National Insurance Contributions (Termination Awards and Sporting Testimonials) Bill

Robert Jenrick Excerpts

2nd reading: House of Commons & Ways and Means resolution: House of Commons
Tuesday 30th April 2019 Commons Chamber

[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.

[Vicky Ford (Chelmsford) (Con)]

rose—

--- Later in debate ---

[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.