National insurance changes probed by Opposition

The National Insurance Contributions (Termination Awards and Sporting Testimonials) Bill gained its second reading on Tuesday 30 April. The five clause Bill introduces a new 13.8% Class 1A Employer-only NICs charge to a termination award (over £30,000) or payment from a non-contractual sporting testimonial (over £100,000). This aligns the NICs treatment with the income tax treatment of termination payments and sporting testimonials, which were legislated for in Finance Acts in 2016 and 2017. The Class 1A NICs charge will take effect for payments made on or after 6 April 2020.

Labour did not oppose the Bill this week but warned it may make substantial changes in Committee stage. A date for the Committee stage is yet to be set.

Government introduction

Exchequer Secretary to the Treasury Robert Jenrick spoke for the Government during the debate, saying the Bill is a ‘welcome simplification’ of the tax treatment of termination awards and sporting testimonials. Jenrick said the fact that termination awards are currently subject to different income tax and national insurance treatment has created confusion and 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.

On sporting testimonials, he said the motivation is primarily simplification, rather than to increase revenue materially. 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’.  When the proposal was first brought forward, the threshold was £50,000 but, having spoken with the sporting bodies, the Government increased it to £100,000, making it significantly more generous. The vast majority of sportspeople will be unaffected by the Bill, he added.

The minister closed by saying: “I would like greater simplification of the tax system, but that journey must begin with single steps.”

Labour response

Shadow Chief Secretary to the Treasury Peter Dowd complained that MPs were given just one sitting day to examine the content of the Bill before today’s debate. Dowd said the proposed employer NICs charge will incentivise employers to reduce the level of non-statutory termination payments to employees so that the overall level of non-statutory payments declines. This will diminish the level of termination payments available to workers who lose their job, while increasing the amount that the Government receive in NICs receipts. He added that the Government’s own policy note states that this additional cost for employers will be reflected in lower wages. He  said: “Similarly, the Chartered Institute of Taxation has raised concerns that the Bill does not set out how the new class 1A charge will be collected by HMRC, stating that it will instead be left to secondary legislation—more secondary legislation, the Government’s default position.”

On sporting testimonials, he said Labour is concerned that the majority of income from such testimonials comes from fans that make voluntary payments. If this measure is passed, there will be a clear inconsistency in the NICs treatment of voluntary donations or tips at sporting testimonials compared with the treatment of cash tips in the service sector, where the employer is not involved.

Shadow Treasury Minister Anneliese Dodds wound up for Labour at the end of the debate. On sporting testimonials, she said she is concerned with any knock-on loss in charitable donations. On termination awards, Dodds wants to see evidence that some employers might be disguising final payment as termination payments. She said: “This measure on employers’ national insurance contributions on termination awards is likely to lead to employers being much less generous with non-statutory termination awards and to leave people worse off at a time when many of them are most vulnerable.” This kind of application of class 1A NICs to cash earnings is highly unusual, to put it mildly, a point she said ‘has been underlined by the Chartered Institute of Taxation’.

SNP response

SNP economy spokesperson Kirsty Blackman complained that the Bill’s explanatory notes do not talk about the amount of consultation that was done or the number of people who contributed to that consultation. She cited the CIOT, saying: “The Chartered Institute of Taxation got in touch with me with queries about some things in the Bill. On the £100,000 limit, the institute said ‘The intention is that the NICs rules will replicate this and only impose Class 1A NICs on the amount chargeable to income tax. We have reviewed the NICs Bill and it charges to Class 1A the amount that is ‘general earnings’. We assume this means the amount above £100,000…but it is not clear. The termination payments legislation refers specifically to the amount chargeable under the Income Tax (Earnings & Pensions) Act 2003. It is surprising that the same approach has not been adopted here’.” She asked: “Why has the Treasury taken a different approach to the drafting of this legislation to that taken to the drafting of the termination payments legislation that was passed previously?”

On termination awards, Blackman went on to say it does affect individuals, because they will receive less money. If the employer is going to give out a pot of £40,000, they will be giving some of that to the Exchequer, instead of to the individual as they currently would. The NICs change is the only example of a class 1A charge on cash earnings that the Chartered Institute of Taxation could find, she said, asking why the Treasury decided to take the route it has chosen. She wonders if it is part of some sort of long-term plan to use class 1A charges on cash in other circumstances.

Conservative backbench speeches

James Cartlidge claimed this Bill is important because it is the future of taxation in this country, saying ‘we are going to be seeing a lot more of this type of Bill on taxation: measures that deal with specifics’.

Craig Mackinlay complained that the £30,000 threshold for tax-free redundancy payments has not changed since 1988. Applying that inflationary increase from 1988 that £30,000 would inflate to £79,800.  A lot of parts of the tax code have fallen behind inflation, he went on. Mentioning that he is a member of the CIOT, he suggested there is probably a perception that the £30,000 settlement payment has been a target to hit rather than a proper target for any other reasons. Hence we now have this fairly complicated formula for payments in lieu of notice. He expects to see an increase in employer contributions to pension schemes as part of a settlement on the way out.

Government response

Tax Minister Mel Stride closed the session, saying a rationale for these measures is to disincentivise any tendency towards the manipulation of payments as between earnings and termination payments on the tax side of things. He explained what is meant by a payment that is customary: If someone is involved in a sports club of some sort, and there is a testimonial every year for a particular player or group of players, and that had been going on for some time, that would be a customary testimonial situation. In those circumstances, the tax treatment would follow accordingly, he said. He told Mackinlay that the £30,000 is reasonable and propionate, especially compared to Germany and USA where the threshold is ‘effectively zero’. On Dodds’ concern about charities, he said it is open to a committee in that situation to route some of the money via payroll giving to the charity—that is without limit – to make sure that that is done in the most tax-efficient manner possible. He closed by saying that HMRC are clear that there has been evidence of disguising what are essentially earnings by transferring them into a termination payment, thereby reducing taxation.

The full debate can be read here.

By Hamant Verma.