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

Peter Dowd Excerpts

Tuesday 14th May 2019 Public Bill Committees

[The Chair]

Thank you. I call Peter Dowd.

[Peter Dowd (Bootle) (Lab)]

Q Thank you. It is a pleasure to see you in the Chair, Ms McDonagh.

Minister, on publishing its report of 14 November 2016, the then chair of the Office of Tax Simplification, Angela Knight, said:

“Our independent review has demonstrated...that some will gain and others will lose from any change.”

Could you tell us who gains and who loses as a result of these proposals?

Robert Jenrick: Are you speaking in relation to termination payments?

[Peter Dowd]

Yes, termination payments.

Robert Jenrick: First, the most important point to make is that we have chosen only to apply national insurance contributions class 1A to employers’ national insurance contributions, not to employees, although I appreciate the argument that could be put forward that that will impact on the total settlement made to employees when an employer looks at the package they are to receive on termination. The evidence we have seen suggests that it will have a very limited impact on wages, which was a point that you raised on Second Reading, Mr Dowd—around 0.01% impact.

In terms of who will bear the cost, the vast majority of termination payments will be exempt. Around 80% of individuals receiving a termination payment will not be affected by the measure. There is already a generous threshold of £30,000, which compares very favourably internationally. There is no income tax payable before that point, and even with this measure, there will be no employers’ national insurance payable—it will only be on payments above that. Because of that, we anticipate that the proposals will affect higher income groups.

The best estimate that Her Majesty's Revenue and Customs and the Treasury have made is that it will impact the top two or three income deciles. It will have a very limited impact on low or middle-income earners.

[Peter Dowd]

Q Can you confirm that no distributional analysis has been undertaken of the impact of the new class 1A charge for employers on termination awards? Is that correct?

Simon Smith: We wrote to the Committee about distributional analysis prior to the session. We said in that note that what we have done, and are able to do with the data we have, is show that this would disproportionately affect higher and additional rate taxpayers. But due to data limitations, we cannot do the formal distributional analysis of the type that we would usually do with a full Budget policy costing. However, we are confident that it would affect the top two to three income deciles, as the Minister says.

[Peter Dowd]

Q I acknowledge your point, but the answer to the question is no; you have not done a distributional analysis, and you say you cannot do one because it is not pertinent or possible to do one.

Simon Smith: Yes, it is not possible.

[Peter Dowd]

Q Okay. May I go on to the issue of collection? The legislation does not set out the way in which the class 1A charge will be collected, stating that that will be covered by secondary legislation. Minister, do you accept the criticism from tax accountants that that is a break from practice and that it will be confusing for employers, as well as, for example, adding to administrative burdens?

Robert Jenrick: No, we do not agree with that. I will let my colleague Raj, who perhaps has the greatest expertise from an HMRC perspective, speak to this in a moment, but the purpose of the policy is tax simplification and greater alignment with income tax. Our primary motivation is to simplify the tax code and to give greater certainty to taxpayers. We chose class 1A as the most logical class of national insurance on which to apply the charge, because it is the class that applies to benefits received by employees, and is paid by employers.

I know that, on Second Reading, you raised the question whether we could have chosen an alternative class, or created a new class altogether. We chose not to create a new class altogether because that would have gone against the grain of what we were trying to do. Far from simplifying national insurance in a modest way, that would have made it more complicated. Class 1 national insurance contributions are somewhat different, because that is both employers and employees.

As I said in answer to your first question, we specifically chose to apply only employers’ national insurance in this situation, not employees’ as well, which, of course, we could have done. That would have simply been an additional charge that individuals had to pay. We chose not to do that. We gave it considerable thought and came to the conclusion that class 1A was the most logical one to apply this through. I think that has been widely recognised. I do not know whether Raj has anything to add.

Raj Nayyar: The only thing I would add is that when there is a cash payment—a termination award—for income tax, it is currently collected through pay-as-you-earn. It is reported in real time and paid either monthly or quarterly, depending on the size of the employer. For a class 1A contribution, where it is a cash award, it will be reported and paid in the same way as pay-as-you-earn income tax.

Robert Jenrick: The point there, just to emphasise it, is that the motivation is greater alignment with income tax. By bringing the two into the same manner of payment, we are simplifying, rather than adding further complexity. Had we created a misalignment, where one—income tax—was paid through PAYE and the other was paid separately, perhaps at the end of the tax year, we would not have served the purpose of the Bill.

[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.

--- Later in debate ---

[Bill Grant (Ayr, Carrick and Cumnock) (Con)]

Q It is a pleasure to serve under your chairmanship, Ms McDonagh. Testimonials are common among sports groups, and they are not necessarily confined to football—they occur in cricket, rugby and so on. One would assume that there was consultation or engagement with clubs or representative bodies. What feedback did you get from them about the changes you propose?

Robert Jenrick: our interest in reforming national insurance contributions for sporting testimonials is long-standing, as is our interest in reforming termination payments, so this measure has been considered for some time. We consulted on it. Inevitably, in the course of that, we got representations from a number of sporting bodies, and Treasury officials and Ministers met some of them. For example, my predecessor, David Gauke, who was then Financial Secretary to the Treasury and is now Lord Chancellor, met the England and Wales Cricket Board, which took a particular interest in this measure. As a result, we took the decision to increase the threshold from £50,000 to £100,000. That is a significant change. Evidence we produced in 2013 suggested that the average applicable testimonial raised around £72,000 a year, so the change will take the vast majority of testimonials out of this measure, which applies only to testimonials that bring in significant receipts.

As far as I am aware, we have not received any representations from sporting bodies since we made the changes to income tax two years ago, and we have received no further representations from sporting bodies since I introduced the Bill a few weeks ago, so I think it has been received reasonably well.

[Peter Dowd]

Q May I follow up on a point that Mr Wood made? I felt a certain amount of ambivalence about the statement that the impact on the charity sector would be minimal. Any pound whatever lost to the charity sector is a loss to the charity sector and to the community, so I am slightly worried that the attitude seems to be, “It’s not much.” It will be something. In today’s society, given austerity, any loss to the charity sector is crucial, so it would help if we firmed up at some point what we believe the loss will be.

Robert Jenrick: Perhaps I can firm that up now. If the sportsperson used payroll giving, the loss would be zero. The individual and the sporting testimonial committee need to register for payroll giving, which is available without limit. In that case, there will be no loss to the charity whatever.

[Peter Dowd]

Q That is right, but that takes me to my second point, which is that you have almost bureaucratised the process. We are moving from a much simpler process to one in which I suspect the onus will be on the organisation or the individual to make a separate declaration. You can clarify that for me if you want, either today or subsequently.

May I ask a couple more questions? The first is on the loss in the last few years as a result of some sporting testimonials income incorrectly being excluded from national insurance contributions. Secondly, can you confirm how much HMRC receives in income tax and national insurance contributions because of contractual and non-contractual sporting testimonials?

Simon Smith: On the second point, I do not think we have a box on methods of collection specifically to note that money is coming in from a contractual or customary sporting testimonial. We would not have a precise figure for that, I don’t think. Raj?

Raj Nayyar: No, we do not.

Simon Smith: We would not have that figure.

Robert Jenrick: That is because it would just count as part of your employment. It would just be another payment in respect of your employment.

Simon Smith: Exactly. We would collect it as we would earnings. That is essentially the role that it is performing in that instance.

[Peter Dowd]

Q Given that answer, can you provide any examples of the confusion that employees have had with the previous tax and national insurance treatment of termination awards?

Raj Nayyar: Long-standing tax and national insurance treatment has relied on an old 1927 case. In that case, it was decided that where a sportsperson received a benefit, or income from a benefit, that was not earnings.

However, since that time, there have been important changes to the tax and national insurance scheme. For example, there was the introduction of the benefits code, which taxes benefits in kind. That was replicated for national insurance contributions. More recently, there have been changes to the Income Tax (Earnings and Pensions) Act 2003 for disguised remuneration—changes that, in certain circumstances, place a tax and national insurance liability on payments by a third party. Those developments threw the treatment of sporting testimonials into a bit of a quandary, because they had overtaken the 1927 case, but HMRC guidance had not been fully updated, and was still based on the 1927 case. The Finance Act 2016 was introduced to try to make that clearer for income tax, and this Bill just follows up for national insurance contributions.

[Peter Dowd]

Q I am glad you mention the point about the Finance Act 2016. Do you think it has succeeded in doing what you intended it to do? Or are you not quite sure yet? Is it too early to say?

Raj Nayyar: From what we can tell, it has; we have no indication to the contrary. I am sure we would have been notified or been contacted if it had not resolved some of the uncertainty.

Simon Smith: It has definitely put the legal position beyond doubt, whereas before there was this contradiction between the case law and other bodies of legislation. Now it is very clear for tax what the position is, so in that sense, it has met its objective.

Raj Nayyar: The legislation has not gone as far as, for example, the disguised remuneration legislation, which places a tax and class 1 employee and employer liability on certain third parties. This is only employer NICs after a £100,000 threshold.

Robert Jenrick: It is a generous level at £100,000. It is only the employer side. Speaking as somebody who enjoys watching sport, you want to support sportspeople, but have to be aware of other individuals whose careers can be quite short. There are other examples that have come to us, such as people in the performing arts, ballet and many other areas. That would possibly include MPs, whose career prospects are not always very good when they leave the job. I think £100,000 is, by comparison, a generous situation.

[The Chair]

If there are no further questions from Members, I thank the witnesses for their evidence.

Examination of Witnesses

Bill Dodwell and Colin Ben-Nathan gave evidence.

--- Later in debate ---

[Peter Dowd]

Q I will ask the same question that I asked the Minister and his colleagues. Angela Knight, the then chair of OTS, said in November 2016:

“Our independent review has demonstrated...that some will gain and others will lose from any change.”

Can you tell us who are the losers and the winners from this particular change?

Bill Dodwell: We do not have data on the winners and losers of putting national insurance on termination payments. That report covered the whole issue of aligning national insurance contributions with income tax in relation to employment income. That meant making sure that the base was the same—that the amounts you charge tax or national insurance on are identical. There are significant differences at present. Secondly, it meant putting national insurance contributions on to an annual cumulative basis, like income tax. That is different from the current system of national insurance, which is charged on a pay period by pay period point, with one exception for company directors, who otherwise had an avoidance opportunity that is closed by putting it on an aggregate basis.

The evidence that the OTS gathered for those reports in March 2016 and November 2016 was that there would be something like 7.5 million winners—people paying less as a result. On average, they would get about £170 a year more, but obviously that is an average. There would then be about 5.5 million losers—people paying more—and their average payment would be about £260 a year. You will be aware that the Chancellor at the time announced that that would not be moving ahead.

[Peter Dowd]

Q Given that you made these suggestions and the Government have taken them up, can you give us some examples of the confusion employers had with the previous tax and national insurance treatment of termination awards?

Bill Dodwell: The March 2016 report, which specifically refers to it, says:

“Often employers apply NICs to termination payments when they are not required to, and end up making NICs overpayments.”

I do not have access to exactly how much. The OTS does not have the same level of analysis that HMRC does, but it did pick up evidence of that.

[Peter Dowd]

Q How substantial was that evidence?

Bill Dodwell: I cannot give you an underlying view. Much of it is provided by people who give evidence to the OTS on a voluntary basis. We seek evidence from as many people as we can, but it is not the same as doing a complete population analysis, which HMRC can do. We cannot do that.

[Peter Dowd]

Q Would you characterise the introduction of a new class 1A NIC charge as an anti-avoidance measure, or as a measure designed to simplify the tax code and raise revenue?

Bill Dodwell: It is very hard to give you a clear answer. I think it is both. I was listening to the evidence from the previous session, and there were clearly some people who were steering payments in a particular way to avoid paying national insurance. The general OTS view is that you make it easier for everybody to understand the system if both employers and employees understand it better, and if the tax and national insurance base is the same. That is not just on income, such as termination payments; it is also on expenses.

[Peter Dowd]

Q I may come back to that at some point, if I may. Can I turn to the Chartered Institute for Taxation? Do you have an opinion or any observation on the time it has taken the Government to bring forward these proposals for a new class 1A NIC charge? The original announcement was made in 2016.

Colin Ben-Nathan: Yes. As has been said, there is the argument for levelling the playing field on income tax and national insurance contributions. I am sure we will come on to discuss how that is being done. The genesis of the changes that we are now talking about—the national insurance changes—was in an OTS report a few years ago, which was all about simplification of the system. There is an important point on simplification. There is also a point on the amount of revenue that is raised from any particular measure and how that measure is introduced. We know that—in relation to this particular measure, because we have been given the figures—there is, in aggregate, an amount of £200-odd million, which is being raised by the imposition of class 1A national insurance. We will talk about how that is being done.

This measure was part of a much wider set of proposals that ultimately has not been taken forward. The income tax changes that were made covered not just this proposal in relation to the question of what the level of the £30,000 limit might be, but foreign service relief and pay in lieu of notice. That was another area that was legislated but not taken forward in relation to some of the earlier proposals that were looked at. In fact, we are looking at a particular proposal here, which is the end point for levelling the playing field and the £30,000 limit.

[Peter Dowd]

Q Does that fit in with the broader proposal? It was referred to in the 2016 press release as being just one step forward in this area. Do you feel that we have ground to a halt at this stage?

Colin Ben-Nathan: As we said at the time, we thought the proposals that were put forward by the Office of Tax Simplification had a lot of merit in trying to simplify a very difficult area, which has occupied the courts, employers, employees and HMRC for many years. Proposals were put forward and consulted on at the time, and we responded to that consultation. Views varied, but ultimately the Government decided that they did not wish to take forward a broad simplification platform and focused on the points that I mentioned previously. Obviously, that was a Government decision. Simplification can still be effected if there is the will and consensus on how to do it.

[Peter Dowd]

Q Yes, and that is the sense that I get. I am not asking you to confirm my sense, but I sense that it has got thus far and no further at this stage.

Part of the Government’s rationale for the introduction of a new class 1A NIC charge on the termination of payments was that it is designed to address employees’ current confusion about national insurance and tax treatment of those awards. In your assessment, does this legislation adequately address that confusion, or is there a danger of perhaps complicating it in the light of the fact that it has not gone further, à la the previous answer to my question?

Colin Ben-Nathan: I think we would accept that this is a difficult area, but we have prepared evidence for the Committee that you will have seen. We have noted that the introduction of class 1A in relation to cash payments, which will typically occur in relation to terminations—not always, because there will be benefits in kind, but it is typically cash—is an unusual move. We understand the Government’s rationale for wishing to impose a charge in the first instance in relation to employers only. That is what class 1A national insurance does. Class 1 national insurance, apart from one exception, which we note, generally imposes national insurance both on employees and employers. There is an exception, and it relates to those above retirement age, where secondary, or employer national insurance contributions are paid, but primary, or employee contributions are not paid. That was something that we pointed out in our note.

You then get the position where you have to ask how easily employers are going to relate to class 1A being imposed in relation to a cash payment—and the way in which it is being imposed. Typically, class 1A will apply to benefits in kind, which are made during the year, though the actual contribution itself is paid after the end of the year, following a submission on form P11D(b), and so on. There will have to be a communication exercise in relation to employers now having to apply class 1A during the year—that is the point that we make about this particular measure being unusual.

[Peter Dowd]

Q I am glad that you have talked about how unusual it is, because that is one of the questions I asked, which you have answered—so that is two for the price of one. An additional justification given by the Government for wider reform of the tax and national insurance treatment of termination awards has been that a small group of well-advised employers has abused the current loophole, allowing them to avoid paying additional tax and NICs. Without breaches of confidentiality, of course, have you ever come across instances of that type of avoidance in your professional life?

Colin Ben-Nathan: I would say that, like many areas of the tax code these days, it is very complicated. You have a varying series of provisions in relation to contractual earnings, termination payments, retirement benefits, restrictive covenants; there is a whole tapestry of legislation here about which it is very easy to get confused. There is one thing in terms of manipulation of the system, but there is another simply in terms of understanding what the rules are. Typically, we find employers wanting to take advice, to make sure that they get things right.

The position at the moment is that we have a code. Section 403 was mentioned: it talks about termination payments that are non-contractual. That is the provision we have, and on redundancy payments as well, where there is a £30,000 exemption. That is specifically there: it has not been changed for a bit, as was said—it was the late 1980s—but it is there for a purpose. Employers will typically want to know whether they are within that exemption or outside it. It is quite important, too, because as well as the £30,000 exemption that was mentioned, there is disability, injury and so on. That particular part of the code is really important. Whether I would go so far as to say that employers were manipulating things, I don’t know, but it is important that employers understand where they are. Overall, our view—again, it goes right back to 2015, when the Office of Tax Simplification report stated that there was an opportunity to really simplify things. That is the way that I would answer the question. I am not sure about manipulation, but I would say that there is a lot of confusion.

[Peter Dowd]

Q I have one more question for the Office of Tax Simplification. Out of the 1,200 tax reliefs that we have—this is not directly linked, but would you consider this to be a low-hanging fruit?

Bill Dodwell: Yes. This is a pretty simple, fairly restricted issue. The evidence given by the Minister shows the small number of people that this affects.

[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.

--- Later in debate ---

[Peter Dowd]

Q On the argument about what is customary, let us say that a footballer starts with club A when they are 16, 17 or 18, moves on to another club when they are 21 or 22, where they stay until they are 26 or 27, before moving on to another club. Now, when they are about 32 or 33, they might have a testimonial—people used to be much older when they had them. Testimonials might not be customary in a particular club, but are they not customary for players in the sporting world, whoever they are? It seems to me to be fairly straightforward and simple. Clearly, the expectation that is on the clubs is the expectation from the sport and the history going back way beyond the 1927 judgment— in fact, to the end of the previous century. That was when testimonials were introduced, because the money players used to get was pretty abysmal.

Colin Ben-Nathan: Yes. I think we also need to remember that the national insurance Bill we are looking at does not use the word “customary” or talk about “normal practice”. It is simply talking about whether something is general earnings in the context of the income tax legislation. What we are really trying to work out is whether something that is received is received in the course of an employment, in relation to an employment, by virtue of an employment or all the glosses on the words and the judgments we have had over the years, or whether it is outside that and effectively relates to personal esteem, qualities and so forth. That is a really difficult line here.

In some ways, the income tax legislation is trying to draw a line and say, “In principle, we’re going to tax everything, whatever it is, if it’s not already taxed.” The first thing that will happen is that they will tax it; the second thing is that there will be an exemption of £100,000, but the exemption will apply only to that which is not ordinarily taxed. We have a question where some sort of guidance, comment or examples would be helpful, for all the reasons that you and others have expressed.

[Peter Dowd]

Q In relation to the point you made about national insurance contributions, one of the questions asked earlier, which you may have heard, was about the loss—or whatever phrase we want to use—to the charity sector. Do you accept, do you think or do you believe that there will be a loss to the charity sector as a result of this legislation?

Colin Ben-Nathan: I have not done the numbers. I think we were trying to get to some of the numbers before in relation to payments that would be above £100,000 in circumstances where a donation was envisaged to be given to charity. Clearly, in that context, there will be a class 1A national insurance charge and therefore there will be an amount going to the Exchequer rather than necessarily in full through to the charity. The amounts mentioned are negligible, but in principle—in theory—one would say there is a measure of loss.

Bill Dodwell: We would hope that there would be good HMRC guidance, which would make the point that the testimonial committee should register for payroll giving and hand the money over that way. Then, as the Minister said, there would be no loss whatsoever. However, that is administration, so the importance of good, straightforward HMRC guidance is to the fore here.

[Peter Dowd]

Q Do you think it adds a layer, given that a testimonial committee would have to register? Do you acknowledge that there is an extra layer—I do not like to use the word bureaucracy, but another layer—on top of what those testimonial committees already have to do?

Colin Ben-Nathan: Yes, of course, if any additional registration is required.

[The Chair]

Unless I have missed anybody, and I hope I have not, that brings us to the end our oral evidence session for this Bill. I thank the witnesses for giving their evidence to the Committee.

The Committee will meet again at 2 pm to begin our line-by-line consideration of the Bill. I point out to members of the Committee that that will not be here in the Boothroyd Room, but in Committee Room 12.

Ordered, That further consideration be now adjourned. —(Amanda Milling.)