The Committee consisted of the following Members:
Chairs: Sir Henry Bellingham, † Sir Roger Gale, † Siobhain McDonagh
† Blackman, Kirsty (Aberdeen North) (SNP)
† Cartlidge, James (South Suffolk) (Con)
† Dodds, Anneliese (Oxford East) (Lab/Co-op)
† Dowd, Peter (Bootle) (Lab)
† Grant, Bill (Ayr, Carrick and Cumnock) (Con)
† Hughes, Eddie (Walsall North) (Con)
† Jenrick, Robert (Exchequer Secretary to the Treasury)
† Knight, Julian (Solihull) (Con)
† Milling, Amanda (Cannock Chase) (Con)
† Morris, Grahame (Easington) (Lab)
† Russell-Moyle, Lloyd (Brighton, Kemptown) (Lab/Co-op)
† Scully, Paul (Sutton and Cheam) (Con)
† Smith, Jeff (Manchester, Withington) (Lab)
† Smith, Laura (Crewe and Nantwich) (Lab)
† Tomlinson, Michael (Mid Dorset and North Poole) (Con)
† Walker, Thelma (Colne Valley) (Lab)
† Wood, Mike (Dudley South) (Con)
Mike Everett, Committee Clerk
† attended the Committee
Robert Jenrick MP, Exchequer Secretary, HM Treasury
Simon Smith, Senior Policy Adviser, HM Treasury
Raj Nayyar OBE, Bill Manager and National Insurance Contributions Policy Adviser, Her Majesty’s Revenue and Customs
Bill Dodwell, Tax Director, Office of Tax Simplification
Colin Ben-Nathan, Chair, Employment Taxes Sub-committee, Chartered Institute of Taxation
Public Bill Committee
Tuesday 14 May 2019
[Sir Roger Gale in the Chair]
National Insurance Contributions (Termination Awards and Sporting Testimonials) Bill
Good morning, ladies and gentlemen. You will have noticed that I am not your Chairman, but I am for the moment; I hope the Chairman will arrive in due course. In the meantime, I have a couple of announcements before we start: please turn off your mobile phones and anything else electronic that makes a noise, and please remember that tea and coffee are not allowed in the room during sittings.
We will consider first the programme motion on the amendment paper, then the motion to enable the reporting of written evidence for publication, and then the motion to allow us to deliberate in private about our questions before the oral evidence session. In view of the time available, I hope we can take those matters formally, without debate. I call the Minister to move the programme motion in his name, which I gather was discussed yesterday by the Programming Sub-Committee.
(1) the Committee shall (in addition to its first meeting at 9.25 am on Tuesday 14 May) meet—
(a) at 2.00 pm on Tuesday 14 May;
(b) at 11.30 am and 2.00 pm on Thursday 16 May;
(2) the Committee shall hear oral evidence in accordance with the following Table:
Date Time Witness Tuesday 14 May Until no later than 10.25 am HM Treasury Tuesday 14 May Until no later than 11.25 am Office of Tax Simplification; Chartered Institute of Taxation
Tuesday 14 May
Until no later than 10.25 am
Tuesday 14 May
Until no later than 11.25 am
Office of Tax Simplification; Chartered Institute of Taxation
(3) the proceedings shall (so far as not previously concluded) be brought to a conclusion at 5.00 pm on Thursday 16 May.—(Robert Jenrick.)
That means that all the deadlines for amendments to be considered during line-by-line scrutiny have now passed.
That, subject to the discretion of the Chair, any written evidence received by the Committee shall be reported to the House for publication.—(Robert Jenrick.)
That, at this and any subsequent meeting at which oral evidence is to be heard, the Committee shall sit in private until the witnesses are admitted.—(Robert Jenrick.)
The Committee deliberated in private.
Examination of Witnesses
Robert Jenrick MP, Simon Smith and Raj Nayyar OBE gave evidence.
Good morning to those who have just joined us. We now resume our public sitting and hear evidence from the Treasury. Before I call the first Member, I remind all Members and witnesses that questions and answers should be limited to matters within the scope of the Bill. Please also recognise that we must stick to the timings in the programme order that the Committee has agreed.
The scope of the Bill is quite narrow. Essentially, the Bill introduces a new class 1A national insurance contribution on termination awards in excess of £30,000, and a new class 1A national insurance contribution on sporting testimonial payments over £100,000. Could Members and witnesses try to keep their comments focused on the scope of the Bill, which is not about general reform of national insurance?
Do any members of the Committee wish to declare any interests before we proceed?
Thank you. The understudy will now hand over to the Chairman.
[Siobhain McDonagh in the Chair]
I apologise to all members of the Committee for being late. Things have conspired against me!
I call the first panel. I remind the Committee that we have until 10.25 am for this session. Will the witnesses please introduce themselves?
Robert Jenrick: Good morning. It is a pleasure to serve under your chairmanship. I am Robert Jenrick, Exchequer Secretary to the Treasury.
Simon Smith: I am Simon Smith, head of national insurance contributions policy at the Treasury.
Raj Nayyar: I am Raj Nayyar, Bill manager for Her Majesty’s Revenue and Customs, and national insurance contributions policy adviser.
Thank you. I call Peter Dowd.
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?
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.
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.
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.
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.
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.
Robert Jenrick: That is technically possible, yes.
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.
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.
Do you mind if I bring in a few more people? Thank you.
Robert Jenrick: Of course. It was raised on Second Reading that, as a country, our threshold has been frozen since the late 1980s. That raised the perfectly legitimate question: is this a sensible place at which to retain the threshold? We think it is. We did international analysis when making changes from the income tax perspective that were legislated for in the Finance Acts 2016 and 2017. As I said earlier, the threshold compares favourably with OECD countries and EU countries. A number of countries, most prominently Germany and the United States, have no threshold at all. We therefore think that the threshold is fair. It is also worth noting that there is a range of exceptions that cover important situations such as disability, to which it does not apply.
The threshold has been debated. In fact, it is not set out in this Bill at all but is set out, from an income tax perspective, in the Finance Act. It was debated at that point and, clearly, the House came to the conclusion that it was a sensible level that compared reasonably with international comparators. The Bill does not speak to that; it purely applies employer’s national insurance class 1A to the amount that is taxable from an income tax perspective, using the threshold that is set elsewhere in the Finance Act. If one wanted to return to that, one would return to it through a future Finance Bill but, as I say, it was debated at the time and the view of the House was that it compared favourably by international standards and was a sensible place to remain for the time being.
Robert Jenrick: As Mr Dowd said, the origin of the reform comes from our asking the Office for Tax Simplification to review benefits including termination payments and to see if there are sensible ways in which we could simplify the system and create greater clarity and fairness. Making a change of this kind was one of its recommendations, which we have now taken forward from an income tax perspective and in the Bill. Simon, do you want to add anything about the process?
Simon Smith: Not on the process, but may I add something on the international comparisons point? The analysis published by the OTS shows that approximately half of countries have no exemption at all for termination payments. We are also aware that there are other countries with no exemption for social security: Switzerland and Denmark, for example, have no threshold at all. That is quite a large number of countries that we would compare favourably with.
The only thing that I would add on the process is that it started with the OTS, but we have since consulted quite widely on the policy. We have spoken to more than 100 groups and individual representatives and have consulted on the draft legislation for the termination payments measure, so it has been widely considered by quite a range of groups.
Robert Jenrick: I hope so. Both measures in the Bill have been in the public domain for a very long time. They were first announced in 2015; we published these parts of the Bill in December 2015 and they have been consulted on and restated in successive Budgets. From an income tax perspective, we legislated in the 2016 and 2017 Finance Bills, which have now come into law—one of them has been in place for two years. We spoke to a range of stakeholders through the consultation and the passage of the Finance Bills. From a business perspective, in the accounting community and, with respect to the second measure for sporting bodies, these measures are anticipated and well expected and have already been put into place from the income tax perspective.
Robert Jenrick: I apologise—it was my mistake. Simon was correct: it is 0.1%.
May I push the Minister further on our discussion about the relationship between these measures and what occurs in other countries? The UK’s system for supporting those in unemployment is far less generous than in most other countries; surely we should take that into account. Will he confirm that he does not intend to use the door that the legislation leaves open to further varying down the threshold of £30,000? The Opposition argued for that door to be closed, but it has not been. Will the Minister confirm that the Government have no plans to further vary down the £30,000 threshold?
Robert Jenrick: We do not have any plans to change the threshold. You are not correct in saying that that is a matter for this Bill; if one wanted to take it forward, it would be a matter for a future Finance Bill. If one wanted to change the threshold, it would need to be done via an affirmative statutory instrument, and there would be every opportunity for the House to scrutinise it, debate it and vote on it at that point. However, we have no plans to change the threshold.
Robert Jenrick: As I say, it would be an affirmative statutory instrument, so if the official Opposition took issue with it, they would have the opportunity to do so.
I have questions about testimonials, as does the SNP spokesperson, the hon. Member for Aberdeen North, but I am sure we will come back to them later. My final question for now is about the real-time approach to payment of NICs. What kind of communication exercise will be undertaken with those who may be affected? I appreciate Mr Nayyar’s comments about ongoing discussions with software providers and others, but concerns have been expressed that this remains something that could be viewed as an administrative burden. The view is that, currently, the system is not set up to accept those payments. Can we have an indication of the communications that will be provided to ensure businesses are aware of this and not concerning themselves unnecessarily?
Raj Nayyar: I will take this. HMRC has regular stakeholder events with tax professionals and software providers in which we will be communicating how this will happen. We will be issuing guidance in due course to explain what we would like employers to do and what they need to be aware of. We will be supplying specifications for third-party software providers about what changes they need to make to their software, so all of that will be ongoing.
Robert Jenrick: To add to that, the purpose of bringing the Bill forward at this moment is that, if we can secure passage through Parliament and gain Royal Assent, there will be good time for that communication and for employers and software providers and so on to make the necessary changes before the start of the next tax year.
“subject to different income tax and national insurance treatment”
and that had allowed a
“small number of well-advised employers to disguise final payments as compensatory termination awards that benefit from a national insurance charge exemption.”—[Official Report, 30 April 2019; Vol. 659, c. 153-4.]
Do some well-informed employers see this as a means of avoiding paying tax and a way of giving a bonus to an employee on a short-term contract, thus also avoiding PAYE income tax?
Robert Jenrick: Essentially, yes. We have numerous examples of this. Raj, will you give some of them?
Raj Nayyar: Common examples we have seen are when an employee may have been due payment in lieu of notice, but they reach an agreement with their employer whereby the contract is terminated and, instead, they get a compensation award for damages for breach of that contract. That is taxable over £30,000 but it would have been entirely NICs-free. The Bill disincentivises that kind of manipulation by the very well advised.
Robert Jenrick: Choosing only to apply employer’s national insurance disincentivises the employer from taking that action, without doing what one might have done by going further and creating a further cost to the employee.
Raj Nayyar: I am afraid we do not have the numbers to break that down.
Robert Jenrick: No, that is not correct.
Simon Smith: To explain the difference between those two figures, the £485 million figure includes the impact of the income tax changes that have already been passed that were part of a package of measures. There are two different sets of changes. The first set—the income tax changes—simplified the rules to make it harder to manipulate payments. The NICs bit, which we are now taking forward, aligns the NICs treatment to remove the incentive to do what we were trying to stop through income tax in the first place. The £200 million figure refers to the yield just from the NICs element of this—the bit that we are discussing today.
Robert Jenrick: We consulted twice and the trade unions took part in the consultations.
Simon Smith: The Trades Union Congress definitely responded. I have a full list of responses, and would have to look at who else responded. The Trades Union Congress definitely sent a response.
Robert Jenrick: We will confirm which other trade unions responded to the consultation. From memory, the Trades Union Congress certainly did.
Robert Jenrick: I tried to answer that earlier. We all understand that, regardless of income, losing your job is a very difficult period in your life. People of all income levels can live to their income and have commitments and so on. I do not for one moment underestimate the difficulty that that situation presents to individuals and their families. However, this measure is targeted at higher earners. We have the £30,000 threshold, which takes out the majority of termination payments. Around 20% of those individuals receiving a termination payment will be affected by this, so 80% will not be affected.
Those who are affected will be individuals in the higher income brackets, as we said earlier—those in the top two or three income deciles. They will be higher rate or additional rate taxpayers. I do not diminish the fact that for higher rate taxpayers, losing your job is a very difficult period in your life which puts all manner of pressures on you and your family. It is worth noting, at least, that this is a measure that is unlikely to impact those on lower incomes.
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.
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.
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.
Raj Nayyar: I think it does, but it might be helpful if we wrote and explained the difference.
Robert Jenrick: Sorry to disappoint you.
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.
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.
I guess there might be a lot of people in that position.
Robert Jenrick: I think there are two questions there, and you are asking a different question from the one asked earlier. You are asking how many individuals or employers are likely to have to pay employers’ national insurance contributions on their termination payments, but the earlier question was about the impact on the amount of money that goes to individuals, and whether we have modelled that. My answer to that second question was that that was very uncertain, because it will depend on the behaviour of the employer, and to what extent they pass that cost on to the employee. We think that around 72,000 termination payments are likely to incur employers’ national insurance contributions; we have modelled that. The more difficult question, to which there is no accurate answer, is about how employers will behave in every case, and whether they will choose to pass all or some of the 13.8% on to the employee in the package they provide.
Raj Nayyar: HMRC has received guidance on that, and it will ensure that it is clear and properly signposted, so that employers and testimonial committees can work out what it means in their circumstances.
Robert Jenrick: Perhaps we can send you a copy of our guidance. This is very long-standing, and a body of case law in this area helps to identify what we mean by “customary”. There are cases of testimonials that would be considered non-contractual but customary; an example would be if it was the custom that once a player had played for a club for 10 years, they automatically received a testimonial, although that was never written into their contract. A cadre of testimonials would fall into that category, and have done so historically.
Robert Jenrick: It is in the public domain, so it was available to all Committee members, but I am happy to supply that.
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.
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.
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.
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.
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.
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.
We will now hear oral evidence from the Office of Tax Simplification and the Chartered Institute of Taxation. We have until 11.25 am for this session. Will the witnesses please introduce themselves?
Bill Dodwell: Hello. I am Bill Dodwell, tax director of the Office of Tax Simplification. I was appointed to that role in January this year.
Colin Ben-Nathan: I am Colin Ben-Nathan. I am chairman of the employment taxes sub-committee of the Chartered Institute of Taxation.
“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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Bill Dodwell: No. All our reports are on public record and published on our website. That report did not specifically suggest class 1A.
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.
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.
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.
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.
Colin Ben-Nathan: It is very much for HMRC to answer on the timing. All I would say is that if guidance is prepared in draft, the Chartered Institute of Taxation will be very happy to comment on it.
Colin Ben-Nathan: Again, I am happy to comment from the CIOT point of view. That is really difficult area, because one is effectively trying to look at whether something is either contractual or quasi-contractual by way of customary expectation, and is taxable because it is earned from employment, or if it is not such, and is to do with personal esteem and so on. All those issues were raised in Reed v. Seymour in 1927, which was mentioned.
That is a difficult area and in our evidence, we made the point that if we do not legislate along those lines, it would be really helpful—I am not suggesting that it would be easy, but that is why we need to do it—to have at least some examples of what HMRC believes is and is not customary. For example, if something regularly happens to somebody and they know and expect it to happen after they have served 10 years, maybe that is customary, but what if it is not 10 years? What if it is eight years, seven years or five years? We make that point because we think it is very difficult when it comes down to it.
The big difference is that there are many costs associated with a testimonial, and if those costs end up being much bigger than expected, they can almost swallow up all the revenue that comes from the testimonial. I wonder, on the first part of the equation—before one gets to the issue of tipping into £100,000—whether you feel that the allocation of costs is sufficiently watertight. The different players set the fee for which they will play for their teams. Is there sufficient clarity in that area?
Colin Ben-Nathan: Obviously, testimonials work in different ways. Essentially, one is looking at the relationship between the testimonial committee and the individual who would receive the money in the first instance, and at the nature of the amount of money at the gross point and whether or not it is earnings. Yes, you are right; there will be costs attached to that. The Bill really speaks to the gross amount that actually comes through to the individual.
The point about tips is interesting. It has been noted that an individual who receives an amount in relation to the position on income tax can use payroll giving, or possibly gift aid, to ensure that the amount effectively goes to a charity with no tax leakage. The interesting thing about national insurance is that is not the case. There is a point there, particularly about the amounts that go to charity.
Bill Dodwell: We covered the difference between gift aid and give-as-you-earn in our March 2016 report. We did not recommend that it was a high-profile case to try to resolve. There is essentially no national insurance saving for gift aid. Gift aid is something like £4 billion or £5 billion a year, whereas payroll giving is something like £130 million, so they differ by a significant order of magnitude. Obviously, gift aid does not just come out of earnings, but can come out of broader income.
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.
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.
Colin Ben-Nathan: Yes, of course, if any additional registration is required.
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.)
Adjourned till this day at Two o’clock.