National Insurance Contributions (Termination Awards and Sporting Testimonials) Bill

(Limited Text - Ministerial Extracts only)

2nd reading (Hansard): House of Lords
Wednesday 26th June 2019 Lords Chamber

Moved by

[Lord Young of Cookham]

That the Bill be now read a second time.

[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.

--- Later in debate ---

[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.

Bill read a second time and committed to a Committee of the Whole House.