picking up the question about the awareness of the finance guarantee and the trade credit insurance scheme scheme among potential new businesses. I would normally were potentially—certainly in their infancy as a policy—not ask whether any of your existing members had made necessarily as successful as they could be, because of the inquiries with you, but I assume not because new businesses communication of their availability to the business would not yet be your members. Would it be a good community. idea to require all communication, literature, websites, I can give you other examples as well. We sent in mailings or whatever, that HMRC has with new business freedom of information requests about national minimum start-ups to have a clearly marked section or a link to a wage advertisements for the change in its rate, and, in website to market and promote the scheme? 2008-09, £874,000 was spent on advertising to the business Steve Hughes: Obviously, in the interface between community the national minimum wage uprating. Last HMRC and businesses, as Priyen said, quite a lot of the year, it was £850,000. So far, there has been no resource time it is between accountants acting as agents of behalf allocated to change for next year. In the fiscal environment, of businesses, and HMRC. The message should be there is a question of how much money is dedicated to getting to them anyway. I can give another example of ensuring that the business community is aware of that. the way in which a recession-specific scheme has benefitted It is not just about resource from central Government; businesses. The time to pay scheme was well advertised representative bodies also have a responsibility to highlight through HMRC. It was an existing scheme, but it was these changes, as do things like Business Link and the beefed up in a time of tight credit and many more end of the regional development agencies and the creation businesses utilised it as a result. HMRC is the perfect of the local enterprise partnerships. It is through all vehicle for that. those channels that it has to be communicated. Priyen Patel: HMRC sends a lot of information to I have seen Government policies where those channels people who are HMRC-bound, whether that is through haven’t necessarily been utilised, but if the Government employment, through changes, through CD-ROMs and want to get the most out of it, you properly use every all the rest. It is not about an increase in the number of available resource to ensure that the business community, letters from HMRC, because those mailshots probably and certainly those who are just starting up, know cost a lot of money. It is about utilising the mailing and about it. information that HMRC proactively sends out, to ensure that the scheme is actively and thoroughly promoted.

Q12 Chris Leslie: I do not know whether sufficient Q10 Mel Stride: On that point, do you think that thought has been given to the design of the scheme and using LEPs—they are emerging now—Business Link, its promulgation to make people aware of it. You made and so on is a good enough channel to get the message a point about minimum wage advertising, and I do not out? Or do you sense that there is something wider that know whether enough has been put into that. Have you needs to be done here? seen the suggestion in the regulatory impact assessment Steve Hughes: On LEPs, possibly not, because they’ve that apparently 240 HMRC staff are to be dedicated to only just been created. They’re only just getting into the promotion and administration of the scheme? Do how they’re going to be organised, meet and operate you have a sense of whether that is sufficient or whether, after their bids have been accepted, so, given that this in your experience, getting through to HMRC and policy is already in play, perhaps they will be the perfect getting information for your members has always been vehicle to advertise it in a year’s time, but certainly not sweetness and light and straightforward? Have there now. been difficulties for your members in the past with Priyen Patel: I have one thing to add to that. I have similar schemes? examples, and I’m sure that Steve has examples as well, Steve Hughes: In terms of the 240 staff and the of businesses that have started up since the emergency impact assessment, as I understood, that was not Budget—I can think of one that has even employed broken down into how much will be in stakeholder someone—but had no idea of this policy until I proactively engagement, as opposed to the general administration told them. I’m sure that there are numerous cases of of the scheme’s operation. Certainly, the principal that. Government Departments that we work with, such as The promotion of this scheme is vital. I checked on the Government Equalities Office, the Department for the HMRC website this morning, and there is a little Business, Innovation and Skills, the Treasury and HMRC, box right down in the corner, which you have to scroll have stakeholder engagement. They have specialists and all the way down to find, but it doesn’t actually say what people whose job it is to engage with the business it is. You click on it, and then you have to go through a community and get things out there. Some of those whole process. It needs to be promoted, because it is stakeholder engagement functions are naturally more good policy, and, as Steve said, LEPs probably aren’t effective than others, and it requires leadership from the place for this to be looked at—local authorities, those Departments that sponsor them, such as HMRC, perhaps. It is up to the Treasury to be creative and to ensure that the message gets out. innovative in a tight fiscal environment, and to ensure that small businesses, or new businesses, look at the Q13 Chris Leslie: Would your organisations be willing scheme. For example, 72% of our members use accountants. to be contracted to do some of that marketing and They start talking to accountants almost from day one. promulgation? Perhaps the Treasury should start looking at accountancy, Priyen Patel: I am not sure about contracted, but we trade bodies, or the ongoing training that accountants would certainly work hard with the Treasury and the do to plug the scheme. civil servants dedicated to the scheme to ensure that our 9 Public Bill CommitteeHOUSE OF COMMONS National Insurance Contributions Bill 10 members know about it. Both our memberships are Q16 Matthew Hancock (West Suffolk) (Con): Does made up of businesses that are already businesses. It is a the fact that this scheme is designed to apply to new way of being a bit creative and finding those people businesses mean that communicating it—and, I think who have just started a business or who are in line to do we all agree that communicating this is an important so. We are looking at vocational schools, graduates and part—would, in a sense, be easier? That is because when people who are finishing vocational courses, and ensuring a new business comes to interact with the tax system for that those people know about the scheme. the first time, the scheme applies, which is rather unlike Q14 Chris Leslie: Do you think the NI holiday proposal the minimum wage legislation, where you have to talk will create jobs? Economists talk about the dead-weight to existing businesses that have already been implementing cost of money that will go into business, which would the bureaucracy in a certain way. The first time a have already created those jobs anyway. Will it create business asks, “How do I have to comply with the tax extra employment? system?” is the point at which the Bill will have an impact on it. Steve Hughes: I think that there are two elements to that. The first, in one sense, relates to the 800,000 people Steve Hughes: First, not all start-ups will be people in the impact assessment to whom it would apply. Even entering the business world for the first time. People the businesses that take on those 800,000 people will may have preconceived ideas because of how they have have extra resource to allocate how they wish as a set up previous businesses, and they may try to apply start-up company, which could be for investing, advertising, them. There is a different make-up of the base of the marketing or whatever they want. That is a fundamentally start-ups that exist in the UK, but I agree that there is good principle to follow for a start-up business, allowing potential for the lines of communication to be easier if it to have the freedom to do that. those businesses are going to Business Link, for example, and that kind of thing. Then again, that all depends on Whether it will create new jobs is a difficult question. the quality of advice that is given. I have no doubt that some start-ups will be incentivised to take on people, and the national insurance holiday One of the problems with the enterprise finance will be one of a number of factors that a business guarantee was that the communication down through start-up uses in trying to take on staff. So, it is difficult bank hierarchies was not as good as it should have to say whether it will on its own, but it will certainly been, so business advisers with the banks did not necessarily contribute to a beneficial outcome for the employment have the information to give to businesses on the option market. of that scheme. Therefore, if the Business Link representative or other representative does not have the Priyen Patel: Before the election, when the previous knowledge of the scheme, the interaction will not work. Government were going to put national insurance up by 1%, we calculated that that would cost 57,000 jobs. Priyen Patel: It is that point of HMRC being a bit So, it has a negative impact. We also asked before the creative with this, because targeting existing businesses election, “What trigger points would lead to an extra is not easy, but it is easier than targeting those businesses employee?” We did not ask, “What would you like as an that have just started, or are in the process of starting. everyday cut in a rate, or investment in something?” but Looking at current Government policy, one of the new “What would actually trigger you to employ someone?” initiatives is the mentoring scheme. Have HMRC and Some 60% said that a cut in employee costs would BIS been communicating about that? As Steve mentioned, incentivise them to take on employees. However, it is banks are a port of call when a business starts up. The important to remember that businesses will not employ business goes to a bank and it usually gets the small and someone for the sake of it; there has to be that demand, medium-sized enterprises start-up box. The question is extra invoices, and extra orders coming into the business what communication has happened between HMRC for it to go and get someone. and the banks within that box, to ensure that that information covers the initiative as well. Q15 Chris Leslie: Would it be a more flexible design of a scheme if, rather than accounting for even the person on the smallest number of part-time hours, Q17 Matthew Hancock: My other question is on the businesses were allowed to aggregate somehow to allow savings on administration. Both of you have mentioned the full-time equivalent? So, essentially, they would not how complex it is to comply with the tax regime. Have be penalised for having lots of part-timers. Obviously, you made any estimates of the positive impact that this new start-ups will not necessarily take on full-time staff will have in terms of reduced bureaucracy for start-up straight away, but they might lose out on some of the companies? I appreciate that they will still have to pay NI holiday relief, simply by virtue of having part-timers. some taxes. Do you think that there should be a proposal that Priyen Patel: We have not done any analysis yet. would allow the full-time equivalent in aggregation to Steve Hughes: In terms of the cost of compliance, it count, in order to maximise the relief? relates to different elements, such as familiarisation Priyen Patel: Yes is my answer, but I can understand with the scheme and making deductions separately the complexity for both the applicant—the business—and from what they would normally do for NI anyway. HMRC. If that can be overcome, yes, it should be, There is an administrative burden for those companies. because head count is what really matters. However, I Obviously, when they come to research the scheme and can envisage there being quite a lot of complication in decide whether to apply for it, that time constraint will doing that. factor into their decision. Steve Hughes: I would echo that. Compliance costs of dealing with tax affairs takes time away from core Q18 Matthew Hancock: So you do not think that it business activity and if, as you outlined, that could be will make it easier for new businesses to comply with the designed in such a way to cope with that issue, it could tax system, because this is one less tax that they will be an option. have to comply with. 11 Public Bill Committee2 DECEMBER 2010 National Insurance Contributions Bill 12

Steve Hughes: No. Ultimately, you have a situation want it to go below hand? I will take the chicken’s where there are so many different reliefs and allowances answer and reserve my judgment until this is a couple of that, if you are a start-up business, you will still have to years in. learn about compliance with the tax system. You may Steve Hughes: Yes, my view is pretty similar. As we have payroll software that does it for you, but as Priyen keep saying, this is setting a new precedent in terms of said, if you are a start-up you generally have an accountant regional policy in a sense. If you are going to try to who should be able to do it for you. foster growth and to rebalance—that is obviously a bit of a buzz word at the minute—towards those regions Q19 Gavin Shuker (Luton South) (Lab/Co-op): that struggle in comparison with the ones that are Mr Patel, you said that the previous plans before the exempted, you have to come up with ever-more radical election would have cost 57,000 jobs. Do you have that policies, which may require differentiation in fiscal policy information by region? and other policies, such as regulatory policy. Priyen Patel: We have that information by turnover of business, and I think that we have it by region—yes, we do. Q24 Gavin Shuker: Do you think that all the measures before us will have a significant effect in terms of Q20 Gavin Shuker: Okay. How many jobs would this rebalancing the economy in areas with high public cost in the east, the south-east and London? sector employment? Priyen Patel: I can provide that data back to the Steve Hughes: I can answer that. I think that this is Committee. one of a number of measures that need to be taken. If you take it in the context of, say, things such as corporation Q21 Gavin Shuker: But you would accept that it is a tax reform, an essentially pro-business message is being proportion of that 57,000? given out. Possibly, we need to go further and to look at Priyen Patel: Yes, it is. That information, however, exemptions on elements of the regulatory regime— was based on a 1% increase in NICs, not on any other planning, for example. We could look at new-generation policy. enterprise zones in areas that struggle to generate private sector employment. That is why I go back to what I said Q22 Gavin Shuker: Would you accept that this policy before, which is that when you talk about rebalancing, it would be detrimental to new businesses starting up in has to be ever-more radical; there is not necessarily an the east, the south-east and London? easy answer under existing policy mechanisms. Priyen Patel: It would not be detrimental, because Priyen Patel: Hopefully, that will lead to the Treasury they are not losing anything. It would obviously impact and the Government as a whole becoming slightly more on a business when it is starting up, and when it is creative and slightly more innovative in policy making. looking at employing its first person. It would have a One thing that the Prime Minister before the election behavioural impact on where it locates and what said when he visited Northern Ireland was that we employment intentions it has. It comes back to the could look at making it an enterprise zone. That would point that this proposal could be for £5,000 or £15,000, obviously imply different criteria for regulation, planning, but the business will only employ someone if there is the tax regime and perhaps capital investment, which demand. You can incentivise quite a lot, and that will would be slightly different from other regions of the have an impact on employment intentions, but the UK. This is a creative policy, and being a bit creative, biggest driver to employment—or loss of employment—is without being too creative, let us say, is welcomed, but business activity and demand coming into the business. because it is very new and very different, it needs some When demand drops off, that has an impact on employment analysis after it has had some run. intentions. Steve Hughes: In terms of firms being at a disadvantage and the exempted areas, I go to chambers of commerce Q25 Gavin Shuker: Are you confident from what you all over the country, and given the make-up of the have heard from the Government and from your previous businesses that I see operating in those communities, I experience of other schemes that we have seen in recent struggle to see necessarily how the holiday as designed years that there will be effective analysis of the data as will act to put one firm at a massive competitive advantage the scheme goes through? over another. That is unless, as we say, those effects Steve Hughes: I have worked on regulation policy become more concentrated and acute as you get closer for quite a while now, and something called post- to the boundaries, as I imagine they would. implementation review is not necessarily carried out as a matter of course by Government Departments when Q23 Gavin Shuker: Assuming that the whole country it should be. There needs to be more robust implementation cannot benefit from a blanket holiday, at what level of that approach of analysing policy, its suitability, how should the exemption apply? Should it be at regional it can be developed and how it can go forward. Without level, LEP level, constituency level or local authority that, what is the point really? The whole point of the level? impact assessment process in the first place is to ascertain Priyen Patel: As I have said, I do not know of any the cost and benefit of each policy. Again, we are going other fiscal measure that is broken down in this way—in slightly blind into this because it is unprecedented, so it the old RDA way, if you like. It is quite an experiment, obviously requires some analysis. and I am not sure whether we would want to go a step Priyen Patel: As I said, we need analysis—probably further without looking, perhaps a year or two years quite a lot of analysis—a year or two years into the into this, at what the uptake and the usage are and at scheme. In a meeting that I had, a Treasury official, who what the advantages or comparative disadvantages have I think is sitting somewhere behind me, said that they been to businesses in the area and outside it. Would I will be looking at this a year in. We will be doing an 13 Public Bill CommitteeHOUSE OF COMMONS National Insurance Contributions Bill 14 independent piece of research looking at this—probably sum from another Government-funded source. I do not a year from now as well—to see what the uptake has think that it will be a problem for many businesses. been and what the advantages and disadvantages have Many businesses will not know about it, so they will do been, and we will share that with the Treasury. Hopefully, what they are doing and, at some point, will be told, they will be doing the same. “You can’t have this for X reason.” It is a lot of money—so much that I do not think the rule will affect Q26 Gavin Shuker: Finally, it sounds from your answers many small businesses in this scheme. as if you believe that these initiatives can be welcomed, but will not make a significant difference to rebalancing Q29 Mel Stride: Do you suspect that it may be a sort the economy in the affected areas. of tick-box form that states that such businesses do not Priyen Patel: One policy on its own is never going to need that particular scenario? do that. There needs to be a package of policies. As Priyen Patel: Yes. Steve mentioned, there needs to be capital investment and work on regulation and planning. The fiscal policy Q30 Richard Harrington (Watford) (Con): I am sure regime is obviously very important as well. It is a that hon. Members on both sides of this table would package, and in his autumn statement, the Chancellor agree that both of your organisations help business a announced that he would go away and look at the other lot, and they also help us, in Parliament and in our barriers to growth and what incentives and measures constituencies, to understand small businesses. I refer to can be taken. That is very welcome. It is a package; it those of us who have not spent most of our career in cannot be one policy on its own. business—I have, by the way. Would I be fair in summarising both of your positions Q27 Mel Stride: I want to go back to the issue of the on the national insurance holiday as thinking that it is a potential complexity of the scheme’s administration for good thing, which would provide a boost in certain employers that take it up. The impact assessment suggests regions, but that for someone wanting to set up a small there will be £75 million of cost across the companies business, it would be just one of a number of factors? that might be expected to take this up. Do you feel that, Those include rent, business rates—a huge burden on in the context of the various things that companies are anyone considering opening a shop or any other form doing in terms of tax administration, and so on, this is of business—national insurance, income tax, corporation potentially a highly administratively onerous scheme? tax and a whole series of taxes and obstacles to business. Or is it at a low level? Where would you place it? To the Is it your view that the national insurance holiday extent that it is onerous, how might it be made less so? would be only a small part of the total decision—not a Priyen Patel: I can understand from businesses’ point fundamental consideration—for somebody looking to of view that they would probably want this policy done set up a business? So in an area that does not have automatically. A business takes on a member of staff, it—which would include my constituency, because it is puts their files into HMRC and it is done magically by in the eastern region—it will not have the effect of HMRC. I can understand why that cannot be done and making people decide not to set up a business. why the complexity for HMRC would be too great—the Steve Hughes: Principally, the policy is about costs for HMRC would probably be too great. On a employment, not necessarily start-up. If you are going scale of other things compared with this, I do not see it to start a business, I do not think that it will come into being overly burdensome to a business. There are certainly the equation. If you are thinking about taking on your other things that are much more burdensome. first member of staff, however, then it will come into Steve Hughes: Businesses will take the administrative play. As you rightly say, it will be within the context of burden into account when they decide whether to adopt other matters such as employment regulation, the tax the scheme. I cannot see that burden acting as a disincentive system and so on. to companies. Priyen Patel: I should have mentioned one other Q31 Richard Harrington: Obviously, I hope that, in thing, which is the retention of records from previous the future, significant reductions in other taxes and years. Most businesses would, I hope, do that anyway, bureaucracy will be a major boost to small businesses. and their accountants would ensure that such systems The hon. Member for Luton South asked you several are in place. If it leads to businesses having to keep questions, and you mentioned the modelling that you records on file or on computer, it is good business have done of the number of jobs—I think it was 57,000 practice, even though it may be a slight burden. or 53,000—that would have been lost under the employer tax regime as proposed by the previous Government. I Q28 Mel Stride: As I understand it, the Bill creates a understand how you can model that from existing need for employers to establish that there is no contravention businesses, but the hon. Gentleman went on to ask you of EU regulations in terms of regional subsidies being whether you could model the number of jobs that applied. No company is allowed to have more than would be lost in regions that did not have the new £200,000 over a three-year period as a result of being in national insurance holiday—the east and London, for one region rather than another. Can you comment on example. I cannot see how that would work, because it that? Do you think many companies will be caught up is trying to predict who would not set up new businesses. in that? Do you think it is something that all companies You kindly offered to send him the figures, but I do not will have to think about and, therefore, will be onerous understand how you could do that—[Interruption.] in terms of the administration? Priyen Patel: In terms of EU state aid rules, £200,000 The Chair: Order. Mobile phones are interfering with would be a huge amount for a business to receive, the sound. They may be on silent, but please take them especially a new business, unless it was getting a huge away from the microphone. 15 Public Bill Committee2 DECEMBER 2010 National Insurance Contributions Bill 16

Priyen Patel: The research that we did before the and through Government bodies. All you have to do is election was on the 1% rise in national insurance have somebody sorting it out, but somehow that gets contributions: it was not on this policy. We found that lost along the way in certain policy implementation. 57,000 jobs would be lost in the SME sector from the 1% rise. We have not done any modelling on this issue, but we have done work that shows that it would have an Q34 Andrew Bingham: I take your point, but a micro- impact on the behaviour of businesses in those regions business—as they are called now—may not have time to that do not have it—where they start up and what their read the trade press and so on. The two people they employment intentions are. always see are the bank manager and the accountant, who is often part of a small business himself. In answer to your first question, we do think that it is a good thing, but hopefully as part of a package of Steve Hughes: Fair point. What I am talking about is policies that reduces regulation and tax burdens and getting that message to the accountants and through looks at other key areas such as infrastructure, broadband the banks as they are the people those small businesses and business rates. All those things have an impact on interact with first. what a business does and where. The most important thing is where the demand is, and where the marketplace Q35 Heidi Alexander (Lewisham East) (Lab): I have a for that business is. The business will want to be as close brief question relating to survival rates of small businesses. to that demand and marketplace as possible. My constituency in south-east London has a higher than average number of firms going out of business Q32 Andrew Bingham (High Peak) (Con): You said within the first year or the first two to three years. What earlier that business would only employ on demand, information do you have about regional variations in and that you do not actually think this would make survival rates and how do you assess the exclusion of them employ somebody. Have you not had any feedback London, the south-east and the east from the proposals? from members suggesting that if it was a marginal Do you see connections between this national insurance decision as to whether they would employ somebody or holiday and survival rates? not, this would give them the little bit extra that would Steve Hughes: I would not say that there was initially make them employ somebody—for instance, if a new too much of a relationship between the two. Ultimately, business wanted to employ a new salesman or wanted if a business sets up in an excluded area and does not to expand? survive its first two years, the maximum that it could Priyen Patel: It is what I call the trigger moment. claim over the first year would be £50,000. Would that What would trigger somebody to employ someone? £50,000 really put it out of business? I do not think so. This would do that, but only if there is a business return Priyen Patel: I agree. I do not see a relationship on that employment. Youhave mentioned a salesperson: between the two. I would echo what Steve says. a business may benefit from paying up to £5,000 less Steve Hughes: In addition, if a business is failing, NICs on the cost of that employee, but will that employee why would it take on 10 people anyway? bring something to the game? If it is a salesperson, will they make that £5,000 plus whatever the average sales return is for salespeople in that business? It is a trigger Q36 Heidi Alexander: I would not have thought that moment of sorts, but the main issue is demand. If the those businesses would necessarily be employing 10 people business sees a demand and wants to tap into it—and in their first couple of years. But I know how close to employ someone to do that or to help that business—the the breadline very small businesses in parts of London NICs holiday will help them. can be when they are setting up. I also recognised what the chairman of the Federation of Small Businesses said previously about many businesses in the south-east Q33 Andrew Bingham: Yes, that is exactly what I working below capacity—which was what was driving mean—a trigger. We are talking about getting the message my question—and the calculations that businesses make out, which a few of us are concerned about. I am not about whether they can continue. I just wondered whether sure how closely your organisations work with smaller the national insurance holiday would have some effect. accountants. Business start-ups do not go to the big Priyen Patel: John was talking about businesses running boys—the PKFs of this world—but to Mr Bloggs under capacity, and we have noticed nationwide that accountants in the high street, and they are the key businesses have been running under capacity for the last people to get this message across. As someone said three, maybe four quarters or so. But that is existing earlier, the first person every new business probably businesses. To use the same statistics for new businesses needs, apart from a sympathetic bank manager, is an is probably quite dangerous. I keep going back to the accountant. Do you work closely with accountants in point that a business will know it is in danger if demand your organisations to make them the message carriers? just is not there. That is the most important thing. Steve Hughes: From the chambers of commerce point of view, we have accountants within our membership. We have close links to the accountancy bodies as well. Q37 Heidi Alexander: But surely new businesses become I would like to make a further point on this. I talked existing businesses at some point? earlier about the communication and stakeholder Priyen Patel: Yes, but the work that we have done on engagement through Departments and people dedicated businesses running under capacity was primarily on to that. I do not understand how it can be so difficult existing businesses, not on just new and very young for them to get this message out. From my point of businesses, which I assume would have different statistical view, you just take a blanket approach. There are lines results. I cannot say that they would be different, but I of communication and you can go through trade bodies cannot guarantee that they would be the same. 17 Public Bill CommitteeHOUSE OF COMMONS National Insurance Contributions Bill 18

Q38 Kelvin Hopkins (Luton North) (Lab): You have Steve Hughes: As I said earlier, the approach to heard from my colleague, my hon. Friend the Member lobbying or representation for organisations such as for Luton South, about Luton being a special case. It is ourselves has fundamentally changed in the past two an area that has significant economic difficulties in a years. It used to be the case that you could go into a region that is relatively prosperous, so the boundary Government Department and request what you wanted problem affects us. without any kind of comeback on how you costed or I am more concerned about the point that you made implemented it. Now, it has got down to the nitty-gritty earlier about demand and that what really matters, of where you would find the money and the practical above all, is the level of demand for the services from policy implementation. Fundamentally, if you don’t small businesses. They depend on individual consumers, have an answer to that, you may lose credibility as an other larger companies and, indeed, the public sector organisation. Resourced as it is, as business or as for their demand. They are all going to be cut and, as of representatives, you have to concentrate on those areas yesterday, I understand, bankruptcies are up and where you can have the most impact, which, for us, is consumption is down, and you will be much more infrastructure spending, the tax system, etc. savagely affected by that than can be compensated for by marginal changes in the tax regime. Is that a fair The Chair: If colleagues have no further questions, it assessment? just leaves me to thank our witnesses for coming along. Priyen Patel: The reduction in demand energies of I’m sure your evidence will be very much appreciated in the public sector will obviously have an impact on the forthcoming sessions. Have a safe journey home. businesses. There is no doubt about that. Where this policy could come in is in helping a business that 2.6 pm already has an employment structure or plan to take The Chair: I invite our next witness, the representative somebody on and maybe cushion a loss in demand for a from Wenta, to take a seat. For the record, will you short period of time. That is quite a dangerous business introduce yourself to the Committee? plan to lead on, because you are taking somebody on who may not be as productive, in terms of achieving Chris Pichon: I am Chris Pichon, and I am the chief demand levels, as other employees would have been in executive of Wenta, which is the enterprise agency the past. acting across Hertfordshire and Bedfordshire. It is important that, where demand or invoices from all sorts of places reduce, businesses look at where else Q41 Mr Hanson: Thank you, Mr Pichon, for your they may go, what else can they do and at diversification. memorandum and for coming to the Committee today. That is the key thing for most of our members, which I want to focus on the issue of the national insurance are small and predominantly micro businesses. A lot of holiday, which is my main concern. In your memorandum our members don’t have regular contracts with big you said: Government Departments or big local public agencies—a “this is a divisive and almost unworkable scheme that will be lot of it is business to business—but a proportion will expensive to introduce and to monitor.” be dealing in one-off contracts with the local primary Would you like to expand on that for us? care trust, the local authority, fire brigade or whomever. Chris Pichon: I wrote the paper on Monday, so I have not had masses of time to go through all the detail. The Q39 Kelvin Hopkins: Would it help if whatever scheme paper is very much my understanding of the proposals is put in place was better targeted? Rather than on a and how they are viewed by my organisation and generally simple regional basis, it could be targeted, perhaps, on in the area that I represent. a local authority basis, so that somewhere like Luton My general view is that, if you are going to apply a could be more fairly treated, and a more prosperous scheme such as this, it should be fairly applied across area of the south-east—the Surrey heartlands or the country. When you start to draw lines and say that whatever—would not get the same cash benefit. the scheme applies only to certain areas—I stand by the Steve Hughes: Where do you draw the line, though? paper—it is divisive and it is unfair for those areas that As I said before, we can all point to areas within these are unable to gain the benefit, if any benefit comes from regions that suffer from higher rates of unemployment the scheme. Just to draw a line and say that it is not and that are more reliant on the public sector than going to be applied across London, the south-east or those areas that are included within the scheme. Ultimately, the east is unfair. Kelvin said just now that areas in all you do by trying to drill down into those areas in Luton definitely needed help, and there are always the exempted regions is increase the complexity of pockets that need such assistance. So when you just the scheme. I know it is not necessarily ideal, but the draw a line arbitrarily and say that a scheme will apply straightforward nature of the scheme in the regions to only one area of the country, I cannot see any where it exists far outweighs the complexity of implementing fairness in that. it at a very targeted sub-regional level. Q42 Mr Hanson: There will be a range of discussions Q40 Kelvin Hopkins: In the 1970s, and possibly before, on a number of alternative models for the distribution Labour Governments had much more substantial and of the scheme, as opposed to the current model before generously funded regional policies than have existed the Committee. There will be, for example, the model of ever since. Is it not in your interests to lobby Government a universal scheme across the whole United Kingdom. to introduce much more regional assistance of the kind There will be the model of a scheme that applies to that was produced by former Labour Governments, specific local authorities. There will be a model that which would help business and moderate unemployment, applies across the country in areas of high public particularly in those areas of highest unemployment? sector employment that might lose jobs. There is the 19 Public Bill Committee2 DECEMBER 2010 National Insurance Contributions Bill 20 model that applies across the country in areas of high operate from home in the early months. You only get unemployment. Amendments have been tabled that reflect employment when they are actually getting into growth that. Do you have a particular view on whether or how and to a point where they are trading up and employing the Committee should approach any of those potential somebody becomes an option. It certainly does not solutions, as opposed to the current model? happen in the early months. Chris Pichon: In my view, if you want to make something work, you have to make it workable and you Q46 Gavin Shuker: You have differentiated between have to understand it. I have read through the certain local contexts within Bedfordshire and Hertfordshire. documentation and listened to your explanation and Would you say that that remains broadly true across the your differentiation between what is a business and how entire east of England, and that there is a lot of diversity? the scheme would and would not apply, and I have to Chris Pichon: Absolutely. The eastern region is very say that it is incredibly complicated, which is why I diverse. Up in Norfolk, you have a vast area of only commented in my evidence that you are making a green space and yet, down in Essex, in Basildon and scheme that is very complicated to understand. For Southend, there are areas where it is the complete people who are running their businesses, who are opposite. So, across the whole of the east, there are bombarded with information and bureaucracy, this is, areas of high deprivation. Just to ignore them, saying, frankly, just another turn-off. “You are not going to cover that area with a scheme such as this,” is unfair. Q43 Mr Hanson: If you were the Minister—I would not want to impose such burdens on you—would you Q47 Gavin Shuker: What kind of proposal do you simply extend the scheme to cover every region of the believe would really help those areas? Is it a national United Kingdom? insurance holiday? Chris Pichon: My honest opinion is that there should Chris Pichon: I have also commented on the figures be a consistent and long-term programme, which is not or the estimates as to what it would cost, or what have changed by the whim of whatever every year, or every you. Just reading them, I was bemused as to how you two years. One of my criticisms about Business Link, can estimate those costs. If you are going to run such a which was a good idea in its original concept, was that scheme, it should apply across the country; you either its objectives were changed so frequently that it did not do it as a whole or not at all. I am not sure that it will do always meet the criteria that it was set up to achieve. a great deal of good, in a sense, or achieve its objectives The problem is that we are overburdened in our area by if it applies only to certain areas. “initivative-itis”. You get set up to run one programme, which runs for a short time and suddenly, before you Q44 Gavin Shuker: First, I congratulate you on being know it, it has gone and there is something else to be set from Bedfordshire and Hertfordshire; it is a very nice up. That sort of thing is disruptive, and unless there is a part of the world, as I understand it. One reason why long-term programme of support, I cannot see it having we want to speak to experts in their field is to get a a massive impact or effect. picture of what it is like locally, where they are. Can you explain to the Committee what kind of variation there Q48 Gavin Shuker: Looking at the proposals we are is between different areas of Bedfordshire and Hertfordshire, considering in this Committee, do you believe they fulfil in terms of public sector employment, unemployment the criteria of a long-term and consistent approach to and that kind of thing? taxation for business, national insurance and so on? Chris Pichon: Yes. We have offices and operate across Chris Pichon: Not really. Hertfordshire, in diverse areas, from Watford to areas in Potters Bar. We cover areas that have very low Q49 Matthew Hancock: I have a couple of brief unemployment, such as Chorleywood but, on the other questions. You said that you did not think any new hand, you can go to a place such as Borehamwood, businesses employed anybody. You say in your written which has very high unemployment. We work in Luton, evidence that that is in the first few months, but this and I agree with what Kelvin was saying—there are proposal is for the first few years. Do you therefore areas with real pockets of deprivation. We run the reject the analysis that was just confirmed by the British innovation centre in Hertfordshire. It is based in Stevenage, Chambers of Commerce and the Federation of Small which has a very high level of deprivation in an area Businesses that 800,000 employees will be positively called Bedwell. We see areas of deprivation, and we affected by the proposal? have delivered programmes that try to target such areas— Chris Pichon: I can only go by our experience of frankly, it is very difficult. For example, the SRB programme operating across an area the size of Herts and Beds, was very targeted, but it is difficult to achieve long-lasting where we have helped hundreds and hundreds of people results where you try and do it by postcode, or whatever. to start up. Very few actually get into employment. It does not work. Q50 Matthew Hancock: But you don’t dispute the Q45 Gavin Shuker: Will these proposals help new number across the country? businesses to start up in the areas of deprivation that Chris Pichon: I am not in a position to dispute that. If you have talked about? that’s what they are giving you, then they’ve obviously Chris Pichon: I think I have commented that I do not got that. It’s not our business to get into that. see a business starting just because there is a bit of a national insurance tax advantage. I have also commented Q51 Matthew Hancock: Okay.In your written submission that, in our experience, very few start-up businesses you said that the best thing would be to abolish employers’ actually employ people. Most, or almost all of them, national insurance contributions completely. 21 Public Bill CommitteeHOUSE OF COMMONS National Insurance Contributions Bill 22

Chris Pichon: That’s a personal view. I have shared it The Government, as you know, were faced with the with some of my colleagues at work. I have tried to biggest debt in history, and all of the other problems. explain very briefly and just given a picture. I understand There is already a big tax burden on business, and it it collects a lot of money, but there are downsides to would seem to me that, although the holiday has that particular element of taxation. It could be used for imperfections—regional imperfections being one of them, other things. I have given a demonstration of where I which we are discussing today—fundamentally, in the think it could be applied. short term, it was all that could be done, because of our burden of debt. Do you agree with that statement? Q52 Matthew Hancock: National insurance raises Chris Pichon: I agree that the state of the country’s £95.5 billion. How would you square that circle? finances is dreadful. I wrote the paper to be thought- Chris Pichon: How do you mean? provoking, if you like. I was saying that there are other ways that you might want to think about in the longer Q53 Matthew Hancock: If you were to abolish it term. It is not possible to do it now, but I did not write it completely then you would have rather a large hole in with the intention of saying that it has to be done now. the finances. It is about getting people to think that there are other Chris Pichon: There are other ways in which the ways of creating taxation. You have different objectives, Government can get income back such as income tax, do you not? You have, as I said in my evidence, a corporation tax and other taxes and by encouraging problem between the minimum wage and social benefits, and getting growth in the economy, which will bring and you have difficulties with the levels of business benefit, and by reducing unemployment. taxation. I wrote it to be a little provocative and suggest that we should consider such things. There might be an Q54 Matthew Hancock: So we should treble corporation inconsistency, but I accept that it is not a perfect tax in order to abolish national insurance? document—I had very little time to write it. Chris Pichon: I am not saying that you should treble it. I am saying that there are alternatives. When I first started running my business back in the ’80s, national Q57 Richard Harrington: On the narrow example of insurance was not at the level it is today. To be honest the holiday, the established figure is that to extend it to with you, it is being used on a political basis to avoid the whole country would have cost an extra £650 million. publicity around income tax. That money would have come, if I can localise it, from those very organisations—such as CVS and the others Q55 Matthew Hancock: You have said that employers’ —that you mentioned. That is the problem that the national insurance should be abolished, and here is a Government had. proposal to do so in a limited area. But then you Chris Pichon: Okay, I am not going to sit here and describe that proposal as a turn-off. How do you square argue about it. that circle? Chris Pichon: There are different elements of it. First, Q58 Kelvin Hopkins: First, I found your paper really I believe there is an unfairness if you apply it only to interesting. It was one of the most interesting papers I certain areas and not across the country. But as an have read for a long time. I agreed with much of it, and, overall statement, I think employers’ national insurance as you say, it was thought-provoking. The point that is an unfair tax on employment. It actually has a you make is that shifting the burden of taxation from detrimental effect within the economy. An organisation employment to profits and to incomes would help generate like ours, on our income and the moneys that we employment. Generating employment would reduce the generate through our operation, paid back to the level of benefits paid out and increase the level of tax Government last year about £110,000 in employers’ paid in, which would help reduce the deficit and boost national insurance. As a not-for-profit company, if we the economy in many ways. That is very helpful, and I were not paying that we could do an awful lot of good must say that I do not find much with which to disagree. with that money and a lot of other organisations could Is your basic argument that marginal tax incentives do the same. That is what I am saying in that statement. unfairly distributed across the country will not help Q56 Richard Harrington: Chris, thank you very much very much? for this paper. Unfortunately, some of us received it Chris Pichon: Yes. quite late. Having just read through it, I feel I should press you on what I fear is a major inconsistency in it. I am not arguing for or against it, but half your paper Q59 Kelvin Hopkins: You also make the point—this calls for the abolition of the employers’ contribution to is a point that I made—that the voluntary sector is national insurance. We referred to it during the election currently in a state of meltdown. That is not going to do as a job tax, and I accept the basic premise of this. But much for the big society, is it? the other half of your paper refers to organisations in Chris Pichon: I made that comment because, over the Watford, which I am familiar with, and elsewhere that past two or three months, everywhere I go I have heard you sit on. The main complainants seem to be people about what the voluntary sector is feeling at the moment, who rely on public funds to operate, CVS being a good which I virtually quoted verbatim. I have mentioned all example. I feel there is an inconsistency there. That links the various local strategic partnerships with which we with the holiday that the Government have announced, are involved and with which I am involved. I do not because many people in Government—in fact, many want to get political, because we are a non-political people on both sides of the House—would, in principle, organisation, but I am relaying the view that the voluntary be in favour of reducing taxes as much as possible to sector is going to struggle immensely from April next incentivise business. year, which is a pity. 23 Public Bill Committee2 DECEMBER 2010 National Insurance Contributions Bill 24

Q60 Kelvin Hopkins: The voluntary sector is akin Q67 Stella Creasy: You would not differentiate between to small business in many ways, because voluntary the private sector and the voluntary sector in this capacity, organisations operate like small businesses in many in terms of whether it will have an impact on employment ways. rate? Chris Pichon: The voluntary offers employment prospects. Chris Pichon: I do not think that you can differentiate I am talking about it as an employment area rather than between them. If you have employment costs, you have as a small business. It also makes contributions through employment costs, and are they different between a employers’ national insurance. small business and a voluntary sector organisation? It may have more impact on how that voluntary organisation organises its funding, but I don’t think there is any Q61 Kelvin Hopkins: Have you looked at what other difference. countries do in terms of taxation? The successful ones, such as Scandinavia, probably do it very differently to Q68 Stella Creasy: The other thing that your note us. says is that: Chris Pichon: I am sure that there are plenty of “There are many businesses that are on the brink of closure”. examples everywhere if we look hard enough. There is What do you think we could be doing to support those always somebody doing something well that we could businesses that are on the brink of closure? Are there learn from. things that we could do on national insurance that might help or hinder them? Q62 Stella Creasy (Walthamstow) (Lab/Co-op): I Chris Pichon: I just made that point as an additional want to follow up on the discussion about the voluntary point. We hear about the difficulties of access to finance sector, because one of the things that we are also through banks. We see that regularly. We have a number expecting in the next couple of years is for some new of business centres across Hertfordshire, and we have voluntary sector organisations to be organised—the nearly 300 businesses operating between those centres, talk of the big society is about exactly that. Could you so we are in contact with small businesses all the time. talk us through your experience of what makes voluntary There is no question but that access to finance for those organisations develop, and whether you think any of businesses is very difficult at the bottom end. these proposals will help or hinder that? I was with Barclays bank at a function the other Chris Pichon: That is not a question, is it? Let us start evening, and even people employed there were saying with what makes them work. I would think that it is out that they recognise that, at the lower end, it can be more of need. They spring up because there is a need, and difficult to access finance than at a corporate level. people form together— From the businesses that we’ve seen in difficulty, I really do believe that funding is a major issue for them. If there were ways of raising money other than through Q63 Stella Creasy: To be clear, I meant the practical taxing businesses on jobs, it would be a significant help aspects of actually setting up a voluntary sector organisation to them. to work in a local community, in terms of having staff, managing budgets and things like that. Do you think Q69 Stella Creasy: What are the sizes of the firms that some of these proposals will help or hinder that? that you are talking about? On average, how many Chris Pichon: I am not sure that I am actually in a employees do they have? position to answer that. I think they will find it very Chris Pichon: Well, the vast majority of businesses in difficult. We have operated with a social enterprise the country, as you will know, employ fewer than 10 people. adviser, and we have been providing support and help to I think 96% of all businesses operating employ fewer social enterprises as they start. It is difficult, because of than that number. It is a vast number. the nature of what they are trying to do, to get them to understand the elements of business in terms of their Q70 Stella Creasy: So they are the sorts of businesses survival and that they need to create surpluses. They that this new start-up holiday would apply to if they cannot just survive on grants. were new, but because they are existing, it will not. In terms of the jobs in your local area and the small Q64 Stella Creasy: Do you think that if this proposal businesses that you are working with, do you think that for an NIC holiday were applied to new voluntary it is more likely that we would be able to generate jobs organisations and new charities, that would be beneficial? within those organisations or by saying, “Let’s start again”? Chris Pichon: Well, it would be, assuming that they would employ enough people to get that benefit. They Chris Pichon: I don’t know. Are you saying that this still have to exist and get started in the first place. I do holiday is actually going to be a job creation scheme? Is not think that you start a social enterprise on the back that what you’re saying? of a tax benefit. Q71 Stella Creasy: No, I’m trying to understand from you. One of the ideas behind this proposal is that Q65 Stella Creasy: What about a not-for-profit voluntary it will encourage businesses to take on employees in new organisation? start-ups. I am trying to understand the other areas Chris Pichon: The same applies. where we might be losing employees. Chris Pichon: I listened to the last bit of the questioning of the two previous witnesses, and they were both Q66 Stella Creasy: You would not see any difference? saying that employment is not driven by that. I agree Chris Pichon: Not a lot, no. with that. 25 Public Bill CommitteeHOUSE OF COMMONS National Insurance Contributions Bill 26

Q72 Stella Creasy: I am trying to get your sense of to make. I am still slightly confused about your views on this as well. whether it should apply to the whole country or only to Chris Pichon: I agree with what they were saying. I certain regions. It is interesting to note that you would think employment is driven by business need rather gladly take anything that is on offer, even if you think it than just by tax advantage, and I do not think the policy is of minimal value. You have mentioned LEGI and will make any difference. It will not come into their objective 1; over the years we have had enterprise zones, thinking: it would not come into my thinking that I assisted area status and endless initiatives from Governments should employ someone because I have that benefit. It since pre-war days, all of which have distorted the is about asking whether the business needs them, and market to some extent. Are you actually saying that you whether there is a need within the business. If there is a want a complete free market and you do not want any benefit to it, I would probably do it. handouts at all? Chris Pichon: My belief is that there should be support Q73 Mel Stride: You mentioned that you felt that this for start-ups and I have thought that for a long time. It policy was unfair, because it is treating different regions does not matter whether it is a start-up in Surrey or in of the country differently. There is some element of Barrow-in-Furness, if it is a new business it may need consensus across the various parties here in Westminster some help, and, if it is there, it should be available for that regional policy is important, and that parts of the all. I have never thought it fair to be so selective about country need a bit of extra help compared with others. where such schemes apply. My view is that you should Inherent in that approach of regional policy is the fact apply them across the piece or not at all. that by definition you will treat some parts of the country differently from others. Are you, therefore, The Chair: If there are no further questions, I thank against regional policy per se? Is that fundamentally our witness for coming along. If your objective was to what is driving your objection to this policy? be thought provoking, you have certainly achieved it. Chris Pichon: In some ways, yes, I am, because I don’t So thank you for bashing through the weather to come think there is any fairness to it. I think that if you are here and have a safe journey home. going to run a scheme it should apply to everyone. I do not think that it is fair to select certain areas and omit 2.36 pm others. Q77 The Chair: I now invite representatives from the Treasury and HMRC to take their seats. Thank you for Q74 Mel Stride: So you would be against any form of coming along and being so patient. Again, just for the regional policy—this or any other. It would make no record, could you introduce yourselves? difference how it was framed: it would fundamentally Mr Gauke: David Gauke, Exchequer Secretary to the be wrong. Treasury. Chris Pichon: I have been involved with Wenta for Sam Mitha: Sam Mitha, assistant director, HMRC. nearly 16 years and I mix with colleagues from other David Owen: David Owen, head of national insurance parts of the country, particularly from the north and policy at the Treasury. the north-east. We often banter that we have to be far more enterprising because we do not get anything. We have not benefited from objective 1 or objective 2 funding, Q78 Chris Leslie: Good afternoon, gentlemen. Thank or local enterprise growth initiative funding, or whatever you for coming to the Committee. Mr Owen, am I right has been given out. We have had to create the opportunities in my understanding that, for the annual changes to from our own resources. In some respects, by throwing national insurance—the indexation for employers— the money at it you disincentivise innovation and the like. If indexation amounts are typically publicised and announced, you are going to have a policy, I think it should apply to roughly speaking, in the autumn period? everyone, and our company believes that too. David Owen: Yes, that is right.

Q75 Mel Stride: One thing that has confused me is Q79 Chris Leslie: Have we had that announcement in that on the one hand you seem to be arguing that this the autumn forecast issued by the Chancellor last Monday? particular policy in the Bill is not going to make a huge David Owen: The confirmation of the indexation has difference to employers—in other words, it is not really not yet been announced. conferring any particular benefit, as such—but you seem to be extremely keen to have it along with everybody Q80 Chris Leslie: Is there a plan for the date when it else. Why would you want something that is not actually— will be announced? Chris Pichon: If you are going to do it, and if you feel David Owen: I would expect it to be very shortly. there is a need to do it—I have said that I have not had a massive amount of time to spend going through every detail of it, but I was asked to come down and make a Q81 Chris Leslie: Could the Minister confirm when comment, and that is what I am doing—introduce it for shortly will be? the long term. Otherwise, what real benefits do you Mr Gauke: We anticipate it to be any day in the next expect to get out of it? Programmes that are not there two or three parliamentary days, which is consistent for the long term will not have much impact anyway. with the usual timing.

Q76 Martin Vickers (Cleethorpes) (Con): My thoughts Q82 Chris Leslie: Do I need to wait till we get into the are similar to those of my colleague Mr Stride, and to Bill proper next Tuesday to know whether you are some extent you have answered the point I was going planning to pursue the normal practice of the Rooker-Wise 27 Public Bill Committee2 DECEMBER 2010 National Insurance Contributions Bill 28 amendment? I know that is more related to personal Q90 Chris Leslie: But Mr Gauke, you are happy to income tax indexation, but that was a retail prices index publish that tracking information so that we can see the tradition. I think it was written into statute, was it not? impact of the redeployment on employer NI satisfaction Mr Gauke: I think that is right. I believe it was one of issues generally? the Finance Acts in the late 1970s. The details will be Mr Gauke: Well, HMRC is being much more transparent revealed by next Tuesday. I anticipate that you will have on the information that it is producing across the board, all that information, which will answer your questions. and we will continue that. HMRC will continue to reveal more information as to the service it provides and Q83 Chris Leslie: Mr Owen—actually I do not know service satisfaction. I can confirm that the thresholds whether this question is to you or Mr Mitha, but I ask it were announced earlier today. of the relevant person—the regulatory impact assessment of the Bill suggests that 240 extra staff will be taken on Q91 Chris Leslie: Were they uprated by the consumer to implement the national insurance holiday. Is that price index or retail price index? figure correct? Mr Gauke: They continued in the usual practice. Sam Mitha: The figure is correct, but they are not additional staff. Staff are being redeployed from existing Q92 Chris Leslie: Which is, Mr Owen? work to undertake work on the national insurance holiday. David Owen: Ordinarily the retail price index is used when there has been no policy announcement that differs from that. Q84 Chris Leslie: From where will they be taken? What tasks? Sam Mitha: They belong to the national insurance Q93 Chris Leslie: And the announcement is— and employers office, where they deal with national Mr Gauke: In a written ministerial statement today. insurance and employers issues. Q94 Chris Leslie: Okay. Thank you. Q85 Chris Leslie: So 240 staff out of how many will Mr Gauke: I knew I had cleared it, but I wanted to deal with this? make sure that it had been announced. Sam Mitha: About 4,000. Q95 Chris Leslie: In terms of the application process Q86 Chris Leslie: So quite a chunk. Which specific and the new unit that is being created, what will be your elements of response to employers will be diminished in target for turning round a decision when a new business order to create that unit of 240? applies and for letting it know that it qualifies? Sam Mitha: The office that they have been drawn Sam Mitha: At the moment we are able to turn them from deals with a large number of things. When the round almost immediately because, as you can imagine, national insurance holiday was created, we set up a businesses are still getting to hear about the holiday. dedicated team which drew staff from across the piece, but mainly staff experienced in dealing with employers’ Q96 Chris Leslie: How many have you turned round national insurance contributions. Given the size of the so far? office, it was simply a case of making sure that the people who are most suitable for the task were drawn Sam Mitha: So far it is 1,100. for this activity and that other work was appropriately reprioritised. Q97 Chris Leslie: And your aim over the lifetime of this holiday is how many? Q87 Chris Leslie: But it would be impossible to take Sam Mitha: The forecast number of likely applications 240 people into this new task without adversely affecting is 400,000. some of the responsiveness to employers on other NI inquiries, would it not? Q98 Chris Leslie: So you are not really on course to Sam Mitha: Well, the normal response to reallocating reach that 400,000 level? staff is to make sure that we avoid any kind of adverse Sam Mitha: We always expected that we would get impact on dealing with customer relations. the applications when new businesses started preparing their tax returns or their accounts. Setting up a new Q88 Chris Leslie: So how will you measure whether business is obviously a very hectic activity and tax is not there will be any adverse impacts? always foremost in people’s minds. This is almost certainly Sam Mitha: We keep indices of levels of customer something on which they would be relying on help and satisfaction and customer response. With the launch of support from their tax advisers. the holiday, it has not been necessary to redeploy all those staff to this work straight away. Q99 Chris Leslie: Would it be out of order to set yourself a three-month target for guaranteeing a turnaround Q89 Chris Leslie: So over the three years of this of an application to a decision? scheme you will be able to track employer satisfaction Sam Mitha: In terms of responding to applications, I and that information will be published? would be disappointed if we were not able to turn them Sam Mitha: Some of it will be published, although I around far more quickly than three months. As I say, do not know whether it will go down to the level of at the moment we are turning them around almost detail of measuring the impact of the redeployment immediately on receipt because we have not had a very of up to 240 staff. large number of them so far. 29 Public Bill CommitteeHOUSE OF COMMONS National Insurance Contributions Bill 30

Q100 Chris Leslie: What are your plans for advertising number of features which are obviously not replicated and disseminating information on this scheme? in the present arrangements, because they had had an Sam Mitha: We have been doing quite a lot of work impact on people’s individual national insurance liabilities. on communicating and marketing the new scheme. This scheme was designed with a view to being operational Obviously our preliminary focus has been on making very quickly, because as you know, it was announced in sure we have the legislation ready. But now that we have the emergency Budget. We were able to have guidance the legislation and the guidance ready this is the range on the new scheme ready by 6 September, so that new of the kind of things that we have done: we have a new employers were able to take advantage of the scheme employers’ helpline and anybody phoning that gets to almost immediately. hear a recorded message telling them about the NICs The new scheme does not require employers to do holiday from the time that it was announced. All new much more than make a number of very simple decisions, employers receive fliers together with the material they for example: is it really a new business? Is it located need to set up a pay-as-you-earn scheme telling them outside one of the excluded regions? And, has it actually about the holiday. We have been in discussion with taken on an employee after the 22 June? So, in terms of employer representatives to ensure that they pass this simplicity, the new scheme is a completely different information through their trade bodies and other groups kettle of fish from the scheme that was operated in the to people who might be in contact with new employers. mid-1980s, which, as I have said, had an unhappy Other more specific activities have included the fact that record. some HMRC offices run seminars for new businesses to On levels of take-up, the scheme will effectively last tell them about what their responsibilities are going to for three years. Although we can bring the scheme to be. Since September, those seminars have included details the attention of new employers, there is very little we of the holiday. Occasionally, Companies House runs can do, because it is a scheme that people have to apply events for newly incorporated companies and again, for. We cannot actually force them to apply for it. We since September, we have made sure that the holiday has know from experience that new businesses have a pretty been mentioned to such companies. hard time keeping their head above water, without We communicate with employers through a bulletin, having to worry about whether they are claiming everything which is sent out regularly by HMRC and has included that they might be entitled to. We are fairly sure, however, material on the NICs holiday. One of the key groups of that the employer NICs holiday will be something that people with whom we would want to work with any new professional advisers will be bringing to the attention of tax initiative or with any new NICs initiative is agents, their clients, because it is definitely something that will and a very large proportion of new businesses are relieve them of additional liability. It is also something professionally represented. So, in our regular newsletters that we are hopeful will influence them when it comes to to agents—and one in particular called Working Together— making decisions about whether, and, if so, when, they there is material on the NICs holiday. We have seen that take on employees, because they will know for a fact the leading tax advisers and NICs advisers tend to that the level of employer NICs that will be payable publish articles on new initiatives; the latest issue of when taking on a new employee will be mitigated if they Taxation includes an article by Peter Arrowsmith, a are in one of the targeted regions. leading authority on national insurance, in which he describes the holiday and draws attention to it for professional advisers. Q102 Matthew Hancock: Earlier, we heard from two of the country’s leading business organisations—the We have been in touch with the British Bankers British Chambers of Commerce and the Federation of Association, and we have had contact with the Department Small Businesses. One said, “I have no doubt some for Business, Innovation and Skills, which has special start-ups will be incentivised to take on new people.” responsibility for small businesses. Following one of the The other said that, in some of their work, “60% of expert witnesses, we will also follow up the reference to small and new companies had said that a cut in employer the BIS mentoring scheme to ensure that we highlight taxation would trigger them to take on more people.” the holiday for people who might have an interest in it. Mr Gauke, could you explain what impact you think that the national insurance holiday will have on generating Q101 Chris Leslie: I know that some of the team at new jobs? the Institute of Chartered Accountants in England and Mr Gauke: Well, the estimate that we have made is Wales have recently written about another national that there will be, as we have heard, something like insurance holiday or similar schemes in the past in quite 400,000 businesses that will make use of the holiday. sceptical terms, particularly when thinking about the Our estimate is that that will average out at two employees fact that a lot of hurdles have to be jumped. Are there per employer. echoes of such a scheme? Are you confident that your 400,000 will be reached? Are you confident, for instance, that by the end of this calendar year, you will have Q103 Matthew Hancock: Is that two extra employees reached a certain proportion? What will that figure be, per employer? and what lessons do you think can be learnt from the Mr Gauke: No, that is two who will make use of it. scheme that ran in the past? The analysis of the behavioural impact, the value-added Sam Mitha: Obviously, when the new Government that is at the heart of your question, is quite difficult to came in and said that they wanted to introduce the make an assessment of at this point. That is the two per NICs holiday, we looked very closely at the past experience employer that we estimate at the moment. On behavioural of running a holiday. The present NICs holiday is quite impact, we will see. A common-sense approach would different from the original scheme, which was confined suggest that it will have an impact, but, of course, what to people who had been unemployed. It included a we are looking at here is bringing through a dynamic 31 Public Bill Committee2 DECEMBER 2010 National Insurance Contributions Bill 32 impact of a tax cut. There is always a degree of uncertainty Mr Gauke: Over the three years the net cost is about that, so we have been relatively cautious. We are £940 million. not making bold or unsubstantiated claims as to what the behavioural impact will be, but we will be keen to Q107 Mr Hanson: Have you set a cap on that net study this and see what the impact is. Common sense cost? If, for example, 500,000 businesses took up the would suggest that it must be helpful for a new business, scheme would the Exchequer put a £940 million cap on at a time when, perhaps, it will be vulnerable, to have the top of the scheme? greater confidence to take on staff when they are not Mr Gauke: The £940 million is an estimate on the having to pay employer’s national insurance contributions basis of the assumptions that we talked about earlier as well, which is a cost on labour and one that is likely about the number of businesses and the number of to deter them taking on employees. employees. That is our best estimate as to what the cost would be. It is not a cap, as such; if we were seeing Q104 Matthew Hancock: The flip side of more jobs different numbers then the cost may vary. being created through tax breaks, of course, is that if you put taxes on employers up, they might take on Q108 Mr Hanson: If, let’s say, two years downstream fewer people. The FSB mentioned their estimate that the scheme appeared on current estimates to be costing the so-called jobs tax would have cost 57,000 jobs, and £1.3 billion as opposed to £940 million, would it continue the Bill is part of the process of trying to reverse that. into its third year or would it be capped at £940 million? Do you agree with that assessment? If not, do you have Mr Gauke: We would continue with the scheme as it a separate Treasury assessment? is. Of course, were we to see greater take-up—returning Mr Gauke: Unfortunately, I am not privy to the to one of the earlier questions—it is likely that we advice that was given to my predecessors as to what would be seeing some evidence of a significant behavioural they anticipated that cost in jobs would be. I have no impact, if we were seeing a lot of start-up businesses in reason to doubt that estimate of 57,000 jobs that would the relevant regions. That would have some positive be the cost if we did not take some steps to reverse the effects. As with most policies, we are not putting in a increase. Clearly, as you make the cost of labour more particular cap. That is our estimate as to what the cost expensive, fewer jobs will be created, and that is perfectly will be. sensible. The intention behind the second part of the Bill and the intention behind the increase in the threshold Q109 Mr Hanson: Other schemes that have been in employer’s national insurance contributions is to designed to help stimulate the economy, such as the car reduce the cost of labour compared with the situation scrappage scheme, have taken place over a defined that we inherited. period of time, using a defined resource and within a Q105 Matthew Hancock: Finally, we have heard a lot defined market, whatever that market might be. I am this afternoon about the fact that there is a regional interested in what the logic is behind having effectively breakdown in the coverage of the NICs holiday, and an open-ended scheme—based on the estimates, I accept— there were questions about whether it would be better that could cost more or less than the £940 million. What to be more targeted. The employers’ organisation said is the logic behind that assessment? that that would make it more complex. Have you made Mr Gauke: I think it is very important in these any assessment of how far people travel in order to circumstances to provide businesses with the certainty work? For instance, I know that lots of people from my that the scheme is there, that it will be a certain way and constituency travel to Cambridge, which is in a different that if they act in a particular way the scheme will be county. Have you made an assessment of how much the available for them. If we were to say, “It’s £940 million, ability to work somewhere different from where you live and once that last pound has been spent, sorry, old boy; ameliorates the impact on pockets of high public sector you have set up your business but you’re not getting any employment? more money,” I think that would undermine the whole Mr Gauke: I think that is an important point, because purpose of the scheme. the fact is that labour markets tend to be larger than, for example, just a local authority area. Depending on Q110 Mr Hanson: But the point I’m making is that in where you are, they can be larger than a county. Were your answers to my written questions you have estimated we to try to target this on pockets—I understand that that the cost of including London, the south-east there will always be an argument over that, but we have and the eastern region in the scheme would be an extra to balance simplicity with targeting and we have settled £660 million. In theory it would be possible, therefore, on a regional approach—particularly if you look at to have a scheme that cost around £1 billion, which was London, the south-east of England and the east of available to the whole of the United Kingdom but England, you often find that pockets of relative poverty which was operated over a shorter period of time. There tend to be next to areas of relative affluence. Those is no bar to that, is there? areas will certainly be within the range in which people Mr Gauke: Well, our view is that the £940 million is would travel to work. We have to bear in mind that in the scorecard; that is based on the analysis that has trying to target something on a particular local authority been done by HMRC and the Treasury. If we were to will mean that some of the beneficiaries could well be shorten the time period, we would come back to some people living in the suburban area next to it, which is of the earlier evidence that sometimes it takes businesses actually quite prosperous. I think we are getting the a little while before they start taking on employees. It balance right in that context. may take a little while for awareness of the scheme to spread and to start to influence behaviour and encourage Q106 Mr Hanson: Could I just ask, as my first start-ups. We have to make a judgment on that, but we question, what is the net cost to the Exchequer over the think that three years is about the right length of time period of the scheme? for the running of the scheme. 33 Public Bill CommitteeHOUSE OF COMMONS National Insurance Contributions Bill 34

Q111 Mr Hanson: What it the logic for excluding for a moment, Three Rivers district council, which London, the south-east and the east? borders Watford, is one of the local authorities in my Mr Gauke: I have already talked about why I think constituency, and within that largely prosperous local trying to do smaller pockets might be ineffective, but authority is one area, South Oxhey, that is quite deprived. the fact is that those regions already have strong private If you were to try to do it on a local authority basis, I sectors and are less reliant, by and large, on the public think people could also say that it was a deprived ward. sector as a whole. The creation of start-up businesses If you start looking at this on a ward basis, you start to tends to be faster in those regions and conversely slower get more and more complicated, more and more distorted in other regions. As we accept the principle of regional and you have a less effective system. I think you would policy, and we also accept that resources are constrained, hear more complaints about boundary disputes and we have taken the view that we should target the scheme so on. at those regions excluding the three that I have already mentioned. Q114 Mr Hanson: I have just one final question. We will return to all of these issues in detail over the next Q112 Mr Hanson: If I said to you that 23 of the top week. In the event of the take-up not progressing at the 100 constituencies for public sector employment are in rate you have anticipated, would you consider expanding London, the south-east and the eastern regions, or if I the scheme to London, the south-east and the eastern said that, at 9% in November 2010, London has the region? highest unemployment of any region in the United Mr Gauke: We are putting this into primary legislation. Kingdom, is there a logic to excluding those regions? If we found after a long period—not just in the first few Part of the logic for this measure is that public sector months—that the take-up was not as high as we anticipated, employment is potentially one of the areas of loss; one could make the point that the policy was not being another part of the logic was unemployment. We could as effective as we had hoped, although the costs would go through the deprivation index or a number of other be lower, as you have suggested. That would be an measures that suggest that there are very severe pockets argument against extending it. Because there are particular of unemployment or deprivation in which people do problems and issues that we want to overcome in areas not necessarily have the ability to travel to other areas, where the public sector takes a bigger part of the or, indeed, are within the criteria that you have set for economy, I do not think we would look to return to this. other regions being included. If, however, we found that this had a substantial, dynamic Mr Gauke: It is very important that we try to tackle effect on our economy, we would need to look at this deprivation and poverty wherever they are. There is a again because it would suggest that it was a very effective question of whether the NIC holiday is a particularly method, but I do not want to make any promises to the useful method for dealing with pockets of deprivation Committee that we would extend it. in, for example, London. I fully accept your point on unemployment in London, but London is also one of the places of enormous job creation. Many people Q115 Mr Hanson: A final, final question from me living in the south-east of England and the east of then on existing businesses. This is obviously for new England work in London. If we were to include London businesses. Did you in preparing this scheme undertake within the scheme, it might help start-up businesses as a any costings or did officials make any proposals for whole, but I am not sure that that is the most effective consideration by Ministers in relation to existing businesses way to deal with such pockets of deprivation in London. of a certain scale, in terms of numbers of employees, I think that there may be other ways of doing that, turnover and time in business? whether that be through the regional growth fund or Mr Gauke: The focus has always been principally on welfare reform, which are more likely to be effective in start-up businesses. The reason for that is that we would tackling deprivation in London. run into what the economists would call a dead-weight cost. Q113 Mr Hanson: Did you cost or develop any alternative scheme, either at official level or at ministerial Q116 Mr Hanson: The focus was on it but did you level, before settling on the scheme that excludes London, ask for any coverage? the south-east and the eastern regions? Did you look at other options and models? Mr Gauke: We did and consideration was given to whether it could be extended beyond that. We were Mr Gauke: We looked at doing this nationally. We always conscious that this scheme would become very did not proceed with that because the cost would have expensive if we applied it to existing businesses. The been greater. We considered the option of looking at intention is to encourage start-ups. this, as you are suggesting, at a much more localised level, but that ends up being more difficult to administer and it is more likely to be distorted—one side of a road Q117 Mr Hanson: It would only be expensive, Minister, might get it, but the other side of the road might not. if you had an open-ended commitment. If you fixed a That is always an issue if you have a boundary, but it budget for it, you could apply this scheme in any becomes easier if you do it on a regional basis. As I said number of ways. in my answer to Mr Hancock’s question, people travel Mr Gauke: The best thing to help start-up businesses beyond their local authority in order to work. We felt is our policy to raise the employers’ threshold. I am that the balance was better if we did it on a regional pleased that we have been able to do that. It would have basis. been damaging for start-up and existing businesses had I also want to make the point about basing this on we allowed the previous plans for a substantial increase local authority regions. I listened with interest to the in employers’ national insurance contributions to be left evidence from Wenta. If I might return us to Hertfordshire unameliorated. 35 Public Bill Committee2 DECEMBER 2010 National Insurance Contributions Bill 36

Q118 Gavin Shuker: I just want to talk practically to which we were giving relief, that would raise the costs about the application process and what happens when of compliance substantially. What you would end up the form or the online submission comes to HMRC. having is—to use the Minister’s expression—a dead-weight What checks are run on those applications? cost. Instead of making the maximum amount of money Sam Mitha: The application process is relatively simple available to new businesses, a significant amount of and straightforward. We have a system whereby new money would be absorbed in trying to administer the businesses that want to take advantage of the holiday scheme. are invited to send in an online application form unless they are in receipt of state aid, in which case they need Q122 Gavin Shuker: So you are saying that the costs to fill in a manual application form. The application of the scheme would vastly increase if you had to work form simply requires them to provide some basic out all the different postcodes. information such as their reference numbers, the name Sam Mitha: It would increase the costs if we had to of the business, the date the business started, the business operate the scheme on anything other than the simple address, the postcode and the region or country in basis we have it on currently. People can quickly tell which the business is located, and to certify that they whether they are eligible and it is easy for us to check have read the guidance on Business Link. whether they are qualified when we do compliance. The The significance of asking for this information is that initial compliance checks primarily reference when they it enables us to tell very quickly whether the business started trading. The subsequent checks are done because qualifies. So, for example, if the business started before it takes some time for us to receive information about 22 June—the date of the emergency Budget—we could the profitability of the business. immediately notify them that they are not eligible. The Q123 Gavin Shuker: I suppose what I find confusing intention is then to operate what we call a “process now, about that is that I can understand how the costs of the check later” system. We notify them as quickly as scheme could increase in other areas, such as publicity possible that they are eligible for the holiday, and that about which areas are affected and in working out they can legitimately start withholding payment of NICs which areas should be included, but I am surprised that if they are eligible. More fundamentally, it gives them the practical aspect of a form coming in and you an incentive straight away in terms of their disbursements. performing a postcode check would be significantly One of the things that we took into account in the more expensive. design of the scheme was that the lifeline for small Sam Mitha: The postcode check is part of the process businesses is cash flow. of compliance checks that we undertake some time Q119 Gavin Shuker: We all definitely welcome the after the application. The Minister was keen that whatever fact that it is a quick and easy process at your end. The relief was available was notified to people straight away. key thing when it comes to part 2 of the Bill is that you The whole application process was designed to ensure check the business address and the postcode. Does that that we got the information that we needed immediately mean that you have a postcode file of those which are to check whether someone qualified. The key aspect is eligible and those which are not? whether it is a new business. You ask whether it is a new business and when it was set up. We will use all the other Sam Mitha: The design of the scheme, as the Minister information in the form if it becomes necessary. We do was explaining, is relatively straightforward, in that all not always check every application that we receive. We you need to demonstrate is that you are not located in a run a risk-based system, and the kind of information so-called “excluded region”. Those regions, and the that is contained in the application form, and any other details of which regions qualify, is set out on Business information that we get, is among the criteria that are Link. Anyone who is interested in applying for the taken into account in deciding whether we undertake holiday would be able to tell very easily whether they any inquiries on a particular case. qualify, either by entering their postcode into the database, or knowing which region they belong to. Those regions Q124 Gavin Shuker: Finally, if I may ask the Minister are large areas of the country, whether they are qualified a question. It has been said that if the scheme were to or not. work on a smaller basis than by region, it would be too complicated. In your evidence, you described it as more Q120 Gavin Shuker: So you have a list of excluded difficult to administer. Can you give us a summary—a postcodes, which at that point would filter a business couple of paragraphs—as to why it would be too out of the pool. complicated, or too difficult, to administer on the level Sam Mitha: Yes, it would be very easy for us to tell if of constituency or local authority? someone was in a region that did not qualify. Mr Gauke: It comes back to the points that we have heard about checking, and ensuring that the address is Q121 Gavin Shuker: It strikes me that it would be in the precise areas. It is also about the possibly distortive possible to change those postcodes right the way down behaviour of a business moving from one place to to the individual 15 households of a postcode, which another to benefit, something that would not do anything would make a business eligible or ineligible. Is that much for the relevant area. The more detailed running correct? down the address becomes, the more complicated it will Sam Mitha: At the moment, all we are discussing is be to administer. the application process and the compliance checks that take place under HMRC’s process of compliance, which Q125 Gavin Shuker: Obviously, you are a Member of is process now, check later. Those checks would be Parliament in Hertfordshire, which would be exempted made a significant period of time afterwards. If you from the scheme. Have you had contact with any local have a system that required us to operate a more businesses or people who are thinking about starting up complicated, or a narrower, range of areas, by reference businesses—either praising or condemning the scheme? 37 Public Bill CommitteeHOUSE OF COMMONS National Insurance Contributions Bill 38

Mr Gauke: No. within the tax system, the better. There are always pressures to drive them apart, but the more that can be done the better. Q126 Mel Stride: Just looking at the national insurance holiday and the issue of tax avoidance and evasion, what sort of scope is there for that to occur in terms of Q128 Heidi Alexander: I have questions in two different companies starting up, then shutting down and rebranding, areas. First, the Minister has spoken a lot about pockets and so on? What kind of measures might be taken to of deprivation, and I contend that there are significant ensure that that did not happen? What effect would any swathes of London that are heavily reliant upon the complexity in those areas have on costs to HMRC and public sector. The boroughs of Lambeth, Southwark, to the applicants? Lewisham and Croydon have 185,000 people employed Sam Mitha: One of the things that we were very clear in the public sector between them—and that is a larger about when we started to help the Minister to design public sector work force than in Tyne and Wear. You the scheme was the risk of avoidance. We needed to have talked about the distortive effect of businesses trade off the fact that we wanted the scheme to operate potentially moving areas if the scheme worked on a flexibly and quickly for small businesses that cannot, in finer grain. For me, however, that would be a good the main, normally afford very expensive accountants, thing in that part of London, and I wonder what you against the risk that some bigger players might find an would say about that. opportunity to exploit the arrangements. The Minister Mr Gauke: The intention behind the policy is to took a decision to cap the number of employees who create new start-ups that would not have been there qualify and set the maximum limit on the amount of before, as opposed to trying to get a start-up that would money per employee that would be eligible for relief. have been on one side of the river to open on the other Given the fact that there is a limited amount of money— side of the river. That is why having the fewest number there is a maximum amount of relief that businesses of boundaries is better. That is one of the arguments for can access—it reduces the incentive for people to engage taking a regional approach. in that kind of avoidance. I fully take on board the point about unemployment The other thing that the design of the scheme did was in London, and that there are large areas of London to make sure that people who had been in business six that are relatively deprived, but it is the nature of months prior to the launch of the scheme, or who London that those areas are often next to relatively claimed to have started a new business, were disqualified. prosperous areas. The challenges of London are probably So, you could not have a situation where an existing not best met by this particular policy. There are other business decided, for example, that it would stop trading things that can be done: some of it is to do with today and recommence trading tomorrow, purporting infrastructure; some of it is to do with welfare reform to to be a new business. Similarly, we were very alert to the ensure that work pays; and some of it may be to do with fact that it was possible for people to restructure matters the regional growth fund. Given that London creates an so that an existing business could claim to be a new awful lot of jobs—yes, it has a lot of unemployment, business. but it also creates a lot of jobs—the impact of this The legislation includes very robust anti-avoidance scheme, which is designed to create more jobs, would be provision, which says that if there are any arrangements relatively marginal in addressing the concerns that you in place that are designed effectively to fragment or understandably have as a constituency MP. restructure an existing business, they will not be eligible for the relief payment. We are fairly confident that the Q129 Heidi Alexander: How do you view the combination of the monetary limits on the maximum inconsistency that London can, of course, apply for amount of relief that a business can claim, which limits the regional growth fund, but new start-ups in London the incentive, the rules on what is regarded as a new cannot benefit from the NICs holiday? That is recognition business—the bit I mentioned about the bulk of the that there is a problem that needs to be tackled, and yet business being carried on by somebody else—and the the Bill, if it moves into legislation, will not enable new very robust anti-avoidance provisions in the legislation businesses to benefit from that. will reduce the incentive for attempting avoidance. Mr Gauke: If there are areas of infrastructure that can be improved to help a part of London, the regional Q127 Mel Stride: On the national insurance thresholds, growth fund can work effectively. Lots of jobs are there has, for some time, been a dislocation between the created in London, but they are often not going to your threshold levels kicking in for national insurance and constituents, so the question is how we address that. It for income tax. So, from the point of view of the would be quite expensive to extend the NICs holiday to employees, you have the anomaly that, over a range of London and it might or might not result in more jobs increasing income, you actually get diminishing marginal being created, but it would not necessarily ensure that tax rates. Is that an issue that you sought to address in those new jobs were going to your constituents. What is any form in the changes? If so, what impact do you happening at the moment is that there are quite a few think the Bill will have on that? jobs being created in London, but that is not necessarily Mr Gauke: On the raising of thresholds, we have seen resulting in low unemployment in Lewisham. a very substantial increase in the personal allowance. In an attempt to try to counteract the increase in employees’ national insurance contributions, as a consequence of Q130 Heidi Alexander: In your mind, are the regional the negotiations which were part of the coalition agreement, exemptions about cost or complexity? the focus has been on raising the personal allowance Mr Gauke: The reason why we have not done this and the threshold in this particular area. Clearly, in nationally is because we have a constrained budget. The terms of simplicity, the fewer cliff edges and steps first question was whether we did it nationally, which 39 Public Bill Committee2 DECEMBER 2010 National Insurance Contributions Bill 40 was what we originally considered—my party considered £42 billion, for which there is not enough resource to it in Opposition—and, in order to reduce its cost, we collect. I am told by tax officers, just as I was told many decided to focus it. The next question was whether we years ago by tax officers, that every additional tax tried to do it on a regional basis or tried to break it inspector collects many times their own salary. Is there down more locally. For the reasons that I have outlined, not a case for substantially increasing the number of tax we took the view that doing it on a regional basis would officers, and recruiting and training them? They will all be more effective, less distortive and less complicated. If collect many times their own salary and solve a lot of we started doing it in London, one local authority those problems. might get it and another local authority would not get Mr Gauke: With respect, I think that that simplifies it, and you would have a lot of discussions about the position a little. It could be pointed out that HMRC’s whether this bit of this local authority is more deprived staff has been reduced over the past five years and, than that bit of the other local authority. We are trying actually, compliance yield has gone up. It is not just a to find a balance, and our view is that we have got the question of numbers, it is a question of ensuring that balance right. HMRC has the right technology and that staff are deployed in the right areas. It is right that we should Q131 Heidi Alexander: Mr Mitha, you said that you find ways to make some of the processing within HMRC have had 1,100 applications so far and that there will be more efficient and free up resources to strengthen tax initial compliance checks. How many people have you inspectors, who can play a vital role. We should ensure rejected at the first obstacle? Have you had a number of that the deterrent works, that we have proper campaigns applications from people who are not eligible? and that HMRC is visible and effective in taking on those who, one way or another, are not paying the right Sam Mitha: Unfortunately, I do not know exactly amount of tax. I do not think we want to overstate how many we have rejected, but my understanding is this—to believe that we can solve all our problems in that most of the applications that we have received have our public finances simply by employing more tax been from people who regard themselves as eligible. inspectors—but we need to do what we can. That may not subsequently be the case if and when they are selected for compliance inquiries. My colleague has just passed me the information—we have rejected 54 of Q134 Kelvin Hopkins: I have written to the Treasury the 1,100-plus applications that we have received so far. about this in the past, and it constantly comes back with the argument “Oh, well, we want to economise by reducing the head count of tax officers.” It is utterly Q132 Kelvin Hopkins: I think I had better ask the irrational when cutting tax inspectors will result in less Minister this question, although I am sure that I would money being collected, rather than in money being get interesting answers from the HMRC representatives. saved. I found this with VAT inspectors at local level We have a tax gap between the tax that should be paid 12 years ago when I wrote to Gordon Brown about it and the tax that is actually paid. Legitimate estimates and I received the same answer. More recently I have put that figure at some £120 billion a year, which is a spoken to the senior representatives of the senior tax vast sum of money. A small dent in that would make officers in HMRC—not just the Public and Commercial this scheme easily affordable, it could cover the whole Services Union, which I am very close to as well—and country and the administrative costs, and pay for much they did not disagree with my analysis that many of the more besides. Could you not usefully target the tax gap? staff were overworked and underpaid; that there were Mr Gauke: I will try not to be too diverse, but, first of not enough of them; and that with many more staff all, I think that it is right that we try to tackle the tax they would do a fantastic job and really close this tax gap. The number that HMRC has produced is not the gap very substantially. Not only would it solve this £120 billion figure, which has some fairly fundamental problem, but it would start to reduce the deficit, which I flaws in its methodology, but the £42 billion figure, am sure would be helpful. which the Government accept, as the previous Government Mr Gauke: Given your remarks, I am sure that you did, as being as accurate as we can make it. Yes, we welcome the £900 million that we have announced that should try to reduce it. In the comprehensive spending we will spend over the spending review period in review we announced £900 million to be spent over the strengthening the compliance capability of HMRC. spending review period on measures to tackle criminal behaviour, to tackle tax evasion and to reduce tax avoidance. Kelvin Hopkins: I hope that compliance capability You are perfectly right. Although I disagree with the implies more tax inspectors too. number, I think that it is right that we try to reduce the tax gap. There is always, inevitably, a tax gap, but we Q135 Stephen Williams (Bristol West) (LD): I have a hope to be able to get it down. HMRC believes that the couple of questions on the policy imperatives behind additional expenditure that we announced in the spending clauses 4 and 5. Is the policy imperative to incentivise review will get the tax gap down by the region of start-ups, or to incentivise start-ups taking on extra £7 billion a year by the end of the spending review employees? period. My role as Minister is to do what I can to assist HMRC in ensuring that it does that. Mr Gauke: We want a combination of the two. The answer is both; clearly it is as employees are taken on that the benefit emerges. The first two or three years can Q133 Kelvin Hopkins: A proportion of the tax gap is be very difficult for a new business, and it faces many not just avoidance, evasion or criminal activity: it is challenges, but we want as far as possible to reduce simply that HMRC does not have enough resource to some of the challenges of the additional costs of labour collect the taxes. There is a fair chunk, even of the that result from national insurance contributions. It is a 41 Public Bill CommitteeHOUSE OF COMMONS National Insurance Contributions Bill 42 big challenge for a new business to take on that first that, for the £940 million, you are only going to get employee; it is a major hurdle. We hear that a lot from £40 million worth of jobs. That is quite a lot of dead the Federation of Small Businesses. If the policy can weight in the scheme, is there not? assist that, and can enable and encourage businesses to David Owen: The £40 million behavioural effect is an take on that first employee with greater confidence, we estimate of the behaviours that would lead to people think that is a very worthwhile objective. taking up the scheme who were not really intended to do so. There were then some indirect behavioural effects Q136 Stephen Williams: Presumably, you are trying that are not included in the figures. to get a double benefit for this incentive. Would you have looked at simply exempting existing businesses Q140 Stella Creasy: But, with this measure, what you taking on an extra employee? are looking at will cost the Exchequer only an extra Mr Gauke: Again, if we had done that the potential £10 million in the first year. You have projected that. I dead-weight cost, as the economists call it, might have have been doing some sums while I have been waiting, been very considerable indeed. I think there are particular and I calculate that as about 2,000 extra jobs. If you challenges for new businesses in the early stages, and at were, as an alternative, to spread that £940 million over this particular stage in the economy when we hear the three years—about £300 million over the course of projections about job losses in the public sector. Let us one year—and put it into another scheme such as the hope that we are coming to a period of the economy future jobs fund and paid people £25,000 a year, you starting to grow, as the OBR projects. So now would could get 12,500 jobs. Would that be a fair estimate in seem to be a good time to try this policy. terms of the cost of the scheme? David Owen: I am not sure that that is the right Q137 Stephen Williams: Just a question on who interpretation of those particular figures. would be eligible. Clause 4(1)(a) implies that it would be a sole trader or a partnership, but clause 5(6)(a) mentions Q141 Stella Creasy: But the chart suggests that the corporation tax. Would limited companies come within scheme will cost the Exchequer only an extra £10 million the scope of this provision as well? in national insurance contributions that would have Mr Gauke: Yes; essentially it is an entity carrying on been made. That is what you are projecting. There is a a trade or a profession. question about how you are using the funding in each year. Q138 Stephen Williams: My final question is on David Owen: Of the £940 million total over the whole clause 5(6) again. How joined up is this with other period of the scheme, there is an allowance for £40 million start-up incentive schemes? I used to advise businesses —as you referred to—for direct behavioural effects. on the Enterprise Investment Scheme and the Enterprise That should not be interpreted as saying that only that Management Incentive when I was in practice, and I cost is generating new jobs. Does that answer your endorse what was said earlier; I am sure that accountancy question? firms up and down the country will be writing to their clients at the moment and organising breakfast seminars to get them through the door so that everyone benefits Q142 Stella Creasy: But in terms of our understanding from the scheme. All the current income tax and CGT the direct impact of the policy, that £40 million is the incentive schemes exempt other activities, particularly only direct impact that you can predict, is it not? You non-trading activities. Yet,under subsection (6), a property are hoping that other things will happen as a result. business or an investment business would qualify, which David Owen: We are expecting some dynamic effects is a departure from existing incentive schemes. Why is because, after all, this policy reduces labour costs. that? Sam Mitha: The Minister was very keen to make sure Q143 Stella Creasy: But you cannot be sure. that this was available to all small businesses. As he has David Owen: We cannot be sure of the scale. Indeed, said, a new business carrying on a trade profession or we are not entirely sure of the direct effects either. vocation, whether it is a sole trader, partnership or newly incorporated company, would qualify. Similarly, there are a number of provisions under the Taxes Act, Q144 Stella Creasy: But we can be sure of the impact some of which have been referred to, which make of other policies aimed at creating jobs, like the future companies carrying on property or investment businesses jobs fund, and of what money spent on those would ineligible for the benefit, but in this instance the Minister deliver in numbers of jobs. The calculation equates to decided that, because the scheme was intended to promote about 2,000 extra jobs. Alternatively, you could use that activity, they should be included within the scope of the money to create a larger number of jobs and you could scheme. The effect is that it encourages new businesses predict that with more accuracy. of all sorts, including those that are exempted specifically David Owen: You are right to say that this is a new from other specific incentives such as EIS. policy that has only just come into operation. It has not been evaluated and therefore its effects are less certain Q139 Stella Creasy: I have a question for each witness, than those of policies that have been running for some but I am conscious that Mr Owen has not been asked time of which we have done evaluations. something for a while so I shall start with him. I am looking at the back of his memorandum about national Q145 Stella Creasy: Is it possible for you to be insurance and doing some of my own sums. Will you absolutely confident that this will generate more than talk me through first the pre-behavioural and post- 2,000 jobs in the first year? That is what the calculation behavioural Exchequer impact? It appears to suggest suggests to me. 43 Public Bill Committee2 DECEMBER 2010 National Insurance Contributions Bill 44

David Owen: I do not think that is a correct interpretation They need to find out what their record-keeping obligations of the figures. There is no figure in there that represents are. But the majority of small businesses rely on their the number of jobs. professional advisers for information about what they need to do and when they need to do it. New businesses Q146 Stella Creasy: The £10 million would represent normally speak to professional advisers when they start about 2,000. If you are paying a £5,000 premium in up, or often to banks, or employer bodies or whatever. national insurance, that would represent about 2,000 Information about the scheme is something they would jobs. That is the £5,000 each year that you are not have early on, which would have an impact on decisions getting into the Exchequer as a result of the holiday. about how many employees they took on. David Owen: As I understand it, the £10 million you are talking about is part of the £40 million. That is the Q149 Stella Creasy: I appreciate that. The modelling amount over the first year. that you have done, on this current trajectory, means that only 18,000 businesses will be part of this. What is Stella Creasy: Yes. the model that you have and where do you expect the David Owen: That is an estimate. The extra costs that increase to come? Is it at a particular time of year, or a arise because of the compliance checks that Sam set out particular experience? Can you give us a little detail are not perfect. Some businesses will benefit, although about where you predict that it will come from? perhaps they are not in the right region or they are not Sam Mitha: I reckon we will get a large number of genuinely new businesses, or they relocate solely because applications when people come to make remittances, of this scheme. We do not think that that particular because employers have to make remittances on the effect will be big. That is what that represents. It does pay-as-you-earn that they have deducted from payments not represent our estimate of how many genuinely new to employees. At that time, their professional advisers jobs will come out of it. will probably tell them that they need to make an application if they want to withhold part of the payment. Q147 Stella Creasy: The Minister says that this is Similarly, when they come to do their annual accounts about new start-up businesses and job creation, but that they will be told that they need to think about the is not what you have just said. You have said that this is fact they are entitled to this relief. But that is not to say about changing people’s use of the national insurance that they will not already have factored it into decisions scheme, and where that might then influence and excite about the number of employees they take on. businesses. David Owen: I am clearly not expressing myself very Q150 Stella Creasy: I am a little concerned that you clearly. I agree with what the Minister said. I think there use the term “reckon”. Do you have any research or is confusion because there are two different types of evidence on which this policy is based to justify that behavioural effects. The direct behavioural effect of the target of 400,000? figures that you are talking about— Sam Mitha: Quite a lot, because we deal with large Stella Creasy: That you put forward in the memorandum. numbers of small businesses, so we know roughly their relationship with us and when they make contact with us. David Owen: Yes, that is correct. It represents the compliance behaviours. It does not represent new businesses starting up. Q151 Stella Creasy: One of my concerns is that the previous witnesses have all said that this will not influence Q148 Stella Creasy: It would be incredibly helpful if whether people take on new employees. You do not you could write to the Committee setting out what have any modelling to the contrary that means you can actual impact you expect—you have predicted and analysed reach that 400,000 target. this policy—in terms of generating jobs. If the proposals Sam Mitha: We can draw on the evidence that we are about generating jobs, as the Minister has set out, gather of the impact that previous changes in national we need to understand better, because that calculation insurance have had on levels of employment. We know implies a very high cost for introducing this scheme in of the experience of the earlier NICs holiday. This is a relation to what you actually get out of it. relatively new experiment. In a sense, we have had to Your comments on compliance lead me to my second rely on the information from past experience in coming batch of questions, which are for Mr Mitha. I want to up with information. The figures are based on the very go back to the point about the number of businesses best information available to us. that have applied so far. You are looking at about 1,100 in the first quarter. So if we said roughly 1,500 a Q152 Stella Creasy: So where did the 400,000 come quarter, on that kind of trajectory over the next three from? years, you are looking at about 18,000 businesses being Sam Mitha: It is the figure that was computed by our part of the scheme. You are talking about a target of colleagues in knowledge analysis and intelligence in 400,000. How are you expecting to get from 18,000 to HMRC, who have access to all the information from tax 400,000? That is a very low trajectory to go for. and national insurance data over a large number of Sam Mitha: To be absolutely honest, we had always years. worked on the assumption that we would not get very many applications to begin with, because anybody setting Q153 Stella Creasy: May I ask, just as I asked your up a new business is obviously going to be focused on colleague, for a note to the Committee? Could you keeping their head above water and on their business. publish the evidence on which that target is based? On There is a cycle to how new businesses approach HMRC. the current trajectory, I have great concerns that you are They need to approach HMRC to set up their pay-as- not going to reach it, so it would be very useful to get you-earn schemes if they are planning to take on employees. the data on which you based that target. 45 Public Bill CommitteeHOUSE OF COMMONS National Insurance Contributions Bill 46

Sam Mitha: Most of the information that you are Q160 Stella Creasy: So it is possible that the 1,100 asking about is summarised in the impact assessment. could go down. Sam Mitha: The 1,100 will obviously have substantially Q154 Stella Creasy: So the model that you put gone up in terms of numbers by the time the risk together—not the reckoning—will reach the 400,000 assessment checks are undertaken, which is, typically, target? when new businesses send in their accounts. Sam Mitha: Yes. Q161 Stella Creasy: But it could go down—so we Q155 Stella Creasy: What proposals do you have for could see a dip before you get the curve on the model. action along the way if you are not hitting the 400,000? Sam Mitha: At the moment, we are trying to focus on There is a big differential on the current trajectory. ensuring that people who are eligible are able to apply. Sam Mitha: We are monitoring the number of We are fairly confident, because we know from past applications we receive. Obviously, one of the things experience that the vast majority of small businesses are that we report regularly to the Minister about is the compliant and law-abiding. We want to make sure that levels of take-up and what we pick up from our contact they do not fall foul of any of our provisions inadvertently, with employers and professional bodies. The proof of by helping them to correct simple errors, or whatever. the pudding will be the numbers of people who take advantage of the holiday. They will be required to submit details to us of the deductions they are making Q162 Stella Creasy: You cannot see any problem in respect of the holiday. with the clauses about publishing all these data, in terms of compliance, the numbers of applications and the rate of growth in numbers of applications. Q156 Stella Creasy: So you do not have any proposals to deal with what is at the moment a very low level of Sam Mitha: It is not for me to comment on whether take-up? You are hoping that your model is right. You the amendments that have been suggested should be do not have a staging post in this process? accepted. Sam Mitha: We are monitoring the figures very carefully. The Minister is taking a keen interest in us reporting to Q163 The Chair: If you cannot comment, will the him. Minister? Mr Gauke: We will look at the amendments when we Q157 Mr Hanson: I take it then, Minister, that there reach them in the course of the Committee’s proceedings. will be no problem in accepting new clause 1, which I, as the Minister, will look at them all fairly and we can would require the annual publication of figures for examine them in detail. business take-up by constituency. Mr Gauke: I look forward to the debate on new Q164 Stella Creasy: But you have every confidence in clause 1. You can hear my response then. what your officials are telling you about compliance—there would no problem in publishing. Q158 Stella Creasy: I have to wear my Public Accounts Mr Gauke: The advice that I am getting seems to be Committee hat in this. I am a little concerned that the reasonable about the likelihood of businesses, essentially, monitoring procedures that you are setting out here trying to abuse the scheme by acting as phoenix companies seem to be quite inert. You expect people to report to or by relocating. Given that there is a cap on the you and you expect the complexity of the scheme to possible benefit for any individual company or particular mean that there is little chance for people to say, “I’m a business, the incentives to act in a fraudulent way are new business and I’ll change addresses and suddenly I’ll somewhat limited. become another new business.” There will be 240 people working on this scheme. What measures do you have to check proactively that claims are not fraudulent, or do Q165 Stella Creasy: Of course, your colleagues pointed you have anything in your model in terms of compliance? out that businesses will be self-reporting the name of You said that it was process now, check later. Do you their company and their address. Those two things are expect any of those 1,100 to be subsequently rejected? relatively easy— Sam Mitha: HMRC runs a risk-based assessment Mr Gauke: Yes, but you also have to have employees system for monitoring compliance which takes into for whom national insurance contributions would otherwise account the information we have about how new businesses be paid, who are getting the benefit of a start-up. operate. It will take into account risk criteria that will be determined by reference to the provisions in the Q166 Stella Creasy: So you will be monitoring the legislation and the information that our investigators national insurance contributions. pick up in the course of analysing the information on Mr Gauke: You have to have employees there in the the businesses that have applied. first place. This is not, for example, a situation of MTIC—missing trader intra-community—fraud within Q159 Stella Creasy: What estimate of risk of fraud the VAT system, in which someone might create phoenix have you made within the scheme? companies or non-existent trades. Sometimes there is Sam Mitha: At the moment, nothing beyond what we impersonation in the self-assessment form. We are not have already published. Our primary focus has been on talking about repayments, as such; we are talking about making sure that we have the legislation ready and that not collecting national insurance contributions that would we have guidance out for businesses, so that they can otherwise be collected, so you need employees there in make applications as quickly as possible. the first place. 47 Public Bill Committee2 DECEMBER 2010 National Insurance Contributions Bill 48

Q167 Stella Creasy: It sounds as though you are for the charitable sector, because it would cover all making the case for all the data being published by employers. However, the focus is to aid the wealth-creating saying how easy it will be. private sector, so that is where the scheme is focused. If I have some final questions, which are only for you, we took out the trade, business or vocation test, which Minister. Why have you focused primarily on start-up is essentially the problem that charities have, we would businesses if the measure is about job creation? We be left with problems such as a household taking on a talked earlier about the role of charities and the voluntary nanny and not having to pay national insurance sector in job creation. Will you explain why you have contributions. chosen to exclude them from the legislation? Mr Gauke: The test is whether there is a trade, Stella Creasy: So, essentially, there is a value judgment— business or vocation. In the context of charities, for example, that would not prevent employees of a bookshop, The Chair: Order. The hon. Lady has had a fair run. which was created by a hospice, from benefiting from As we have to finish at 4 o’clock, we shall now move to the scheme. You are right to say, however, that it would the final question. not include charities that do not have a business element. We could have run into particular difficulties, where Q170 Mel Stride: Following Stella Creasy’s comments we felt that the scheme would have acted inappropriately; about the modelling, I want to be clear about your for example, if a household took on a cleaner or a position, Mr Mitha. You are saying, as I understand it, nanny. It would not be carrying on a business, trade or that the model is well researched and that it is outlined profession, but it could be seen as being a start-up in the impact assessment, so members of the Committee business, and the NICs holiday would apply in such can look at it there. It shows non-linear growth in the circumstances. We wanted to narrow it in those senses, take-up of the national insurance holiday, so we might and the test of a trade, business or vocation is well expect a smaller take-up at the beginning, accelerating established. as the scheme takes off. The figure of 1,100, as the The purpose of the policy is to encourage start-up current level of take-up, is therefore not inconsistent businesses and the creation of jobs. It is not specifically with the model you developed. Is that correct? designed to help charities, but to help the wealth-creation Sam Mitha: I would agree with that. The modelling is sector in regions currently reliant on the public sector. based on the very best evidence available to HMRC, and it draws on extensive experience of the impact of Q168 Stella Creasy: Is that not a little against the big NIC changes in the past and on the very best academic society though? If the big society is about all the wonderful evidence. Ministers have taken a close personal interest voluntary and charitable organisations coming together in the issue, so it is something we are keeping under to deliver public services—a piece of business for them— review. why should they not be seen as job-creation businesses as well? The Chair: As there are no other questions, I thank Mr Gauke: I do not think that it is against but, rather, our witnesses for coming along. It has been very informative neutral on that particular sector. and I am sure that the Committee welcomes your evidence. Q169 Stella Creasy: It is abstaining. Is that what you Ordered, That further consideration be now adjourned. are saying? —(Mr Goodwill.) Mr Gauke: The purpose is to help start up businesses. I do not think that it is doing any harm to the charitable 3.57 pm sector. Clearly, if we were not to increase the threshold Adjourned till Tuesday 7 December at half-past Ten for employers’ NICs, that would have been damaging o’clock.