I beg to move amendment 1, 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.
With this it will be convenient to discuss the following:
Amendment 2, page 14, leave out lines 20 to 23.
This amendment is consequential upon Amendment 1.
Amendment 3, 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).
Labour’s amendments on redundancy payments focus: first, on ensuring that there is proper democratic scrutiny of any attempt to reduce the £30,000 threshold for the taxation of termination payments, rather than the power to do so residing merely in regulations; and secondly, on ensuring that injured feelings are included in, rather than removed from, the definition of injury for the purpose of tax-excluded payments.
It is frustrating to be back in the Chamber to debate these issues again, with, again, no indication from the Government of any change in their position. The discussions in the Bill’s previous stages, including in Committee, detailed many ways in which provisions against aggressive tax avoidance and evasion could be tightened. Yet, rather than heed those reasonable suggestions for the removal of loopholes, the Government seem keen to target those made redundant as a potential source of revenue.
The changes in clause 5 are occurring in the context of the Government being determined to rush headlong into reducing corporation tax rates, despite the Institute for Fiscal Studies and others being clear that there is no automatic link between lowering rates and increasing revenue. In fact, I would hazard to suggest that in this case the opposite might be true. The Government’s previous cuts to corporation tax have manifestly not increased business investment.
The changes in the clause are also occurring when, as we have discussed, many loopholes have been retained for non-doms and, furthermore, while new measures for corporations exempt some of those firms that appear to have the most labyrinthine business arrangements, designed for tax purposes—not least some public infrastructure companies.
One might, then, wonder exactly why the Government have decided to stick to their guns and focus tax increases on those who are made redundant, which is effectively the idea that the provisions in the clause promote. We have been told by the Minister repeatedly that there are no immediate plans to reduce the threshold beyond which termination payments are taxable. If that is the case, why create the power to reduce it?
If I may finish, I will be more than happy to take an intervention.
To use an appropriate analogy on Halloween, I would not have bought a pumpkin last weekend if I expected it to sit on the shelf when I brought it home. I would have bought it because I expected to carve it, albeit not very artistically, for my children. I would not purchase something if I did not think I was going to use it, so why are we spending valuable parliamentary time debating a measure that will never be used?
I simply wish to point out that, as I think the hon. Lady will know, the statutory instrument on changing the £30,000 threshold would have to be passed by the House under the affirmative procedure. It would be an affirmative SI so it would have to be voted on by the House.
The Minister’s point exemplifies exactly what I anticipated might happen. I was just about to say that the second line of defence from the Government, after proclaiming that they would abstain from using the powers that they are so keen to give themselves, is that, in any case, they would have to bring any change to the House for a vote. Indeed, that is what has occurred just now. We are all aware of the difference between passing a measure through the ordinary legislative procedure, with the amount of scrutiny that that receives, and passing a measure through the type of approach that the Minister has mentioned just now. I regret that this appears to be part of a piece, with a broader trend to exempt new policies from the parliamentary scrutiny that they deserve, and which the British public have rightly come to expect from its elected representatives.
Arrangements for those facing redundancy are not, and should not be, a matter of purely technocratic interest. The Government’s failure to raise the tax-free threshold for statutory redundancy pay has meant that it has already lost much of its original real value. That perhaps explains why, when the Government consulted on this issue, there was no conclusive evidence in the consultation either of widespread abuse in this area or of a clamour for a reduction in the threshold.
We are also asking the Government to reconsider their plans on injury to feelings payments as part of termination payments.
My hon. Friend is making an excellent speech. Does she agree that the watering down of injury to feelings compensation is just another part of this Government’s plans to undermine and erode workers’ rights?
Some 85% of payments under the £30,000 threshold are not touched by these changes. Where there is the potential for manipulation of amounts above £30,000, does the hon. Lady not agree that that potential tax avoidance loophole should be closed?
I am grateful to the hon. Lady for her comments, but I must tell her that the consultation on the measure did not reveal widespread evidence of such manipulation of the rules. It was quite clear in that regard. Indeed, when advice was sought about appropriate measures in this area in the future, a range of different views came from stakeholders and consultees about the way forward. She is right to say that we are not talking about these changes affecting everyone who is made redundant. They apply to a minority of people, but it could be people who have had a very difficult time and who really rely on that redundancy payment for sustaining some kind of quality of life into the future. It is absolutely important that we have a proper debate about, and parliamentary scrutiny of, any changes, which is exactly what our amendments are intended to do.
I was talking about the new plans for injury to feelings payments as part of termination payments. I noted that there were many claims from the Government on this topic on First and Second Readings of the Bill, not least that payments allotted via tribunals would not be affected by these measures, but it is not the case that employment tribunals can decide whether payments are subject to tax or otherwise. That is not within their power. Yes, in some cases, some types of employment tribunal award are “grossed up” to take account of the tax that will be due, but that is very different from deciding whether an award is in and of itself taxable, which seemed to be implied in some of the previous debates on this issue.
In addition, the measures proposed in the Bill would cover the far more common payments made directly by an employer to settle discrimination complaints as part of a redundancy or other dismissal.
The hon. Lady asserts that those awards made by tribunals are not necessarily non-taxable, but those made for discrimination, for example, are completely non-taxable.
If we are talking about payments made for discrimination in the context of a redundancy payment, yes, they are. That is our exact point, which is why we are discussing this matter about injury to feelings. We have had some comments in this House which appear to misunderstand the nature of injury to feelings payments. In some cases, these have been trivialised, almost suggesting that these payments are made because an employees’ nose has been put out of joint rather than something potentially more serious. But “injury to feelings” is a substantive legal category. Where there is genuine evidence of misuse of this category, that should be stamped out, but we have not been provided with such evidence as part of our deliberations on the Bill. Injury to feelings is related directly to discrimination experienced by a person because of their characteristics as an individual—their age, gender, sexual orientation, disability status or ethnicity. This should be taken seriously and it should not be a focus for penalising individuals, as is the case under these proposals. Again, as my hon. Friend suggested, this appears to be part of a piece, with more general measures watering down the protection to individuals suffering from discrimination at work, whether or not they take that discrimination to a tribunal. Clearly, tribunal fees have been struck down because of their discriminatory impact. Now measures are popping up that water down individuals’ protections in other ways.
Just so that our constituents appreciate what is happening in the broader context, does the hon. Lady welcome the announcement that was made in September by the presidents of the employment tribunals of England and Wales that, in each of the three bands for injury to feelings, the maximum award is rising?
Again, I would be very careful to separate out tribunal awards that are made in the context of discrimination at work, which is not what we are talking about, from awards that might be in relation to redundancy, which is what we are focused on. In relation to discrimination generally, there has been a long-running discussion about what the rates should be for different bands. If one looks at the average award, or, even better, the median award, we are not talking about massive sums of money. It is very important that the public receive that message. For example, someone who has experienced discrimination on the basis of sexual orientation, is generally receiving much less than £10,000—I regret that I cannot recall the exact figure. It is very important that we do not give the impression that people are somehow holding companies to ransom in this area. Indeed, that is perhaps underlying some of the change that has been forced on the Government through the court decision that we should not have tribunal fees, because these tribunals are being used not vexatiously, but purposely in order for people to protect their rights at work.
In conclusion, Labour’s message on this Finance Bill is clear. We felt that it offered an opportunity to reboot our economy, to deal with our massive productivity challenges and our cost of living crisis, and to shore up public finances by sealing loopholes for the very best-off people and biggest multinational companies. Instead, we have a series of missed opportunities and measures focused on soft targets, rather than on those who can afford expensive accountants and engage in complex schemes to avoid tax.
The House will be delighted to know that I do not intend to speak for very long. We have discussed this matter a number of times before. It is important to note that this measure is a revenue-raising one; the aim is to make £430 million for the Government. However we paint it, these workers are facing redundancy. They are receiving the pay-out at the same time as losing their jobs, so they are vulnerable by their very nature, and are having to think carefully and reassess how they go forward. This additional money will go to the Government, rather than to these workers who are being made redundant. For that reason, the Scottish National party will support the Labour party’s calls, particularly those regarding termination payments.
I am not sure that that was a redundancy payment that would be counted in this category. I do not know the tax status of the gentleman, or how much tax he would have paid on that or any other payments he received. It does not appear as though the Government are looking to pursue such people. It seems that they are looking to make tax changes.
That was before my time in this House. I am not sure what power Parliament would have had regarding the payments. I obviously do not think that somebody who has demonstrably not behaved very well should get huge sums of money as a result.
The SNP has been clear about our position. We feel that the measure does not offer the protection we would like for workers who are being made redundant. The Government understand that this is our position, and we ask them to make moves on the matter.
I am grateful for the opportunity to speak once again in the debate about the taxation of termination payments.
Before entering this place, I was an employment rights lawyer for more than decade, so this issue is very important to me. I have represented employees who had been dismissed and discriminated against day in, day out. Very often, this would involve negotiating termination packages or settlement agreements for them. The Bill seems to make it harder for people to get proper compensation for their ill treatment. Having seen at first hand the devastating effect that dismissal and discrimination can have on someone’s life, I am deeply concerned that the Bill seeks to narrow the scope of termination payments.
An employee can currently receive up to £30,000 in tax-free compensation as part of a settlement package. The figure already excludes from the tax-free amount things that would generally be considered as pay, such as accrued but untaken holiday pay, any unpaid wages or bonuses due, and pay in lieu of notice that is provided for in the contract of employment. However, sums for future loss of earnings or for injury to feelings are generally not subject to tax, provided they do not exceed £30,000.
Far from this being about tax avoidance, it is about properly compensating people who have been wrongly treated rather than treating them as a means to top up the coffers. Despite this, the Government wants to give themselves the power to decrease the tax-free amount that can be paid to an employee upon termination. Under the proposals, the threshold could be reduced using secondary legislation, without the full and proper scrutiny of parliament. The Minister says that the Government have no intention to reduce the threshold.
The previous Conservative Government changed the redundancy legislation. The purpose of redundancy money is to tide people over until they can get another job, so it should not be taxed at all.
We know that redundancy payments and the way in which they are capped means that they often do not adequately compensate people after they have been dismissed from work. The fact that the Government want to give themselves the power to decrease the threshold prompts a question: why do they want to do it if they do not want to exercise that power? It seems that they would treat those who have suffered wrong treatment in the workplace as a source of revenue rather than as victims worthy of support. This is all the more important when taking into account the fact that the tax-free threshold has not increased since 1988.
Even given the fact that, as the hon. Lady said, the threshold has not increased for some time, it still covers 85% of payments made in this country. Surely that is an acceptable amount.
The amount should reflect someone’s loss of earnings, their ability to get back on their feet and the injury they have suffered after redundancy, so it is not good enough to tell 15% of these people, “We don’t care about you.”
If the threshold had risen in line with prices, it would be £71,000 today. Surely the Government should be going after the billions hidden in tax havens and the corporations that avoid paying tax, as well as properly resourcing HMRC, rather than going after those who have been treated badly at work. Being dismissed or discriminated against at work can have a catastrophic effect on someone’s life, so the Government should not be attacking those who might be at their most vulnerable.
I will make some progress.
It seems curious that the Government want to make it a priority to enshrine it in statute that compensation for injury to feelings awards connected to the termination of employment should be taxed as earnings. This is yet another example of how the Government, rather than going after the big corporations that are avoiding tax, would penalise those who have been unlawfully discriminated against at work.
When we last debated the Bill in Committee on
Under these proposals, however, such awards would be taxed as a matter of routine when the £30,000 threshold is exceeded. Not only does that seem inherently unfair to victims of discrimination, but in practical terms it will lead to all sorts of litigation and drafting issues about whether an award is in connection with the termination or a previous act of discrimination unconnected to the termination. For example, a woman is subjected to sexual harassment at work over a sustained period. She subsequently tells her employer she is pregnant and is dismissed as a result. She pursues a claim for sexual harassment, unfair dismissal and maternity discrimination. She is awarded £30,000 for loss of earnings, which takes her up to the tax-free threshold. She is awarded another £10,000 for injury to feelings. Who determines what part of the award is for the harassment, which is unconnected to the termination of her employment and therefore not taxable, and what part is in relation to the pregnancy-related dismissal and therefore taxable?
Moreover, because personal injury claims will be exempt from tax but injury to feelings will not be, we are likely to see more employment tribunal claims pleading personal injury—for example, psychiatric damage—which will inevitably lead to complex medical evidence and longer hearings. With strains already on the employment tribunal system and on HMRC, that is surely not the route we should be going down. Or is this just the start of a slippery slope, with the Government ultimately wanting to tax all injury to feelings awards and all personal injury awards?
For those reasons, I urge the Government to accept our amendments and to go after the real tax avoiders, not hard-working individuals who have been treated unlawfully at work.
Following our vigorous and constructive debate during the Committee of the whole House last month, I welcome the opportunity to reiterate the importance of the changes we are making to the taxation of termination payments today. In doing so, I thank the hon. Members for Oxford East (Anneliese Dodds), for Lewisham West and Penge (Ellie Reeves) and for Aberdeen North (Kirsty Blackman) and acknowledge their contributions.
Before I respond to some of the detailed points raised, let me begin by briefly reiterating the objectives of the changes we are making. As I have outlined previously, the current rules around the taxation of termination payments can be unclear and complicated. Unfortunately, this complexity has led to a small minority of individuals and employers—particularly those with the most generous pay-offs—seeking to manipulate the rules to avoid paying the tax that is owed. They do so by characterising large pay-offs as termination payments rather than earnings, meaning that they qualify for the £30,000 tax exemption and an unlimited employee national insurance contributions exemption. As Members on both sides of the House have agreed, this situation is clearly unfair for the vast majority of employees, who are unable to manipulate their payments in this way. The purpose of this clause is to tighten and clarify the tax treatment of termination payments to make the rules fairer and prevent manipulation.
As we have heard, amendments 1 and 2 would remove the power to reduce the £30,000 tax exemption threshold for termination payments by regulations. As I have said several times in this House, the Government have no intention of reducing this tax-free amount, despite the best efforts of Labour Members to suggest otherwise. Let me assure the House again: any reduction in the threshold would be subject to a statutory instrument and the affirmative procedure, so the House would have to approve any such proposal. The House rejected this amendment in Committee of the whole House, and I urge it to do so again.
Amendment 3 would exempt from taxation all termination payments for injured feelings. As the House heard earlier this month, this amendment would present further opportunities for those seeking to manipulate the system by opening a large loophole for payments to be routinely reclassified on account of an injury to feelings, without any medical evidence, simply in order to pay no tax. This is hard to prove or disprove, and it would be very difficult for HMRC to regulate. In any case, payments for injured feelings will of course continue to qualify for the £30,000 tax exemption like any other normal termination payment. The House wisely rejected this amendment earlier this month, and I urge it to do so again.
The changes being made by clause 5 are a fair and proportionate way to close a loophole in the rules that has unfortunately been open to manipulation in the past. The Government have repeatedly shown that many of the concerns raised by Labour Members are unfounded —and, frankly, give the appearance, at least, of misconstruing an important tax avoidance measure as some kind of attack on those losing their jobs. This politicking is unworthy of the Opposition. I have heard no new arguments or evidence today to convince me of the need to reconsider this clause. I therefore urge the House to reject the amendment.
Question put, That the amendment be made.
The House divided:
Ayes 274, Noes 308.