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

Kirsty Blackman Excerpts

Tuesday 14th May 2019 Public Bill Committees

[Peter Dowd]

Q I understand that class 1A charges will arise and be paid in real time, rather than after the tax year-end, as is the case with other class 1 charges. Given that we are talking about simplification, do you not accept that payment in real time would require additional boxes on the PAYE real-time information submission, and a new process by Her Majesty’s Revenue and Customs for monthly or weekly PAYE reductions for employers? Would that not place an administrative burden on employers that is not factored into the policy note produced by Treasury officials? It does not appear to be as simple as you are suggesting, in the round.

Raj Nayyar: May I answer that for the Minister? The main point is that employers are already doing that for income tax. They already have to report and pay in near-real time, so it will not add much to what they already have to do for income tax.

Just to clarify one point, there will be instances when they will pay the class 1A termination award after the year-end, and that is when the termination award comprises a benefit in kind. For example, if an employee is allowed to keep a car for a specific period, that is a benefit in kind, and that will continue to be reported after the end of the year.

[Kirsty Blackman (Aberdeen North) (SNP)]

Q To follow up on that, can you confirm that this is the only class 1A liability that will arise on cash earnings?

Robert Jenrick: Yes.

Raj Nayyar: Yes.

[Kirsty Blackman]

Q So there are currently no others for cash apart from those in the Bill for sporting testimonials and termination awards?

Robert Jenrick: Yes.

Raj Nayyar: Yes.

Simon Smith: Yes.

[Kirsty Blackman]

Q On the real-time collection mechanism, can you confirm that this is the only class 1A liability that will arise in real time?

Robert Jenrick: Yes.

Raj Nayyar: Yes.

Simon Smith: Yes.

[Kirsty Blackman]

Q It seems to me that you are creating a different class within a class with these 1A contributions. They are still going be termed 1A contributions, but they will be treated totally differently and arise on different classes of stuff from current 1A contributions.

Robert Jenrick: It is distinct from the others, but, as I said earlier, if the choice was about which of the classes is the most logical to apply this to, this would remain the most logical. If your argument is that because this is somewhat different, you could have created an additional class of NICs, you could have done that, but we took the view that that would have added more complexity than simply having a somewhat different situation within class 1A.

Raj Nayyar: Can I add to what the Minister said? We are working to minimise any additional administrative burden there may be, but, as I said, because this is already being done by employers for income tax, any additional burden would be minimal. HMRC will make sure that guidance for employers is ready in good time, and it will also be talking to and consulting software providers about how to bring this about.

[Kirsty Blackman]

Q Currently, there may be employers out there who do not do anything on class 1A, because they do not provide any benefits in kind to employees. They will not change anything they do, but may now be liable for class 1A contributions done in this different, unusual class 1A way, just because you are bringing cash termination payments into class 1A contributions. Is that right?

Robert Jenrick: That is technically possible, yes.

[Kirsty Blackman]

Q Okay. So it could be an additional administrative burden on those who do not currently pay any benefits in kind.

Raj Nayyar: We think that there would be a one-off understanding and learning.

[Kirsty Blackman]

Q On the impact on the amount that employees receive, your work tells us that mostly people in the top two or three income deciles will be affected—or disproportionately impacted, as you suggest. Have you quantified the total amount that employees will lose as a result?

Robert Jenrick: I will ask Simon to answer in a moment, but it is not as simple as that, because that is being paid for by employers. As I said earlier, we have chosen not to apply both employer and employee national insurance contributions, so the employee will not pay anything directly. Your question cuts to, “If you were an employer looking at how much money you were willing to pay somebody as part of a termination, would you take into account the fact that the employer now has to pay 13.8% class 1A national insurance contributions?”

That is quite possible—we do not dispute that—but it is difficult to accurately quantify the proportion of employers that would pass that on to the employee. We know that it is a revenue-raising measure, and we expect—and the Office for Budget Responsibility has verified—that it will bring in around £200 million a year on an ongoing basis. Those facts speak for themselves. We will be raising additional national insurance revenue from employers, but it will be for employers to decide how much of that is passed to employees through the usual negotiations.

Simon Smith: The only thing that I would add is that the OBR has chosen to model this as a 0.1% reduction in wages. There has been no further adjustment on top of that for redundancy payments or anything else. That is largely because it is uncertain, as the Minister said, how it would be distributed. It will depend a lot on the individual employer-employee relations whether it is taken as lower profit, wages or anything else.

[Kirsty Blackman]

Q Does the Treasury have details about the number of business start-ups by people who have received termination payments?

Simon Smith: We do not have specific data on that.

[Kirsty Blackman]

Q If the Committee meets on Thursday, it would be useful if you could look and see if you have data on the number of business start-ups as a result of termination payments, because I am concerned about the impact there may be on business start-ups as a result of the reduction in termination payments received by employees. Do you see what I mean?

Robert Jenrick: I certainly do not hold those figures. I have seen independent anecdotal surveys, but I do not know on what basis they have been drawn up. Clearly, as you allude to, a large number of small businesses are begun by people who have lost their job and have taken that as an opportunity to set up their own business.

To return to the facts of the Bill, we still have a very generous threshold of £30,000. However wealthy one is, losing a job is a very difficult time in life. It is not an experience that people want to go through, whatever income level they have, but that does compare favourably by international standards. A number of countries, such as the United States and Germany, have no threshold at all, so people would start to pay income tax and employment taxes from £1. Even with this change, our system will compare favourably with other countries that we would look to as competitors or countries that we think have sensible welfare safety nets.

[Kirsty Blackman]

My other questions are on sporting testimonials. Chair, do you want me to hold them or ask them now?

[The Chair]

Do you mind if I bring in a few more people? Thank you.

--- Later in debate ---

[Thelma Walker]

Q And there are conversations to be had with the trade unions about this.

Robert Jenrick: As I said, we have consulted on this and I believe that they took part. They have had an opportunity to have their views known and listened to by the Treasury, as have business groups.

[Kirsty Blackman]

Q Moving on to sporting testimonials, I am not somebody who goes to a huge number of live sports matches of any kind. How much do people generally pay for a ticket to a sporting testimonial?

Robert Jenrick: There is no easy answer. There is immense variation in events; they vary from a sporting testimonial at Wembley stadium for a premiership footballer to ones at my local football club in Newark for a player who has retired after a 10-year career. You see a complete range of prices for sporting events. We have evidence on the amount raised by the average sporting testimonial that is affected by the Bill from a piece of work that HMRC and the Treasury did in 2013. I believe it was £72,000. Obviously, many much smaller testimonials go below that, such as the one I have just described in the small club in my constituency. Finding the evidence on more substantial testimonials is not easy, because there is no central point of collection for it, but after doing a trawl for evidence in the public domain, we came to the conclusion that the amount is about £72,000 a year. As you will probably have seen, there is a threshold in the Bill of £100,000, so the vast majority of sporting testimonials will not be caught by this measure.

[Kirsty Blackman]

Q Are the ticket prices for the ones that are over £100,000, because they are likely to be caught, normally fixed, or are they done on a donation basis?

Simon Smith: Again, there would be a lot of variation. The other point I would make is that not all sporting testimonials will be affected by this Bill. We are talking about only non-contractual, non-customary sporting testimonials. Contractual and customary sporting testimonials are already fully taxable and NIC-able. Indeed, the income tax treatment of the non-contractual, non-customary sporting testimonials has already been legislated for, and it is in operation.

[Kirsty Blackman]

Q I have a question about the consistency of the language in parts 1 and 2. Part 1 defines the amount received in relation to the income of the earner under section 403 of the Income Tax (Earnings and Pensions) Act 2003, whereas the sporting testimonial section, instead of defining it on the basis of an ITEPA category—I think section 226E is the key one for sporting testimonials—talks about about general income. It does not define it in terms of the ITEPA eligibility threshold. Why is there a difference in language between the two parts of the Bill? When part 2 talks about general earnings, does it actually mean ITEPA section 226E?

Raj Nayyar: I think it does, but it might be helpful if we wrote and explained the difference.

[Kirsty Blackman]

Q Is it intentional that there is a difference?

Raj Nayyar: Yes, it was, but I think it would be best if we wrote to you.

[Kirsty Blackman]

Q This is the last question from me. I have tabled an amendment about the Exchequer providing a report on the impact three years after the Bill comes into force so that we are aware of whether it has raised the £200 million a year that the Treasury suggested it would. I do not have a huge amount of success in getting amendments accepted, so I wonder whether the Minister and his team would provide that report, even if they do not accept my amendment?

Robert Jenrick: Sorry to disappoint you.

[Kirsty Blackman]

It was worth a try.

Robert Jenrick: I did actually accept one of your amendments to the Finance Bill, so it sometimes works.

[Kirsty Blackman]

You did; it is true. It does not happen often, though.

Robert Jenrick: The established process is that we review pieces of new legislation within three to five years. As this is a Treasury Bill, we will write to the Treasury Committee within three to five years, setting out our intention to review the Bill and the outcome of our work.

Raj Nayyar: If we have not already done so. Sometimes HMRC will already have commissioned research on how a policy has worked out, and we can then just explain that that has happened and the impact of it.

Robert Jenrick: The £200 million is for termination payments. As for sporting testimonials, we believe that this measure will raise a very small amount of money. Our motivation is to ensure clarity by placing the tax situation on the statute book, and to ensure fairness between sportspeople who have testimonials, rather than to raise significant sums of money. The OBR has certified that the effect is negligible, which means less than £3 million, but it could be significantly less than £3 million.

[Mike Wood]

Q A lot of sporting testimonials at all levels are used to raise money for charities and good causes, with either all or some of the proceeds going to local or national charities. How do you expect these measures to impact on charitable giving through sporting testimonials?

Robert Jenrick: That is a good question. We do not think it will have a material impact. If you are a sportsperson who wants to give all or part of your testimonial receipts to charity, there are two options available to you. First, you could use our very generous system of payroll giving, which is without limit. Your employer, which in this case may well be the sporting testimonial committee, could register for that and take advantage of it. If you had not done that, and the receipts came to you as an individual, you could choose to make a donation and use gift aid at a later date, and take advantage of what by international standards is a very generous relief. We do not think there will be an impact on the receipts that charities receive from some of these testimonials.

--- Later in debate ---

[Paul Scully (Sutton and Cheam) (Con)]

Q On the two thresholds of £30,000 for termination payments and £100,000 for testimonials, are they at the right level, or do you have any comments about where those sit?

Bill Dodwell: I do not think that we at the OTS have a specific view on those levels, no.

Colin Ben-Nathan: It has been commented upon that the £30,000 limit was last increased in the late 1980s and has not been increased since. We get back to the point of whether a measure is revenue-raising or revenue-neutral. One of the points that we raised previously on feedback is that, and Bill will talk for the OTS, if there was going to be an overall simplification—which is what we were looking at—the sense was that it may be revenue-neutral. At the moment the position is that revenue is being raised, but the actual threshold of £30,000 remains static. It will now apply for the purposes of both income tax and class 1A national insurance. Where relief should sit is, of course, a matter of debate given the pressures on the public Exchequer, but the comment is that it is overall revenue-raising.

[Kirsty Blackman]

Q I was going to ask Mr Ben-Nathan about the collection mechanism, but you have answered that. Do you share my slight concern that employers who currently do not use any benefits in kind, so do not have any liability for class 1A, will potentially be brought into liability by this change?

Colin Ben-Nathan: It is true that if they do not deal with benefits in kind, if there is a termination point and it falls within the special rules and is above £30,000, class 1A national insurance from next year will be payable. That is the way the Bill is presented.

[Kirsty Blackman]

Q My second question is around the different language used in the two parts of the Bill. I raised this issue earlier in questions to the Minister. Will you explain more about your concerns or queries around this?

Colin Ben-Nathan: In relation to the termination payment part of the Bill, we have a cross-reference back to the taxing section that refers to the £30,000 limit and so forth. That seems pretty clear to us in terms of what should and should not be subject to class 1A national insurance. When we look at sporting testimonials, it is not so clear because we are effectively saying that the amount of general earnings should be subject to class 1A national insurance. The question therefore is: is it all the general earnings that are brought in by section 226E, which is effectively everything that is coming in, or is it those earnings, less the £100,000 reflected in section 306B, which is the exempting section? It is simply a question for the draftsmen to clarify that we have actually got that right. I cannot believe it has not been thought about, but it did occur to us in looking at the Bill.

[Kirsty Blackman]

Q I have a couple of questions for Mr Dodwell. On the implementation of these changes, I am not sure how much evidence or guidance the Office of Tax Simplification provides to Government. In referring to equality of treatment between NIC liability and tax liability, did you suggest that the way to sort this out in this case would be for the Government to use class 1A contributions?

Bill Dodwell: No. All our reports are on public record and published on our website. That report did not specifically suggest class 1A.

[Kirsty Blackman]

Q Do you think that using class 1A contributions liability to make this change will be simpler for employers, or might it make it more complex for them?

Bill Dodwell: I think arguably it makes it more complex. But it has been done specifically to preserve an employee relief. That is the logic. If we had no reliefs at all, it would be a simpler system, but reliefs are there for a purpose. We do not just want to argue purely for the simplest system always.

[Kirsty Blackman]

Q I have one last question for both of you. I have been raising issues about road maps and where the Government intend to get with anything that they are doing, and how they intend to get there. I am concerned that in many cases, there does not seem to be a grand plan. In relation to tax simplification, generally and also specifically around income tax and national insurance changes, are both of you comfortable that you know where the Government are looking to get to and how they are looking to get there? Or are you not comfortable about that?

Bill Dodwell: I do not think there is evidence that the current Government have a plan to align the income tax and national insurance base completely. There is no evidence to support that. There are revenue-raising and revenue-losing parts of all that, so I am sure that the Government will be thinking about that.

We have also talked about trying to make the collection and enforcement mechanisms simpler to understand, at least on the national insurance side. We understand that HMRC is doing some work on that. Again, it is not a simple system, because national insurance is not the same as income tax. The two came from a different place; maybe we should argue that they should be one, but they are clearly not identical at all. We have to preserve those differences unless we go for a full-blown merger.

[Kirsty Blackman]

Q Mr Ben-Nathan, have you anything to add?

Colin Ben-Nathan: Whether it is this Government or any Government, there is a need to look not just at national insurance and income tax, but—speaking as chairman of the employment taxes sub-committee—at the whole question of employment, self-employment and the gig economy. Matthew Taylor’s work and the Government’s response are ongoing and very important. We need a road map—I think that would help us. There have been attempts to move towards some sort of coalescence, for example around national insurance, employees’ and employers’. It is a difficult area and there are strong views one way and the other, but further moves in that direction would be really helpful, because the gig economy is here and we have to deal with it.

We have to look at these questions; I think that the Government are looking at that. The sooner we can do that, the better, but obviously other matters are occupying us at the moment.

Bill Dodwell: The OTS is about to publish a report—on Thursday, I hope, subject to everything going well—that I think will allude to some of that difference. The biggest financial part of the equation is, of course, employers’ national insurance, which is levied on employment but clearly does not apply where there is self-employment or qualifying freelance work. That is such a major and material issue that going from zero to a lot of money would not—for any Chancellor, I am sure—be a simple solution.

[Bill Grant]

Q In relation to termination awards, the Chartered Institute of Taxation has made some negative comments about collection methodology and timing of collection. It suggests that there is an administrative burden and that it is quite complex—colleagues have touched on some of that. Is the institute justified in its concerns? Can they be overcome by information or guidance from you to employers?

Colin Ben-Nathan: We, as the Chartered Institute of Taxation, make points and the Government then decide what the policy will be. We have the Bill in front of us; I am sure that guidance will be issued, and I hope it is helpful. It is useful to have examples in guidance—we might come on to that in relation to other matters as well. Yes, ultimately employers will follow the rules as set down. We simply make the point that it is unusual for a class 1A charge to be imposed under real-time information, because normally that is not the case; the charge is paid after the end of the year.