National Insurance Contributions (Secondary Class 1 Contributions) Bill

Committee (2nd Day)

Clause 1: Rate of secondary Class 1 contributions

Amendment 6

6: Clause 1, page 1, line 1, at end insert— “(A1) In section 9(1A) of the Social Security Contributions and Benefits Act 1992, after paragraph (aa) insert—“(ab) if the employer is a specified employer under subsection (1B), the specified employer secondary percentage;”(A2) After section 9(1A) of that Act insert—“(1B) A “specified employer” means a business with an annual turnover of less than £1 million.(1C) For the purposes of this Act, the specified employer secondary percentage is 13.8%.””Member’s explanatory statement This probing amendment would exempt the smallest businesses from the increase in national insurance contributions.

My Lords, I rise to move Amendment 6 in my name and to speak to my Amendments 23 and 48, all on small business—a subject dear to my heart, as noble Lords will recall from our debates on the Procurement Act in the last Parliament, mostly in this very Room.

Small business is at the entrepreneurial heart of the economy. We need a constant stream of start-ups for an economy that is dynamic. The amount of regulation on such businesses is already discouraging. My own findings are that the imposition of additional employer NICs is leading some businesses towards despair, with more closed shops on the high street and busy insolvency practitioners. Others are not setting up. Their customers are affected by the chill created by the Budget and the enormous NICs hit in particular, which has a multiplier effect on confidence.

I acknowledge that the increase in the employment allowance is helpful and I congratulate the Federation of Small Businesses on its work on this with the Treasury and DBT. However, more needs to be done to drive growth. I believe that easing the strain of NICs on SMEs could play an important part.

My Amendment 6 would exempt micro-businesses with an annual turnover of less than £1 million from this jobs tax. I have tabled this amendment because I want to understand whether the Government would consider an exemption that would have a relatively low impact on the revenue that the Treasury receives from this policy. To exempt such small businesses would not come at a great cost to the Treasury, yet it would have a big impact on the businesses that it would protect and on attitudes to the Government’s plans. The Financial Conduct Authority defines “small businesses” as companies with an annual turnover of less than £1 million—hence my choice for the threshold. I add that even many of these businesses may not survive recent tax rates. The Government will be failing in their promise, I fear, to be the most pro-business Government ever.

My Lords, I shall speak to Amendments 22, 39 and 53 in my name in this group, to which the noble Baroness, Lady Kramer, and my noble friend Lady Neville-Rolfe have added their names. I shall also speak to Amendments 6 and 33, tabled by my noble friends Lady Neville-Rolfe and Lady Noakes respectively.

Rather than taking a sectoral approach, about which others spoke passionately last week, my three amendments focus on the size of businesses and organisations impacted by the measures in the Bill, specifically those categorised as small businesses, which means that they employ between 10 and 50 full-time staff. I should again declare my interests as set out in the register, as I advise and invest in a number of businesses of this size, predominantly start-ups and scale-ups. These are the companies that grow and create jobs at the fastest rate and, through their size and agility, seize the nettle of productivity. If I may mix my metaphors for a moment, these are the acorns that seek to become unicorns or, at the very least, sturdy oaks.

The Department for Business and Trade reports that there are some 220,000 businesses across the UK that employ between 10 and 50 staff—that is 4.3 million of the 28 million jobs in the private sector and they generate £780 billion in annual turnover. However, this group involves not just fast-growing early-stage start-ups but a huge swathe of family and local businesses spread across the country and, indeed, businesses that have been struggling to keep their heads above water in what have been five very difficult trading years.

While the Government have sought to protect the majority of our micro-businesses, those employing between one and nine staff, from rising NICs, they have left all other small businesses exposed to these sudden and dramatic increases. In terms of impact, the Government tell us that 250,000 employers will see their NICs decrease, 940,000 will see theirs increase, while about 800,000 employers will see no change. This has allowed the Government to claim that the majority of employers will see no increase. With respect, that is deeply misleading. The question that matters is what proportion of jobs will attract increased national insurance contributions. I ask the Minister that question. Can he confirm, if he does not have the numbers at hand, that in fact the number is close to 80%?

My Lords, I have Amendment 33 in this group; I thank my noble friends Lady Neville-Rolfe, Lord Ahmad of Wimbledon and Lord Howard of Rising for adding their names to it. As my noble friend Lady Neville-Rolfe said, my noble friend Lord Ahmad of Wimbledon is unfortunately unable to join us for the early part of this Committee. He very much regrets that he is not able to take part because he cares a lot about the fate of small and medium-sized businesses.

My amendment would delay the commencement of the Bill, and therefore the extra national insurance contributions, until the tax year after an impact assessment focusing on the impact of the Bill on smaller businesses has been published. My amendment is similar to Amendment 59, tabled by the noble Baroness, Lady Kramer, which was debated on our first day in Committee. Amendment 59 required an ex-post impact assessment, while mine is on an ex-ante basis. Amendment 59 also used a rather broad definition of SMEs, including those with employees of up to 250; my amendment is more granular and focuses on the smaller end of the SME spectrum, which is where most SMEs are.

As we know, there is no impact assessment with this Bill. It is a well-accepted principle that, when the Government put forward legislation, they are expected to make sure that Parliament has the information it needs to scrutinise the legislation. The Leader of the House in the other place recently wrote, in response to a Written Question:

“The Government is committed to ensuring Parliament has the information it needs to hold the Government to account and to understand the impact of legislation. When a bill is published the Explanatory Notes include information regarding any financial implications”.

The Explanatory Notes refer to the tax information and impact note, which we discussed on our first day in Committee. I do not think that any noble Lord who commented on the note then, other than the Minister, regarded it as remotely adequate, because it simply did not give sufficient analysis of the impact of the Bill. The Minister bravely called the note a detailed assessment and asserted that the Government would not publish anything else. That is no way to treat Parliament.

I believe that a full impact analysis should have been prepared, given the potential impact of the national insurance changes on employment costs and levels, prices, profit margins, and of course growth. All the business groups are saying that the impact of the national insurance changes on businesses will be significant and negative. There will be impacts on many businesses of all sizes, but in particular, as we have heard, on small and medium-sized businesses, which are what my amendment focuses on. The OBR has made calculations of the direct and indirect effects of the Bill, to work out the benefit to the public finances. However, as we debated on the first day in Committee, that analysis is at a macro level and does not cast light at all on the impact on different sizes or types of businesses.

HMRC has given numbers, which the noble Lord, Lord Londesborough, cited earlier; they are regularly trotted out by Ministers to give the impression that the impact of these changes is rather benign because of the large numbers that will either have no impact or make some gain. However, we have no more granular analysis than these three large numbers. I am fairly sure that the HMRC numbers do not factor in the increases to the national living wage, which, especially for younger workers, will have a very big impact when that uplifts wages, and therefore on the amount of national insurance that will be collected. I am sure that the figure of 250,000 that will be affected is an understatement, but we have no way of telling because we do not know any of the assumptions underlying the numbers that we have been given.

It is a bit difficult to make sense of the HMRC figures. They add up to a little over 2 million employers paying secondary national insurance contributions. The most recent ONS survey data, from January last year, shows that the total business population includes 5.5 million businesses, of which 4.1 million are sole traders —or at least they have no employees, so we presume that they are sole traders. That leaves only 1.4 million businesses with employees, rather than the 2 million in the HMRC analysis.

I do not know what the cause of that is—it may be to do with incorporated sole traders, but we do not have any information. Could the Minister shed any light on those figures and tell us whether any further analysis can be shared with the Committee? In particular, I want to ask the Minister whether there is any further analysis of the 250,000 businesses that are expected to pay more national insurance contributions as a result of the Bill. According to the ONS data, there were 264,000 businesses with more than nine employees, so I agree with the noble Lord, Lord Londesborough, that most employers in the category of those who will be affected negatively by this Bill are employers in businesses with more than nine employees. That means that huge numbers of small and medium-sized businesses are caught by the changes, with, at best, only micro-businesses escaping a negative impact.

I have tabled my Amendment 33 simply to try to find out the impact on different sizes of business, through three categories of turnover—£1 million, £5 million and £10 million. The £1 million aligns with the new Companies Act definition of a micro-business. According to the ONS analysis of businesses, as amplified by Department for Business and Trade data, businesses that have between one and nine employees have an average turnover of only £600,000, well below the Companies Act micro-business level. The next category, which is the 10 to 49 employees range, has an average turnover of £3.5 million, so all those plus some more would fall into my £5 million threshold. The £10 million threshold would include a fair chunk, but by no means all, of the larger categories of SMEs. That is really what we need to try to find beneath the analysis. I do not much mind whether we get analysis by number of employees or by turnover bands; the important thing is that the Government analyse and publish the effect on different sizes of business.

There is a good reason to focus on smaller enterprises, even though these changes impact all sizes of business—mainly because smaller businesses find it so much tougher to cope with additional costs, because they have far fewer options. Having a smaller workforce, of, say, 12 to 15 employees, makes it hard to implement changes involving staff cost savings without impacting operational effectiveness. We know the category of these businesses with fewer employees is where we find start-ups, which we hope will eventually get themselves through to scaling up, because that is what we require for growth to come through to the economy. If we are harming these businesses at the beginning of their lives, that will have a knock-on effect on the growth of the UK.

We need a lot of questions answered about what is happening in those segments of the business community. If the Government have that sort of analysis, they really ought to share it with Parliament. Indeed, if they have the analysis, and if they get their skates on and publish it fairly promptly, my amendment would not even delay the implementation of the national insurance changes. If they cannot provide the analysis, however, the Government need to ask themselves whether they are right to pursue this policy choice without understanding the detailed impacts—and Parliament needs to consider whether the Bill should come into effect in an information void.