Freeport doubts despite NICs Bill passing second reading unopposed
The National Insurance Contributions Bill passed its second reading in the House of Commons on Monday 14 June. The opposition parties broadly welcomed the measures in the Bill, but some MPs are concerned about how freeports will operate. The Bill passed unopposed and will go to a Public Bill Committee for consideration on Tuesday 22 June.
There are four measures in the Bill:
- an employer’s national insurance contributions (NICs) relief for employees in freeports (employers with premises in a freeport in GB will be exempt from employer’s NICs on up to £25,000 of a new worker’s wages)
- an employer’s NICs relief for employers of veterans (employers will not pay employer NICs on earnings worth up to £50,270 in a veteran’s first full year of civilian employment)
- an exemption for Test and Trace support payments from self-employed NICs (which will apply retrospectively)
- changes to DOTAS (Disclosure of Tax Avoidance Schemes) legislation with regard to NICs.
Frontbench opening speeches
Financial Secretary to the Treasury Jesse Norman opened the debate by outlining the Bill’s contents. He said that while the Freeport NICs relief applies only to Great Britain the Government intends to legislate for the relief in Northern Ireland too. Norman explained that a sunset clause will mean the relief ceases at April 2026 unless the Government lay secondary legislation to extend it, if wished, for up to a further five years, after a review. He claimed freeports will attract new businesses and regenerate communities by ‘creating jobs, boosting investment and spreading prosperity’.
The minister said this Bill should give a real boost to veterans’ employment prospects, and should mean that many more businesses benefit from their ‘often extraordinary’ skills and personal experience. Under the Bill, employers will not pay employer NICs on earnings worth up to £50,270 in a veteran’s first full year of civilian employment. This amounts to a saving of up to £5,500 per hired veteran, he explained.
On Test and Trace support payments, Norman said the Bill ensures that self-employed workers are treated consistently with their employed counterparts and do not have to pay NICs on support payments. The legislation will therefore retrospectively exempt Test and Trace support payments from class 2 and class 4 NICs for the 2020-21 tax year. And it will ensure that in future Test and Trace support payments will not be included in profit liable to class 2 and class 4 NICs.
The final measure in the Bill relates to changes in DOTAS in relation to NICS. Along with changes in Finance Act 2021, HMRC will be able to act decisively over a wider range of promoters and their supply chains if they fail to provide information on suspected avoidance schemes. HMRC will be able to warn taxpayers about suspected avoidance schemes at an earlier stage than at present. In addition, said Norman, the Bill places responsibility for the obligations within DOTAS and for any failure to comply with them both on promoters of these schemes and their suppliers.
Norman concluded: “The Bill supports regional growth and, with it, the Government’s levelling-up agenda, boosts employment while helping to protect those on low incomes from the financial impacts of COVID-19 and strengthens the Government’s powers to tackle promoters of avoidance schemes. For all those reasons, I commend it to the House.”
Labour’s Shadow Financial Secretary James Murray said his party supports the intentions of this Bill but would like to see some kind of post-evaluation that would see each freeport judged against the key tests of whether, across the country, they lead to any net increase in jobs, deliver improvements in training and skills for local residents, produce tangible transport and infrastructure improvements beyond the port itself and adequately protect against the risks of tax evasion, smuggling and criminal activity.
Commenting on the timing of the freeport relief, Murray said: “It is hard to understand why this relief is conditional on employment not commencing until 6 April 2022. As the Chartered Institute of Taxation has pointed out, with freeports expected to start operating in 2021, that would surely hamper freeport employers this year and perhaps create perverse incentives about delaying the start of an employee’s work.”
The shadow minister also wondered why employers do not need to pay any NICs for under-21s and apprentices earning up to just over £50,000 a year, but they will have to pay contributions for freeport employees next year if they earn more than £25,000. He wants to know why the cap on the relief for freeport employers is set below median pay in all freeport areas and why it is half of that for those employing under-21s and apprentices.
Slightly off topic, there were some exchanges between the minister and shadow minister about the UK Government’s approach to a global minimum tax rate. Murray asked why the UK Government’s position has been to back a rate of 15% rather than the original Biden proposal of 21%. Norman replied that it was “completely inappropriate for a Minister to comment on confidential negotiations” and accused Murray of ignoring that the negotiations were a package involving two pillars. While the Government “have been in no way lukewarm on pillar 2” (global minimum tax rate) Labour had, he argued, ignored pillar 1 (taxing rights), and as a consequence, “under a Labour party Administration, there would have been no taxation of these platforms.” Murray disputed this, saying he had said many times that there should be a deal on both pillars.
Moving on to the veterans’ relief, Murray wondered why the duration of the relief was only 12 months, much less than the relief for employers in freeports, which is 36 months.
The MP also wonder why the Test and Trace exemption for class 2 and class 4 contributions was not implemented earlier, in line with the exemption for class 1 contributions. If the class 2 and class 4 exemptions had been announced earlier, that could have given ‘much-needed certainty’ to self-employed people at an earlier point in the outbreak, he said.
And on the DOTAS changes, Murray said: “As they may know, the Chartered Institute of Taxation believes that there is a hard core of between 20 and 30 promoters, identified by HMRC, who clearly do not play by the rules. Do Ministers recognise that number? If so, I would be grateful if the Exchequer Secretary set out what goals HMRC has to clamp down on those 20 to 30 hard-core promoters. Are there any targets, and are there dates by which Ministers expect the number of hard-core promoters at large to fall substantially?”
Conservative backbench speakers
Fay Jones said the freeports policy recognises that talent is spread evenly across the country but opportunity is not, and its strength is that there is no single model for freeports. For example, manufacturing businesses operating in a freeport can benefit from tariff inversion, whereby tariffs from a finished products are lower than those on component parts. Further tax and non-tax incentives, such as lower rates for corporation or even employment tax, as well as simplified customs processes, could also be offered. She agrees with the Chancellor that tens of thousands of jobs could be created with a successful freeports programme. Jones also backed the veterans’ NICs changes, pointing out that the House of Commons Library estimates that the percentage of veterans of working age is projected to increase from 37 per cent at the moment to 44 per cent in 2028.
Kevin Hollinrake, vice-chair of the all-party parliamentary group on anti-corruption and responsible tax, used his remarks to promote the group’s proposals for tougher measures against promoters of tax avoidance schemes. “At the moment, the requirement, as I understand it, is that a promoter considers a scheme reasonable… We are seeking to bring forward a change in the form of a double reasonable test: would a reasonable person have considered that scheme reasonable? A promoter might offer a highly contrived underlying scheme behind a loan charge, in which someone would move their money into an offshore jurisdiction and bring it back as a loan, on which they would pay no tax. That is a highly contrived scheme. I could argue that I thought it was reasonable, but a court could not possibly decide that a reasonable person would describe that scheme as reasonable. In that way, it would be far easier for HMRC to take forward prosecutions against promoters to stop this stuff happening in the first place.” He urged the minister, who he said had attended a roundtable organized by the group on the topic, to ‘consider the proposal again’.
Hollinrake also praised freeports, which he said would create incentives for businesses, small and large, to relocate to those areas, or to start in those areas and grow.
Robin Millar commented that freeports are a common feature of the world’s most ambitious free-trading nations and are used by many of UK’s closest allies. The practical provisions in this Bill provide practical incentives for investors and employees and are at the heart of levelling up, he said.
Anthony Browne supports the veterans NI relief but thought the principle of it could be extended to other areas where there are structural issues around different groups and unemployment, particularly the long-term unemployed and the disabled,.
Other opposition speakers
Richard Thomson (SNP) said it is vital that wider policy objectives - such as environmental obligations, the commitment to net zero and fair pay for those employed in freeports - are met. Thomson said the veterans’ NICs changes ‘cannot and must not’ be seen as any kind of substitute or sticking plaster for what his party believe is a planned 40 per cent reduction in the budget of the Office for Veterans’ Affairs. On Test and Trace, he commented that if the payments can be made exempt from NICs, it makes it harder to justify the continuation of the situation whereby any past or future thank you payments made to NHS and care workers in Scotland remain liable to income tax.
On DOTAS, Thomson said he wants more, such as a workable set of general anti-avoidance rules that tackle tax avoidance in all its forms; do not exempt existing and established abuse from action; include in their scope international tax abuse; give a tax authority the right to take action against tax avoidance, which it defines, in an objective fashion capable of being numerically assessed, without the consent of any unelected authority; and place the burden of proof on this issue on the taxpayer.
On freeports, John McDonnell, a former shadow chancellor, highlighted the corporate tax reliefs available already and the lack of any projections of the impact on the Exchequer, or of any impact assessments on the areas where freeports will be located and their neighbouring areas. McDonnell pointed out that in May 2014 the Public Accounts Committee described the impact of George Osborne’s enterprise zones as ‘particularly underwhelming’ and criticised the Government for ‘over optimistic’ claims about job creation. He wants the Government to commit to publishing data annually on the impact of freeports on local and regional job creation; on tax revenues, locally and nationally; and on neighbouring economies.
Separately, McDonnell said the Government could have made provision for increasing the national insurance contributions paid by the highest earners.
Lib Dem Sarah Olney backed the provisions for veterans and COVID-19 payments but is concerned that the Government have not yet published an assessment of the likely impact of the freeports NICs reduction. Olney said: “If the Government are unable to say how much the Treasury will lose from the cut in national insurance, one can conclude only that they do not yet have any confidence in how much they expect freeports to boost employment. There is a very real danger that freeports will divert business activity from areas outside freeports, and that this measure will hit the public finances without any subsequent increase in economic activity.” She suggested a better approach would be an increase in the annual employment allowance to £16,000 which ‘could benefit every small and medium-sized enterprise’.
DUP’s Jim Shannon welcomes the commitment to freeports in Northern Ireland as well. Shannon welcomed that the Government have proposed the creation of a tax site within any UK freeport to support and facilitate a robust system of monitoring and ensure that the available reliefs are claimed legitimately. On DOTAS, the MP said: “Our businesses need a level playing field and help, and it is my hope that this Bill will enable those avoiding and evading tax to be brought into line.”
Frontbench winding-up speeches
Abena Oppong-Asare, Shadow Exchequer Secretary, wound-up for Labour. She said MPs need clarity on why the freeports NICs relief is conditional on employment beginning after April 2022 given that freeports are expected to begin operating in 2021, and why the level of the relief is set at £25,000, which is below both median pay in the freeport areas and the rate for those employing under-21s and apprentices.
On the Test and Trace, Oppong-Asare highlighted that only about one in eight of the workforce are eligible for the £500 payment. Of those who apply, only 30 per cent succeed, and of those who apply for the discretionary scheme, only about 20 per cent succeed. She wants more from the Government on what extra support it will give to people to self-isolate in the coming months.
The shadow minister welcomed the anti-tax avoidance measure but asked what action the Government will take to clamp down on the most active promoters of tax avoidance schemes.
Exchequer Secretary to the Treasury Kemi Badenoch (pictured below) responded to the debate for the Government.
On why the self-employed Test and Trace NICs exemption was not legislated earlier, Badenoch said that class 1 NICs exemptions were made in regulations. However, the self-employed exemption requires primary legislation, and therefore is included in this Bill, as this is the earliest opportunity to legislate.
On the veterans relief, the minister said the reason the relief was just for a year is that the aim of the policy is to support veterans’ transition into civilian life through encouraging employers to hire veterans.
On the upper secondary threshold for freeports and why, at £25,000, this is lower than for other reliefs, she explained that £25,000 per annum is approximately the average salary in the UK.
Some MPs had asked why the relief was not starting until April 2022. Badenoch said: “The Government have been clear that this relief is only available on new hires from April 2022, and set this out in the “Freeports Bidding Prospectus” published in autumn 2020. The reason why is that having a clear start date is a simple approach that will support the freeport businesses. Further, a freeport tax site needs to be designated so that the location requirements can be met, otherwise there would be no reference in legislation for what geographical area constitutes a freeport tax site.”
The Exchequer Secretary said the freeports scheme is ‘much more ambitious’ than previous freeports, partly because of Brexit freedoms. She said the Government remain committed to establishing at least one freeport in Wales ‘as soon as possible’ and working with the Northern Ireland Executive to ensure that a suitable model for a freeport there is developed.
She said DOTAS measures introduced by this Bill will boost HMRC’s powers to deal with the promoters of ‘unscrupulous’ arrangements. In addition, it will help ensure that taxpayers are better informed about the risks posed by avoidance schemes. This measure will deter the operators of such schemes and better protect consumers.
On corporation tax, which, although not in the Bill, had been raised by the Shadow Financial Secretary during the debate, Badenoch said that the reason a global rate of 15% was settled on “is that, at that value, it will protect against multinational tax avoidance while leaving appropriate room for countries to use corporation tax as a lever to support their economic, fiscal and environmental objectives”.
The Bill’s Public Bill Committee will take place in two sittings on Tuesday 22 June.
The full session is here.
By Hamant Verma