The National Insurance Contributions (Termination Awards and Sporting Testimonials) Bill completed its passage through the House of Commons this week. The Bill will introduce a limited class 1A employer charge on termination payments over £30,000 and on payments over £100,000 related to non-contractual sporting testimonials.
The Government claims it is a simplification measure and addresses its fears that well-advised employers are avoiding paying the right amount of tax and national insurance on termination payments. However, Labour and SNP doubt that premise, and continue to have concerns about how the new class 1A national insurance charge will impact on the level of termination awards that workers receive, particularly in respect of women, employees over 50 and pregnant women.
Opening the Bill’s report stage debate, Shadow Chief Secretary to the Treasury Peter Dowd moved two amendments that called on Treasury ministers to undertake a distributional analysis of class 1A national insurance contributions, looking specifically at the impact on the level of termination awards received by employees and, importantly, at the impact on employers; and require the government to undertake a review every two years looking at the impact of this measure on women, pregnant women, workers over the age of 50 and any other group of people with protected characteristics. This was the only clause pushed to a vote but it was defeated (214 - 273).
Dowd also proposed an amendment that stated that no regulations may come into force until the Secretary of State has made a Statement to the House of Commons on the expected effects of the provisions of this Act on donations to charities by the recipients of sporting testimonial payments.
In a lengthy speech, Dowd reminded the House that termination payments have an ‘emotional and a financial significance’, and the amount awarded is often determined by painstaking and careful negotiations between managers and trade union representatives. The Bill is taking money from people at perhaps one of the most vulnerable times in their working life. The MP went on to say that neither the Office of Tax Simplification nor Treasury ministers have been able to provide figures on the number of employers who have taken advantage of the existing loophole or on the amount that has been lost to the Exchequer as a result. But he said this is a tax-avoidance measure without any evidence that there is any substantive tax avoidance going on with regard to this.
Dowd went on to say: “Ministers have claimed many times that they have a desire to simplify tax. They talk all the time about simplification of tax. They have an Office for Tax Simplification. They institutionalised it. Has there been much simplification? Not as far as I am concerned. There certainly has not been any simplification of national insurance contributions. Therefore, despite the many claims from ministers that they have a desire to simplify the tax and national insurance treatment of termination awards, the Chartered Institute of Taxation and other tax experts have raised concerns about the lack of information in the Bill as to how this new class 1A charge will be collected. In their rush to try to get more money into the Exchequer, they have not even decided or worked out how they are going to collect it.”
The MP went on to complain of a pattern of the government not telling MPs how and when they are going to enact planned taxes, leaving it up to secondary legislation, which is ‘clearly’ a break from normal practice.
He then said the measure will also place additional administrative burdens on HMRC at a time when it continues to be hamstrung by the government’s ‘disastrous’ reorganisation of its estate, the introduction of Making Tax Digital and the preparations for a no-deal Brexit.
Dowd suggested that the government’s rationale is wholly to do with the revenue that they expect to raise and is little more than an attempt to increase national insurance receipts for the Exchequer while shying away from any major tax or national policy change. The government’s own impact assessment notes that this measure will present an ‘additional cost to employers’, he added.
On the second and final measure covered by this very short Bill that relates to a new class 1A charge for non-contractual sporting testimonials of more than £100,00, Dowd said there remains a ‘huge’ lack of clarity over how the charge will be applied, particularly when it comes to a payment that would be ‘customary’. He said: “The Chartered Institute of Taxation has also pointed out the clear inconsistency that would arise between the national insurance treatment of sporting testimonial payments and the treatment of voluntary tips in the service industry.”
From the Labour backbenches Jim Cunningham described the Bill as a stealth tax on people who are going to be unemployed for quite a long period. David Drew said one of the great myths about professional sportspeople is that they are all terribly well paid; county cricketers, people playing in the lower regions of football and rugby players playing outside the premier league are not well paid, he told the House. He added: “Are we seriously suggesting that people who organise a darts match, a pool tournament or a dinner are going to be brought into the regime, whereby they have to think about national insurance contributions, taxation and the rest? That is surely crazy.”
Speaking during the third reading debate, Shadow Treasury Minister Anneliese Dodds remained ‘deeply concerned’ that the Bill still leaves the door open to reducing the value of national insurance-free termination payments. Dodds added: “There are huge problems with our tax system. They are not dealt with by this thin and meagre Bill.”
SNP’s economy spokesperson Kirsty Blackman spoke for her party’s amendment that asks the government to review of the impact of Class 1A National Insurance Contributions on termination awards within 12 months of this Act coming into force. Blackman said the reality is that there will be an impact on employees as employers will choose to give their employees less in termination awards because they will be liable for this class 1A contribution. Another thing that concerns her is that the government’s projections show that wages for everybody will fall as a result of this additional charge on employers. The government has not yet said how they intend these payments to be paid in real time, or how they intend that employers should ensure that they are recording them and paying them in real time, she added. A number of employers will need to have new computer systems to pay this money. Those who do already pay for benefits in kind will need to have a different computer system that allows them to pay in real time rather than at the end of the year. That will involve a lot of additional work for HMRC and for tax professionals who will have to advise employers on this method.
On sporting testimonials, the MP is concerned about the reduction in charitable giving that she expects as a result of these changes. She is anxious that people who did not expect a sporting testimonial will end up, through no fault of their own, in a situation where the government consider it to be one that they expected to get.
She also spoke to an SNP amendment that the Secretary of State must, within three years of this Act receiving Royal Assent, lay before Parliament a report on its Exchequer impact.
James Cartlidge accepted this is a revenue raising move but argued that the government has been very open about this planned tax, so it is not fair to call it a stealth tax.
Exchequer Secretary to the Treasury Robert Jenrick responded to the debate. On calls for various reports, he said this Bill has been known about for some time. It was published for the first time in 2015. It has been restated in Budgets. It has been consulted on and is therefore not a new measure.
The government has also chosen not to change employee national insurance contributions as well, which we could have done for even greater simplification. This is to protect employees in a difficult period in their working lives, he said.
On calls for a distributional analysis, Jenrick is confident that the termination awards affected by these changes will be disproportionately paid by higher and additional rate taxpayers.
On the impact on start-ups, he said the Treasury do not hold this data and it is not an easy statistic to collect.
And on the proposed clause that would require the government to report every two years on the impact of the changes to termination awards, and on the number and size of the awards, Jenrick said the government has already assessed the impact of the policy in compliance with our duties under the Equality Act 2010. The conclusions to this were published as part of the tax information and impact note. He added that the government explicitly chose not to target individuals—by maintaining an unlimited employee NICs exemption, despite pressure to fully align income tax and NICs. And he said no groups are explicitly targeted by this award, which affects all groups identically in legal terms.
On termination awards and the calls for the government to report to Parliament on the impact of the changes on sporting testimonials, he did not anticipate that there will be any material change to charitable giving so long as the individual concerned chose to make use of payroll giving.
The Bill passed its third reading (270- 207) and heads to the Lords.
The full session can be read here.