Minister challenged over timings for freeports and veterans NICs reliefs

The Bill introduces a new national insurance contributions (NICs) relief for employers in Freeport areas (clauses 1-5), and a new relief for employers of armed forces veterans (clauses 6-7). It also extends relief for self-isolation support scheme payments to the self-employed (clause 10) and widens powers to make regulations in relation to disclosure of contributions avoidance arrangements (clause 11).

Labour raised questions around timing of the introduction of the Freeport relief, the duration of the veterans’ relief and the inability for it to be claimed in-year. On the latter – a CIOT concern - the minister said he would ask HMRC to consider it again. The SNP pressed an amendment and a new clause to a vote but neither was successful. Neither party opposed any of the existing clauses.

Clause 1: Zero-rate contributions for employees at freeport tax sites

This section included debate on Labour’s New Clause 5 that asked the Government to evaluate the wages of the jobs created as a result of the employers’ relief introduced by this Bill.

Financial Secretary to the Treasury (FST) Jesse Norman said the relief will be administered through pay-as-you-earn and real-time information returns by HMRC, and that this approach has been welcomed by stakeholders. On Labour’s new clause, Norman said it ‘recapitulates’ much of what the Government has already done and told MPs that the Government will publish costings of the freeports programme at the next fiscal event. Before funding is allocated and tax sites are designated, each freeport will need to pass a business case process, which includes assessing how effectively tax sites can be monitored, he said.

Labour’s Shadow Financial Secretary James Murray questioned why the NICs threshold of £25,000 for freeports is substantially less than the equivalent thresholds for employers’ relief for under-21s and apprentices, which is £50,270 in 2021-22. Murray went on to probe the specific source of the data that says that £25,000 is approximately the average salary in the UK when according to the ONS the median income in all of the local authority areas where the eight freeport sites are located is greater than £25,000.

Murray said Labour’s new clause is an attempt to understand if the Government are concerned that making the threshold for the NICs relief in freeports £25,000 might create an incentive for employers to create posts paid less than £25,000, rather than higher paid posts, which could in turn create the risk of salaries being bunched below the threshold, thereby undermining salary progression.

Norman replied that £25,000 is ‘roughly the national average earnings’ and that is different from median earnings. He added that this measure has been structured to focus towards longer-term employment, as the relief runs for three years, and therefore it allows the employment rights associated with longer-term employment to be vested in those employees.

Clauses 2-3: Freeport conditions

SNP Treasury Spokesperson Richard Thomson proposed amendment 1 which provides conditions to businesses in freeports. These include a strategy on how the freeport will contribute to the target for net UK greenhouse gases emissions, a strategy ensuring no goods passing through the freeport are products of slave labour, and an environmental impact assessment of the freeport. His related other amendment (amendment 2) that defines the living wage, payment of which is one of the conditions business would have to meet under his first amendment.

In his speech Thomson said ‘you shouldn’t get owt for nowt’, explaining that in exchange for the substantial package of reliefs that are on offer through this Bill, businesses must offer ‘something in return’, beyond their presence and their baseline economic activity within the bounds of a freeport. He said activities in a freeport should contribute to wider environmental objectives and protect workers’ rights, not only within the perimeter of a freeport but anywhere else that has any kind of economic relationship with the freeport.

Also debated in this group were two Labour new clauses. New Clause 1 would have required the Government to assess the impact on job creation in freeports in 2021-22 as a result of NICs relief being available from April 2022 rather than April 2021. New Clause 2 would have required the Government to evaluate the impact on job creation of the employers’ NICs relief not being available for employees who spend 60 per cent or more of their time across more than one freeport, but less than 60 per cent in any one freeport.

Labour’s James Murray (pictured below thanks to Parliament UK) said it is hard to understand why the relief is conditional on employment not commencing until 6 April 2022. He said: “As the Chartered Institute of Taxation pointed out, with freeports expected to start operating in 2021, that would surely hamper freeport employers this year, and perhaps even create perverse incentives to delay the start of an employee’s work.” He called for a review to assess the impact on job creation decisions of the relief becoming available from April 2022 rather than April 2021. He said: “If he [the minister] is not willing to, perhaps he could explain why the Chartered Institute of Taxation is wrong to say that this choice of date could hamper freeport employers this year and perhaps create perverse incentives to delay the start of an employee’s work.”

On the 60 per cent location rule, Murray said that it if an employee splits their working time between two freeport sites, the employee may not qualify as a freeport employee, ‘which might not be what is intended’.

Separately, Murray said: “I would like to ask the Minister about clause 2(1)(a), which provides that the employed earner’s employment is a new employment commencing between 6 April 2022 and 5 April 2026. As the Chartered Institute of Taxation has pointed out, it is unclear whether an employee who is TUPE transferred from an existing employer to a new freeport business on or after 6 April 2022 qualifies for this relief.”

The minister, Jesse Norman, explained that a freeport employee is an employee of a freeport employer who spends 60 per cent of their working time in a freeport tax site and has not been employed by that employer in the previous 24 months.

He said it is important to understand that this is a ‘place-based policy’: “Opening up that relief to employees who did not meet that requirement would undermine the policy aim of supporting employment in the freeport area, because it would mean that employers could effectively claim relief on employees carrying out work outside a freeport area—indeed, in an area that may not be related to the freeport at all.”

On the starting date of 2022, Norman said there are number of further steps to be undertaken before a freeport tax site can be designated and a freeport can go into operation. It is useful therefore to have a date certain for the operation of the policy, he said.

On TUPE-ed employments, he said these are not regarded as new employments, and the employment is transferred but is not regarded as new, so the employee would not be eligible for the reliefs.

The minister said that Thomson’s new clauses would add complexity to what is a well-established and rapidly moving process, and they would create potential delay.

Thomson pushed amendment 1 to a vote but it was defeated (9-1).

Clause 4: Anti-avoidance

The FST explained that the Bill excludes employers that arrange their affairs with the aim of benefiting from the relief where that arrangement is contrary to the policy intent. An example of where the Government would expect HMRC to reject a claim for this relief would be where an employer structures their employment contracts so that a workforce can easily be dismissed after three years with the sole purpose of hiring new staff so that they can benefit from another three years of relief, or if an employer were to fire their employees and rehire the exact same posts with new employees.

James Murray asked if HMRC will get any new resources to counter attempts at using freeports as a form of tax avoidance. Norman replied that HMRC has been closely involved in the policy design in order to minimise any potential for tax avoidance and is ‘well staffed’ to address these concerns.

Clause 5: Zero-rate contributions for employees at freeport tax sites: Northern Ireland

The FST explained that the Bill gives the Treasury the power to legislate for the detail of the freeport NICs relief in Northern Ireland in secondary legislation, although he explained that the specific design of the relief will have to comply with EU rules on the provision of state aid, due to the requirements of the Northern Ireland protocol.

James Murray wanted to know how the freeports model will need to be adapted in Northern Ireland to comply with the terms of the protocol. He also asked if the Government intends freeport to be established in all four nations of the UK by 6 April 2022. The minister replied that ‘these things are subject to current discussion and negotiation’.

Clauses 6-7: Zero-rate contributions for armed forces veterans

Two Labour new clauses were discussed in this group. New Clause 3 called for an assessment of the impact of NICs relief for employers of veterans being claimable retrospectively for 2021-22, rather than in real-time. New Clause 4 would have required the Government to evaluate the impact of the NICs relief for employers of veterans being available only for one year rather than three years.

The FST, Jesse Norman, said the Government had made a manifesto commitment to support ex-service personnel in their attempts to work to secure stable and fulfilling employment – and that it is honouring that commitment by providing employers with a zero rate of national insurance contributions on the earnings of qualifying veterans (during their first year of civilian employment).

On Labour’s new clauses, Norman said most of these issues were considered during the detailed consultation - the Government have already committed to reviewing the measures, and the policy costing and underlying analysis were signed off and certified by the OBR, with the methodology set out in the Budget policy costing document.

As in the second reading debate, James Murray, for Labour, asked why the Government has chosen to make the relief available for only one year, rather than any longer; in particular, why not for three years, in line with the relief for freeport employers? He said the review being suggested by Labour would have to assess the impact on decisions on the creation of jobs for veterans of the relief being available for earnings paid over a one-year period rather than a three-year period.

Murray explained that new clause 3 “is about enabling us to understand the impact of the Government’s reluctance to make the relief claimable in real time for 2021-22. As the Chartered Institute of Taxation sets out, it seems that the policy intention is that the relief will be available from 6 April 2021, although employers will need to pay the secondary class 1 NICs on the earnings of eligible veterans for the 2021-22 tax year, then claim them back retrospectively in April 2022. From the 2022-23 tax year onward, employers will be able to claim the relief in real time through their PAYE declarations.”

He continued: “The Chartered Institute of Taxation reasonably questioned why employers cannot self-serve the relief for 2021-22, once the legislation has been passed, especially given the challenging circumstances of the pandemic and the cash-flow implications. The institute asks whether HMRC could be permitted to exercise its discretion and to permit employers to make real-time claims for 2021-22 where their payroll software provides for suitable identification of eligible veterans.”

The minister replied that the NICs relief for veterans is at a higher level for a shorter period, because the goal is to support a very specific process of transition, which veterans have as they come out of the armed forces.

Replying to Murray’s comments on the timing of payments and their cash flow implications, Norman said he is ‘happy to consider the matter further and to ask HMRC to consider it’, though he noted the matter had been given extensive consultation and IT problems could not just be wished away.

Labour’s Sarah Owen intervened to say the veterans’ NICs relief needs to be ‘for much longer; than a year’ adding: “The cuts to 10,000 armed forces personnel come at a time when people are losing their jobs due to the economic pressures from the pandemic, and it seems very odd to say that we are looking at a long-term solution yet giving armed forces personnel the security of only one year.” Norman replied the key is to offer genuine support at a moment when a veteran needs it as they come out of the armed forces and go into employment, and to design that flexibly.

Clauses 8-9: Upper secondary threshold for earnings

The Bill contains a regulation that would allow the Treasury to set for every tax year a freeport upper secondary threshold and a veterans upper secondary threshold over which the secondary percentage, rather than the zero secondary percentage, would apply. Different upper secondary thresholds may be set for each measure.

James Murray welcomed the fact that the Tax Minister had confirmed on Second Reading that the upper secondary threshold for veterans will be £50,270 in a veteran’s first full year of civilian employment. But he remained ‘unconvinced’ by his argument for setting the threshold for employers in freeports below the average wage in freeport areas.

Clause 10: Treatment of self-isolation support scheme payments

The FST reminded MPs that, in response to the pandemic, the Government had launched a £500 support payment in England for low-income individuals who had been told to self-isolate but who could not work from home and would lose income as a result. The Scottish and Welsh Governments had announced similar schemes. These payments had already been exempted from employee and employer class 1 and class 1A NICs, through secondary legislation. This Bill extends the exemption to the self-employed and retrospectively exempts Test and Trace support payments from class 2 and class 4 NICs for the 2020-21 tax year. It also enables the Government to ensure, through regulations, that future Test and Trace support payments will not be included in profits liable to class 2 and class 4 NICs.

James Murray welcomed this exemption. He argued that the Government should have confirmed sooner that these exemptions would be put in place, to provide self-employed people with certainty.

Clause 11: Disclosure of contributions avoidance arrangements

Minister Jesse Norman explained that this clause widens existing regulation-making powers so that regulations can be made for national insurance, mirroring the amendments to the disclosure of tax avoidance schemes—DOTAS—procedures that are included in the Finance Act 2021. The changes enable HMRC to obtain information and documents much earlier for avoidance schemes that HMRC suspect should have been notified to them but have not been disclosed. This also provides that future modifications to part 7 of the Finance Act 2004 (DOTAS) can be applied or modified so that they apply to NICs without the need for primary NICs legislation, which should enable changes to be made ‘efficiently and effectively’ said Norman.

Labour spokesperson James Murray said: “As I made clear on Second Reading, we welcome any measures that help HMRC to track tax avoidance schemes. During the debate, I drew Ministers’ attention to a point made by the Chartered Institute of Taxation: that it believes that there is a hard core of between 20 and 30 promoters, identified by HMRC, who clearly do not play by the rules. I asked: ‘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’. Unfortunately, the Exchequer Secretary did not address those questions at the end of Second Reading, so I am glad to have the chance today to raise them again for the Financial Secretary to address. Would he comment on whether he recognises 20 to 30 as the number of hardcore promoters, and on whether there are any targets with dates by which Ministers expect the number of hardcore promoters at large to fall substantially?”

Norman replied: “It is HMRC’s view—as he says that it is the Chartered Institute of Taxation’s view—that some 20 or 30 promoters are in the market at present. HMRC are vigorously applying themselves to curtailing that activity and to supporting and protecting taxpayers. The Bill will give them an important additional tool with which to do that.” But he said it ‘would [not] be prudent to make an estimate or assessment of what the appropriate number of promoters is or could be’, adding that ‘over the past six years, more than 20 promoters have left the market. That is a significant achievement’.

Clause 12: Regulations

The FST explained to MPs that this clause specifies how regulations are to be made under the Act and the parliamentary procedure that will apply to them.

James Murray remarked: “Although it will always be easier for the Government to amend legislation by way of regulations, we recognise the concerns that the Chartered Institute of Taxation has articulated that the powers to make those changes are extensive. There may well need to be flexibility to allow the finer detail of legislation to be amended, but there is a strong argument that any fundamental changes should be subject to full consultation and scrutiny.”

The minister replied that the Treasury takes ‘extremely seriously’ the question of what its appropriate powers are, and there has been considerable discussion and indeed parliamentary engagement on what the appropriate powers for HMRC should be in each case.

Clauses 13-14: Interpretation, etc and Short title

The shadow minister, James Murray, raised no specific points on these clauses but took the opportunity to thank committee colleagues, “and to give special thanks to the Clerks, the Library and the Chartered Institute of Taxation for all their advice during the passage of the Bill so far”.

New clauses

There was a brief debate on SNP spokesperson Richard Thomson’s New Clause 6 and New Clause 7 that call for NIC relief for businesses in freeports dealing with green manufacturing products. Thomson said there is a strong appetite to find new ways to support the economy, especially in those sectors that can contribute to green recovery.  He claimed providing exemptions on NICs and ensuring that they are targeted on businesses engaged solely in green manufacturing could do much to drive innovation and improvement.

The FST replied that designing a sector-focused relief is not straightforward and it would add complexity to the tax system. The Government already has a raft of policies to support green manufacturing companies, he claimed.

Another SNP new clause, new clause 8, would have provided exemptions for Scottish Government Covid payments to social care workers from primary class 1 contributions. Richard Thomson he had remarked previously on the unfairness that was caused by the Treasury refusing to exempt the thank-you payment that the Scottish Government made to health and social care workers from income tax. Contrary to a number of assertions, the Scottish Government do not have the ability to exempt it from income tax, he said, other than by paying far more than the £500. He pushed the new clause to a vote “to ensure that clarity is provided and that any future payments for health and social care workers can be exempt from national insurance contributions.”

The FST replied that any payments made in connection with an employment are chargeable to income tax and national insurance contributions. He said the UK Government has provided more than £5.9 billion of additional funding for the Scottish Government this year through the Barnett formula. If the intention of the Government in Scotland is for health and social care workers to benefit by at least £500, it remains open to them to gross up the payment to take into account the tax and NICs liabilities, as the Welsh Government have done, he said.

Thomson pushed new clause 8 to a vote but was defeated (10-1).

The CIOT’s written evidence to the committee was reported and published.

The full session is here (the amendment paper is here)

By Hamant Verma