National Insurance Contributions (Termination Awards and Sporting Testimonials) Bill (Second sitting)

James Cartlidge Excerpts

Tuesday 14th May 2019 Public Bill Committees

[The Exchequer Secretary to the Treasury (Robert Jenrick)]

It is a pleasure to return this afternoon, following my grilling by members of the Committee this morning, to explain the clauses in the Bill, starting—as you said, Sir Henry—with clauses 1 and 2. Before I respond to the hon. Members who have tabled new clauses 1 and 4, it may help the Committee if I begin by explaining some of the background to clauses 1 and 2. My apologies for repeating some of what I said this morning in answer to questions from members of the Committee.

The Office of Tax Simplification, or OTS, stated during its 2013-14 review of the tax and national insurance contributions treatment of these payments that

“the well-advised can often end up better off than the unadvised, as they are more able to structure their employment contract (or, indeed, their termination payment) to achieve the better tax treatment.”

One reason why businesses had an incentive to do so was the absence of any employer’s national insurance on termination awards of any size. My officials and I outlined some examples of that this morning during questions, which I think was supported by the interesting evidence from Bill Dodwell of the OTS.

Following that report from the OTS, the Government announced in the 2015 summer Budget that they would consult on simplifying the tax and NICs treatment of termination awards. We consulted openly and widely on that policy, receiving responses from 100 stakeholder groups and nine individuals, covering tax experts, law firms, trade unions, business groups and individual businesses. We also held several meetings with stakeholders to discuss their views on our draft proposals. Following that, in the 2016 Budget, we confirmed that we would be taking forward reforms to the tax and NICs treatment of termination awards, and shortly afterwards published draft legislation for consultation.

The income tax measures announced in the 2016 Budget were legislated for in the Finance (No. 2) Act 2017 and took effect from April 2018. The Government then reconfirmed in the 2018 Budget that the associated reforms to NICs legislation would be in place for April 2020. The reforms made by clauses 1 and 2 have therefore been properly consulted on, tested with stakeholders of all kinds and debated by Parliament—both during the process of this Bill and, more particularly, through the passage of the Finance (No. 2) Act. They have also been widely expected by stakeholders for many years.

I now turn to the changes made by clauses 1 and 2. It is important to note that the reforms we are discussing today are the second part of a package of changes, some of which have, as I said, already been approved through the Finance (No. 2) Act and took effect in April 2018. The tax rules for termination awards that existed before the reforms introduced by the Finance Act (No.2) 2017 were unclear and unnecessarily complicated. Some awards were taxed as earnings, others were taxed only above £30,000, while others were completely free of tax and national insurance contributions. That complexity left the system open to a degree of manipulation that we heard evidence about this morning. The Finance Act (No.2) 2017 tightened the rules on what element of an award is taxed as earnings. From 6 April 2018, the NICs liability was more closely aligned with the tax treatment, so that those amounts taxed as earnings became liable for employer and employee class 1 NICs.

Termination awards that are not earnings are currently charged to income tax on amounts that exceed £30,000, and they are entirely exempt from employee and employer national insurance contributions. Allowing the difference between the income tax treatment of that income and the employer national insurance treatment to persist would be confusing, and continue to provide an incentive for employers to manipulate final payments to achieve a tax advantage.

The clause will close that loophole, simplify the tax system, and raise about £200 million in revenue to continue to support the funding of public services in a significant way. Clause 1, which applies to Great Britain, achieves that purpose by ensuring that where an income liability arises on termination awards above £30,000, there will be a corresponding liability to employer class 1A national insurance contributions.

[James Cartlidge (South Suffolk) (Con)]

On Second Reading, not much attention was given to employee benefits. How do they fit into that threshold?

[Robert Jenrick]

If my hon. Friend is referring to the benefits system, that is completely unrelated. Contractual benefits are liable to a tax liability in addition to that—perhaps I can provide more information on that in a moment. They will be part of taxable income taken in the round, which once generated is then subject to income tax and the employer’s national insurance contribution in the final termination payment.

The effect of the change will mean that a 13.8% class 1A secondary employer’s NICs charge will be applied to income derived from a termination award that is already subject to income tax. In addition, clause 1 also includes other modifications to existing legislation that relates to employer class 1A NICs, to ensure that the new liability for termination awards works as intended. Clause 2 makes corresponding changes for Northern Ireland, ensuring that the provisions apply across the United Kingdom.

Before I address new clauses 1 and 4, let me say a few words about what clauses 1 and 2 do not do. First, they do not introduce a NICs liability on the employee—I hope we made that clear during questions this morning. There remains an unlimited employee national insurance charge exemption on termination awards. Although there is a principled case for greater simplification and alignment by applying employee NICs to that income, the Government have listened carefully to representations made during the consultation, and we believe that our approach strikes the right balance between delivering greater simplification for employers, and fairness to individuals who are undoubtedly in a difficult period of their lives: losing their jobs and having to make the necessary adjustments.

Secondly, the clauses do not reduce or seek new powers to change the existing £30,000 threshold, below which termination awards are entirely tax-free and NICs-free. As we discussed this morning, that threshold remains generous compared with those of many other countries, including the United States and Germany, which tax income linked to a termination from the very first pound. It will ensure that about 80% of awards are unaffected by clauses 1 and 2, and that awards made as statutory redundancy pay are untouched. We have no plans to lower the threshold in future. Any future Government who wished to do so would need parliamentary approval.

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[Robert Jenrick]

My hon. Friend makes an important point. Statutory redundancy pay is £15,000, so for these purposes, £30,000 appears generous. I have already made the international comparisons. It is also important to point out that there are a number of exemptions altogether, for discrimination, physical harm, disability and so on, set out in other areas of legislation to ensure that those who are particularly vulnerable and deserving are protected when it comes to the payment they receive for their injuries.

I will briefly discuss the amendments that would be made to the Bill if new clauses 1 and 4 were accepted. New clause 1, tabled by the hon. Member for Aberdeen North, seeks to require the Government to produce a report on the impact of class 1A NICs on termination awards. Furthermore, it specifies that the report must contain

“an assessment of the expected impact”

of the changes in certain respects, which I will not list here but which are available in the Bill documents. New clause 4, tabled by the right hon. Member for Hayes and Harlington (John McDonnell) and the hon. Members for Bootle, for Oxford East, for Stalybridge and Hyde (Jonathan Reynolds) and for Manchester, Withington from the official Opposition, also asks the Government to report on several similar issues to those covered in new clause 1.

The new clauses are unnecessary because they seek to force the Government to report on a narrowly prescribed set of issues, most of which have been considered during the detailed consultation that has already been completed and that I have outlined, ahead of new information becoming available. The Government are already committed to reviewing the measures and being transparent about the impact that they are expected to have.

It is worth giving Committee members a little more detail on these issues. First, the Government do not deem it appropriate to conduct reports that have been very narrowly constructed. A report focused exclusively on one aspect of the Government’s reforms to termination payments—the distribution analysis, for example—would miss other important aspects such as the impact on the levels of tax avoidance or the funding of public services.

[James Cartlidge]

My hon. Friend is making an excellent point. Does he agree that we should look at the impact on job creation and the ability of employers to create jobs, particularly on the day we learned that unemployment is at the lowest level of my entire lifetime? I was born in 1974.

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[Peter Dowd]

I am pleased that the hon. Gentleman has raised that. Perhaps when we have a little chat in the Tea Room I will give him a copy of the letter from the shadow Leader of the House, my hon. Friend the Member for Walsall South (Valerie Vaz), to the Chancellor, setting out not our plans, but what Labour has done in the past on tax enforcement. [Interruption.] The Minister says from a sedentary position that they did not work. He should try telling that to taxpayers, who, as a result of Labour’s proposals over the best part of 15 years, raised billions upon billions of pounds, which went into public services. I will send a copy of the letter to the hon. Member for Walsall North, in case I do not bump into him in the Tea Room. I do not think the Chancellor replied; I cannot possibly think why.

Moving on to the substantive issue—[Interruption.] I do not mind a little bit of chuntering from Government Members, but if they made it at least marginally coherent, so that I could hear it, that would be really helpful. The Opposition’s new clause 4 would require the Government to review the impact of class 1A national insurance contributions on termination awards. The review would include:

“(a) an assessment of the impact the new Class 1A liability has on the level of termination payments workers receive;

(b) an assessment of the impact the new Class 1A liability has on employers;

(c) a distributional analysis of the new Class 1A liability; and

(d) anything else the Secretary of State considers appropriate.”

We are being very generous, and are giving the Secretary of State lots of room for manoeuvre in reporting to us on these matters.

As we stated on Second Reading, the condensed Bill before us is a shadow of its former self, standing at just five clauses. In fact, if it was a person, it would resemble a skeleton. The Government’s timetable for the Bill has been determined by the internal politics of the Conservative party—that is the reality; it is as simple as that—rather than an honest assessment of the time needed to scrutinise the measures properly.

The origins of the new class 1A contributions charge levied on termination awards can be traced, as Members know, to 2013, when the Office of Tax Simplification published its interim report, “Review of employee benefits and expenses”. Following the publication of the final report, the Government consulted on the proposed NIC changes and announced their intention to introduce the measure in the 2016 Budget. Two and a half years later, we are finally scrutinising the Government’s NIC reforms to termination awards.

The tax and national insurance treatment of termination payments remains a sensitive topic to workers and employers alike. As I said on Second Reading, employees facing redundancy often consider this final payment an evaluation of the work they have done for their employer. Termination or redundancy payments therefore have both an emotional and financial significance; the financial significance is sometimes slightly out of proportion, but there is nevertheless a relationship.

[James Cartlidge]

The hon. Gentleman is right about the psychological impact of redundancy payments. Does he therefore agree that we should celebrate from the rooftops that unemployment is at its lowest level since 1974?

[Peter Dowd]

I celebrate anybody getting a proper, secure, well-paid job. I am afraid that the hon. Gentleman should not expect me to celebrate somebody getting a job on two or three hours a week, and he should not expect me to celebrate the fact that £30 billion-worth of tax credits are going to subsidise people in poorly paid jobs, when only 20 years ago that was £1 billion. Do not ask me to celebrate that. Let us have the full picture. Yes, I always celebrate when somebody gets a decent well-paid, well-trained job with good terms of employment, but no, I do not welcome poorly paid, less well-trained jobs. I am sorry, but I cannot. But for the record, yes I welcome job creation—well-attuned job creation.

To get back to termination payments and their emotional significance, 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 it is not a judgment on the intrinsic worth of the staff who are leaving, even though they have had to make them redundant. The job losses might be because of the Government’s economic policies.

The Government’s rationale for the introduction of a new class 1A employer NIC charge, which will be levied at 13.8% on termination awards above the £30,000 threshold, is to do with ease and simplification. In its “Review of employee benefits and expenses: final report” in 2014, the Office of Tax Simplification stated that

“many employers are unclear about which parts of a termination package qualify for the exemption”

from tax and national insurance. I stand to be corrected, but I am not sure whether we got a significant amount of clarity on that today.

Additionally, Ministers have 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. However, 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 of the amount lost to the Exchequer as a result of that. That was probably confirmed today—we do not know.

Despite the many claims of Ministers about the desire to simplify the tax and national insurance treatment of termination awards, the Chartered Institute of Taxation and other tax experts have raised concerns around the lack of information in the Bill about how this new class 1A charge will be collected. We did not get a great deal of clarity on that today. Currently, Ministers plan to leave it up to secondary legislation, as alluded to earlier. That is not only a break from normal practice, but looks set only to confuse employers even more, rather than simplifying the national insurance treatment of termination awards. The people who came to speak to us today were probably a bit too polite to say that.

The provision will also add additional administrative burdens to HMRC at a time when it is hamstrung by what can only be described as the disastrous reorganisation of their estate by the Government—my hon. Friend the Member for Oxford East has been involved significantly with that—the introduction of Making Tax Digital, which has added to the problem, and of course the preparations for a no-deal Brexit, which have compounded it even further. Taken in the round, that is a challenge.

So what is the rationale for the introduction of this new NIC charge on termination awards, if not to make things less confusing for employers or to tackle tax avoidance, which is supposedly rife? I suggest that the Government’s rationale is wholly to do with the revenue they expect to raise, and is little more than an attempt to increase national insurance receipts for the Exchequer, while shying away from any major tax or national insurance policy change. I think that there was an acknowledgement of that today. This is just one element of what should have been a wider examination, as set out in the press release to which I referred, on 16 November 2016. This is certainly the opinion that the Office of Tax Simplification advocated in its 2014 report, in which it stated that a new NICs 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 employer NIC costs and to individual employees receiving reduced termination payments, as employers would be unlikely to increase their redundancy budgets. Similarly, the Government’s own impact assessment notes that this measure will present an “additional cost to employers” that will be

“reflected in lower wages and profit margins with a reduction in total wages and salaries of 0.1%”

within the first year of its adoption. My hon. Friend the Member for Oxford East clarified that with the Minister in today’s evidence session.

To put it simply, this new NICs charge will lead to added costs to employers, some of whom will be small and medium-sized business owners, and less generous termination payments to employees as a result. At the same time, the Treasury has downgraded its forecast of the likely amounts this new charge will raise for the Exchequer from £485 million to £200 million a year. I am sure the Minister would like to provide clarity on that.

This issue goes to the heart of new clause 4, which seeks a review of the measure’s impact on the level of termination payments that employees receive and the cost to employers, and a distributional analysis of this new class 1A charge, which Treasury officials said had not been done. On the ground, it might have been too complicated and the cohort may not have been large enough under the circumstances. Given the likely cost to employers and of falling workers’ wages and termination payments, as well as the Government’s shrinking forecast of the amount of revenue the charge would raise, surely it makes sense to pause and gather further information before proceeding. After all, the Office of Tax Simplification noted in its original report that if Ministers were to follow its recommendations for a new NICs charge on termination awards, more data on the potential winners and losers would be needed. We were not able to establish who they were today. I specifically asked that question and could not get an answer. It was like an aggregate amorphous statement.

Sadly, Ministers have not provided that information, despite having years to do so. Treasury Ministers have refused to undertake a distributional analysis, citing the cost or that the cohort is not large enough as excuses, and they are still unable to provide credible figures on the number of workers who receive statutory redundancy payments versus those who receive non-statutory payments. Uncertainty also remains about whether the Government will seek to lower the £30,000 threshold at a later date through primary legislation or secondary regulations. The Minister said they have no plans to do this, but we already raised this issue during consideration of a previous Finance Bill—in fact, I think I raised it. The question was, “If you have no intention of doing it, why introduce legislation to do it and why introduce it through the process of secondary legislation?” If it were me doing that, I would not be banking a piece of legislation unless I intended to use it. That is the case here; the Government will use this. Otherwise, why take up parliamentary time to do so? If they are taking us on a run-around to fill time, that too is inappropriate.

New clause 4 seeks a review of the proposed class 1A charge, focusing on its impact on workers’ wages, on termination payments, added costs for employers and a distributional analysis of the measure. Without such a review, which will provide a wealth of information and further evidence of the likely effect on wages, termination payments and employers, the Opposition will not support this part of the Bill.

I will comment later on new clause 3, but at this particular point, that is all I want to say. I may ask questions of the Minister in due course.

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[Anneliese Dodds (Oxford East) (Lab/Co-op)]

It is a pleasure to serve in the Committee with you in the Chair, Sir Henry. I am grateful to the Minister for those explanatory comments. However, I would like to speak in favour of the official Opposition’s amendment 2 and new clause 5, as well as the SNP’s new clause 2, which overlaps with our amendment 2. I do not want to repeat what we have already covered in our discussions today or, indeed, in the House. None the less, even after all that, we surely require more information about the impact of these measures to make a proper judgement about them.

As the Minister acknowledged, our amendment 2 and the SNP’s new clause 2 ask for additional information about how the Bill would affect charities, and individual sportspeople and charities, respectively. There are quite a few elements that still remain unclear, even after the discussions we have had. I am sorry to drag us back yet again to the topic of what is customary and what is not, but, surely, when we are looking at the design of tax measures, we need to ensure that there is crystal clarity about what every concept could mean, particularly when there might be manipulation of some of those different concepts.

When we debated the meaning of “custom” in the House, the then Minister, after questioning by the hon. Member for Aberdeen North, said that funds from a testimonial above £100,000 would be subject to NICs where such a payment was “customary”. He described “customary” as referring, for example, to cases where, in a particular sports club,

“there is a testimonial every year for a particular player or group of players, and that had been going on for some time”.

He said that

“that would be a customary testimonial situation”—[Official Report, 30 April 2019; Vol. 659, c. 173.]

I explained in the previous session why I think that that kind of circumstance is extremely unlikely to occur. We need to have a reality check about how things are operating in different sports, so that we can assess them.

I looked at some of the information that has been provided by the Professional Footballers’ Association. It noted that, in 2015, about 0.5% of professional footballers had a testimonial to celebrate them, whereas on an average career length of about eight years—that is the average career length, which, as was mentioned before, is much shorter than it was historically, certainly in the professional game—12% of footballers should finish their career each season. Very roughly, that means that about one in 25 of the professional football players we would anticipate being eligible for a testimonial actually receives one. That is clearly a very small proportion of those who could qualify for one, which suggests that this is a very unusual process, so the use of the term “customary” does not have much weight.

I then looked at the evidence from the England and Wales Cricket Board, which states explicitly that there must be no pattern to the granting of testimonials and no specific connection with the player’s number of years’ service at the club, and that there is no specific period of time that should be seen as an automatic trigger for a testimonial. It appears, in the case of that organisation, that it is not possible for there to be a customary testimonial. It just cannot exist.

[James Cartlidge]

As I understand it, the difference is between something that is contractual and the fact that it is customary, in the general sense, to have what are called “benefit games” or “testimonials”. That does not mean that there has to be a specific number; in fact, if there were, that would presumably be contractual. The fact is that they are customary when someone has made a contribution or has been with a team for a long time, however that is defined or specified. It is a tradition of sport; surely that is all we are saying.