I beg to move amendment 1, page 12, leave out lines 8 to 12.
This amendment removes the power for the Treasury to amend the meaning of “basic pay” for the purposes of calculating “post-employment notice pay” by regulations.
With this it will be convenient to discuss the following:
Amendment 12, page 13, line 27, at end insert—
“402F Review of impact of termination payments on low income workers
(1) Within two months of Royal Assent being given to the Finance (No. 2) Act 2017, the Chancellor of the Exchequer shall commission a review of the impact of the provisions of sections 402A to 402E on low income workers.
(2) A report of this review must be laid before the House of Commons before the start of the tax year 2018–19.”
This amendment requires the Chancellor of the Exchequer to carry out a review of how the changes to termination payments will affect low income workers before these provisions come into effect.
Amendment 2, page 14, line 15, leave out “different” and insert “higher”.
This amendment removes the power for the Treasury to reduce the £30,000 threshold in connection with the taxation of termination payments by regulations.
Amendment 3, page 14, leave out lines 20 to 23.
This amendment is consequential upon Amendment 2.
Amendment 4, page 14, leave out lines 27 and 28 and insert—
‘(2) “Injury” in subsection (1) includes—
(a) psychiatric injury, and
(b) injured feelings.””
This amendment explicitly includes (rather than excludes) injured feelings within the definition of “injury” for the purposes of payments which are excluded from the provisions of Chapter 3 of Part 6 of the Income Tax (Earnings and Pensions) Act 2003 (payments and benefits on termination of employment).
Clause stand part.
To be fired from a job is perhaps one of the most difficult experiences for an employee. There are very few people in this Chamber, let alone in the country, who have never had to go through the awkward, bitterly disappointing and scary experience of losing, or potentially losing, a job. This is the daily reality for thousands of people, and it goes to the heart of clause 5.
I ask the Committee to imagine how thousands of people across the country at BAE are feeling at this moment after yesterday’s announcement of job losses. How are those workers feeling in Warton, Samlesbury, Portsmouth, Guildford and RAF Leeming, and in the Chief Secretary’s own county of Norfolk at RAF Marham? Added to the worry, concern, anxiety and hopelessness of redundancy now comes a potential tax bill to pay for the Government’s hapless management of the economy. Will the writ of clause 5 stretch across the Irish sea? What about the threat to the jobs of those at Bombardier in Northern Ireland, and the thousands of other associated jobs over there?
The hon. Gentleman rightly points out the devastating consequences for people who lose their jobs—he refers to particular instances at the moment—but does he also recognise that this Government have created 3 million more jobs, which is helping our economy and those people?
This is not relevant to the debate, but a significant number of those jobs are incredibly low paid, and people have not had pay rises for many years. What the hon. and learned Lady says might well be the case, but the reality is that it is not about the quantity; it is about the quality—[Interruption.] Of course it is.
How insensitive and out of touch must this Government be to put clause 5 before Members today of all days? The Prime Minister has vowed that she will do anything and everything she can to help those affected at Bombardier and BAE, so perhaps the Minister would like to withdraw this provision here and now and put the Prime Minister’s warm words into action.
I agree with the hon. Gentleman about the concerns that those workers will be facing, but he knows perfectly well that the Government’s proposals in this Bill are designed to deal with abuse. He knows that there are no plans to change the rules in a way that would affect people on lower incomes who are not doing anything wrong, and the Minister made that clear on Second Reading. The hon. Gentleman’s scaremongering is making the concerns of those workers worse, rather than reassuring them, which is what he ought to be doing in this House of Commons.
The only people who are scaremongering are this Government who are threatening to tax people’s redundancy payments—that is the scaremongering in this House.
Perhaps the Minister would like to withdraw this proposal. I will happily give way to him if he wants to reconsider his decision—he might have discussed it with the Prime Minister. In some instances, a job loss can be even worse if individuals lose their employment because of base and nasty discrimination, whether because of their age, gender, race, religion or sexuality.
The amendments speak directly to the question of how much money an employee who has lost their job should receive in tax-free redundancy pay, and how much an employee who is discriminated against should receive in tax-free compensation from an employment tribunal.
Is the hon. Gentleman not aware that when a tribunal has granted an award on the grounds of discrimination, that is automatically exempt from tax, despite what this clause may or may not be doing?
I agree with that particular point.
We know the Government’s overall stated aim is to crack down on what they say is significant avoidance related to non-contractual payments in lieu of notice. To do this, there is a complex set of formulas to mandate what will be considered as notice pay, even when that is not actually given in lieu of notice. Amendment 1 addresses our concern that the Government are giving themselves the power to change the meaning of basic pay for the purpose of calculating notice pay. That could significantly change the basis of the calculations, so the Minister should set out more clearly the intention of this measure.
I agree with everything my hon. Friend says, of course. Does he agree that a lump sum on termination of employment could be considered as potential income over a period of years, and should not be considered just as a lump sum to be taxed within one year?
Again, that goes to the heart of the issue. The Government are trying to focus on a particular moment in time, rather than taking into account the fact that a person might be out of employment for a long time.
We see a running theme of this Government in this Bill and so many of their other actions: they are removing powers from Parliament and giving them to Ministers. But other elements have been tacked on to the clause that are seemingly unconnected to the stated aims about payments in lieu of notice. It is clear that the Government are laying the ground so that workers who have already lost their jobs should pay tax on more of their termination payments. Is that the message that the Government are now sending to the likes of the BAE workers? Is it the message they want to send to the victims of redundancy? There can be no other explanation for this clause. It gives the Treasury powers through delegated legislation to raise or lower the tax-free threshold.
Changes to the tax-free allowance for termination payments were first mooted by the Office of Tax Simplification in 2013 when it cited such payments as an employee benefit that would merit further study. I find it rather peculiar that a payment to an employee who has just lost their job is considered as an employee benefit—how bizarre. It is as though a termination payment were some sort of added extra and a huge inconvenience for employers, when in fact that worker has just lost their job and this may well be the last payslip they receive for a long time. The Government have promised not to reduce the threshold, so it comes as a bitter pill that the Bill will allow them to do just that.
If there is no intention to reduce the threshold, Conservative Members should have no hesitation in voting for amendment 2, which would allow the threshold only to be increased through delegated legislation, removing the power to decrease the amount. I wait with bated breath for the Minister to keep the Government’s word and accept our amendment.
In the previous debate, the Minister went to great lengths to claim that the Government’s plans to give themselves the power to water down the tax-free threshold on termination payments, and to exclude injury to feelings from tax-free compensation payments, had nothing to do with attacks on those who have just lost their jobs. No, instead that is apparently part of some ambitious strategy that the Government have to tackle tax avoidance.
The Minister is so concerned about tax avoidance that he has claimed that
“when the Government find tax avoidance, we will clamp down on it.”—[Official Report,
Vol. 628, c. 253.]
Such a bold assertion makes me wonder if the Minister has even read his own Finance Bill. Has he read clause 15, which we will debate later, through which his Government are loosening the rules to allow more non-doms to receive tax breaks if they use money from offshore tax havens to invest in the UK?
Is it not the case that the Government are squeezing money out of people who cannot escape from taxation—namely, less well-off people who lose their jobs—rather than chasing the big money people who evade and avoid taxes?
My hon. Friend, as ever, puts it in a nutshell. That is the case.
Has the Minister read clauses 29 to 32 and schedules 8 and 9? With those measures, the Government are deliberately signposting a loophole to ensure that non-doms can set up offshore trusts that are exempt from planned changes to non-domiciled status. That exemption completely undermines the Government’s planned changes. The fact is that this Government are not interested in tackling the scourge of tax avoidance and evasion, which costs the UK economy billions every year. They have no interest in ensuring that those who invest foreign money in the UK do so in a transparent and open manner.
Does the hon. Gentleman accept that under this Government we have made the largest strides to close the tax gap that we have seen in recent years, which means that we are collecting more from rich people and tax avoiders than ever before?
That will be dealt with later, but it is not the case for many multinationals. The papers are strewn with examples of the Government’s sweetheart deals with multinationals, so the hon. Lady cannot tell me that that is the case.
I thank the hon. Gentleman for generously giving way. The latest figure for the tax gap is 6.5%, which he will know is lower than that in any year under the last Labour Government. It was over 8% in the financial year 2005. He will also know that our record on avoidance and evasion is that we have raised £160 billion since 2010. What amount did his party achieve by clamping down on avoidance, evasion and non-compliance when it was in office?
It does not include profit shifting from multinationals. I am quite happy to defend the record of the last Labour Government, but I am more interested in this Government and what the next Labour Government will do in this regard.
The Government are only interested in doing what they have always been interested in since the party was founded: dramatically curbing the rights of workers and transferring their money to those who least need it. That is, outrageously, what clause 5 will do. Why else would the Government give themselves the power to lower the tax-free threshold for statutory redundancy payment? Why else would the Government feel the need to further harm discrimination victims? If, as they say, there is a need for clarity in the definition of “injury”, why do they not accept amendment 4, which would make it clear that victims of discrimination should not have compensation for harm taxed as if it were earnings? We only need to look at the comments of the Chief Secretary to the Treasury, who wrote an astounding report in 2012 comparing the work practices of Germany and the United Kingdom.
The hon. Gentleman is being very generous in taking interventions. He suggests that the Conservative party is not looking after those on lower incomes. Does he not accept that it was our party that increased the tax threshold for lower income workers and also introduced the living wage?
When we take into account cuts to working tax credits and changes to benefits, that does not stack up, I am afraid. The hon. and learned Lady should know that.
In 2012, the Chief Secretary set out how some employers in Germany were exempt from pesky regulations, such as on unfair dismissal, or social security contributions, and opined that the UK Government should follow suit. She argued that the best way to fight unemployment, particularly among the over-60s and the under-20s, was by encouraging more shift work, work on Sundays and late-night work and, yet again, getting rid of protection against unfair dismissal. Is it any wonder that this Government are hellbent on giving themselves the power to cut the amount that a worker can receive tax-free after they are dismissed?
Because it goes to the heart of this Government’s attitude—[Interruption.] Narrative; that is a very good word. Should anyone in the Chamber be surprised that the same Government brought in the illegal and deeply unfair employment tribunal fees? It is part of the theme and the narrative. They are now set, once again, to try to limit the amount that workers who are discriminated against in the workplace can receive. The clause is simply another step that this Government have taken in the past seven years to distort and debase hard-won employment rights. If it remains in the Bill unamended, it will give the Government even more power to wreak havoc and misery on the lives of some of the most vulnerable people in our society.
In the light of yesterday’s announcement of BAE job losses, what message does the clause send to workers such as those at BAE? It says, “You’ve lost your job—a well-skilled job at the forefront of our defence industry—and you may lose your tax-free redundancy sum or have it reduced.”
The Prime Minister was handed a fake P45 last week. That was a joke. Many sacked workers get a real P45, and now, under these proposals, they may also get a big tax bill to accompany it. That is no joke—[Interruption.] Conservative Members may snigger and laugh, but it is no laughing matter. I ask the Minister once again to withdraw this proposal.
I will deal with the amendments and some of the issues introduced by Peter Dowd.
Let me cover first the jobs position. The only criticism I have of my hon. and learned Friend Lucy Frazer, who raised this matter, is that, of course, jobs are created not by the Government but by businesses operating under the conditions that are created by the Government. It is important we remember that, because we should not take it for granted. The jobs performance of many countries in the European Union has been pitiful by comparison. Not that long ago, this country created more jobs than the rest of the European Union put together. That is not a trivial point; it makes a difference to millions of people across the country.
The hon. Member for Bootle ought not to sneer at the number of jobs. He is also wrong about the quality of those jobs. Figures from the Office for National Statistics clearly show that most of the jobs that have been created are permanent, full-time and skilled managerial or professional jobs. They are not rubbish jobs, as he calls them in that slightly sneering way. They are good-quality jobs and are providing good livelihoods for people across our country.
The right hon. Gentleman suggests that Governments effectively have no role in creating jobs. The reality is that macroeconomic policies have an enormous effect on the creation of jobs. Those countries that have chosen foolishly to join the euro and now have a massively overvalued currency, in effect, have lost millions of jobs in some cases. We have fortunately not been part of the euro, and currency flexibility is a crucial part of that; that is Government policy.
I completely agree, but the hon. Gentleman misquotes me. I did not say that Government have no role. I said that Government do not create the jobs, but I explicitly said that Government create the conditions within which businesses operate and can create jobs. He is absolutely right about that, and I do not necessarily demur from what he said. The euro and the straitjacket of monetary policy across Europe has led to appalling situations in some countries where unemployment rates are very high, which I do not think is sustainable. That is why our economic performance is incredibly strong. We should not throw that away.
I have not got any idea. I was not Chief Whip between 2010 and 2014. Individual taxpayer matters are for Her Majesty’s Revenue and Customs, and Ministers do not get involved in individual taxpayer decisions. As the Financial Secretary to the Treasury and several other hon. Members have pointed out, we have reduced the scope for businesses to avoid and evade paying taxes. We have closed that gap and are collecting more revenue that we can spend on our important public services, which I want to turn to.
The hon. Member for Bootle mentioned multinationals. He will know that there is nothing we can do unilaterally to collect money from multinationals that operate in different countries. That has to be part of an international process. He will know that David Cameron’s Conservative Government led that process and set up the initiatives. It is not very exciting, Mrs Winterton, but we are part of what I think is called the base erosion and profit-shifting programme. I am a non-practising chartered accountant, and I am afraid that we talk about such exciting things over coffee, but it is important because it relates to a set of international rules for treating where companies earn income consistently so that we tax them where they are genuinely doing their economic work. This Government cannot do that unilaterally; we have to co-operate. This Government have been leading and shaping that work across the world, not following others or trying to avoid it. Not only do we not have anything to be ashamed of, we have a lot to be proud of, which is shown in the revenue that we have been collecting.
Moving on to the substance of clause 5 and the amendments, I want to return to the point I made when intervening on the hon. Member for Bootle. There is nothing in the proposals that should alarm anybody—particularly those on lower incomes—who is playing by the rules. That issue came up when there were votes on the Ways and Means motion, and the Minister made the Government’s intentions clear and they are not what the hon. Gentleman suggested. Anybody worrying about their job at Bombardier, BAE Systems, about which we heard yesterday, or any other company should know that the Government have not proposed to alter the £30,000 tax-free limit at all. If the Government were to bring forward such a proposal, it would be governed by a statutory instrument under the affirmative procedure, meaning that the matter would come to the House and that Ministers would have to make the case at the Dispatch Box and persuade the House to back a change. There is no such proposal. The hon. Gentleman knows that it is not true and in saying that it is he is scaremongering and worrying people when they have no reason to be worried. He should be ashamed of himself.
As the Minister set out on Second Reading, clause 5 is necessary because the rules are unclear and complex and there is some abuse. Some 85% of termination payments are below the £30,000 threshold and will not be affected, but we must make sure that people do not abuse rules that are there for a good reason: to ensure that employees who lose their jobs are properly compensated and have some money to help them as they look for another job. There is no proposal to change that; this is about dealing with abuse.
On amendment 4 and “injured feelings”, there is a clear reason why it is foolish. Were it agreed to, it would introduce a large loophole into the process that would absolutely be abused. If someone wanted to offer some tax-free payments on loss of office, the payment could be labelled as “injured feelings”, rather than as something in the contract, and they could avoid paying tax and national insurance on it. The Minister should be congratulated on thinking things through and ensuring that people cannot dream up loopholes. Dealing with tax evasion is not just about acting after it has happened; it is about smartly drafting legislation so that loopholes are not left open in the first place.
My right hon. Friend is making an incredibly powerful argument. I was just considering his remarks on tax avoidance, loopholes and, indeed, Thames Water, which was mentioned by Catherine West, and it is important to remember that industrial-scale tax avoidance arose under the previous Labour Government, who did nothing at all to stop this egregious tax avoidance. This Government have been passionate, trenchant and active in righting that wrong.
My hon. Friend is right. We hear a lot from the Opposition about clamping down on evasion and aggressive tax avoidance, and I give them credit for talking about it a lot. Unfortunately, they did not do anything about it when they were in government. The Minister and this Government talk about it a little bit, but we spend most of our time dealing with it and collecting the money, which is getting the balance right.
The list definitely dates from 2010—if I am not mistaken, that was when the Tory Government came to power—and includes Google, the Vodafone sweetheart deal, and Amazon. Government Members should concede that, despite some gradual improvements, we are still not where we ought to be and that this group of amendments includes things that taxpayers would like to see this House take much more seriously.
There are a couple of things in what the hon. Lady says. She is absolutely right that we need to do more to ensure that multinational companies pay tax in the appropriate jurisdiction, but we cannot do that unilaterally. We have to work with other countries, because we need international agreement on where a company’s profits are earned. The media sometimes does not understand this, but companies pay tax on profits, not revenues, so the whole argument is about where the profits land and that has to be addressed internationally. This Government are leading that international work, not following it—[Interruption.] It is no good Anneliese Dodds shaking her head. UK tax professionals have been leading this work and continue to drive it forward. We have a proud record.
I have seen some of this from the inside, within the European Union. For example, I have seen measures against trusts and measures to introduce country-by-country reporting blocked by Conservative MEPs, and I frequently saw measures to attempt to introduce international co-ordination get blocked by Conservative-related politicians.
No. First, it cannot just be done at European Union level—[Interruption.] No, we have to do it globally, because many of the companies involved are US companies. The base erosion—[Interruption.] I do not know why the Opposition Front-Bench team are laughing. The base erosion and profit sharing programme comes from the OECD.
I cannot take an intervention when I am still dealing with the first one. The base erosion and profit sharing programme is a global initiative, and we are leading on that work.
As for the point of the hon. Member for Oxford East about the EU, if I remember rightly, the reason why the Government blocked the French-driven proposals for country-by-country reporting was that they were part of an EU plan to try to drive up the total amount of tax that we take from business, not to ensure that companies pay tax in the right way. We are not an anti-tax country. That move was part of an EU plan to avoid countries being able to have competitive tax regimes and to avoid businesses locating in the United Kingdom. The French wanted to stop that because many of their businesses and smartest people now work in London or other parts of the UK, but the change was not in our national interest and I believe that that is why we blocked it. However, we need to continue the international work, and I am pleased that we have been leading on it.
My final point is about workers’ rights. I understand that the hon. Member for Bootle has to do this stuff to please people on his side, but he is absolutely wrong. This Government have absolutely no agenda of the sort that he mentioned. When talking about our leaving the European Union, my right hon. Friend the Prime Minister has made it clear that we want to protect workers’ rights. We stand four-square behind the rights that are in place, and we will be legislating for them in the European Union (Withdrawal) Bill, which I am sure will provide many hours of joy and fun in Committee. You may even be in the Chair, Dame Rosie, to listen to some of those exciting debates. We are going to protect workers’ rights, and there is nothing at all in the proposals to concern somebody who is worried about losing their job. This is about cracking down on people who have been abusing the provisions that protect legitimate workers who lose their jobs, using them as an excuse to get tax-free cash out of the system and cheat the taxpayer. That is what the proposals are about and that is why I hope that the Committee rejects all the amendments and supports clause 5.
It is good to be back in the House after a bit of a recess and to be here again talking about the Finance Bill. It is our second such Bill this year—our second of three—so we are here for the long haul. I want to discuss termination payments and the relevant amendments tabled by the Scottish National party and Labour. The Government have been clear that they are just closing a loophole, but the Budget suggested that the measure will generate an extra £430 million a year. That is £430 million a year that these workers will not be getting when they receive their termination payments. However the Government want to dress it up, this is additional tax on these people who are losing their jobs and receiving termination payments. These people are in a vulnerable situation, as they are receiving a termination payment and are no longer in employment and they will be taxed more as a result.
Like the Labour party, the Scottish National party has concerns about the impact of that measure on low-income workers, and we have made that clear in our amendments. I understand that the Government are saying that 85% of those who get these termination payments and will be affected by this change are not low-income workers, but the other 15% are, and my concern is for them. If someone finds themselves out of a job, an amount of money is needed to allow them to get back on their feet and to ensure that they do not have a significant knock to their confidence, so that they can get back to the workplace after a relatively short time.
Mr Harper used the phrase “we have closed the gap”. I am not sure that it is quite closed yet. There is still a gap as regards non-payment of tax. Fair enough, measures have been taken to move towards ensuring that tax is paid by the rich in the way it should be, but the gap has not yet closed.
The hon. Lady may remember that the tax expert Richard Murphy calculated at one point that the genuine tax gap—not the one that the Government give us—was £119 billion a year. That has no doubt come down slightly, but there is a long way to go before we collect that tax. That figure overwhelms the amount of money that the Government will squeeze out of workers who are losing their jobs.
I absolutely agree and I think that the tax gap is probably significantly larger than the Government are suggesting. On that note, small countries are very good at having a very small tax gap—a wee plug for Scottish independence there.
We have a couple of other specific concerns about termination payments. We are still not clear about people who have faced termination as a result of injury, injury to feelings or psychiatric injury. We do not want them to receive less of a payment as a result of this change. I heard what the Minister said earlier about those people who have been involved in discrimination cases when the decision has been in their favour, but we want to ensure that people who are trying to move on from a situation after termination but who have been injured or have suffered an injury to feelings or a psychiatric injury are not disadvantaged by this change in the rules.
I will not speak for much longer, but let me say one more thing. The Government’s explanatory notes say that the Government are looking to ensure that all payments in lieu of notice, not just contractual payments in lieu of notice, are taxable earnings. That way of putting it is what most concerns me, because it is clear that workers will be impacted by this change when it comes in. I expect that this change will be proposed by the Government and accepted, so I would very much like a commitment from the Minister that, if it comes in in the next tax year, the Treasury will do an impact assessment one or two years in to see the specific impact on that group of low-income workers who the Government suggest are in the minority. I would like to see its impact, and if it proves to be particularly negative, I want the Treasury to take mitigating steps to change it.
“The narrative”—those were the word used by the Opposition Front-Bench spokesman in response to the Minister. We should remind ourselves that the narrative is that we are discussing employment-related tax treatments against a backdrop of a significant increase in employment and a significant decrease in unemployment. That goes to the heart of this whole debate. Employment is something that we all want to see expanding through the UK economy. Having started and run a small business and having recruited people to that business, I know that no employer recruits someone with the intention of kicking them out. I hope that that goes without saying, but I have said it nevertheless.
Does my hon. Friend agree that a small business owner with just a couple of staff has to go through a lot of stress in the whole process of making someone redundant? We should not forget that small business owners are people as well, often quite low paid because they are sacrificing salary. That can lead to mental health issues, stress and anxiety.
My hon. Friend is absolutely right. I will respond to her point in a few moments, but it is a very important one and we must not overlook it.
We have had a jobs boom over the past few years, in stark contrast to many other developed economies around the world and across Europe, which has struggled. In particular, in the UK, which is dominated by small and medium-sized enterprises and, indeed, microbusinesses, which often have only one or two principals and one or two employees, it is important that we continue to give confidence to those businesses, many of which do not have a large administrative back-office function. That is often the case, as it was in the business that I started. I was doing the client interaction and sales, and a colleague of mine was doing the journalism side of the business, but we were also the accountants and the HR department. To give confidence to small and microbusinesses that they can employ people, it is incredibly important that everything to do with employment is as simple and transparent as possible.
At the moment, the tax treatments around severance payments are very competitive. Depending on the combination of events, the payment can be taxed any one of a number of ways. Although I did not speak about this set of clauses on Second Reading, I did welcome the Bill, and I welcome this general move to simplify, to clarify and to give small businesses in particular—although of course this affects businesses of all kinds—the confidence to employ people, knowing that the HR and financial treatment around that employment will be as simple as possible.
The Opposition spokesman kept talking as though severance payments were not taxed at the moment, and of course they are. They are taxed—
Above the £30,000 threshold, there are tax treatments. Through the Bill, the Government are seeking to make the treatment of the figure above £30,000 most important and straightforward—[Interruption.] I absolutely welcome that.
Order. There are too many sedentary interventions, and it makes it rather difficult for the Hansard writers, as well as everyone else.
I am happy to take interventions, but I have never been a particularly good lip reader, so the Opposition will have to help me out on that one.
The Opposition suggested that somehow there would be some terrible Government sleight of hand to try to diddle people out of their money at a point at which they have lost their job, but has been made absolutely clear by the Minister and in the speech made by my right hon. Friend Mr Harper that there will be transparency in any changes. None are proposed, but if they were, they would follow the affirmative process, which would mean a Minister at the Dispatch Box, in front of the House, being quizzed and questioned by the House. They would have to be voted on by the House. So the idea that there would be some sort of back-office sleight of hand in this is inaccurate.
At a time when we have, unfortunately, heard news of proposed job losses in one of our key businesses, the Opposition’s approach is unwise. I understand why their Front Benchers have done this—they want to have an attack on the Bill—and I am sure that if I were in their shoes, I would find whatever means I could to try to criticise the Bill. The simple truth is that there are no such proposals and nothing in the Bill to imply that there would be, but it is right that the Government maintain the opportunity to be flexible in the future.
Does the hon. Gentleman agree that in the light of the shake-up in these organisations and the dreadful stress that these people are under, introducing this clause at this time is completely inappropriate and heartless? The Government can bring it back another time if they wish.
The hon. Gentleman will be unsurprised to hear that I do not agree with him. The Bill is where the proposal is and the passage of the Bill has been timetabled in the way that it has. The idea that we delay changing the tax treatments of severance payments to a point in time when no one in British society is in the process of losing their job is farcical, as I am sure that, on reflection, he will recognise.
As has been said, the £30,000 threshold means that 85% of termination payments are completely unaffected. I am sure we have all heard anecdotes about businesses seeking to manipulate the definitions of the various elements of severance payments specifically to avoid the tax that is owed. Surely, Opposition Members would wish to make sure, as Government Members would, that tax is applied fairly, dispassionately and transparently, and that it affects all people equally. Once again, a disproportionate burden would otherwise fall on small businesses, which do not have that administrative back-office function and cannot play manipulative games to avoid tax. They are the ones that have to pay the full tax, as is right.
Some companies may have clever back-office accountants looking at ways in which to massage the definitions of the various elements of a severance payment to minimise the tax—tax that is due to the Treasury and that we want and need to fund public services. Surely, the Labour party is not suggesting we should turn a blind eye when a clever set of accountants can massage figures, making sure that the burden falls wholly and solely on small businesses, which do not have the opportunity to employ people to do that kind of smoke-and-mirrors work? I cannot imagine that is what Labour would want to do.
Amendment 4 proposes including the words “injured feelings”. Again, I am sure that this is being proposed with the best intentions, but the Labour party must realise that putting into a Bill a definition that is so vague and open to abuse is just inviting unscrupulous businesses to use it as a means of avoiding the tax that should be fairly paid upon a severance.
I am guessing that the hon. Gentleman is unaware—perhaps he is not—that “injury to feelings” is a legal term. It is used within that profession, and it is recognised and understood. Therefore, it is completely reasonable to include it in an amendment.
I thank the hon. Lady for informing me of that. I am more than happy to look in more detail at that definition, because I do not have it at my fingertips, but putting it in the Bill would present to unscrupulous employers something that looks like an invitation to use this as a back-door route to avoid the tax that should rightly be paid upon severance. It would be unwise for that to go through, because it would send exactly the opposite signal to what we are trying to achieve with the relevant clauses elsewhere in the Bill, which is to say, “If you play by the rules, fine.” The vast majority of people who receive severance pay have no need to concern themselves and neither do the vast majority of businesses. The only individuals who should be a little distressed by what is going through in the Bill are the very small number of companies that have abused the severance payment structures to avoid paying the tax that is fair. I have little sympathy for those companies. If they play by the rules, we are on their side. If they seek to bend or break the rules, I have no sympathy whatsoever.
I am seeking to ensure my hon. Friend understands that this does not benefit the companies; this is of benefit to individuals who take advantage. There is no tax benefit to the companies because it is income tax that is payable. [Interruption.] Well, there is national insurance—employers’ NI.
Although, as I am reminded, there is an NI implication. Again, I have heard a number of anecdotes about conversations with departing employees from not the most honourable of companies in which things have been said such as, “If this complaint were to gently disappear, I am sure we can squeeze a little more money into your severance payment, using this route or that one.” This is one of the areas where simplicity and clarity are important, because companies may be using massaging methods to try to get a bit more money into the pocket of a departing employee, so that employee does not to have recourse to the law where inappropriate behaviour has taken place. Dangling some cash in front of them may be being used as an enticement not to take a constructive dismissal case, for example, and that is exactly the kind of thing we want to avoid.
In conclusion, I will be generous in spirit and assume that these amendments are just poorly thought through, rather than anything that is attempting to be more damaging. They would undermine the core direction of travel of the Bill, so I will not support them.
I am grateful for the opportunity to speak in this debate. Before entering this place, I was an employment rights lawyer for more than a decade, so this issue is very important to me. I represented dismissed and discriminated against employees for many years, and saw at first hand the devastating effect that the way they had been treated had on their lives. The Bill clearly seeks to narrow the scope of termination payments. Of course tax avoidance should be clamped down on, but the Government’s own consultation did not reveal evidence of widespread abuse. Charlie Elphicke said that there was tax avoidance on an industrial scale in this area, but that simply is not borne out by the evidence or indeed my experiences as an employment rights lawyer.
The hon. Lady is a making a strong and passionate case. My concern was industrial-scale tax avoidance, because big corporates were allowed to game the tax system without any action being taken to stop them doing that, largely because of the Brownite prawn cocktail circuit that was pursued in the early 2000s. In the last Parliament, I fought a campaign to get a lot of the law in this area tightened, and I am glad to say that a lot of that was taken forward.
This is not about big corporates; I am talking about adequately compensating people who have been sacked or discriminated against at work. In my experience, a sacked worker’s priority is to receive a fair settlement, not to avoid tax. It seems to me to be another example of the Government hounding people when they are at their most vulnerable, when instead they should be helping and supporting them.
The introduction of measures that will allow the Government to reduce the £30,000 tax-free threshold via the backdoor of delegated legislation could lead to profound effects on people’s lives without there being any proper scrutiny in Parliament. That is even more important given the fact that the threshold has not been increased since 1988; had it risen in line with prices, it would be £71,000 today. Amendment 2 would mean the threshold could only be increased, not decreased.
Does my hon. Friend agree that it is curious that, between 2010 and 2014, such a large company as Thames Water paid zero corporation tax, yet here we are talking about sums of £30,000? It is estimated that there is £6 trillion in tax havens, yet we are quibbling the amounts that go to individuals who have had a difficult time in the workplace.
May I deal with the intervention I am currently dealing with first?
People who have lost their jobs and been discriminated against often get small amounts of money in the wider scheme of things, but it makes a huge difference to their lives while they are looking for another job, getting back on their feet and getting their confidence back after the treatment they have been through.
The hon. Lady is talking about people who have lost their jobs who have been discriminated against. All our hearts would go out to someone in that situation, but is she aware that the tax-free threshold for people who have been discriminated against is not affected by the provisions in the Bill? Such awards will be wholly tax-free under the Bill, so does she agree that discrimination is not relevant to the debate?
Discrimination is relevant to the debate, because the Bill would introduce legislation that would tax injury-to-feeling awards on termination. Discrimination can of course have a devastating effect on a worker’s life and career, yet the Government seem to treat victims of discrimination as a way to top up the Government coffers.
I have already given way several times; I wish to make some progress.
Consider the example of a mother who has been discriminated against and dismissed for taking maternity leave. Rather than enjoying her time at home with her baby, she feels stressed and anxious about the future and her capacity to provide for her family.
The hon. Lady is being extremely generous in giving way. I just wish to put on the record that discrimination awards will not be affected by the Bill. I have a copy of the Bill here: there is full exemption for compensation awarded by an employment tribunal relating to discrimination awards. She is talking about a case of a mother who is discriminated against, and none of us would wish to see that—I am a mother myself and I have employed mothers—but that is not what the Bill is about.
The hon. Lady is talking about discrimination awards in employment tribunals; I am talking about discrimination awards as part of termination payments. They are two distinct things. As I understand it, the Bill would tax as earnings discrimination awards as part of termination settlements. For example, were someone to settle with their employer rather than go to tribunal, any injury-to-feelings element of the settlement that was above the £30,000 threshold would be taxed. That is a significant change for people who suffer discrimination. It might affect the mum who settles with her employer following her dismissal after having a child, or the disabled worker whose employer would rather sack them and make a termination payment than make adjustments for them. Such people will be worse off because that element of their award will be taxable.
It cannot be right that, rather than supporting victims of discrimination, the Government seem to want to use them as a source of revenue. These people need protections, not to be used to provide a revenue stream, so I urge all Members to vote for the Labour amendments.
The shadow Minister said that the measures in the Bill are part of a wider pattern of Government behaviour. Indeed they are: they follow in the footsteps of the 75 different measures we have already taken to clamp down on tax avoidance and the £160 billion we have already raised for our public services by doing so. They follow in the footsteps of the changes we have made to capital gains tax, which have increased the amount we have raised and ended the disgraceful situation in which hedge-fund bosses were famously paying less tax than their cleaners. They follow in the footsteps of the changes we have made to corporation tax to prevent international avoidance—the so-called Google tax. They follow the changes we have made to the taxation of non-doms to create more balance and end the situation whereby people could be here for 25 years and still claim to be non-doms. So the Bill is part of a wider pattern of behaviour: it is part of an ongoing war on tax avoidance that the Government are waging.
On the specifics of the amendments, it seems to me that the Opposition are incredibly well intentioned. We all want the same things—we all want to drive down tax avoidance—but the problem with amendment 1 is that, in the real world, the Treasury is constantly engaged in a war of attrition with people who are constantly trying to create new loopholes and ways to avoid tax. As quickly as the Treasury closes one loophole, there are people trying to create others.
I shall make some progress.
Realistically, we cannot will the end of reducing tax avoidance without willing the means. The idea that, every time the Treasury needs to make a small change to a definition to clamp down on a new form of avoidance, we should have to come back with not just new statutory instruments but new primary legislation would really put sand in the wheels of the war on tax evasion and slow down our ability to tackle this serious problem.
Amendment 4 brings a more serious problem. If it is accepted, there will be people in the tax-avoidance industry rubbing their little hands together because the Opposition will have created, completely unwittingly, a huge new loophole, which will be used to abuse the system and avoid tax.
I am just about to conclude.
The measures in clause 5 are good, and they are part of a wider pattern of behaviour: a war on tax avoidance that we have waged in order to get more money for schools, hospitals and police in my constituency and others. They are part of a wider economic policy that has delivered not just record employment—the highest since 1975—and record tax cuts for those at the bottom end, but a record increase in the national living wage that will give us one of the highest living wages in the entire developed world. It is a pattern of behaviour that sees us making those who need to pay their tax pay it, so that we can have an economy that works for everybody.
I will speak only very briefly in support of the Labour amendments as most of what I would say has been said by my hon. Friends. The reality is that, in this country, we have a revenue problem, not an expenditure problem. The Government are constantly imposing austerity measures on ordinary people and on public services, and we see the result of that in the health service, local government and education. We need to get more money into the Treasury, which means dealing with tax avoidance and tax evasion among the corporates—the big money people—not squeezing the relatively small amounts of income given to people who lose their jobs.
Does my hon. Friend agree that it is a pity that, since the start of the new Government, Mr Pickles, who was formerly a Member in this House and is now in the other place—[Interruption.] To the best of my knowledge, he has not been replaced as the anti-corruption tsar. Indeed, unless the House has been informed otherwise, that particular thread of Government policy seems to be lost.
My hon. Friend makes an interesting point.
The reality is that many Government Members have close associations with the City and with big money. I do not want to accuse anyone individually, but that is the reality. Many have been in hedge funds and wherever. The biggest scandal of all took place within Her Majesty’s Revenue and Customs. A few years ago, Dave Hartnett, who was the boss of HMRC, was involved in sweetheart deals with the corporates, losing countless billions for the Treasury. He was not doing anything illegal, but cosy deals with corporates is not exactly public service. When he finally left HMRC, he set himself up as a consultant, advising the same corporates on how to avoid taxes. That is an absolute scandal. We should be stopping such practices.
Tax officers should be public servants who are driven by the public service ethos. At the grassroots level, the ordinary members of staff are driven in that way. Many of them are members of the Public and Commercial Services Union, with which I am associated. The PCS has argued for many years that we should have more tax officers, and that they should be better paid and better appreciated for the work that they do. I would like to think that, instead of closing tax offices and squeezing the number of tax officials, this Government would increase their number. PCS has told me on many occasions that every tax officer collects many times their own salary, so every time we appoint another tax officer, we get more than their salary coming back. That is what we should be doing. It has been a scandal for many years. Even before this dreadful Conservative Government, we were not collecting sufficient tax. We were allowing tax evasion and tax avoidance to go unchallenged. I want to see a world in which people, particularly those with plenty of money, pay their taxes at the highest level. I am not talking about ordinary working people.
Finally, it was recently suggested that quantitative easing, which is not strictly relevant to this amendment, is benefiting the better off and not the ordinary people. It would be good if some of that QE could find its way into the Treasury coffers and help the spend on public services. That would be a better way of generating more jobs, more demand and better services in our economy.
This is indeed an important Bill. I look forward to serving on the Bill Committee and to helping it to become law.
We have heard a number of things about the narrative and the tone from the Opposition. I say to Kelvin Hopkins that I have nothing to do with hedge funds or with rich people in the City—unless we are talking about the city of Birmingham and about my friends who are rich in happiness and goodwill if not money.
There is always a fine balance to strike when seeking to legislate on these matters. Generally speaking, we have a good regime of employment law in this country, notwithstanding some of the questions about the gig economy, which we are currently examining in the Business, Energy and Industrial Strategy Committee. Although the gig economy is outside the scope of this debate, it does need further scrutiny.
I am worried about Labour’s amendments. This Bill provides protections. It protects the public purse against those who seek to avoid and evade tax. The Opposition have raised some examples, and they were right to do so. This Bill does not condone those people or support their actions at all.
We know that, in most cases, the British taxpayer agrees with the system of taxation, but when that system is seen as unfair, it does lose the consent of ordinary workers. It is usually people with deep pockets and the resources to take advantage of the loopholes who cause deep anxiety among the British public. Therefore, I welcome the measures that we have set out in the Bill as they will end such practice.
The Opposition’s answer to the issue of taxation and revenue is to raise taxes on everyone. That is not the Conservative view. We prefer to keep taxes on the low paid and on small businesses low—that is what we have done already—and, at the same time, to crack down on the tax avoiders. Ultimately, that brings in more tax, and underpins a thriving economy.
There are measures in this Bill that will end some exploitative practices of big businesses and of a minority of individuals in this country. That will help the Government to collect the tax that is due to them from big businesses as well as from overseas investors and rich non-doms. We cannot allow a minority of businesses to tarnish the reputation of UK plc and the small and medium-sized businesses. However, we must remember that 99% of businesses in this country are SMEs. They are not this caricature of rich, greedy hedge-fund people which, frankly, I do not recognise, but we hear about from the Opposition. They are ordinary men and women up and down this country, advancing their dream of a better life by setting up a small business. In so doing, they are creating jobs for other people. I worry about the tone of this debate as it sends out a message from this Chamber. We need to send out a message that encourages people to take that risk and start businesses. That is why we need to strike the right balance.
I speak from experience. Before I entered this House, I spent 25 years working in small businesses. I ran my own business and I was a human resources director in other businesses. I have worked for some small midlands manufacturing companies, advising them on employment issues. I have seen the stress and worry that employers go through when they are dealing with a termination. Of course, termination has an impact on the employee, but let us not forget that these employers are trying to do their best under difficult circumstances. Without doubt, there are some unscrupulous employers, but I have seen small business owners lose sleep and suffer from stress and anxiety. Sometimes, despite the best efforts of management, a job does not work out. We are dealing with a trust relationship after all. We are talking about the vagaries of human nature, and, as my hon. Friend James Cleverly observed, small businesses often do not have access to qualified HR advice and employment lawyers as they are too expensive and beyond their budget.
Some of Labour’s amendments, particularly those on the injury-to-feelings issue, cloud the whole legislative landscape for small business owners, making it extremely difficult for them to know what to do in a stressful situation. That is why I do not support these amendments. The provisions are purely about preventing the manipulation of the rules.
Just on that point about small businesses, I agree with the hon. Lady that they are immensely valuable to the economy and we must support them. However, would the Government not do better to stop banks such as RBS squeezing the life out of small businesses by very, very unfair financial practices, which has certainly happened to businesses in my constituency?
I thank the hon. Gentleman for his intervention. I am sure that members of the Treasury team are doing everything they can on those points, and I welcome the work that they are doing in that regard. I have also seen small businesses in my constituency being affected by such practices. I do not condone them at all. We all want to see a country where good work is rewarded, and where employers and employees can work together. No system of legislation is perfect, but this Bill does strike the right balance. It is sensible and well thought out and we will continue to scrutinise it in Committee. Therefore, I will not vote for Labour’s amendments.
I often think, when I get to my feet in the Chamber, that my job is not really to talk to the people in the Chamber. I am sure that there are many clever people in here—far better educated than me—who know all the complex details of the Bill and the nuances of the financial implications. But my job is to represent the people of Willenhall and Bloxwich in Walsall North. If they were to tune into the Parliament channel at the moment, they might be slightly perplexed as to what was going on, so I thought I would try to assist them by considering amendment 1 particularly.
I would tell my constituents that £30,000 of a termination payment is currently untaxed and this Government have no plans to change that. Opposition Members might say, “Come on—what are you playing at? You’re putting something in here so you can do something sneaky in the future.” My answer is that there is actually a statutory instrument that requires an affirmative procedure. The people of Walsall would say, “What the hell is that?” And I would tell them it means that if the Minister wants to do something in future, he needs to come back to the Chamber to get the approval of this House and that he also needs the approval of the House of Lords.
My constituents would then say, “That sounds pretty reasonable, but can we trust you? Surely you’re looking to take more tax off us in the future.” I would say, “Are you kidding? Look at this party. What have we done for you? We have increased the level below which you will pay tax from £6,500 to £11,500—almost doubling it. This country has the highest level of employment it has ever had and there are more women in jobs than ever before. And which party gave you the minimum wage? Not only was it the Conservative party”—[Interruption.] My apologies—small technical problem. Okay, I would say, “Which party subsequently increased the minimum wage to the level that we are at now—a massive increase on the original introduction level?” [Hon. Members: “Ah!”] And I would tell my constituents that this party has the aspiration to increase the minimum wage even further in the future.
I think I remember the hon. Gentleman saying, “Let’s not talk about the past. Let’s talk about what this Labour Government might do for you in the future.” Well, there is not going to be a Labour Government. There is going to be a Conservative Government who will continue to increase the minimum wage. If my constituents are going to trust anybody in the House, it should be the Conservatives. We have no intention of taking more tax off people. If we did, we would have to come back to the House to get approval anyway.
Let us ground ourselves for a moment. I am proud of this Government’s record on tax avoidance. Since 2010, our policies clamping down on tax avoidance and evasion have collected more than £140 billion, ensuring that our tax system is just and that everyone pays their fair share. Clause 5 makes the tax system fairer, which should be the ambition of all responsible political parties. A fairer tax system means that we can fund our vital public services without increasing taxes or passing more debt on to future generations. It is not rocket science; these are the basic rules for responsible government. To that end, I welcome the clauses we are discussing today, especially clause 5. They tighten the rules and close loopholes that have been exploited for too long, denying the Treasury what it is owed and short-changing the vast majority of individuals and small and medium-sized enterprises that pay their fair share.
I cannot be the only Member of Parliament who represents a constituency whose jobs, prosperity and opportunities are dependent on small businesses thriving, and I take every opportunity to stand up in the Chamber and back small businesses across Wealden. But back to clause 5. The tax paid on termination payments is currently unclear and confusing. Clause 5 tightens and clarifies the rules governing the tax due on these payments. The changes make the rules fairer, minimising the potential for manipulation by some larger employers, which often give the most generous pay-offs.
The oil downturn has had an enormous effect in my constituency and in that of Kirsty Blackman. Like my hon. Friend Rachel Maclean, I am a business owner. There are already too many barriers to employment. The Bill seeks to give clarity and the amendment will add to the complexity of employment. We do not want further barriers to employment. Does my hon. Friend Ms Ghani agree that we want clarity, which will ultimately help employment and small businesses?
My hon. Friend is spot on. We want absolute clarity. As I continue with my speech, the Committee will realise that the changes in clause 5 will barely have an impact on most people in our constituencies.
The changes are not asking someone who has been made redundant to pay more tax. The first £30,000 of the termination payment remains exempt from tax as well a national insurance contributions. As a result, the changes in clause 5 will not have an impact on 85% of people who receive termination payments. If we have constituencies where 90% of businesses are SMEs, the figure will probably be even higher than 85% in our constituencies. On average, 25% receive a payment of more than £54,000, so they are not exactly the least well-off in society. Those who are not following the rules and are not manipulating the loopholes will pay no additional tax. It is simply about clarifying the fine details.
I was disappointed that Labour tabled amendment 4. The whole point of clause 5 is to close loopholes, preventing tax avoidance and ensuring that everyone pays their way. Amendment 4 will open up more wriggle room. If we accept it, what is to stop larger companies routinely reclassifying termination payments on account of injury to feelings with the sole aim of paying less tax? It is a naive amendment that would create new loopholes. The public will see this as political point-scoring by the Opposition. Not only did Labour not close loopholes when it was in power; it is trying to open new ones when it is in opposition.
The changes in clause 5 will bring in £430 million a year by 2022. They clarify and tighten the regulations, but I urge the Committee to reject all Opposition amendments to ensure that the changes are as effective as they can be. The Finance Bill is about addressing imbalances in the system and making important changes to the tax regime system to ensure that the rules do not unfairly benefit large companies. It will build on the hard work of the Government since 2010 that has seen tax payments increase by £1 billion. The tax gap, which has been mentioned so often this afternoon, has fallen to one of the lowest in the world at just 6.5%, down from 10% under Labour, so let us just stick with the facts. I welcome clause 5, which will add to that record and ensure the tax system works for everyone.
What a pleasure it is to serve under your chairmanship, Dame Rosie, and to respond to the first of what I am sure will be a series of lively and exciting debates on the Finance Bill. Before I respond to some of the more detailed points raised, including the amendments, let me remind the Committee of the overall purpose of clause 5.
The clause is designed to tighten and clarify the tax treatment of termination payments to make the rules fairer and to prevent manipulation. Our tax treatment of termination payments is one of the most generous in the world. That is something of which we can be proud and something that this clause does not change, but the current rules can also be unclear and complicated, as many hon. Members have suggested. Some payments are taxed as earnings, others are taxed only above £30,000 and others are completely exempt from income tax and national insurance contributions. Most employers use the rules as intended, but the complexity in the system leaves it open to manipulation. Indeed, a small minority of individuals and employers, particularly those with the most generous pay-offs—this is an important point—have thought to manipulate the rules by categorising large pay-offs as termination payments, rather than earnings.
My hon. Friend Ellie Reeves made the point that the tax-free amount has not been indexed for many years. Had it been indexed properly, it would now be £71,000, not £30,000. Would not that be a way of avoiding any of these difficulties, as the lump sum would be so much bigger?
This is one of the most generous thresholds in the world. In fact, there is no threshold at all in Germany and the United States of America, because none of these payments is treated as being tax-exempt.
Such categorisation means that payments qualify for the £30,000 tax exemption and an unlimited employer national insurance contributions exemption. The situation is clearly unfair for the vast majority of employees, who are unable to manipulate their payments in this way. Clause 5 makes changes to prevent such manipulation in the future, while still ensuring that the vast majority pay no income tax on their payment. The first £30,000 of all termination payments will remain exempt from tax.
Peter Dowd made a general point about the Conservative party’s treatment of workers, and I make no apologies for the way this Government have stood up for workers up and down our country. We are committed to enhancing workers’ rights. We introduced the national living wage, and we doubled fines for firms that break the rules in that respect. We appointed the first director of labour market enforcement, and we are committed, as we have constantly said, and as our Prime Minister has made clear, to protecting workers’ rights as we leave the European Union.
Nearly 85% of payments are below £30,000, so retaining the threshold will ensure that the vast majority of people going through the difficult experience of being made redundant will still pay no tax whatever. That means that the UK continues to have one of the most generous tax exemptions for termination payments, and I have mentioned Germany and the United States having no tax exemption at all.
Clause 5 tightens the tax rules for termination payments to prevent manipulation—a point made by my right hon. Friend Mr Harper in an excellent contribution. He highlighted our overall record on bringing in taxes where attempts are made to avoid tax, and I referred to the £160 billion raised since 2010. He referred to our being at the forefront of the OECD base erosion and profit shifting project, and we have also brought in the diverted profits tax to clamp down on the kind of behaviour he referred to.
Let us not lose sight of the purpose of bringing in tax, which is to raise public finances so that we can employ doctors, nurses, paramedics, police and soldiers and pay for all those great public services that all of us hold so dear. That is why I am so proud of this Government’s record on clamping down on tax avoidance more generally.
The Office of Tax Simplification has said:
“the well-advised can often end up better off than the unadvised, as they are more able to structure their employment contract (or, indeed, their termination payment) to achieve the better tax treatment.”
The hon. Member for Bootle said in this House only last month:
“If there is genuine evidence of the abuse of payments in lieu of notice, that needs to be acted on”—[Official Report,
Vol. 628, c. 206.]
It is fair to say that, while the hon. Gentleman is a very amiable fellow, he is not right about everything, but on this point he is actually very right. This clause is to deal with the very abuse about which he has previously expressed concern. We will prevent employers from categorising large pay-offs as tax-free payments, rather than earnings. Instead, employers will now be required to tax what the employee would have earned if they had worked their notice period in full. All payments in lieu of notice will now also be taxable as earnings to equalise the treatment of those with and without a contractual right to such a payment.
Finally, clause 5 clarifies that there is a total tax exemption for payments on account of injury or disability of an employee. In 2014, the Office of Tax Simplification raised the possibility of removing this exemption. It recognised that that would be a draconian approach, but it noted that interpretation is
“often a problem area for employers and their advisers.”
However, we have not pursued that approach. Instead, we have provided certainty by confirming the current position established by case law in statute. The total exemption relates to termination payments provided on account of a physical or psychiatric injury that prevents the employee from carrying on the duties of the employment, which hopefully addresses the point raised by Kirsty Blackman. Therefore, employees with evidence of an identified medical condition will pay no tax on related termination payments.
Some Members raised concerns in previous debates that the Government would be taxing compensation paid to employees where it is proven that they have been discriminated against. Once again, I am happy to reassure them. All compensation for awards for proven discrimination during work will continue to remain completely exempt from tax. There was an interesting interaction between my hon. Friend Gillian Keegan and Ellie Reeves on this point. We accept that, where there is a tribunal award in respect of injury to feelings, it is treated in exactly the same way as when an employer accepts that discrimination has actually occurred. All the clause seeks is to confirm the long-standing position that genuine compensation payments are tax exempt, while ensuring there is no loophole that can be used to reduce the tax that is owed.
Let me now turn to the amendments. As the hon. Member for Bootle set out, amendment 1 would remove the power to amend the meaning of basic pay for the purposes of calculating post-employment notice pay by regulation. When we consulted on this measure, we listened to responses that asked us to make the basic pay definition more simple. It now excludes overtime, bonuses, commission and tips. However, we introduced this power to allow the Government to act quickly and to remain flexible if there is manipulation in the future. Any amendment to the meaning of basic pay would be subject to a statutory instrument and the affirmative procedure, so the House would have to expressly approve any change to the meaning. I therefore urge the House to resist the amendment.
Amendment 2 and consequential amendment 3, also tabled by the Labour party, would remove the power to reduce the £30,000 threshold by regulation. Some Members have raised concerns during the debate that the Government intend to reduce this tax-free amount. We have no intention to do so. If we were to do so, we would, as my hon. Friend James Cleverly pointed out in his excellent speech, be required to do so by an affirmative statutory instrument. However, I repeat that we have no intention of reducing this tax-free amount. I therefore urge the House to resist the amendment.
Amendment 4 would include injured feelings within the definition of injury. As I outlined earlier, clause 5 confirms that termination payments provided on account of physical or psychiatric injury will be completely tax exempt—an important point raised by the hon. Member for Aberdeen North. However, the clause also confirms the established position that injury to feelings is not covered by this definition. The reason for this restriction is clear: without it, there would be a large loophole—as identified by my hon. Friend the Member for Braintree and my right hon. Friend the Member for Forest of Dean—allowing payments to be routinely reclassified on account of injury to feelings, and without medical evidence, simply in order for people to pay no tax. These things are hard to prove or disprove, and would be difficult for HMRC to police. However, it remains the case that payments on account of an injury to feelings, like any normal termination payment, will qualify for the £30,000 tax exemption. I therefore likewise urge the House to resist the amendment.
The Minister is concerned that some people might be exploiting a loophole, but as a result he has decided to disadvantage everybody who is subject to termination as a result of injury to feelings, rather than giving them the benefit of the doubt, which seems pretty unfair to me.
The problem is that one cannot escape the possibility that the employer and the employee, who could both gain from reduced tax, will work together to suggest that there has been an injury to feelings, even when in fact there has not been. How does one prove whether or not there has been an injury to feelings? That is why there is a loophole.
Amendment 12, tabled by the hon. Member for Aberdeen North, would require a review of how these changes will affect low-income workers. That is unnecessary because only 85% of the payments are below £30,000. As I have explained, the provisions do not affect awards for discrimination at work, for example. We have also maintained the £30,000 income tax exemption. We have considered the impact on low-income workers throughout, and we will continue to do so.
In conclusion, the Government recognise that losing a job is a challenging time, but we must remain vigilant to opportunities for the tax rules to be manipulated. That is why clause 5 sets out a fair and proportionate set of changes that will continue to protect the vast majority of employees. The first £30,000 of a termination payment will remain tax-free, as will the whole of the compensation payment for discrimination during employment. However, where there were opportunities for manipulation, the loopholes must be closed, and they now will be. I therefore urge hon. Members to reject the amendments and agree to clause 5 standing part of the Bill.
The Government seem to have taken a scattergun rather than forensic approach to this matter, affecting everyone regardless of the circumstances. Time after time they go for easy targets. If they have no intention of revising thresholds downwards, what is the point? Why are they wasting the Committee’s time? The key point is whether people who have been made redundant should have further worries about their financial future vis-à-vis redundancy, and that sets a hare running, whether the Government like it or not.
As for the consultation, the bottom line is that it was at best inconclusive. Many non-vested respondents suggested that it would be appropriate to uprate the threshold, rather than reduce it—I do not necessarily agree, but that was the case—but there is absolutely no evidence of that, which in the current climate will unnerve many people. Therefore, once again, at the last minute, I ask the Minister to withdraw this iniquitous proposal.
Question put, That the amendment be made.
The House divided:
Ayes 269, Noes 311.
Question accordingly negatived.
Amendment proposed: 2, page 14, line 15, leave out “different” and insert “higher”.—(Peter Dowd.)
This amendment removes the power for the Treasury to reduce the £30,000 threshold in connection with the taxation of termination payments by regulations.
Question put, That the amendment be made.
The House divided:
Ayes 272, Noes 312.
Question accordingly negatived.
More than two hours having elapsed since the commencement of proceedings, the proceedings were interrupted (Programme Order,
The Chair put forthwith the Questions necessary for the disposal of the business to be concluded at that time (
Amendment proposed: 4, in clause 5, page 14, leave out lines 27 and 28 and insert—
‘(2) “Injury” in subsection (1) includes—
(a) psychiatric injury, and
(b) injured feelings.””—(Peter Dowd.)
This amendment explicitly includes (rather than excludes) injured feelings within the definition of “injury” for the purposes of payments which are excluded from the provisions of Chapter 3 of Part 6 of the Income Tax (Earnings and Pensions) Act 2003 (payments and benefits on termination of employment).
Question put, That the amendment be made.
The House divided:
Ayes 281, Noes 312.