National Insurance Contributions (Termination Awards and Sporting Testimonials) Bill
Tuesday 30th April 2019
(5 years, 6 months ago)
Commons ChamberRead Full debate National Insurance Contributions (Termination Awards and Sporting Testimonials) Act 2019 Read Hansard Text Read Debate Ministerial Extracts
The Exchequer Secretary to the Treasury (Robert Jenrick)
I beg to move, That the Bill be now read a Second time.
This is a small and narrowly drawn, but nonetheless important, Bill. It aims to provide a welcome simplification of the tax treatment of termination awards and sporting testimonials. The corresponding rules determining the income tax treatment of termination awards and sporting testimonials were legislated for in the Finance Acts of 2016 and 2017. At that time, it was made clear that we would return and replicate those rules in national insurance legislation in due course, to ensure that there was not a persistent misalignment. Implementation of the measures in this Bill will replicate those rules in national insurance legislation. By the nature of national insurance, it is required to have a separate piece of legislation from the Finance Bill.
These measures were first announced at Budget 2015. They were then consulted on and published in draft in December 2016. They were subsequently reconfirmed at Budget 2018, so it is reasonable to say that they are expected by those affected and have been subject to much scrutiny. Together, they mean that a 13.8% class 1A employer national insurance charge will be applied to income derived from termination awards and sporting testimonials that are already subject to income tax.
Let me first set out the measure that covers termination awards. Between 2013 and 2014, the Office of Tax Simplification reviewed the tax treatment of employee benefits and expenses. The OTS published an interim report in August 2013 identifying termination awards as one of a number of priority areas. It found that relatively few employers and employees properly understood the regime. There was confusion, and the regime was therefore ripe for reform and simplification.
The OTS specifically identified three areas of misunderstanding on which it recommended we take action. First, certain forms of termination awards are exempt from employee and employer national insurance contributions and the first £30,000 is free from income tax. However, there is a common misconception that the first £30,000 of any termination payment is automatically tax free. Secondly, many employers believe that this exemption applies where in fact it does not, and thirdly, employers are unaware of the different income tax and national insurance treatment of termination payments.
Following the OTS recommendations, the Government announced at Budget 2016 that they would be reforming the tax and national insurance treatment of termination awards. As I said, the reforms to the income tax treatment of termination awards were legislated for in the Finance (No. 2) Act 2017 and took effect from April 2018. The Government confirmed at Budget 2018 that the associated reforms to national insurance legislation would be in place for April 2020. However, the fact that termination awards are currently subject to different income tax and national insurance treatment has created confusion, and that is what we are attempting to deal with today. Moreover, the current misalignment incentivises an admittedly small number of well-advised employers to disguise final payments as compensatory termination awards that benefit from a national insurance charge exemption. These reforms will close that loophole.
The Bill will place a 13.8% class 1A employer national insurance charge on income derived from termination awards on amounts over £30,000. However, I want to assure hon. Members that, when it comes to employee national insurance, these payments will remain entirely exempt. We have chosen to continue to ensure that employees will not face any additional liability as a result of these changes in terms of employee national insurance. This measure will raise around £200 million per annum for the Exchequer, which will make an important contribution to our public services. As this is a Budget measure, this sum has already been reflected by the Office for Budget Responsibility in its projection for the public finances.
Let me turn to the second measure in the Bill, which deals with aligning the employer class 1A national insurance treatment of income from sporting testimonials with the income tax treatment. As many hon. Members will be aware, a sporting testimonial is a one-off event—or series of related events—held on behalf of sportspeople who have played for a certain club for a long time. This often takes the form of an exhibition match involving famous players from the past and present. The testimonial can be used to raise money for the sportsperson before retirement, or sometimes to raise money for charity. The relevant income tax changes were debated and came into force from April 2017. As stated at the time of the Finance Bill—later the Finance Act 2016—the rules governing sporting testimonials are now changing to give clarity to the national insurance treatment as well.
Currently, when a sporting testimonial is non-contractual or non-customary, it can be organised by a third party, rather than the club or employer, to raise money without it being subject to NICs. Where the employer arranges the testimonial, or if it is part of the contract, or if there was an expectation that the sportsperson would be entitled to one, the testimonial is already subject to income tax and NICs.
James Cartlidge (South Suffolk) (Con)
Is there a sense of how common it is for a testimonial to be contractual? We all know that it is commonplace in cricket and football for players to have testimonials or similar events, so one assumes that most of them are contractual.
Robert Jenrick
My hon. Friend makes a good point, and our analysis is the same. Last year, only around 220 sporting testimonials of any kind took place in the United Kingdom, and a large number will have been contractual. Certainly, the highest-profile ones, such as those of premiership footballers or leading cricketers for significant county clubs, are usually contractual. As I will go on to say, because the measure has a one-off £100,000 threshold during the career of the sportsperson, a large number of those 220 testimonials will fall below the threshold. Less high-profile sportspeople, who will perhaps have lower earnings, are likely to be within the threshold. We are talking about a small number of relevant testimonials and, as hon. Members will see in the Bill’s accompanying documents, the measure will raise a negligible sum. Our motivation is primarily the simplification of the tax system and the avoidance of doubt for sportspeople and those advising them, rather than to increase revenue materially.
Rebecca Pow (Taunton Deane) (Con)
The Minister is making a clear point. I want to speak mainly for the cricketers of Somerset county cricket club, and I declare an interest here, because my husband, who is an auctioneer, has helped to raise money at many of their testimonials. A testimonial can make an important contribution to a player’s salary, especially those who have played for a long time. Will the Minister clarify that the legislation will clear up the situation, which does seem somewhat confusing? We do not want players to feel hard done by, but we have to take the right amount of tax and we must be fair. Will he also clarify that the proposals are fair and that players who may earn less will not be jeopardised?
Robert Jenrick
Yes, and I must also declare an interest as a member of Nottinghamshire county cricket club. We have given the matter a great deal of thought. The proposal was raised several years ago, as I said, and we consulted at that time with the sporting bodies, including the England and Wales Cricket Board. It was my right hon. Friend the Member for South West Hertfordshire (Mr Gauke), then the Financial Secretary to the Treasury, who discussed the matter with the cricketing bodies. When the proposal was first brought forward, the threshold was £50,000 but, having spoken with the sporting bodies, we made the decision to increase it to £100,000, making it significantly more generous and allaying some of the concerns that my hon. Friend the Member for Taunton Deane (Rebecca Pow) sets out.
Mr Deputy Speaker (Sir Lindsay Hoyle)
Let us hear from Essex county cricket club.
Vicky Ford
I just wanted to declare an interest as a member of Essex county cricket club. I thank the Minister for supporting cricket.
Mr Deputy Speaker
That is not a problem as long as we do not forget the great county of Lancashire. [Laughter.]
Robert Jenrick
Very good. I re-emphasise not only that there is a £100,000 threshold, but that this is about fairness. All sportspeople who have a contractual right to a testimonial, which is commonplace, will have been paying income tax and national insurance on the benefit from that for some time, so this measure merely provides a greater degree of certainty and fairness. Of course, some of the clubs organising such testimonials will be smaller, or they may involve testimonial committees, so providing them with the clearest possible advice will be helpful. It will also ensure that there is no doubt in their minds when doing a good thing that is in the interests of players who may be at the end of their careers or may have been injured prematurely.
From April 2020, non-contractual and non-customary testimonials arranged by third parties will now be subject to NICs above a £100,000 threshold. A third-party testimonial committee will be liable to pay the class 1A employer NICs charge on the amount raised above £100,000. These types of testimonials will not be subject to employee NICs, to ensure that the sportsperson is not adversely affected. Again, as with the termination awards measure, we have chosen to act in relation to employer national insurance contributions, not employee contributions, so there remains a benefit to individuals in that respect.
I reassure hon. Members that the vast majority of sportspeople will be unaffected by the Bill because they will not exceed the £100,000 threshold. As I have said, Her Majesty’s Revenue and Customs estimates that only around 220 testimonials occur each year, most of which will remain unaffected as they either fall below the £100,000 level or are part of a previous contractual arrangement, which is commonplace in most sports.
Although the measure will bring in negligible revenue—we estimate less than £3 million a year—its value comes in the alignment and simplification of the tax and NICs treatment of sporting testimonials and clarity for those taking part in testimonials or those on sporting testimonial committees. Sporting bodies and other relevant stakeholders are expecting the changes, because our intention to make them has been known since at least 2015. As the changes required an NICs Bill, there has been a short delay, but that is what we are attempting to do today.
In conclusion, it may be a small and narrowly drawn Bill, but it is none the less important and includes two measures that simplify our tax code. Like many right hon. and hon. Members, I would like greater simplification of the tax system, but that journey must begin with single steps, and we are taking one of those today in simplifying the tax code in two significant respects that will have real-world consequences for individuals, who will benefit from a simpler system. The Bill will also raise a significant sum for public services and support our continued efforts to improve the public finances. It brings the national insurance and tax treatment of termination awards and sporting testimonials into closer alignment, and I commend it to the House.
Peter Dowd (Bootle) (Lab)
The condensed national insurance Bill before us is a shadow of its former self. I would have liked to be able to say that I was bowled over or knocked for six by the Minister’s speech, but there were more own goals than anything else. It is far from the extensive Bill that was promised by the Chancellor’s predecessor at the 2016 Budget, which included the Conservatives’ 2015 manifesto pledge to abolish class 2 national insurance contributions. Instead, that manifesto pledge, like many of the Government’s promises, has quietly been sent to the landfill, barely even being recycled in this five-clause Bill. As for scrutiny, we have not even been able to amend the last three or four Finance Bills, but I am pleased that we will have an evidence session in Committee. I will be grateful for small mercies because we may be able to tease matters out a little more.
The cannibalisation of the national insurance Bill, which has been driven by the Chancellor’s volte-face on a tax cut for 3 million self-employed workers, reflects once again why the Conservative party has long ceased to be the party of the self-employed in particular and business in general. To many observers this will be viewed as another missed opportunity—one of the many opportunities that this Government have missed—to seriously address the relationship between the growing levels of self-employment in the UK and the levels of taxation and national insurance contributions that are paid.
The rushed timetable of this Bill has shown, once again, the Government’s complete lack of respect for parliamentary convention and the procedures of this House. The Opposition were notified only last Wednesday of the Government’s intention to timetable the Bill’s Second Reading, with an updated version of the Bill published last Thursday. The Government do not know one day from the next, although they do try to live from one day to the next. They gave parliamentary colleagues just one sitting day to examine the content of the Bill before today’s debate. The Government might not take their legislative responsibilities seriously, but the Opposition do.
Of course this is nothing new. Members have become accustomed to the Government’s handling, or mishandling, of legislation. The Government are engulfed in chaos and infighting on Brexit, and The Times reported yesterday that their rushed introduction of this hollow, some may say vacant, Bill is a further desperate attempt by the Prime Minister to keep this zombie Parliament in session.
Unwilling to face the electorate and unable to bring her dead-in-the-water Brexit deal back to Parliament for the fourth time, the Prime Minister is attempting to pack parliamentary business in the hope of avoiding an early Queen’s Speech that would no doubt be opposed by the Democratic Unionist Party and her own Back Benchers. This is a new embarrassing low for a Government who are all at sea. It is high time that the Prime Minister did the honourable thing and set a date for a general election and her departure. We have a kakistocracy dressed up as a Government.
The Bill is comprised of two key measures: the introduction of a new national insurance contributions charge for employers on the taxable element of termination payments above £30,000, as the Minister set out; and the introduction of a national insurance contributions charge on income from non-contractual sporting testimonials over £100,000.
The new class 1A employer NICs charge will be levied at 13.8%, if I understand it, and its introduction will align the NICs treatment of termination awards and income from non-contractual sporting testimonials. On the face of it, the Minister would have us believe that these changes are technical and benign. However, there is nothing technical about fundamental changes to the treatment of termination payments either for the employer paying them or for workers facing redundancy, who regard this final payment as an evaluation of the work they have done for their employer.
Termination payments, therefore, have both an emotional and a financial significance, and the amount awarded is often determined by painstaking and careful negotiations between managers and trade union representatives. A good employer might offer a generous termination payment to an employee as a sign that, even though they have had to make them redundant, it is not a judgment on the intrinsic worth of staff who are leaving.
However, a likely by-product of the Government’s proposed employer NICs charge is that it will incentivise employers to reduce the level of non-statutory termination payments to employees so that the overall level of non-statutory payments declines. This will diminish the level of termination payments available to workers who lose their job, while increasing the amount that the Government receive in NICs receipts.
The tax information and impact note for this measure goes to great lengths to clarify that this new charge will be limited to employers, and the Minister asserts that the Government have no plans to make further changes to the £30,000 statutory threshold, yet the Government’s own policy note states that this additional cost for employers will be reflected in lower wages.
The Office of Tax Simplification, which the Minister mentioned, noted in 2015 that imposing tax and national insurance contributions on all termination payments is
“likely to have a significant cost impact for some people, particularly those lower paid employees who may…often be the ones receiving smaller termination payments”.
Despite the clear impact that this measure will have on workers and employers alike, the original consultation noted that the Treasury had failed to undertake a distributional analysis of the impact of this new charge. With that in mind, will the Minister confirm whether, a few years on, that remains the case?
Similarly, the Chartered Institute of Taxation has raised concerns that the Bill does not set out how the new class 1A charge will be collected by HMRC, stating that it will instead be left to secondary legislation—more secondary legislation, the Government’s default position. The Treasury says it anticipates that the charges will arise and be paid in “real time,” rather than after the end of the tax year. However, tax experts note that this is a break from normal practice and will prove extremely cumbersome, requiring additional resources at a time when the Government are continuing their disastrous reorganisation of HMRC.
James Cartlidge
It is always a great pleasure and highlight to hear the hon. Gentleman talking about distributional analysis, but does he agree that, where we have what are effectively exceptional one-off payments that are hard to predict, it can be difficult to undertake such analysis? Sometimes we just have to be honest and accept that a measure is relatively minor. Although the money it raises is significant, we are unlikely to have the sort of data he is asking for.
Peter Dowd
It might be a minor measure, but the actual impact on individuals is potentially significant. I am interested in the impact it might have on individuals who lose their job, and not necessarily the capacity or otherwise of the Government to make an assessment of that. I focus my attention on those who may not get another job for a considerable period.
I now turn briefly to the second measure in the Bill, which seeks to introduce a similar NICs charge on non-contractual sporting testimonials for employed sportspersons. I look forward to leading the Government’s testimonial sooner rather than later.
Sporting testimonials have become a key part of our nation’s rich sporting history, presenting an opportunity for fans to pay tribute to sportspersons who are coming to the end of their playing career. I come from Liverpool, a city with a fantastic football team, Everton, and another football team, Tranmere Rovers. There is another team whose name I cannot remember; it has slipped my mind.
Under the Government’s proposal, the new class 1A employer NICs charge will apply after the first £100,000 and will make the controller of the sporting testimonial, usually an independent committee, liable to account for the charge where the employer is not organising the testimonial.
Although the Opposition recognise the logic of applying employer NICs to non-contractual sporting testimonials, where the money is going not directly to a sportsperson but, rather, to a testimonial committee, we are concerned that the majority of income from such testimonials comes from fans who make voluntary payments. If this measure is passed, there will be a clear inconsistency in the NICs treatment of voluntary donations or tips at sporting testimonials compared with the treatment of cash tips in the service sector, where the employer is not involved. That is something we will seek to address in Committee.
This condensed national insurance Bill is further evidence of the Government’s perpetual desire to shift the tax burden from the well-off to workers. Rather than tackling tax avoidance and raising taxes to ensure that the wealthy and large corporations pay their fair share, the Government are yet again introducing measures designed to raise additional revenue for the Exchequer from the termination payments of workers.
The introduction of a new employer NICs charge will inevitably lead to employers reducing non-statutory termination pay, leaving workers worse off when they have just faced the trauma of losing their job. To put it simply, this measure is unfair, cynical and disproportionate considering the scarring effect it will have on workers compared with the limited amount of revenue it will raise. We cannot support this, but we will look at it in more detail in Committee.
James Cartlidge (South Suffolk) (Con)
Before I start discussing the Bill, Mr Deputy Speaker, I hope you will not mind my saying that it is a pleasure to follow the hon. Member for Bootle (Peter Dowd), as always, but it is a particular pleasure to follow the brilliant speech made by my hon. Friend the Member for Cheltenham (Alex Chalk) about climate change and his Bill about the net zero UK carbon account. It was one of the finest speeches I have heard since entering this place. It was an inspiring speech on an incredibly important subject.
Having said that, although I intervened on the hon. Gentleman to say that this was a minor matter, that does not mean it is unimportant. I meant that it was minor in terms of the revenue, albeit that its revenue is important and welcome. We should add that it has been baked into the Government’s accounts, so if anyone were to oppose it, they would have to suggest where £200 million a year of revenue was going to come from, as we would be spending this money on public services, from which we will all benefit.
Given the context of politics today, I would understand it if someone sitting in the Public Gallery or watching this debate elsewhere were to look at the title of this debate, “National Insurance Contributions (Termination Awards and Sporting Testimonials) Bill”, and think to themselves, “With all that is going on in the country—with these Union Jack and European Union flags outside, and all the talk about European elections, local elections, Nigel Farage back out on the stump and so on—is this really what we should be debating?” I would say that this Bill is important because, in its own way, it is the future of taxation in this country. Members may think that that is an odd thing to say, but we are going to be seeing a lot more of this type of Bill on taxation: measures that deal with specifics. I would not necessarily say that it deals with avoidance, but it is certainly a tidying-up measure that brings in welcome revenue.
Contrary to what the hon. Gentleman said, the Bill has little noticeable impact. Why do I say that? Ever since the early 1990s—since the 1992 general election and the 1997 one—and for the time being perhaps, the days when one of the main parties would go into a general election promising to change one of the main rates of taxation have gone. When I was elected in 2015, the Government we served in had specific legislation saying that we would not increase the main rate of national insurance. I think it also said we would not raise the main rates of income tax and VAT. There was legislation about the aid budget. We then found out that we would not increase tax on the self-employed and we would not increase the main tax on the employed. In fact, we changed inheritance tax. You soon run out of anywhere left where you can change any substantive tax, which must have been a concern in the Treasury; you are left with those yet to come and the good, old-fashioned national credit card. Our party has tried to avoid using that as much as possible. If Labour were successful at the next election, I am not sure it would be quite so successful on that—I think the card would take something of a hit.
The reason we support these types of measures is not because we welcome tax increases per se. In the context where the Government have pledged not to increase main rates of tax—I am sure Labour would be the same, although perhaps not on corporation tax—and in a political climate of no parliamentary majority, it is difficult to pass those “more radical” tax changes. So we will see more and more of these types of changes. We may call them tidying-up exercises or tax simplification measures—we have had many similar measures called “anti-avoidance”—but the point is that in total they bring in a lot of revenue. We are talking about significant revenue—£200 million a year is significant. If we put that in the context of the police budget, we see that it is a significant sum, so it is important. I will certainly be supporting this measure. I do not know whether the Labour party will, because I was confused by the hon. Gentleman’s speech. Perhaps we will get some clarity later.
One thing we should be wary of is that the specific area of taxation we are changing and increasing here is employers’ national insurance. I declare an interest, as an employer. I am a controlling director of a small business and have been for many years. It is fair to say that there are pluses and minuses with using employers’ NI as a method of obtaining revenue for Her Majesty’s Treasury. On the upside—this is why I have sympathy with this measure—it is saying, “Here are a lot of similar activities and it just so happens that in some of them employers’ NI is not paid. It is in the other ones, so we are harmonising the situation.” That is perfectly fair and reasonable. We have seen this in other contexts, with the classic one being IR35; people, often knowingly and perhaps sometimes unknowingly—it is hard to say—have constructed their tax affairs in such a way that, in effect, they are not having to pay either some employees’ taxes or the costs that there would be for a traditional company paying employees of paying employers’ NI. It is important always to consider the application of employers’ NI because, if it is not applied fairly, it can offer a perverse incentive in the tax system and create strange behaviours.
My right hon. Friend the Chancellor has talked about people who became self-employed and were not genuinely self-employed—I cannot recall the precise phrase he used, but we all know what that means. It means that someone is setting up their tax affairs in such a way as to reduce the amount of taxation they pay, rather than doing so because they are a plumber who, by their very nature, is going to be self-employed.
Peter Dowd
These testimonials are very important. A former Liverpool football player, Jamie Carragher, a Bootle lad, also had a testimonial and he put the best part of £1 million into his Jamie Carragher 23 Foundation. That is worth a mention.
James Cartlidge
I am grateful to the hon. Gentleman for mentioning the other Liverpool team, as it were. They seem to be doing quite well this season. It is a good and important point to make, because it sounds to me as though a relatively small number of sportspeople will have to pay a bit more tax in the coming years as a result of the Bill—there are a small number who do not have testimonials agreed contractually—but it is fair to have fairness.
Let me conclude on fairness. The hon. Member for Bootle and I have had one or two exchanges on Treasury matters over the years. He finished with quite a stirring wind-up, saying that with this Bill we were somehow supporting the rich—that classic old storyline that we were the party of failing to crack down on tax avoidance by the rich and were instead hitting the poorest. Well, what is the threshold in the Bill? It is £100,000.
James Cartlidge
The hon. Gentleman can correct me if I am wrong, but I believe the limit for testimonials is £100,000. [Interruption.] The hon. Gentleman mentions redundancy payments from a sedentary position; he can correct me if I am wrong again, but I do not think the Bill affects redundancy payments. It is about other, voluntary termination payments. On the subject of terminations, Mr Deputy Speaker, you will be delighted to hear that I shall now terminate my speech, but I will support this very good Bill.
Kirsty Blackman (Aberdeen North) (SNP)
Let me start by saying that I agree with almost everything that the Labour shadow Minister said. I will not make any cricket puns because I do not know anything about cricket—I will just stay out of that one—but I will make a point of mentioning that Aberdeen is obviously the greatest football team and should be mentioned first in any discussion of sporting prowess.
First, on the issues raised by the Labour shadow Minister about the Bill process, I share his concerns about the fact that we were told we would be getting the Bill before it had been introduced to this place. That is a real concern. Perhaps the Treasury drew the short straw again, and when the Government announced that they would have a Second Reading of a Bill but panicked because they could not work out which Second Reading it should be, they scrambled around and said to the Treasury, “You guys must have something”, and the poor Treasury Ministers were dragged here to present this Bill.
The serious point is that this is a highly technical Bill and we have had a very short time to look through it. I looked through the explanatory notes, as I am wont to do in these circumstances, but they do not talk about the amount of consultation that was done or the number of people who contributed to that consultation. I am aware that perhaps there are tax information and impact notes that do talk about the amount of consultation that was done, but it would have been useful to have that information in the explanatory notes so that we could be clear about how many individuals and organisations had come to the Treasury and said, “These are the good things and the bad things about the Bill.” That would have put us in a much more informed position, although I am sure we will get into the meat of that discussion in Committee.
On the intention behind the Bill, it was announced some time ago that there would be changes in this policy area and it has taken a while for the Bill to come through. Why has it come through now? If it has been intended for some time, why has it taken so long for the Bill to come before the House? Was it just that the Treasury drew the short straw, as I said, and had to bring a Bill to the House today and just had to find something? It would be useful to know something about the timing for the Bill, why it has come along now and what the logic behind that is.
I have a couple of questions on some of the specific things mentioned in the Bill. In introducing it, the Minister said that if there is a contractual obligation that there will be a testimonial, that will be treated differently, but also talked about cases in which there is an expectation that there will be a testimonial, which to me does not mean the same thing as a contractual obligation. I am not clear what the Treasury means by an expectation of a testimonial. Somebody could score a goal in every single club game they have ever played, but that does not mean they have a contractual testimonial obligation. I would expect, though, that that person would probably get a testimonial for being such a big part of their football club. Is that what is meant by “expectation”? If not, will the Treasury confirm exactly what is meant by that word in the Bill?
On the amounts for testimonials, the explanatory notes say:
“The new Class 1A liability does not affect individuals as it is to be paid by the controller of the sporting testimonial.”
That seems a bit disingenuous to me, because although it does not affect the individual’s liability, it does affect the amount of money they will get. Has the Treasury done any maths on how much less sporting individuals will get from their testimonials because this liability might have to be taken off before the money is handed over to them? It seems to me that, rather than being something quite removed, it will have a direct impact on individuals.
The Chartered Institute of Taxation got in touch with me with queries about some things in the Bill. On the £100,000 limit, the institute said:
“The intention is that the NICs rules will replicate this and only impose Class 1A NICs on the amount chargeable to income tax. We have reviewed the NICs Bill and it charges to Class 1A the amount that is ‘general earnings’. We assume this means the amount above £100,000…but it is not clear. The termination payments legislation refers specifically to the amount chargeable under the Income Tax (Earnings & Pensions) Act 2003. It is surprising that the same approach has not been adopted here.”
Why has the Treasury taken a different approach to the drafting of this legislation to that taken to the drafting of the termination payments legislation that was passed previously?
Mr Jim Cunningham (Coventry South) (Lab)
There is another question, about the definition of who is an employee and who is an employer. There have been various examples in the courts of people being treated as employers when they were actually employees. There is still a bit of obscurity about that when it comes to tax, which creates a lot of difficulty for people.
Kirsty Blackman
I absolutely agree with the hon. Gentleman’s point. When in a moment I talk about the termination awards for individuals, I will discuss that specific issue.
On termination awards for employees, the explanatory notes say:
“The new Class 1A liability does not affect individuals as it is paid by the employer.”
The reality is that, again, it does affect individuals, because they will receive less money. If the employer is going to give out a pot of £40,000, they will be giving some of that to the Exchequer, instead of to the individual as they currently would. The details show that the Exchequer expects to receive £210 million for 2023-24 as a result of the change; do Ministers expect individuals to receive £210 million less and that that money will go to the Exchequer instead, or do they expect employers magically to find some more money and to continue to pay employees who are leaving their organisation the same amount as before, while paying a slice to the Treasury as well? It would be useful to know how much less the Treasury expects individuals to receive as a result of the change, not just how much the Treasury expects to receive.
The NICs change is the only example of a class 1A charge on cash earnings that the Chartered Institute of Taxation could find. Why has the Treasury decided to take the route it has chosen? Class 1A contributions are normally paid in respect of things such as benefits in kind, rather than on cash earnings. The Bill seems to me to make a fairly fundamental change to how NICs are treated and to the different classes of NICs. It would be useful to know why the Treasury has decided to make this change. Is it part of some sort of long-term plan to use class 1A charges on cash in other circumstances? Or will they continue to be used mainly on benefits in kind?
It seems to me that it is a bit of an ad hoc change. Perhaps the Treasury is putting forward some grand plan, or perhaps it is just a small change. I have asked similar questions about the recent changes to the Financial Conduct Authority and the Bank of England. It seems that a lot of small ad hoc changes have been coming through with no blueprint for where the Treasury expects to be at the end of the process and what it expects the system to look like at that point. It would be useful to know more about that.
I would like to know about a few main things. On the £100,000 for sporting testimonials, is the Bill intended to operate in the way things operated under the previous legislation on sporting testimonials, but the language in the Bill is just unintentionally a bit woollier? On employees, we have that issue with the class 1A charge; does the Treasury intend to make further changes to class 1A contributions, or is this the last change it expects to make? We expect secondary legislation to come through as a result of the Bill, to tighten things up and make further changes in future, but when is that expected to come—in this Session, or quite close to the Bill’s implementation in 2020? If it is the latter and the secondary legislation does not come through in enough time, it might be difficult for employers to make sensible decisions.
Craig Mackinlay (South Thanet) (Con)
It is always a pleasure to follow the hon. Member for Aberdeen North (Kirsty Blackman). The two of us often seem to be in the Chamber at a similar time discussing tax issues.
These measures have been a long time in process. Back in the Budget of 2016, there was talk of a consultation on trying to align more closely national insurance with tax treatment. I note that, today, the Exchequer Secretary to the Treasury said that this is a form of simplification of the tax system. I might disabuse him of those thoughts by telling him to look more closely at the new rules regarding post-employment notice pay within payments in lieu of notice as part of termination payments. Far from being simple, it is actually rather complex.
As I said at the very start, these proposals have been making their way through this House in various forms. There were some delays because of the unexpected election in 2017, but they did find their way into a draft Bill in December 2016—the National Insurance Contributions Bill. Some proposed changes came through in the 2017 Budget, which included the scrapping of class 2 national insurance for the self-employed—currently £3 a week—and a corresponding increase in class 4 national insurance contributions for the self-employed. They were highlighted as fairly controversial at the time, but I did not share that view. I was quite supportive of the increase in class 4 national insurance because of the generosity, as I saw it, of the new state pension that came into play. That slight increase in the class 4 national insurance rate was, I felt, a fair quid pro quo for the quite substantial increase in the new state pension, but, for whatever reason, that measure was not taken through. I had some serious concerns about scrapping class 2 national insurance, and I will explain why.
The lowly paid self-employed person may not hit the threshold for class 4 national insurance contributions, which is, I believe, something above £8,500, but is more likely to have paid class 2 national insurance contributions and so would be ticking up a national insurance record into the future. Given that WASPI women have concerns about where they find themselves today, I was worried that this House and future Members of this House—I will probably be long, long gone—would face a raft of new people saying, “Where’s my pension. I have been self-employed all these years.” They would then be told, “Ah, but you didn’t pay any national insurance; you didn’t pay class 2, and you certainly weren’t earning class 4.” I was pleased to see that that idea disappeared and that we are back to what was the old system.
We have had this £30,000 threshold for tax-free redundancy payments—let me put it in easy terms—for quite some time. It could be argued that we have been at that level of £30,000 for too long. I did a bit of research before today and found that the last time that the £30,000 threshold was raised was with effect from 6 April 1988. It must have been considered to be the right rate at the time—it was an increase in rate from £25,000 to £30,000. I did not manage to find out when the £25,000 rate was first implemented, but it must have been deemed at the time to have been the right rate for what was a tax-free settlement, or payment, for years of service within a company. It was obviously deemed to be the right amount for people to adjust to a new work situation, or to act as a bridge towards retirement for people who were getting towards the end of their normal working life, which was perhaps more traditional in those days of the ’80s. I know the hon. Member for Bootle (Peter Dowd) raised some of those points in his speech.
Having consulted the Office for National Statistics for inflation increases since 6 April 1988, I found that £100 then is now worth £266 today. Applying that inflationary increase from 1988—no more, no less—that £30,000 would inflate to £79,800, or in broad terms £80,000. However, I do understand—for the record I am a member of the Chartered Institute of Taxation and a chartered accountant—that there is probably a perception that the £30,000 settlement payment has been a target to hit rather than a proper target for any other reasons. Hence we now have this fairly complicated formula for payments in lieu of notice. Changes came in on 6 April 2018, including this whole concept of post-employment notice pay. It was really to recognise the difference between contractual payments in lieu of notice and non-contractual payments in lieu of notice. I will not bore the House for too long with the formula that applies, but it is a fairly beefy one: it is basic pay multiplied by the number of days from the last day of employment, divided by the number of days in the last pay period, minus the amounts paid on termination—a formula given the letter T. Therefore, far from it being a tax simplification measure, the PILON rules have added quite a layer of complication to a figure of £30,000 that, in due course, should have been given adjustment for inflation in any effect.
We are now left with PILONs—the new PILONs assessment of what they are actually worth—holiday pay, and any restrictive covenants being included within that £30,000 limit that is tax free and national insurance free. Above that, we have the normal rules of tax and— in complex speak—employers’ class 1A national insurance coming into play. What we are likely to see in terms of adjustment, in answer to the hon. Member for Aberdeen North, is an increase in employer contributions to pension schemes as part of a settlement on the way out, which is not any bad thing. There is nothing wrong with that.
We have a very powerful and strong message to tell about auto-enrolment. It must be the right thing for all employees now. We are now running into millions, and there will be a fund approaching tens, if not hundreds, of billions in due course, and that must be to the good, as people accumulate their own pension funds. We will look back at auto-enrolment and see it as one of the most successful and vital measures that any Government could have implemented. It is like any other measure. It sounds expensive—it means a percentage off salaries, which will always be unwelcome particularly in times of low inflation, and it means that people might see their take-home salary go down—but there will be a lot of thanks from many employees in due course that these funds have been accumulated. If, in trying to circumvent, in an entirely legitimate way, paying the class 1A national insurance on these amounts—for normal employees over £30,000—employers provide more funding to a pension scheme, then that is something as a quid pro quo that the Treasury should actually support.
These measures should have come into play in April 2019. They were deferred last year for a further year, which is mentioned on page 42 of the official Red Book. Therefore, far from saying that these things have come out of the blue and have not been considered, they have been consulted upon since 2016. They nearly got somewhere, but were deferred for another year. Therefore, in terms of planning and getting that together, there is plenty of time for employers to make any due adjustment. I have really concentrated on part 1 of the Bill.
Let me turn to the sporting side of things and the £100,000 limit. There have been a lot of discussions on this subject, because we are talking about huge figures, especially when the very well-known sports stars have their testimonials. When there are millions of pounds involved, these people—who are already very wealthy—often decide to give all the money to charity, which is a laudable ambition. I suppose that the one downside of this type of legislation is that it is possible for the employer in such cases to suffer the national insurance on an amount that the recipient has never actually received because he or she has decided to put it through their tax return as a very generous donation to charity.
This subject brings out the debate about certain limits in our tax regime that have not been touched for a very long time. What was the purpose of the £30,000 threshold? There was a reason for it in 1988, but does it still apply in the modern employment market? Perhaps people do not work as long for the same employer now; that feature is probably slightly different today from how it might have been in 1988. What should the figure be? Does it deserve flexing up? We could have a similar debate across other bits of the tax code—perhaps including inheritance tax.
Lots of parts of the tax code have fallen behind inflation. They were originally there for a reason. Some were introduced when the Labour party was in government, but now that we are in government perhaps there is a debate to be had about what these things were for in the first place, as part of the tax simplification process. But if there is any fear or threat that there has been manipulation of the tax and NI system, it is right that these payments should be part of the normal weft and weave of what we are doing with national insurance. I therefore have no difficulty supporting the Bill, and I wish the Exchequer Secretary to the Treasury every success in its progress through the House.
Anneliese Dodds (Oxford East) (Lab/Co-op)
It is a pleasure to follow the hon. Member for South Thanet (Craig Mackinlay), who always talks about these issues from a professional perspective, related to his work before he first entered this place. It was very interesting to hear his comments, and I will return to some of them as I set out the Opposition’s summary of our concerns about the Bill.
When the Minister was introducing these measures, he said that they were expected. As many Members have said, they most certainly were expected. In fact, they were introduced a lot later than we had anticipated, as the hon. Member for Aberdeen North (Kirsty Blackman) pointed out. In fact, the Government’s paperwork associated with the measures indicated that some revenue has been loss as a result of that late presentation. The hon. Member for South Suffolk (James Cartlidge) noted that the figures here were “baked in” to the Government’s accounts. Well, if he looks at the accompanying paperwork to these measures, he will see that it actually appears that those expectations have had to change given the late presentation of the Bill to the House. Of course, Labour would take very different decisions on taxation. We believe that the rates for the very best-off should be increased for the top 5%, that a different approach should be taken to corporation tax and, in particular, that we should not be focusing on trying to increase tax on those people who have, above all, lost their jobs—of course, that is part of the focus of this legislation.
I will, however, start by discussing the sporting testimonials element of the Bill. These measures would see NICs treatment of sporting testimonials charged to class 1A NICs, mirroring the tax liability. As has been mentioned, this would only apply to testimonial payments exceeding £100,000. Many members have already noted that the situation—I hesitate to say “playing field” because we have definitely had enough puns in this debate—has changed since these testimonials were introduced, when many players were not earning enough money adequately to save for their retirement. Particularly in football, which is the sport that I know best in this regard, players at the very top levels are earning more than enough throughout their lifetime not to have to rely on these testimonial payments for future revenue. It is therefore appropriate that clubs as employers, or the testimonial committees that would be providing the payments, look to make these national insurance contributions.
The public are rightly angry about the amount of tax avoidance that the wealthiest in this country engage in, but I am concerned that these measures do not come close to addressing systemic issues within football, particularly around taxation. As I understand it, as of January, HMRC was looking into the financial affairs of 173 players, 40 clubs and 38 agents. Now, I have little doubt that the Minister is itching to mention the case of Rangers football club when he responds to the debate—I am well aware of the case that was taken against Rangers—but I think we need to contrast what has occurred in our country with developments in Spain, for example, where firm action has been taken against the extremely well-paid players who sought to artificially avoid tax. We have not seen similar action taken here. For example, the problem around image rights companies was known about for quite a long time before action was firmly taken. It is an insult to the thousands of volunteers at clubs across the UK—who scrimp and save to ensure that the players are paid, the grounds and stands are properly maintained, and records are properly kept—to see some of those at the very top get away with sharp practices.
Ministers must be aware that testimonials are actually becoming less common as a means of ensuring financial security for players and that the funds from testimonials are very often donated to charity, as many hon. Members have mentioned. I would like some more detail from the Minister about the perceived impact of this legislation on funds being donated to charity. Yes, in some cases funds may pass straight to a charity, but in other situations they go to charity eventually—via a player. In fact, if one looks at the charities that have benefited from the most recent testimonials, many have been foundations associated with particular players. The Minister said that, of the previous 220 testimonials that have been examined in relation to coverage by such measures, most would not have been covered because the testimonial was contractual or because its value was less than £100,000, but he did not talk about testimonials where charitable donations were concerned. I am a little bit worried that this quite important source of funds for charities might not be getting the consideration it requires as part of the Bill. I hope that the Minister will reflect on that in his closing remarks or provide more detail in Committee.
I turn to the impact of the Bill on termination awards. The Bill would introduce a new 13.8% class 1A employer NICs charge to any part of a termination award that is already income tax liable. The Minister has stated his contention that abuse exists in this field, with the claim that some employers might be disguising final payments as termination payments. Again, we really need to see concrete evidence. We have probed on this issue in previous discussions on Finance Bills, but we have not been provided with evidence of abuse. Actually, from memory, consultations carried out in this area did not suggest that there was widespread evidence of abuse. Surely, we need that evidence before considering these measures in detail.
In fact, as my hon. Friend the Member for Bootle (Peter Dowd) explained very clearly, this measure on employers’ national insurance contributions on termination awards is likely to lead to employers being much less generous with non-statutory termination awards and to leave people worse off at a time when many of them are most vulnerable. That could have severe implications for the individuals concerned, but it could also have wider economic implications. I was interested to learn that around 30% of all small businesses founded in the UK in recent times have been started in response to redundancy, with many people only having the resources to pursue their entrepreneurial ambitions because of their termination award. It is necessary to think about those wider impacts.
The Government maintain—indeed, we heard it again this afternoon—that this measure does not affect individuals, as it is paid by the employer, but that surely is not the case. In fact, the Government themselves predict in the material presented alongside the Bill that the measure would reduce wages overall by 0.1% over the year 2020-21. It is crucial that the Government undertake more detailed consideration of the likely impact of this measure.
As has been discussed, this is not the first time that this Government have sought to narrow the scope of tax relief on redundancy and termination payments. In the 2017 Finance Bill, they removed any exemption for payments in lieu of notice from the tax-free scope of payments for injuries. As Members will remember, that was very concerning with regard to workers’ rights, which are one of the main aspects of compensation in discrimination cases. The Opposition rightly contested that change.
Again in the 2017 Finance Bill, the Treasury provided itself with the power to vary the tax-free amount for other termination payments. Trade unions raised their concerns about that measure, as they believed that if the Treasury further lowered the tax-free threshold, it would incentivise employers to lower non-statutory termination awards even further. Indeed, the TUC has suggested that the tax-free element should be increased rather than decreased. I was interested by the comments made by the hon. Member for South Thanet, who noted that the value of the £30,000 threshold has been eroded significantly over time and would be worth more than double the amount if it had kept pace with current prices.
The Opposition remain concerned that the Bill still includes the power to potentially vary the NICs threshold upwards or downwards without proper scrutiny in this place, and I hope the Minister will be able to rule that out today. I also hope he will return to this in legislative form, to make it crystal clear that the Government do not intend to reduce the threshold.
I note that the guidance published alongside the legislation emphasises that
“no statutory redundancy pay on its own will be affected”.
That implies that non-statutory redundancy pay could find itself affected, exactly as the Opposition have warned. Can we have a clear statement that we will not see, via secondary legislation, tax and NICs being applied to voluntary redundancy payments for individuals with two years, or more or less than two years, of continuous service?
The Minister will be aware that this kind of application of class 1A NICs to cash earnings is highly unusual, to put it mildly. That point has been underlined by the Chartered Institute of Taxation and was made eloquently by the hon. Member for Aberdeen North. This appears to be a set of rather ad hoc changes. The hon. Member for South Suffolk, in a wide-ranging and interesting speech, suggested that the Bill is part of a general push to simplify the tax landscape, particularly when it comes to the relationship between payment as an employee and other forms of payment. In reality, we have seen an increasing complication of that landscape. We have not seen an alignment between the tax treatment of individuals and their employment treatment. Instead, we see an increasing bricolage of measures to try to deal with the disjuncture, with what is happening around IR35 being a good example. One would hope that the Government will start to try to get a grip of this issue in a more determined and less ad hoc fashion in months to come—if, indeed, they have months to come.
There is one last administrative issue that I want to mention. We have had referred to us by experts in this area the fact that HMRC has suggested that the charge will arise and be paid in real time, rather than at the end of the tax year, as is the case with other class 1A charges. That seems to require a new process—again, additional complication—for submitting information through the pay-as-you-earn real-time information submission and for HMRC to have to adopt a different process for allocating the different elements of that payment. There are already many issues with it allocating real-time information payments into the wrong pots. This seems to suggest additional complication, and we need the Government to rethink this and consider an annual payment, rather than a real-time one. This change potentially comes at the same time as other significant forms of upheaval within the tax system, from making tax digital to preparations for Brexit.
As my hon. Friend the Member for Bootle stated very clearly at the end of his remarks, we will not oppose the Bill at this stage, but we hope that it will be possible to make some substantial changes in Committee, because they are very much needed, as has been reflected by the tenor of this debate.
The Financial Secretary to the Treasury (Mel Stride)
I thank all right hon. and hon. Members for their contributions to this important debate, which is narrow in scope, as the Exchequer Secretary to the Treasury pointed out, but none the less important. There were a limited number of contributions, made up for, however, by their quality.
Let me bring us back to the essential element of what this Bill is all about, which is aligning the employer national insurance treatment in respect of termination awards and sporting testimonials with that of income tax. As a number of hon. Members pointed out, the rationale behind these measures is to bring in alignment and, with it, some elements of simplification. We should remind ourselves that, as we have heard, the genesis of this journey was back in 2013-14, with the report by the Office of Tax Simplification. Another rationale for these measures is to disincentivise any tendency towards the manipulation of payments as between earnings and termination payments on the tax side of things. There is, of course, additional revenue to the Exchequer of some £200 million per year as a consequence of these measures.
I turn now to some of the specific points that have been raised—first and foremost, by the hon. Member for Bootle (Peter Dowd). He told us some jokes about cricket that were not bad—well, by his standards, at least, they were passable. He managed to remember two of the three great football teams up in the Liverpool part of the country, proving conclusively, I have to say, that he knows far more about football than he does about economics and taxation. [Interruption.] Yes, cruel but fair. That was exemplified by his lamenting the fact that we did not abolish class 2 NICs. I was surprised to hear him say that, because he was at great pains, as he always is, to be the champion of the lower paid—as indeed are Conservative Members. The rationale for stepping back from that abolition, as he will know, is that it would have imposed a very significant burden on the very people he seeks to protect—the lower paid—by putting up the cost of the contributions that they would have to make in order to qualify for their state pension.
Curiously, the hon. Gentleman accused us, contrary to the assertions of the hon. Member for Oxford East (Anneliese Dodds), of having rushed the timetable for this legislation, despite the fact that its genesis was about five years ago. That is probably indicative of the speed at which a future Labour Government would get things done—five years is rushing it, in those terms. He also accused us of not taking the legislation seriously, but as he spoke there were precisely none of his hon. or right hon. Friends sitting on the Benches behind him.
My hon. Friend the Member for South Suffolk (James Cartlidge) gave a masterful performance in which he not only showed great in-depth knowledge of the issues at hand but understood the mentality and the challenges that we have as Ministers in the Treasury. It is indeed a restrictive environment where we do not want to put people’s taxes up, we make commitments not to do so, and we fight day in, day out to ensure that we stick to those pledges. But at the same time, we do of course have to raise revenue, as he described. He also cantered around the tax terrain, touching on IR35, auto-enrolment and various other aspects of tax. It was a very thoughtful contribution to the debate.
The hon. Member for Aberdeen North (Kirsty Blackman) specifically referenced the amount of consultation—or the lack of it, as she saw it—around the Bill. I should remind her that we have consulted on it twice. It was issued in draft in December 2016, and it was prefigured when we handled the income tax aspects of these issues in the 2016 and 2017 Finance Acts. Of course, the measures themselves were first mooted back in 2015, so we have been round the block with them.
Kirsty Blackman
The point I was making was not that there was necessarily a lack of consultation, but that we did not know how much consultation there had been, because the details are not in the explanatory notes, where they would often be. Normally, the explanatory notes will say a bit about the amount of consultation there has been, but they do not say anything at all. If that had been written down for us, and we had known how many consultation responses there had been, I would not have asked the question.
Mel Stride
The Exchequer Secretary to the Treasury has just reminded me that there has been a lot of information out there—we have, not least, written to Members to explain the background to these measures.
As to the hon. Lady’s specific point, she has raised the quality of information memorandums with me before in a different context. I said on that occasion, and I will restate now, that I am happy to look at the point she has raised. While we may have disagreements over policy across the House, I think we all accept that it is important that the relevant information is clearly provided and in the right place, and I will certainly be happy to look at that issue.
The hon. Lady raised the issue of tax treatment where there is an expectation that a testimonial payment will be made. She understandably asked how we know whether such a payment should be seen as having an expectation attached to it. The answer is if that payment is customary. If someone is involved in a sports club of some sort, and there is a testimonial every year for a particular player or group of players, and that had been going on for some time, that would be a customary testimonial situation. In those circumstances, the tax treatment would follow accordingly.
The hon. Lady also raised a point about employer NICS at 13.8% being applied above the £30,000 threshold. She raised the prospect that some of that may be borne by the employee, because the employer would have a certain amount that they were looking at. She raised the question of what the balance was between who bears that cost and the £200 million per year received by the Exchequer. I very much doubt that that information is available, but if it is, I will certainly make sure that we provide it to her. That may be an issue she wishes to come back to in Committee.
My hon. Friend the Member for South Thanet (Craig Mackinlay) specifically majored on the threshold—the £30,000—and pointed out that it first came into effect in 1988. What I would say to him is that, in the case of Germany and the United States—certainly in the case of income tax—the threshold is effectively zero, so in terms of international comparisons, the figure of £30,000, while it is true that it has not increased by inflation since 1988, is none the less set at a reasonable and proportionate level. As a number of speakers have also pointed out, 80% of termination payments are below the £30,000 threshold in any event and would therefore not fall under this employers’ national insurance.
The hon. Member for Oxford East, as well as helpfully pointing out that Labour’s mission is to increase corporation tax, came on to the issue of avoidance and evasion, particularly in the area of football. She thought I would mention the Rangers case, and it is important to do that, because it does indicate that we will take cases right the way to the Supreme Court when we believe that issues such as disguised remuneration are in play. Whether it is in football or other areas of commerce and economic life, we will make sure that the right amount of tax is paid. I will not rehearse the arguments that the hon. Lady has heard from me on many occasions about the tax gap and how successful the Government have been in that respect compared with Governments of the past.
The second issue the hon. Lady raised was charitable giving. She set up the prospect of a testimonial being held and the money going through the committee and then on to a charity. She asked what the tax treatment would be in those circumstances. It is open to a committee in that situation to route some of the money via payroll giving to the charity—that is without limit—to make sure that that is done in the most tax-efficient manner possible. However, she may wish to return to that matter in Committee, where we can perhaps have a more detailed debate about it.
The hon. Lady asked about seeking evidence of the abuse of termination payments—in other words, disguising what are essentially earnings by transferring them into a termination payment, thereby reducing taxation. HMRC is clear that there has been evidence of that in the past. I am sure that she will wish to revisit the matter in more detail in Committee.
The hon. Lady mentioned the impact of these measures on wages, citing the correct figure of 0.1% for the reduction by 2020-21. However, I point out that we have now had 10 months of increased real wages, due to our success in keeping inflation down and generating nominal wage growth. Of course, with regard to employment, which is part of the issue we are addressing, we now have among the highest levels of employment in our history, and the lowest unemployment since the mid-1970s.
The hon. Lady asked what guarantees there are that we will not reduce the threshold in either case. Of course, it is up to this Government, or any future Government, to take a view on these matters, but I can assure her that we have no expectation or intention at the present time to lower the thresholds. If we did, that would of course be by way of an affirmative statutory instrument, which means the measure would have appropriate scrutiny.
In conclusion, I thank the Opposition and all Members for their contributions, and for not opposing Second Reading.
Question put and agreed to.
Bill accordingly read a Second time.
National Insurance Contributions (Termination Awards and Sporting Testimonials) Bill (Programme)
Motion made, and Question put forthwith (Standing Order No. 83A(7)),
That the following provisions shall apply to the National Insurance Contributions (Termination Awards and Sporting Testimonials) Bill:
Committal
(1) The Bill shall be committed to a Public Bill Committee.
Proceedings in Public Bill Committee
(2) Proceedings in the Public Bill Committee shall (so far as not previously concluded) be brought to a conclusion on Thursday 16 May 2019.
(3) The Public Bill Committee shall have leave to sit twice on the first day on which it meets.
Proceedings on Consideration and up to and including Third Reading
(4) Proceedings on Consideration and any proceedings in legislative grand committee shall (so far as not previously concluded) be brought to a conclusion two hours after the commencement of proceedings on Consideration.
(5) Proceedings on Third Reading shall (so far as not previously concluded) be brought to a conclusion at the moment of interruption that day.
(6) Standing Order No. 83B (programming sub-committees) shall not apply to proceedings on Consideration and Third Reading.
Other proceedings
(7) Any other proceedings on the Bill may be programmed.—(Mel Stride.)
Question agreed to.
National Insurance Contributions (Termination Awards and Sporting Testimonials) Bill (Ways and Means)
Motion made, and Question put forthwith (Standing Order No. 52(1)(a)),
That, for the purpose of any Act resulting from the National Insurance Contributions (Termination Awards and Sporting Testimonials) Bill, it is expedient to authorise provision adding termination awards chargeable to income tax to the amount by reference to which, in the case of Class 1A National Insurance Contributions, the appropriate national health service allocation (for England, Wales and Scotland) and the appropriate health service allocation (for Northern Ireland) are to be calculated.—(Mel Stride.)
Question agreed to.
National Insurance Contributions (Termination Awards and Sporting Testimonials) Bill
Monday 10th June 2019
(5 years, 5 months ago)
Commons ChamberRead Full debate National Insurance Contributions (Termination Awards and Sporting Testimonials) Act 2019 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Consideration of Bill Amendments as at 10 June 2019 - (10 Jun 2019)
19:19 - The House divided: - Ayes: 214 / Noes: 273 - Question accordingly negatived.
19:37 - The House divided: - Ayes: 270 / Noes: 207 - Question accordingly agreed to.
Peter Dowd (Bootle) (Lab)
I beg to move, That the clause be read a Second time.
Mr Speaker
With this it will be convenient to discuss the following:
New clause 2—Report on the impact of Class 1A National Insurance Contributions on termination awards—
“(1) The Secretary of State must, within 12 months of section 1 of this Act (termination awards: Great Britain) coming into force, lay before Parliament a report on the expected impact of the new Class 1A liability on termination awards in excess of £30,000.
(2) That report must contain an assessment of the expected impact on—
(a) the total net value of termination payments received by individuals;
(b) the average net value of such payments; and
(c) the number of business start-ups using termination payments as funding in their first year in each region of the United Kingdom.”
New clause 3—Report on the impact of Class 1A National Insurance Contributions on sporting testimonials—
“(1) The Secretary of State must, within 12 months of section 3 of this Act (sporting testimonials: Great Britain) coming into force, lay before Parliament a report on the expected impact of the provisions of this Act on sporting testimonials.
(2) That report must contain an assessment of the expected impact on—
(a) the total amounts received by individuals from sporting testimonials; and
(b) donations made to charity from sporting testimonial proceeds.”
New clause 4—Report on Exchequer impact—
“The Secretary of State must, within three years of this Act receiving Royal Assent, lay before Parliament a report on its Exchequer impact.”
New clause 5—Effects of termination awards provisions—
“(1) The Treasury must publish reviews of whether the payment of Class 1A contributions on termination awards under sections 1 and 2 has had—
(a) any effect on the number of termination awards made above £30,000;
(b) any effect on the size of termination awards made above £30,000; or
(c) a disproportionate effect on—
(i) women,
(ii) pregnant women,
(iii) persons aged 50 or over, or
(iv) any other group of people with protected characteristics (within the meaning of the Equality Act 2010).
(2) The first review under subsection (1) shall be published no later than 24 months after this section comes into force.
(3) Subsequent reviews under subsection (1) shall be published no later than 24 months after publication of the previous review.”
This new clause would provide for a general review of the termination awards provisions of this Act within every period of 24 months.
Amendment 1, in clause 5, page 5, line 39, at end insert—
“(3A) No regulations may be made under subsection (3) to bring section 3 or 4 into force until the Secretary of State has made a Statement to the House of Commons on the expected effects of the provisions of this Act on donations to charities by the recipients of sporting testimonial payments.”
Peter Dowd
Although he is not here, may I welcome the new Financial Secretary to the Treasury to his post, and congratulate his predecessor, the new Leader of the House, on his elevation to the Cabinet? I understand that the elevation was short-lived, as he realised that he still had to sit across a table—a Cabinet table rather than a Treasury one—from the Chief Secretary. I expect that if some of his colleagues get their way on proroguing Parliament, he may well even be put on a zero-hours contract, because there would be little else to do.
I have previously stated, both on Second Reading and in Committee, when we had wide ranging discussions on the Bill, as we always do with financial Bills—we talk about a whole range of issues and get into all sorts of discussions about various things, even quoting Cicero and going into all sorts of Greek mythology; it is helpful to broaden our horizons when dealing with these Bills—that the Bill is a pale imitation of the great national insurance reforms that the Government promised to enact just a few years ago, in those halcyon days of the 2010 to 2015 Tory Government, who were going to conquer the world and who proposed massive changes to national insurance contributions. Of course, in effect, nothing came of that. The former Chancellor went west and the proposals lay around gathering a little bit of dust, then more dust and then even more dust on the shelves at the Treasury.
As we all know, national insurance is paid by employees, employers and the self-employed, and it is used to fund a variety of contributory benefits such as the state pension, contributory employment and support allowance, maternity allowance and other benefits. In 2018-19, national insurance contributions raised around £137 billion, which is more than was raised by VAT but less than was raised by income tax, at £132 billion and £192 billion respectively. National insurance contributions are clearly a substantial revenue raiser for the Exchequer.
Along with the Prime Minister, the Government’s credibility and all sense of reason in the Tory party, gone are the proposed abolition of class 2 national insurance contributions and the planned expansion of class 4 national insurance contributions, along with the Government’s parliamentary majority to boot. Those proposals have been replaced with these meagre clauses, which masquerade as a real Bill. They will introduce a limited class 1A employer charge on termination payments over £30,000 and on payments over £100,000 related to non-contractual sporting testimonials.
While we are on the subject of sport—loosely—I reaffirm my congratulations to Liverpool football club on their win, albeit as an Everton supporter. As I said in Committee, I can say that in the clear knowledge that it probably will not get much further than the people present, so I will not be criticised by my Everton-supporting friends and family. Saying it here tonight makes it more or less a secret, in essence.
Consideration of the Bill’s remaining stages has been brought forward to pack out an empty parliamentary timetable. The timing could not be more fortuitous, as we enter the first official week of the long-running Tory leadership campaign. It is a burden for everybody else to have to put up with it, and I am sure it is a burden for those on the Government Front Bench and Back Benches, too. I suspect that they will not say that, but I will say it for them.
There is a backdrop to this debate. We have already seen a sneak preview of the chaos and dysfunction that any of the hard Tory Brexiteers who are running for Prime Minister will soon unleash on the country. The right hon. Member for Tatton (Ms McVey) has suggested purging the Cabinet of remain-supporting MPs. The frontrunner, the right hon. Member for Uxbridge and South Ruislip (Boris Johnson), is flirting with the idea of the UK going AWOL with around £48 billion in October. That figure is almost as big as his ego. The Foreign Secretary, the right hon. Member for South West Surrey (Mr Hunt), has more positions on Brexit than the “Kama Sutra”.
Meanwhile, the right hon. Member for Esher and Walton (Dominic Raab) is threatening to put two fingers up to parliamentary sovereignty and prorogue the House, denying the elected representatives in this Chamber a say over the biggest issue facing this country since the second world war, and perhaps beyond that—I do thank you for your indulgence, Mr Deputy Speaker. So much for bringing back control. To what—an empty, locked Chamber? It is important, because had Parliament been prorogued, would we have been able to debate this Bill on national insurance contributions? No, we would not. Where would all the money go? We would not have it. We are here making the case for why Parliament should not be prorogued, but more importantly we are making the case because we have to get the cash in. All this is taking place while our European partners look on in polite bemusement, along with the rest of the country, as we are subjected to a month-long Conservative party psychodrama. That context is important to the matter at hand.
The Opposition continue to have concerns about how the new class 1A national insurance charge will impact on the level of termination awards that workers receive, particularly in respect of women, employees over 50 and pregnant women. Opposition new clauses 1 and 5 would require Ministers to adequately address our concerns. The tax and national insurance treatment of termination payments remains a sensitive topic to workers and employers alike. Employees facing redundancy often consider this final payment as an evaluation of the work that they have done for their employer, so it is psychologically important for them. As I have previously said, termination payments therefore have an emotional and a financial significance, and the amount awarded is often determined by painstaking and careful negotiations between managers and trade union representatives.
The Government’s rationale for the change apparently remains one of simplification: they cite many employers’ previous confusion as to what parts of a termination payment might qualify for exemption from tax and national insurance. However, Ministers have also cited the opportunity for well-advised employers to avoid paying the right amount of tax and national insurance on termination payments as justification for wider reform. It is important to repeat that that seems to have been given as justification for wider reform. We do not necessarily accept that justification. Neither the Office of Tax Simplification nor Treasury Ministers have been able to provide figures on the number of employers who have taken advantage of the existing loophole or on the amount that has been lost to the Exchequer as a result. That is important, because if a case is going to be made for something, the least we could be given is a little evidence—a few facts and statistics—to back up the assertion.
Mr Jim Cunningham (Coventry South) (Lab)
The best way to describe it is as a stealth tax on people who are going to be unemployed for quite a long period. Women are going to be under the cosh. We have to remind ourselves that women seem to be paying the price. We have only to consider the long, drawn-out saga of the Women Against State Pension Inequality, who cannot even get justice out of this Government.
Peter Dowd
My hon. Friend makes a valid point. Assessments of the impact of austerity have found that 86% of the burden has fallen on women. The figures indicate that women are the most badly affected by austerity, and all this Bill does is overlay that and up the ante even further. I thank my hon. Friend for making that point, because in effect it is a stealth tax. That is what it amounts to: a stealth tax with no evidence base whatever to support it, other than the Government just wanting somehow to get more and more cash in because of their failed economic policies.
Grahame Morris (Easington) (Lab)
I am grateful to my hon. Friend for giving way. The arguments that he is making are sound. There is a concern that this may well open the gates to further measures in the future. I fully understand that this is a charge that is being applied to employers, but it would be instructive if we used plain English and simple terminology. Why do we not use the term “redundancy” instead of “termination awards”, so that people will realise what is happening?
Peter Dowd
That is a very good point, because that is exactly what the Government do time after time. When they introduce these notions and concepts, they always try to put up a bit of a smokescreen. My hon. Friend is absolutely spot on. Let us call this essentially what it is, which is redundancy. Potentially, it is taking money from people at perhaps one of the most vulnerable times in their working life. Let me repeat: what we want is evidence. This an evidence-free zone—it is as simple as that. The other important point to make is that this is, in effect, a stealth tax. Worryingly, though, there is no coherence to this whatsoever. There is no coherence to this at all. Somebody comes up with an idea and the Government push it through because they want to push it through. There is no evidence for it whatsoever.
James Cartlidge (South Suffolk) (Con)
I have enjoyed discussing this Bill with the hon. Gentleman in Committee and on Second Reading. The definition of a stealth tax is surely a tax that is stealthy. In other words, it is not immediately visible, and has to be found in the small print of, for example, the Red Book. This is on the front of a Bill; this is the name of the Bill. I do not think that this can conceivably be described as a stealth tax. The Government have been very open about it, and it is on the front of the Bill.
Peter Dowd
I am very pleased that a Conservative Member of Parliament admits that he is putting taxes up. He has admitted that the Government are openly putting up taxes. Okay, even if I accept that it is not a stealth tax—
Peter Dowd
Just a moment. Even if I accept—[Interruption.] I am happy to give way. Even if I accept, which I do not, that it is not a stealth tax, it is, none the less, about a Tory Government putting taxes up. It is as simple as that. I will give way to the hon. Gentleman.
James Cartlidge
The point is not whether it is going up, but whether it is being done in a stealthy fashion. I accept that this is raising revenue. The Minister will not cut it, because that will take revenue from elsewhere. The question is whether it is stealthy. It is on the front of the Bill; it is the name of the Bill. It is not remotely stealthy. Stealth taxes are so named when we pull the wool over people’s eyes, but this is very open and transparent, and, yes, it will increase revenue for the Treasury.
Peter Dowd
The hon. Gentleman can point that out to me as much as he wants. I admitted, or acknowledged—call it what you will—that even if it is not a stealth tax, it is a Tory Government putting up taxes. [Interruption.] We agree on that. [Interruption.] I am happy to have that conversation with him outside the Chamber, if need be, so that I do not get into trouble with either you, Mr Deputy Speaker, or those Members on the packed Benches. The bottom line is that what we have here is quite clearly and unambiguously an admission from the Tories that they are putting taxes up. That is what it comes down to. [Interruption.] My hon. Friend the Member for Coventry South (Mr Cunningham) says from a sedentary position that they do so in a sneaky way.
Ministers have claimed many times that they have a desire to simplify tax. They talk all the time about simplification of tax. They have an Office for Tax Simplification. They institutionalised it. Has there been much simplification? Not as far as I am concerned. There certainly has not been any simplification of national insurance contributions. Therefore, despite the many claims from Ministers that they have a desire to simplify the tax and national insurance treatment of termination awards, the Chartered Institute of Taxation and other tax experts have raised concerns about the lack of information in the Bill as to how this new class 1A charge will be collected. In their rush to try to get more money into the Exchequer, they have not even decided or worked out how they are going to collect it.
Mr Jim Cunningham
I thank my hon. Friend for giving way. I made a remark about sneaky tax from a sedentary position. I have a good example of why we should not trust what those on the Government Front Bench say: in their manifesto, they pledged to retain the free television licence for old-age pensioners. What did they do? They passed it on to the BBC. We have all seen the announcement today. How can we trust anything they say?
Peter Dowd
That is another stealth tax—the television licence. The fundamental point is important. It goes to the heart of this debate. This is a rise in taxes. We are not quite sure how it is going to be collected, but it is going to be collected from some of the most vulnerable people. Currently, Ministers plan to leave it up to secondary legislation to determine how it is going to be collected. That is another important point. This has happened so many times with this Government—no amendments to the law in relation to the Finance Bill. Again, this goes to the heart of the matter. The Government bring forward legislation, proposals and policies to this Chamber. They try to push something through, but they do not tell us how and when they are going to do it. But they are going to do it. We have no opportunity to challenge them because they close down the debate. They have done so on the last four Finance Bills, I think—I stand to be corrected on that one.
Currently, Ministers plan to leave that up to secondary legislation, which is clearly a break from normal practice. Furthermore, rather than simplifying the national insurance treatment of termination awards, they look set to confuse employers even more. Therefore, a fundamental attempt apparently to simplify these proposals has actually not simplified them. If the raison d’être for this is simplification —that is what we have been told—the Government are that incompetent that they cannot even get that right, because it is not simplifying matters at all.
The measure will also add additional administrative burdens on HMRC at a time when it continues to be hamstrung by the Government’s disastrous reorganisation of its estate, the introduction of Making Tax Digital and the preparations for a no-deal Brexit. These specific proposals are being introduced when HMRC is in flux, but do the Government care? They do not care at all. So what is the so-called rationale for the introduction of this new national insurance contribution charge on termination awards, if not to make things more confusing for employers? Another factor has been thrown in: this is a tax avoidance measure, apparently. [Interruption.] The Minister says that he is not sure about that. Read some of the documentation.
Peter Dowd
I beg your pardon. So it is a tax avoidance measure, apparently, without any evidence, as far as we can gather, that there is any substantive tax avoidance going on with regard to this. I am all for tackling tax avoidance, as the Minister well knows. We support the tackling of tax avoidance, but we always want to do it when there is some evidence for it. We have lots of evidence of tax avoidance in other areas that the Government are not tackling, and in an area for which they do not have a particular amount of evidence, they are tackling it. It is a bit topsy-turvy—a bit round about. We find ourselves in a rather bizarre scenario.
I suggest that the Government’s rationale is wholly to do with the revenue that they expect to raise and that this is little more than an attempt to increase national insurance receipts for the Exchequer while shying away from any major tax or national policy change. The previous Chancellor got his fingers well and truly burned because he did not do it right. That is the issue here. We are having all this tinkering around, which is making matters more and more confused. That is certainly the opinion of the Office of Tax Simplification, as advocated in its 2014 report, which stated that a new national insurance contribution charge could raise revenue for the Exchequer and offset the costs of any tax treatment change affecting termination payments. The report went on to concede that the policy was likely to lead to increased NIC costs to the employer—not just more NICs, but increased costs to the employer—and to individual employees receiving reduced termination payments, as employers would be unlikely to increase their redundancy budgets.
The Government’s own impact assessment notes that this measure will present an “additional cost to employers”. Here we are yet again, with the party of business putting more and more costs on to employers through this national insurance contributions proposal, at a time when they are all under terrible stress for a whole range of reasons—not least because of the uncertainty of Brexit. The impact assessment also says that this will be
“reflected in lower wages and profit margins”.
Not only are the Government attacking businesses and bringing their profits down; they are also accepting that they are attacking workers’ wages. It is a double whammy, as the employer and the employee both get stung. What a state of affairs! Sadly, it is some of the most vulnerable people in the workforce who will pay the ultimate price. Whether it is a pregnant female employee voluntarily leaving the workforce or an older worker opting for early retirement, the new national insurance contributions charge will have a significant impact on the level of termination awards received.
To address the issue, the Opposition have tabled new clause 5, which would require the Government to undertake a review every two years looking at the impact of this measure on women, pregnant women, workers over the age of 50 and any other group of people with protected characteristics. New clause 5 would ensure that the impact of the new national insurance charge was carefully monitored; that is very important. It would also require Ministers to take personal responsibility for its outcome, with regular statements to the House. I know Ministers do not like doing that—Mr Speaker in effect acts as the person who gets them to come here to speak to us—but it is important that Ministers come to this Chamber to explain what they are doing. They are responsible to Parliament for their actions. The Executive are responsible to us and that is what we are demanding through new clause 5.
Similarly, new clause 1 would require Treasury Ministers to undertake a distributional analysis of class 1A national insurance contributions, looking specifically at the impact on the level of termination awards received by employees and, importantly, at the impact on employers. I am particularly thinking about small and medium-sized business owners, who are likely to see added costs as a result of the measure. We want to ensure that such employers are not going to be penalised because of the lack of evidence base for the Government’s proposals—other than, quite simply, that the measure will raise money. The Government should stop telling the House that this is about simplification, because it is not. We have to be honest about that. It is just about raising revenue. There is nothing wrong with doing that—it is crucial—but it is important that the Government are honest about what they are doing. They often get their figures wrong when they indicate how much they intend to raise. In fact, some of the figures identified in their proposals are almost a work of fiction.
The second and final measure covered by this very short Bill relates to a new class 1A charge for non-contractual sporting testimonials of more than £100,000. [Interruption.] I can hear the Government Front Benchers saying that I am making a long speech. Well, I know that Conservative Ministers do not like to be held to account at all; it is in their DNA. One of their colleagues, who is a contender for the leadership, even wants to prorogue Parliament—to close it down—so it is important that I make these points clear.
As my hon. Friend the Member for Oxford East (Anneliese Dodds) said in Committee, there remains a huge lack of clarity over how the charge will be applied, particularly when it comes to a payment that would be “customary”. She made a very important point and hit the nail on the head, and I am not quite sure that we are any further on at all from those discussions in Committee. There remain seriously unanswered questions as to how a national insurance contribution charge on sporting testimonial payments, which are in effect charitable donations from fans, would affect sporting charities and foundations set up by individual sportspeople. The Chartered Institute of Taxation has also pointed out the clear inconsistency that would arise between the national insurance treatment of sporting testimonial payments and the treatment of voluntary tips in the service industry. To answer these concerns, the Opposition have tabled amendment 1, which would require the Government to review the impact of this class 1A national insurance contributions charge on donations to charities.
Dr David Drew (Stroud) (Lab/Co-op)
I have listened very carefully to my hon. Friend and I totally agree with him. May I concentrate on the issue of testimonials? One of the great myths about professional sportspeople is that they are all terribly well paid, but county cricketers, people playing in the lower regions of football and rugby players playing outside the premier league are not well paid. Traditionally, long-term servants have had the opportunity of a testimonial and those testimonials are often organised by groups of volunteers. Are we seriously suggesting that people who organise a darts match, a pool tournament or a dinner are going to be brought into the regime, whereby they have to think about national insurance contributions, taxation and the rest? That is surely crazy.
Peter Dowd
My hon. Friend makes an important point. The Government would have us believe that there is an amount of money that people can raise or earn before the testimonial tax—that is what it is—comes in. I am sure that the Minister will be able to explain that to us, but we have had very little help by way of explanation from the Government on this whole area, and the measure is being introduced without significant or appropriate discussion.
Members will no doubt be pleased that I will only speak for another hour—I jest. This is yet another piecemeal reform designed to penalise employers and workers alike, while raising comparatively small sums for the Exchequer compared with the total amount of national insurance contributions that it receives each year, which I identified earlier as more than £130 billion. Of course, the Government remain wedded to cutting taxes for large corporations and the wealthy alike, leaving our public services and ordinary workers footing the bill. In fact—this is important—the right hon. Member for Uxbridge and South Ruislip has committed to £10 billion of tax cuts should he become Prime Minister, with the Institute for Fiscal Studies saying that the biggest beneficiaries would be wealthy pensioners and people living solely off investments, as neither pay national insurance contributions. Actually, all the Members of Parliament here would also be better off under the proposal by the former Foreign Secretary.
The Opposition will not countenance supporting a Bill that will indirectly lead to workers’ termination pay being reduced, especially when Tory hopefuls are throwing even more money at those who do not need it. Nor will we support a Bill that fails to offer any protection for women, older workers or pregnant women who could be financially worse off as a result of this change. If the front-runner for the Tory party leadership can give £10 billion to supporting wealthy investors, we can afford to support pregnant women who have been made redundant. For those reasons, we will oppose this Bill on Report and on Third Reading. I encourage colleagues from across the House to do exactly the same. Thank you very much for your indulgence, Mr Deputy Speaker.
Kirsty Blackman (Aberdeen North) (SNP)
It is a pleasure to take part in a Report stage where the Government do not have amendments to their own Bill. That is quite unusual these days. Most of the Bills that we have seen recently have had Government amendments to them because there have been errors in the drafting, so I congratulate to the Minister for managing to bring in one that has not. Obviously, it would be great if he could see his way to accepting all the amendments tabled by the Opposition and by me, but he can save that up for his speech and let us know then whether he is willing to do so.
I will talk us through the amendments that we have tabled but also make it clear that we are willing to support the amendments tabled by the Opposition. Our new clause 2 is about the impact of the changes to class 1A national insurance contributions on termination awards. It asks for a number of different things, including
“an assessment of the expected impact on…the total net value of termination payments received by individuals…the average net value of such payments; and…the number of business start-ups that are funded by termination payments…in each region of the United Kingdom.”
We ask for this for a number of reasons, but mostly because I was a bit annoyed by what is in the Government’s explanatory notes, which basically said, “We expect there to be no impact on employees”, but actually meant, “We expect there to be no additional tax liability impact on employees.” But the reality is that there will be an impact on employees as employers will choose to give their employees less in termination awards because they will be liable for this class 1A contribution.
I specifically mentioned the number of business start-ups because I am acutely aware of the number of people, particularly where I am in Aberdeen, who struggled during the oil price fall that occurred in 2015-ish and were made redundant as a result of it. A number of them went on to start new businesses because of the termination payment that they received. I am concerned that reducing the amount of termination awards that people receive will mean that there will be fewer of those new business start-ups, and we may not see some of those businesses that go on to be phenomenally successful just for want of a few extra pounds in the termination award that is made.
Another thing that concerns me is that the Government’s projections show that wages for everybody will fall as a result of this additional charge on employers. The Government have admitted that; it is included within the calculation. Even people who are not receiving termination awards or are not, at any stage, likely to receive them—even those who are receiving only the Government’s national living wage, which is a pretendy living wage that people cannot live on, and those who are under 25 and therefore not eligible for it—will experience a reduction in wages as a result of the Government’s changes to employer class 1A liability in relation to termination awards. It is not fair that we are asking people who already do not have enough to live on to pay this additional contribution. That might seem to be an odd position to take in this Chamber when we have Conservative leadership candidates talking about lowering tax for the very richest, but I do not believe that wages should be lowered for those at the bottom of the pile, to increase what is in the Government’s coffers. If we are to do that, surely we should choose, as the Scottish Government have done, to levy that money through a more progressive taxation system.
The other issue with the termination awards aspect relates to the collection method that is described. Currently—this is from the Government’s website—employers pay class 1A and 1B national insurance on expenses and benefits they give to their employees. They have to fill in the forms only once a year and are given a deadline for doing so. The Government have not yet said how they intend these payments to be paid in real time, or how they intend that employers should ensure that they are recording them and paying them in real time. If the Government expect them to do this, they need to clarify that more quickly. I am particularly concerned about the employers who currently do not pay class 1A contributions in any way, shape or form because they do not allow employee benefits such as company cars or health insurance as part of their deal, yet are now being brought into class 1A contributions because, for some unknown reason, the Government have chosen to use class 1A contributions as the method of collection—the method of liability—rather than choosing a different method. Class 1A contributions are not levied on any cash just now; they are levied only on benefits in kind.
Therefore, a number of employers will need to have new computer systems to pay this money. Those who do already pay for benefits in kind will need to have a different computer system that allows them to pay in real time rather than at the end of the year. That will involve a lot of additional work for HMRC and for tax professionals who will have to advise employers on this method. That is an extra cost to employers—not just the actual additional money that they will have to pay but the additional administration cost that they will have to go through. It is incredibly important that if the Government intend to press ahead with this, they do everything they can to ensure that every employer who does not currently have any liability for class 1A contributions, in particular, is well aware of these changes and the new liability that will arise if they make any termination payments in excess of £30,000.
Let me move on to sporting testimonials. My concern is much the same as that raised by Opposition Front Benchers in relation to the donations to charities that are made as a result of sporting testimonials. There will be a new liability for people receiving money as part of sporting testimonials as long as they are not paid through an employee charitable donation-type method. It is a bit much to expect committees that are set up to have to register themselves in this way to pay the sporting testimonial beneficiary through payroll giving. That is a bit of an over-cumbersome situation. A lot of the people who receive money through sporting testimonials give a significant chunk of it to charities. I am therefore concerned about the reduction in charitable giving that there will be as a result of these changes.
The Government have pretty much said that this has a negligible Exchequer impact, but, once again, an additional administrative burden is being built up. This may stop some of these committees going forward with testimonials if they realise that they have to register for payroll giving and have to pay class 1A national insurance contributions as a result.
Dr Drew
The hon. Lady will have heard my earlier intervention. It is not uncommon for people to give very generously when they have a favourite sportsperson. It could happen that someone expects to get £30,000 over the course of a year, yet people are so generous that they give £60,000. Should that be backdated? In other words, if the additional £30,000 could be given to charity, does that impact on the whole amount or the part amount? This what happens in real life; it is not as straightforward as perhaps the Government think.
Kirsty Blackman
I thank the hon. Gentleman for his intervention. The liability only arises for testimonials of more than £100,000, but I understand his point. For example, I do not know how it would work if a committee were to receive £80,000 on the day of the sporting testimonial and then another £25,000 afterwards in charitable donations. I hope that the Minister will make plain which period the income from a sporting testimonial covers. If the income arises after the sporting testimonial, does it breach the £100,000 cap, and would the liability for class 1A contributions therefore arise, even though it did not occur on the day of the sporting testimonial?
There is also a difference between contractual and non-contractual sporting testimonials. The hon. Member for Oxford East (Anneliese Dodds) made this incredibly clear in Committee and discussed in some detail the definition of “contractual”. The issue is not only the word “contractual”, but whether a sporting testimonial was expected. For example, if everybody who plays centre forward for a football club is given a sporting testimonial, does that mean that everybody should expect a sporting testimonial, or does it just happen that the last five people who played centre forward were amazing at scoring goals and therefore received a sporting testimonial? My concern is that people who did not expect a sporting testimonial will end up, through no fault of their own, in a situation where the Government consider it to be one that they expected to get.
My concern in both cases is the impact on HMRC, which will have a job of work to do in deciding whether the sporting testimonial income creates liability for class 1A contributions. Is it a contractual testimonial? Is it one that the sportsperson should have expected to receive? That will be a difficult set of cases for HMRC to deal with, to come to the correct decisions.
New clause 4 simply says:
“The Secretary of State must, within three years of this Act receiving Royal Assent, lay before Parliament a report on its Exchequer impact.”
Before a Treasury Bill comes before Parliament, explanatory notes and a TIIN—a tax information and impact note—are provided, which we all are able to access. A TIIN projects how much the Treasury expects to receive as a result of tax changes, whether it is a tax relief or an additional tax. I have pushed Ministers before on how we know whether the expected impact was actually received.
The information that I was given in Committee was not as strong as I hoped for. I understand that at an unspecified point in the future, the Treasury Committee will be given a report on the Exchequer impact of tax changes. I do not know who keeps track of when those reports are published or whether a report is provided to the Treasury Committee on all measures that have an Exchequer impact. However, I do know that the Members who serve on the Bill Committee—whether Opposition or Government Members—and who scrutinise the Bill, raise concerns about its progress and ask questions about the potential Exchequer impact do not get a copy of the report. Only the Treasury Committee gets a copy of the report and has the right to scrutinise it.
If the Government cannot accept new clause 4—it would be nice if they did, so that a report was laid before Parliament that we could all see—I ask that when reports are published and sent to the Treasury Committee, all Members who serve on the Bill Committee also receive a copy. It would not be a massive administrative burden on the Treasury to ensure that we were all emailed a copy; I am not even asking for a paper copy. It would mean that Parliament and the Government’s decisions were more transparent. It would also mean that the next time we were asked to take a decision on national insurance contributions or anything else, we could look back at whether the impact that the Exchequer projected was actually received.
I get that there are various reasons why we change taxation. We can change taxation to discourage behaviour that we do not want, to encourage behaviour that we do want, to raise revenue or, as the Government say they are doing in this case, to simplify things—although I have given a number of reasons why this is not the way to simplify national insurance contributions or termination payments. This House can only make sensible decisions about taxation if we understand how accurate the Treasury’s projections are. It would be much better if the Government committed to send us a copy of this report when it goes to the Treasury Committee.
I will not press new clause 4 to a Division, but I am happy to vote with the Opposition on any measures that they press. I hope that the Minister will say yes to the small request I have made, because it would not have a huge administrative impact or cost him anything.
The Exchequer Secretary to the Treasury (Robert Jenrick)
I am grateful for the opportunity to respond to the comments and questions posed by the hon. Members for Aberdeen North (Kirsty Blackman) and for Bootle (Peter Dowd). I shall not detain the House long, but I will try to respond to as many points as possible. I am surprised that the hon. Member for Bootle has raised those concerns and indicated that he intends to vote against this measure, given that he did not divide the House on Second Reading and did not divide the Committee on a single clause.
Peter Dowd
I indicated at the time that we would reserve our judgment and see whether the Government came up with sensible proposals. The fact of the matter is that, regrettably, they have yet again not come up with those suggestions, proposals, recommendations and explanations. That is why. Here we are giving the Government the benefit of the doubt, and we are being criticised for it.
Robert Jenrick
Let me respond to the amendments tabled by the hon. Gentleman and the hon. Member for Aberdeen North. It is a bit like groundhog day, because we have been through these arguments before. I will first address new clauses 1 and 2, which seek to amend the legislation that deals with termination awards, and then new clause 5.
New clauses 1 and 2 seek to commit the Government to report to Parliament on the impact of the changes to termination awards legislation within one year of implementation. They both seek further information on the impact of this measure on individuals whose contracts have ended and on employers. New clause 1 also asks specifically about distributional analysis, while new clause 2 asks the Government to consider the impact on businesses using termination payments to fund a start-up—a matter that we also discussed in Committee.
First, the Government consider that producing such reports is unnecessary, because we have already considered these issues in detail as part of the policy development and extensive consultation process. As we have discussed on a number of occasions, this Bill has been known about for some time. It was published for the first time in 2015. It has been restated in Budgets. It has been consulted on. This is not a new measure; it is well known to individuals and stakeholders who might be affected and to the tax and professional community who will be involved in advising businesses. There is little more to be said on that.
Kirsty Blackman
As the Minister has said, we discussed this in Committee, as well as on Second Reading. As we have discussed it before and he knew this question was coming, can he tell us how many businesses use termination payments for their start-up and how many fewer will use it for their start-up as a result of these changes?
Robert Jenrick
As I said in answer to the hon. Lady in Committee, that is not information that HMRC collects. Studies are made by independent bodies, some of which I highlighted to her during the previous stage of the Bill. I could direct her to them, but I cannot vouch for the veracity of those studies, which are produced by independent bodies. Of course, there is anecdotal evidence of the number of start-ups created in the event of significant redundancies at particular businesses, but that is not something HMRC collects or would be able to do easily. With great respect to the hon. Lady and the point she is trying to make, I do not agree that that is something we should attempt to do in this case.
The point the hon. Lady raised in her closing remarks was about the review that HM Treasury does in the ordinary course of business. We do intend to do that, and we do so within three to five years of Royal Assent to a Bill. As I explained in Committee, the conclusions on the Bill will be communicated publicly to the Treasury Committee. I understand the point she has made on a number of occasions that we could at that point specifically notify certain Members of this House should they be in this House and remain interested. However, again with respect, I suggest it is perfectly reasonable that we send that to the Treasury Committee, which will publish it. It will be in the public domain, and if she or other right hon. and hon. Members are interested at that stage, they will be able to view it and take it from the Treasury Committee website.
Kirsty Blackman
Could the Minister please let us know whether that will be in three years’ time or five years’ time, or at what point in that two-year period should I be watching the Treasury Committee’s website?
Robert Jenrick
I cannot tell the hon. Lady that at the present time, and for good reason. We do not know at this moment when will be an appropriate time to review this particular tax. Clearly, it can take time to gather the correct evidential base, and that will vary from tax to tax. We will choose the correct moment when we have the greatest degree of evidence to make an informed decision, but it will be within the three-to-five year window.
The existing processes I have described allow time for the Government to consider an adequate amount of evidence, including administrative and taxpayer data. These do take time to collect. They often involve external research, stakeholder views and other relevant analysis. After one year, as is proposed in new clauses 1 and 2, is rarely the appropriate time to review a new tax. Accepting these new clauses at this stage would mean rushing into reviewing these polices prematurely, without proper consideration and without enough evidence to do so robustly, which is what I think all right hon. and hon. Members would wish us to do.
Secondly, the Government have already explicitly considered the impact on employers and individuals as part of this policy development and the consultation process I have already outlined. We decided on an approach that protected those losing their jobs—for example, by retaining the important £30,000 exemption. We have stressed on a number of occasions throughout the passage of the Bill that the Government certainly have no intention of changing that. Were this or a future Government to do so, it would require an affirmative statutory instrument, which could then be debated and voted on by the House. We have also chosen not to change employee national insurance contributions as well, which we could have done for even greater simplification. We chose not to do so to protect employees in a difficult period in their working lives.
At this point, I would add that this policy has been costed. That was certified by the independent Office for Budget Responsibility, and the methodology for this assessment is described in the Budget policy costing document. The suggestion from the hon. Member for Bootle that this was not properly costed is not correct; it has been independently certified.
New clause 1 also requests that the Government conduct a distributional analysis. As I have set out on a number of occasions, the Government have already assessed the distributional impacts of this policy using the information that is available to us. We are confident that the termination awards affected by these changes will be disproportionately paid by higher and additional rate taxpayers. It will not be possible to make a further assessment until we have collected the administrative data on the impact of this policy, which we will do in due course, and it will of course inform the review we have already described in three to five years’ time.
New clause 2 asks that we consider the impact on start-ups. I have answered the question from the hon. Member for Aberdeen North: we do not hold this data. It is not an easy statistic to collect. It requires tracking the behaviour of an individual across time and between different employments.
Peter Dowd
We will push new clause 5, but I beg to ask leave to withdraw new clause 1.
Clause, by leave, withdrawn.
New Clause 5
Effects of termination awards provisions
“(1) The Treasury must publish reviews of whether the payment of Class 1A contributions on termination awards under sections 1 and 2 has had—
(a) any effect on the number of termination awards made above £30,000;
(b) any effect on the size of termination awards made above £30,000; or
(c) a disproportionate effect on—
(i) women,
(ii) pregnant women,
(iii) persons aged 50 or over, or
(iv) any other group of people with protected characteristics (within the meaning of the Equality Act 2010).
(2) The first review under subsection (1) shall be published no later than 24 months after this section comes into force.
(3) Subsequent reviews under subsection (1) shall be published no later than 24 months after publication of the previous review.”—(Peter Dowd.)
This new clause would provide for a general review of the termination awards provisions of this Act within every period of 24 months.
Bought up, and read the First time.
Question put, That the clause be read a Second time.
Robert Jenrick
I beg to move, That the Bill be now read the Third time.
I am grateful to all the right hon. and hon. Members who participated throughout the passage of the Bill, particularly in Committee. I thank the Committee’s Chairs, my hon. Friend the Member for North West Norfolk (Sir Henry Bellingham) and the hon. Member for Mitcham and Morden (Siobhain McDonagh).
This is a small and narrowly drawn but none the less important Bill that continues the Government’s aim of aligning tax and national insurance contributions where it is right to do so. The Bill aligns the employer national insurance contribution treatment of termination awards and sporting testimonials with the current tax treatment. It also raises about £200 million a year for the public finances.
As I mentioned in previous debates, the Bill has been expected for some time. The measures were first announced at Budget 2015, consulted on thereafter and so have been widely expected and subjected to a great deal of scrutiny. The effect of the changes in the Bill will mean that a 13.8% class 1A employer national insurance charge will be applied to income derived from termination awards and sporting testimonials that are already subject to income tax.
I would like to reiterate my thanks to hon. Members who participated in the debates. I thank my superb officials at HM Treasury and Her Majesty’s Revenue and Customs, whose patience and professionalism never ceases to impress me. I commend the Bill to the House.
Anneliese Dodds (Oxford East) (Lab/Co-op)
It is a pleasure to speak on behalf of the official Opposition on Third Reading. It is also a pleasure to speak opposite the Exchequer Secretary, who has been left holding the baby no less than three times this evening—understandable, perhaps, given the immense turbulence currently occurring on the Government Benches. I echo his thanks to the officials who have been involved with the Bill and to all those who made so many contributions, particularly in Committee.
As we have said repeatedly, this is a meagre Bill. We have many concerns about it that have not been addressed during its passage and were certainly not addressed this evening. First, on sporting testimonials, we still lack clarity on the scope of the Bill due to its terminological ambiguity. We still do not have any proper projection from the Government with regard to its impact on charitable giving.
On termination payments, we remain deeply concerned that the Bill still leaves the door open to reducing the value of national insurance-free termination payments. As a result of the Bill—the Minister even acknowledged this in his speech just now—we could see a reduction in the amount of NI-free payments going to those who are losing their jobs through secondary legislation. That is completely inappropriate and something we will not accept. The Government themselves have admitted that the measures will exert downward pressure on wages. There will also be a negative impact on termination payments, because they will be passed on from employers to employees.
There are huge problems with our tax system. They are not dealt with by this thin and meagre Bill. As a result, we will be voting against it on Third Reading.
Kirsty Blackman
The Bill does not do what the Government set out to do, which is to simplify the tax system. The tax system is not simpler as a result of the changes that are being made. It will be more complicated and companies will have a larger administrative burden. It also reduces wages. I raised concerns about the fact that those who are already at the bottom of the pile will be receiving less in wages as a result of the changes the Government are making. I am happy to vote with the Opposition.
Having said that, I felt that the Committee was good-tempered and we discussed the issues at some length. It was really nice to have an evidence session in Committee. Hopefully, we will move on to the Finance Bill Committee taking evidence so that we can have more informed debates.
Finally, I would like to thank a couple of our staff members who have been involved in the progress of the Bill—Emily Cunningham and Chris Mullins-Silverstein—for their work in supporting us. My speeches would have been much less informed if it had not been for their help and support.
Question put, That the Bill be now read the Third time.
National Insurance Contributions (Termination Awards and Sporting Testimonials) Bill
Tuesday 11th June 2019
(5 years, 5 months ago)
Lords ChamberRead Full debate National Insurance Contributions (Termination Awards and Sporting Testimonials) Act 2019 Read Hansard Text Amendment Paper: Consideration of Bill Amendments as at 10 June 2019 - (10 Jun 2019)
National Insurance Contributions (Termination Awards and Sporting Testimonials) Bill
Wednesday 26th June 2019
(5 years, 4 months ago)
Lords ChamberRead Full debate National Insurance Contributions (Termination Awards and Sporting Testimonials) Act 2019 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Consideration of Bill Amendments as at 10 June 2019 - (10 Jun 2019)
Lord Young of Cookham (Con)
My Lords, it is a pleasure to open this short Second Reading debate on the National Insurance Contributions (Termination Awards and Sporting Testimonials) Bill. This is a small but important Bill that aims to bring the national insurance contributions, NICs, and tax treatment of termination awards and sporting testimonials into closer alignment. The rules determining the income tax treatment of termination awards and sporting testimonials were legislated for in the Finance Acts 2016 and 2017. Implementation of the measures in this Bill, announced at Budget 2018, will replicate these rules in NICs legislation.
The Bill has been expected for some time. Both measures were first announced at the Budget 2015, consulted on and published in draft in 2016. They were subsequently confirmed at Budget 2018, so they are expected by those affected and have been subject to much scrutiny. Together, they mean that a 13.8% class 1A employer NICs charge will be applied to income derived from any termination award over £30,000 or sporting testimonial over £100,000 that is already subject to income tax.
Let me give more detail on termination awards. Between 2013 and 2014, the Office of Tax Simplification reviewed the tax treatment of employee benefits and expenses. The OTS published an interim report in August 2013 identifying termination awards as a priority area. It found that relatively few employers and employees properly understood the regime and it recommended reform. The Government announced at Budget 2016 that they would implement the reforms of the tax and NICs treatment of termination awards and, shortly after this, they published draft legislation.
The reforms to the income tax treatment of termination awards were legislated for in the Finance (No. 2) Act 2017 and took effect from April 2018. The Government confirmed at Budget 2018 that the associated reforms to NICs legislation would be in place for April 2020. However, the fact that termination awards are currently subject to different income tax and NICs treatment has created confusion. Moreover, the current misalignment incentivises well-advised employers to disguise final payments as compensatory termination awards that benefit from a NICs exemption.
The Bill will place a 13.8% class 1A employer NICs charge on income derived from termination awards on amounts over £30,000. However, I assure noble Lords that employee NICs payments will remain entirely exempt. Employees will not face any additional liability as a result of these changes. Only around 1% of the workforce will receive a termination award in any given year, and of these around 80% will be unaffected by the Bill. This measure will raise around £200 million per annum for the Exchequer and make a useful contribution to public finances.
Finally on termination awards, it might be helpful if I address one of the main points raised during Report in the other place. Opposition Members proposed a new clause that would have required the Government to report every two years on the impact of the changes to termination awards on the number and size of awards, as well as any effect on specified groups with protected characteristics. As the Exchequer Secretary explained, the Government had already assessed the impact of the policy in compliance with our duties under the Equality Act 2010 and the conclusions were published as part of the tax information and impact note. No groups are explicitly targeted by the policy, which affects all groups identically in legal terms. Our assessment found no disproportionate impact on any of the groups specified in the proposed new clause. It is also worth noting that since 2017, if not further back, the Government have received no representations from stakeholders regarding any disproportionate impact on protected groups, despite our consulting extensively in 2015 and legislating for changes to the income tax treatment of termination awards in 2017.
I turn to the second measure in the Bill: aligning the class 1A employer NICs treatment of income from sporting testimonials with the income tax treatment. A sporting testimonial is a one-off event, or a series of related events, held on behalf of sportspersons who have played for a certain club for a long time. This often takes the form of an exhibition match involving famous players from the past and present. The testimonial can be used to raise money for the sportsperson before retirement, or sometimes to raise money for charity.
The relevant income tax changes came into force from April 2017. The rules governing sporting testimonials are now changing to give clarity to the NICs treatment. Currently, where a sporting testimonial is non-contractual or non-customary, it can be organised by a third party rather than the employer, to raise money without it being subject to NICs. Where the employer arranges the testimonial, if it is part of the contract or there was an expectation that the sportsperson would be entitled to one, the testimonial is already subject to income tax and NICs.
From April 2020, any income derived from non-contractual and non-customary testimonials arranged by third parties exceeding the £100,000 threshold will be subject to a class 1A employer NICs charge of 13.8%. I will say a few words about the £100,000 threshold. Some noble Lords may be aware that the Government consulted extensively on the proposals for reform, the draft legislation, guidance, and the threshold. Following this consultation, the Government increased the tax-free threshold from £50,000 to a very generous £100,000.
These types of testimonials will not be subject to employee NICs to ensure that the sportsperson is not adversely affected. I also emphasise that the Government expect the impact on charitable donations to be minimal, since donations made from sporting testimonials via payroll giving, operated by independent sporting testimonial committees, will not be subject to any income tax or NICs at all. I also reassure noble Lords that the vast majority of sporting testimonials will be unaffected by the Bill. HMRC estimates that there are only around 220 testimonials each year, with an average taking of around £72,000.
In conclusion, although this is a small Bill, it is nevertheless important and necessary. By bringing the national insurance and tax treatment of termination awards and sporting testimonials into closer alignment, the Bill simplifies the tax system, reduces the incentives for manipulation and raises important revenue for our public services. I commend it to the House.
Lord Macpherson of Earl’s Court (CB)
My Lords, I will speak briefly in support of the Bill. It would be poor form not to, since the Bill has its origins in George Osborne’s last Budget, when I was his Permanent Secretary.
In many ways, it is a textbook piece of tax legislation. It originated from a proposal from the Office of Tax Simplification and reflects extensive consultation. I recognise that increasing tax on redundancy payments will not satisfy all, but if they are subject to income tax, it follows logically that they should be subject to national insurance. Who knows? A higher tax charge might deter unnecessary redundancies.
Nearly every Government I worked for at the Treasury looked at bringing income tax and national insurance closer together. I remember a review in the mid-1990s, encouraged by the noble Lord, Lord Heseltine, which I suspect was led by the noble Lord, Lord Young, as Financial Secretary to the Treasury. However radical their initial intentions though, Governments tend to shy away from wholesale reform, understandably scared off by the number of winners and, more importantly, losers. The difference in assessment periods and tax base of national insurance and income tax is problematic. National insurance is assessed weekly; income tax is assessed annually. National insurance is payable only on earnings; income tax is payable on savings and rental income too. Income tax includes a number of reliefs, not least on pension contributions; national insurance does not. National insurance provides pension entitlement; income tax does not. National insurance is not payable by employees over the pension age; sadly, income tax is payable until you die. The income tax system is progressive, marginal rates increasing with income; national insurance is not. Indeed, once earnings go above the upper earnings limit, the employee’s marginal rate falls from 12% to 2%.
Therefore, although there would be substantial administrative gains if income tax and national insurance were brought together, and the tax system would become altogether simpler and more intelligible for citizens, Governments generally conclude that full alignment is altogether too difficult. Indeed, I wonder how much Governments really want it. National insurance rates have almost doubled during my working life, while successive Governments have taken credit for reducing the basic rate of income tax from 33% to 20%.
All that said, it is still possible to create greater alignment. The Bill represents a small step in that direction. I would be grateful if the Minister would confirm that the Government remain committed to finding further ways of bringing income tax and national insurance closer together. It is right in principle that sporting testimonials and large redundancy payments are subject to income tax. If that is the case, they should also be subject to national insurance.
It is a pity that only employers’ national insurance contributions—class 1A—are being applied. There is a strong case for applying employee national insurance contributions as well. No doubt the Government will argue that there are precedents for exempting certain types of employment income from class 1. For example, benefits in kind, such as a company cars, are subject to class 1A but not class 1. I encourage the Government to look at this again at some point in the future. The national insurance system should not discriminate between different forms of remuneration. Potentially, it would bring in some useful additional revenue, which, to judge by the spending commitments of the candidates to be the next leader of the Conservative Party, will be needed.
In seeking greater alignment between national insurance and income tax, I encourage the Government to keep two areas in their sights. The first is self-employed earnings, where the Office of Tax Simplification recommended abolishing class 2 and raising class 4. Sensibly, the Chancellor came forward with a proposal on this in 2017, but he was forced by a strange coalition of Brexiteers and the official opposition to withdraw it. At some point, maybe many years hence, a Government will be elected with a rather more compliant majority than exists today. At that point, I hope Treasury Ministers will have another go at simplifying the system and creating greater alignment between employee and self-employed national insurance.
Secondly, by bringing the starting point for income tax and national insurance closer together, Gordon Brown achieved broad alignment in the early 2000s. For the rest of that decade, the annualised lower earnings threshold was maintained in line with the income tax personal allowance. The coalition Government chose to prioritise increases in the income tax allowance. The national insurance threshold has been left behind. At some point, I hope the Government will seek to close the gap. I am encouraged that both candidates in the Conservative Party leadership election have advocated a rise, although they have not yet said how they propose to fund it. I know closing the gap fully would be very expensive, but if in future the Government have the resources to cut taxes, I hope they will make this a priority. Meanwhile, I strongly support the Bill and wish it safe passage.
Baroness Kramer (LD)
My Lords, I intend to be very brief on the Bill and I certainly will not oppose it, but I want to pick up a couple of issues raised by the noble Lord, Lord Macpherson, from a slightly different angle. I follow the logic of keeping national insurance contributions so that, essentially, they track the pattern of income tax—though I am delighted by the Minister’s assurance that this is not mission creep and we will not very shortly see coming down the track an attempt to apply a national insurance tax on the employee. We are looking at employees at a fairly critical and difficult phase of their lives. That is one thing you can be fairly sure of when somebody’s employment ends, especially when it is an unexpected redundancy. That is the issue I want to raise.
Our tax system deals very badly with earnings that spike in one particular year. To give a redundancy example, somebody who is made redundant in one year and receives a substantial payment might then not be employed for the next three years. It makes you question whether applying the taxes we do was appropriate in the way that it was attached to that redundancy payment. We do not do things such as income averaging, which other countries use. As we look at the whole world of work and how it is changing—with changes in how people are employed and paid, and the mixed and portfolio lifestyles they have—we need to step back and look again at how we track both income tax and NICs. I have no problem bringing them into alignment if that can be workable, though the transition looks absolutely terrifying and near impossible. At some point, however, we have to look much more fundamentally at whether these systems actually work with the way people work and earn their living today.
With that exemption, and taking the Minister entirely at his word that there will be no move to suddenly apply NICs to the employee, I support this legislation. The Minister was kind enough to meet us earlier and clarified a couple of questions in his opening statement, but I want to know whether there is any further information on one issue: do we have any evidence that this was being abused? Logically, one could work out how it could be abused, but I am not quite sure how much evidence there is that anyone was abusing it. That is rather an interesting question when we look at this legislation today.
Lord Tunnicliffe (Lab)
My Lords, before I begin, I should like to thank the Minister and his team for the briefings they have held on this Bill. Early engagement is always useful, particularly when dealing with technical taxation measures. In particular, his team’s and his own thoroughness is such that I do not expect to have to bring forward any probing amendments; the concept of the Bill has been battered into my brain sufficiently.
Second Reading is normally a time for us to come together and debate the lofty ambitions of the Government of the day. Clearly, the role of your Lordships’ House is somewhat constrained when it comes to matters of finance. However, noble Lords ordinarily enjoy the opportunity to make speeches on wide-ranging aspects of the UK economy. But as has become conventional in these somewhat unconventional times, Ministers have found themselves scrambling for any legislation that can bulk out the timetable and survive a fractured House of Commons. So, having dealt with the fate of 19 individual animals—as important as they are—just last week, your Lordships’ House now finds itself discussing the mirroring of current income tax arrangements for termination awards and proceeds from sporting testimonials for national insurance purposes.
I understand from those who follow such things that I achieved notoriety in the stand-up routine of the Times journalist Matt Chorley when I used his catchphrase, “This is not normal”, in a debate in February. However, we find ourselves in the longest parliamentary Session by sitting days since the English Civil War while the Government scrape the barrel for things to do. This truly is not normal. We on these Benches would prefer to be dealing with more pressing tax matters. That includes taking action to crack down on the tax avoidance and evasion that prevents much-needed extra spending on public services.
Nevertheless, while the Bill before us lacks ambition, we must diligently carry out our work and consider the implications of these changes to the tax code. The genesis of the Bill was a wide-ranging review by the Office of Tax Simplification in 2013. The first set of recommendations, to make relevant payments subject to income tax, were legislated for several years ago. Now, as the Minister explained, we are legislating to levy class 1A employers’ NICs charges on the same payments. While the OTS has a noble aim, the matters under consideration today provide a reminder of why tax is often anything but simple.
On termination payments, we have concerns that the introduction of additional employer NICs may act as a disincentive to responsible employers who want to top up statutory redundancy payments in recognition of an employee’s contribution to the firm. I am grateful to Treasury officials who have listened to this concern in meetings and I accept their argument that the number of cases is likely to be small. However, I hope that the Minister can provide reassurance that the Government will reflect on this point when reviewing the impact of the legislation in due course.
While the definition of a termination payment is beyond the scope of the Bill, as helpfully laid out in a letter from the Minister on 24 June, I hope consideration will be given to how future tax changes can encourage employers to properly look after those employees whom they have to let go.
I would be grateful if the Minister could clarify how different forms of termination payment, whether below or above the £30,000 threshold, are treated for the purposes of determining eligibility for, and the calculation of, social security benefits such as universal credit.
In a meeting with the Minister and his officials, we also discussed the potential for errors to be made when the new regime takes effect in 2020. I was reassured that responsibility for any miscalculations will lie ultimately with the employer and that individuals will not be pursued by HMRC to recoup any sum from which the correct deduction has not been made. I would be grateful if the Minister could put this on the record and confirm that this differs from the situation with regard to income tax, whereby shortfalls in tax due can be recouped in the usual way.
Turning to sporting testimonials, I understand that the Minister will provide further clarity on the types of event to which the Bill extends; that is, providing a plain English explanation of “non-contractual, non-customary”. The policy note on GOV.UK notes that the impact of this change is “negligible”. It notes that around 220 testimonial committees are established each year, but that only a small number will be impacted by the measure. It further acknowledges that there will be a cost and additional administrative burden for testimonial committees as a result of the policy change. Given that the Exchequer will gain little, I return to my previous observation that tax simplification, while desirable, should not be prioritised over other, more fundamental issues in the tax system or wider UK economy.
A concern raised by my colleagues in the Commons related to the Bill’s impact on charitable donations arising from testimonials. A number of sports men and women who are financially secure choose to use their testimonial to support charities, including their own foundations. However, introducing a new NICs charge will reduce the funds passed on to those organisations. Can the Minister clarify what guidance will be made available to committees to ensure that charitable donations resulting from testimonials are treated in a tax-efficient manner? As in the case of redundancy payments, it would be a shame if an unintended consequence of this measure was to introduce additional barriers to what we all recognise as generous and responsible behaviour.
Finally, as the Bill progressed through the Commons, my colleagues probed what steps the Treasury will take to review its impact. We may choose to pursue this as the Bill progresses here, particularly in relation to my concerns about charities. We look forward to continuing our engagement with the Minister and his officials, and hope that the Government will take appropriate steps to address the concerns raised. I also note that the more interesting elements of the Bill, frankly, sit in the income tax legislation to which it cross-refers. Therefore, it would be inappropriate for this House to address the fundamental concept of the Bill, which is to use the essence of the tax legislation as the basis on which it functions. We are not likely to pursue any amendments to that end.
Lord Young of Cookham
My Lords, this has been a short but interesting debate, and I am grateful for all the contributions made. The noble Lord, Lord Macpherson, claimed paternity for this reform and emphasised the logic of what is contained in the Bill. He reminded us of the different characteristics of national insurance and income tax and raised some broader issues about alignment. I can confirm that we will continue to look for opportunities for alignment, as he suggested. He wanted to extend the measure to employee NICs, which I think would qualify as mission creep in the vocabulary of the noble Baroness, Lady Kramer. We have no plans to charge employee NICs on termination awards, or indeed on testimonials. We think that the changes in the Bill strike the right balance between simplification and keeping taxes associated with redundancy at a reasonable level.
The noble Baroness asked about abuse. HMRC has evidence that a minority of well-advised employers have been manipulating the rules to minimise their NICs liability, which is a further reason for seeking to bring in this alignment. She made an interesting point about averaging: namely, that if you get a lump-sum redundancy or testimonial and no other income for a period, you should be allowed to spread it over a number of years. I would be misleading her if I said that that was likely to happen, but it is an interesting suggestion which we shall take on board and see whether there is an opportunity to spread the receipts.
I am grateful for the kind words of the noble Lord, Lord Tunnicliffe, about Treasury officials. He raised concerns that the Bill would result in smaller termination awards being made to employees unfortunate enough to lose their jobs. Noble Lords will know that no individual, on termination of his or her employment, will face an additional NICs liability as a result of the Bill. The class 1A employer NICs liability is a liability on the employer. On his question, as I think I said earlier, only 1% of employees receive a termination award each year, and of these only 20% will be affected by the Bill—but it is entirely up to businesses how any additional NICs liability is accounted for.
The noble Lord asked for reassurance that responsibility for any miscalculations of class 1A employer NICs or income tax will lie with the employer. I am happy to confirm that position for national insurance. In the case of any underdeduction or underpayment of PAYE income tax by an employer, HMRC is obliged to recover in the first instance from the employer. However, in some circumstances, for example where the employer made an innocent error or the employee knew that insufficient tax had been paid, HMRC may transfer the PAYE income tax to the employee at a later point.
The noble Lord asked how different forms of termination payment were treated for the purpose of determining eligibility for, and the calculation of, social security benefits such as universal credit. I can reassure him that the changes being introduced in the Bill do not affect the interaction of termination payments and universal credit. Termination payments in the form of redundancy pay are treated as capital rather than earnings and are therefore disregarded as income for universal credit purposes. However, if that payment results in someone having more than £16,000 in savings, they would no longer be eligible for universal credit. Termination payments in the form of payments in lieu of notice—PILONs—are treated as earnings for universal credit.
None the less, the Bill will not negatively affect a household’s universal credit entitlement, because earnings for universal credit are considered net of income tax and NICs. This is fair, as the purpose of a termination award or sporting testimonial is to ensure that the individual unfortunate enough to lose their job receives a lump sum, a large part of which is tax free, to cover the costs associated with retraining and finding a new job.
With regard to sporting testimonials, the noble Lord raised a concern that the new NICs charge could reduce donations to charitable organisations. I am happy to reassure him that, because testimonial committees are required to operate PAYE on income from testimonials in excess of £100,000, any charitable donations can be made through payroll giving without incurring any income tax or NICs liability at all. HMRC will ensure that the published guidance will make this clear prior to implementation.
I also assure the noble Lord that, although we have received no indication that the current guidance is causing any practical difficulties and this Bill does not make any changes that would supersede it, we will continually update our guidance in response to the issues raised during the passage of the Bill. This will include some practical examples of non-contractual and non-customary sporting testimonials to ease understanding, in response to the issue just raised by the noble Lord.
The noble Lord also asked what steps the Treasury would take to review the impact of the measures in the Bill. Again, I reassure him that the Treasury will continue to keep these issues under review once the measures in the Bill are in force. In the published tax information and impact notes for the measures in the Bill, the Government set out their commitment to review the policy through communication with taxpayer groups affected by the measure. We are also committed to carrying out post-legislative scrutiny three to five years after the Bill becomes an Act.
I say to the noble Lord and to all other noble Lords who have taken part in this debate that we are of course happy to have further informal discussions before the remaining stages of the Bill if any noble Lords would find that helpful. I am grateful for the opportunity to explain the issues that have arisen today and for the support of noble Lords for the Bill, and I am delighted to commend it to the House.
National Insurance Contributions (Termination Awards and Sporting Testimonials) Bill
Wednesday 10th July 2019
(5 years, 4 months ago)
Lords ChamberRead Full debate National Insurance Contributions (Termination Awards and Sporting Testimonials) Act 2019 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Consideration of Bill Amendments as at 10 June 2019 - (10 Jun 2019)
Lord Young of Cookham (Con)
My Lords, I understand that no amendments have been set down to this Bill, and that no noble Lord has indicated a wish to move a manuscript amendment, or to speak in Committee. Therefore, unless any noble Lord objects, I beg to move that the order of commitment be discharged.
National Insurance Contributions (Termination Awards and Sporting Testimonials) Bill
Tuesday 23rd July 2019
(5 years, 4 months ago)
Lords ChamberRead Full debate National Insurance Contributions (Termination Awards and Sporting Testimonials) Act 2019 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Consideration of Bill Amendments as at 10 June 2019 - (10 Jun 2019)
Lord Young of Cookham (Con)
My Lords, I have it in command from Her Majesty the Queen to acquaint the House that her Majesty, having been informed of the purpose of the National Insurance Contributions (Termination Awards and Sporting Testimonials) Bill, has consented to place her interest, so far as it is affected by the Bill, at the disposal of Parliament for the purposes of the Bill.
Royal Assent
Wednesday 24th July 2019
(5 years, 4 months ago)
Lords ChamberRead Full debate Read Hansard Text Amendment Paper: Consideration of Bill Amendments as at 10 June 2019 - (10 Jun 2019)