Examination of Witnesses

National Insurance Contributions (Termination Awards and Sporting Testimonials) Bill – in a Public Bill Committee at 9:28 am on 14th May 2019.

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Bill Dodwell and Colin Ben-Nathan gave evidence.

Photo of Siobhain McDonagh Siobhain McDonagh Labour, Mitcham and Morden 10:25 am, 14th May 2019

We will now hear oral evidence from the Office of Tax Simplification and the Chartered Institute of Taxation. We have until 11.25 am for this session. Will the witnesses please introduce themselves?

Bill Dodwell:

Hello. I am Bill Dodwell, tax director of the Office of Tax Simplification. I was appointed to that role in January this year.

Colin Ben-Nathan:

I am Colin Ben-Nathan. I am chairman of the employment taxes sub-committee of the Chartered Institute of Taxation.

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury

Q I will ask the same question that I asked the Minister and his colleagues. Angela Knight, the then chair of OTS, said in November 2016:

“Our independent review has demonstrated...that some will gain and others will lose from any change.”

Can you tell us who are the losers and the winners from this particular change?

Bill Dodwell:

We do not have data on the winners and losers of putting national insurance on termination payments. That report covered the whole issue of aligning national insurance contributions with income tax in relation to employment income. That meant making sure that the base was the same—that the amounts you charge tax or national insurance on are identical. There are significant differences at present. Secondly, it meant putting national insurance contributions on to an annual cumulative basis, like income tax. That is different from the current system of national insurance, which is charged on a pay period by pay period point, with one exception for company directors, who otherwise had an avoidance opportunity that is closed by putting it on an aggregate basis.

The evidence that the OTS gathered for those reports in March 2016 and November 2016 was that there would be something like 7.5 million winners—people paying less as a result. On average, they would get about £170 a year more, but obviously that is an average. There would then be about 5.5 million losers—people paying more—and their average payment would be about £260 a year. You will be aware that the Chancellor at the time announced that that would not be moving ahead.

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury

Q Given that you made these suggestions and the Government have taken them up, can you give us some examples of the confusion employers had with the previous tax and national insurance treatment of termination awards?

Bill Dodwell:

The March 2016 report, which specifically refers to it, says:

“Often employers apply NICs to termination payments when they are not required to, and end up making NICs overpayments.”

I do not have access to exactly how much. The OTS does not have the same level of analysis that HMRC does, but it did pick up evidence of that.

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury

Q How substantial was that evidence?

Bill Dodwell:

I cannot give you an underlying view. Much of it is provided by people who give evidence to the OTS on a voluntary basis. We seek evidence from as many people as we can, but it is not the same as doing a complete population analysis, which HMRC can do. We cannot do that.

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury

Q Would you characterise the introduction of a new class 1A NIC charge as an anti-avoidance measure, or as a measure designed to simplify the tax code and raise revenue?

Bill Dodwell:

It is very hard to give you a clear answer. I think it is both. I was listening to the evidence from the previous session, and there were clearly some people who were steering payments in a particular way to avoid paying national insurance. The general OTS view is that you make it easier for everybody to understand the system if both employers and employees understand it better, and if the tax and national insurance base is the same. That is not just on income, such as termination payments; it is also on expenses.

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury

Q I may come back to that at some point, if I may. Can I turn to the Chartered Institute for Taxation? Do you have an opinion or any observation on the time it has taken the Government to bring forward these proposals for a new class 1A NIC charge? The original announcement was made in 2016.

Colin Ben-Nathan:

Yes. As has been said, there is the argument for levelling the playing field on income tax and national insurance contributions. I am sure we will come on to discuss how that is being done. The genesis of the changes that we are now talking about—the national insurance changes—was in an OTS report a few years ago, which was all about simplification of the system. There is an important point on simplification. There is also a point on the amount of revenue that is raised from any particular measure and how that measure is introduced. We know that—in relation to this particular measure, because we have been given the figures—there is, in aggregate, an amount of £200-odd million, which is being raised by the imposition of class 1A national insurance. We will talk about how that is being done.

This measure was part of a much wider set of proposals that ultimately has not been taken forward. The income tax changes that were made covered not just this proposal in relation to the question of what the level of the £30,000 limit might be, but foreign service relief and pay in lieu of notice. That was another area that was legislated but not taken forward in relation to some of the earlier proposals that were looked at. In fact, we are looking at a particular proposal here, which is the end point for levelling the playing field and the £30,000 limit.

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury

Q Does that fit in with the broader proposal? It was referred to in the 2016 press release as being just one step forward in this area. Do you feel that we have ground to a halt at this stage?

Colin Ben-Nathan:

As we said at the time, we thought the proposals that were put forward by the Office of Tax Simplification had a lot of merit in trying to simplify a very difficult area, which has occupied the courts, employers, employees and HMRC for many years. Proposals were put forward and consulted on at the time, and we responded to that consultation. Views varied, but ultimately the Government decided that they did not wish to take forward a broad simplification platform and focused on the points that I mentioned previously. Obviously, that was a Government decision. Simplification can still be effected if there is the will and consensus on how to do it.

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury

Q Yes, and that is the sense that I get. I am not asking you to confirm my sense, but I sense that it has got thus far and no further at this stage.

Part of the Government’s rationale for the introduction of a new class 1A NIC charge on the termination of payments was that it is designed to address employees’ current confusion about national insurance and tax treatment of those awards. In your assessment, does this legislation adequately address that confusion, or is there a danger of perhaps complicating it in the light of the fact that it has not gone further, à la the previous answer to my question?

Colin Ben-Nathan:

I think we would accept that this is a difficult area, but we have prepared evidence for the Committee that you will have seen. We have noted that the introduction of class 1A in relation to cash payments, which will typically occur in relation to terminations—not always, because there will be benefits in kind, but it is typically cash—is an unusual move. We understand the Government’s rationale for wishing to impose a charge in the first instance in relation to employers only. That is what class 1A national insurance does. Class 1 national insurance, apart from one exception, which we note, generally imposes national insurance both on employees and employers. There is an exception, and it relates to those above retirement age, where secondary, or employer national insurance contributions are paid, but primary, or employee contributions are not paid. That was something that we pointed out in our note. You then get the position where you have to ask how easily employers are going to relate to class 1A being imposed in relation to a cash payment—and the way in which it is being imposed. Typically, class 1A will apply to benefits in kind, which are made during the year, though the actual contribution itself is paid after the end of the year, following a submission on form P11D(b), and so on. There will have to be a communication exercise in relation to employers now having to apply class 1A during the year—that is the point that we make about this particular measure being unusual.

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury

Q I am glad that you have talked about how unusual it is, because that is one of the questions I asked, which you have answered—so that is two for the price of one. An additional justification given by the Government for wider reform of the tax and national insurance treatment of termination awards has been that a small group of well-advised employers has abused the current loophole, allowing them to avoid paying additional tax and NICs. Without breaches of confidentiality, of course, have you ever come across instances of that type of avoidance in your professional life?

Colin Ben-Nathan:

I would say that, like many areas of the tax code these days, it is very complicated. You have got a varying series of provisions in relation to contractual earnings, termination payments, retirement benefits, restrictive covenants; there is a whole tapestry of legislation here about which it is very easy to get confused. There is one thing in terms of manipulation of the system, but there is another simply in terms of understanding what the rules are. Typically, we find employers wanting to take advice, to make sure that they get things right. The position at the moment is that we have a code. Section 403 was mentioned: it talks about termination payments that are non-contractual. That is the provision we have, and on redundancy payments as well, where there is a £30,000 exemption. That is specifically there: it has not been changed for a bit, as was said—it was the late 1980s—but it is there for a purpose. Employers will typically want to know whether they are within that exemption or outside it. It is quite important, too, because as well as the £30,000 exemption that was mentioned, there is disability, injury and so on. That particular part of the code is really important. Whether I would go so far as to say that employers were manipulating things, I don’t know, but it is important that employers understand where they are. Overall, our view—again, it goes right back to 2015, when the Office of Tax Simplification report stated that there was an opportunity to really simplify things. That is the way that I would answer the question. I am not sure about manipulation, but I would say that there is a lot of confusion.

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury

Q I have one more question for the Office of Tax Simplification. Out of the 1,200 tax reliefs that we have—this is not directly linked, but would you consider this to be a low-hanging fruit?

Bill Dodwell:

Yes. This is a pretty simple, fairly restricted issue. The evidence given by the Minister shows the small number of people that this affects.

Photo of Paul Scully Paul Scully Chair, International Development Sub-Committee on the Work of the Independent Commission for Aid Impact

On the two thresholds of £30,000 for termination payments and £100,000 for testimonials, are they at the right level, or do you have any comments about where those sit?Q

Bill Dodwell:

I do not think that we at the OTS have a specific view on those levels, no.

Colin Ben-Nathan:

It has been commented upon that the £30,000 limit was last increased in the late 1980s and has not been increased since. We get back to the point of whether a measure is revenue-raising or revenue-neutral. One of the points that we raised previously on feedback is that, and Bill will talk for the OTS, if there was going to be an overall simplification—which is what we were looking at—the sense was that it may be revenue-neutral. At the moment the position is that revenue is being raised, but the actual threshold of £30,000 remains static. It will now apply for the purposes of both income tax and class 1A national insurance. Where relief should sit is, of course, a matter of debate given the pressures on the public Exchequer, but the comment is that it is overall revenue-raising.

Photo of Kirsty Blackman Kirsty Blackman Shadow SNP Spokesperson (Economy), SNP Deputy Leader

Q I was going to ask Mr Ben-Nathan about the collection mechanism, but you have answered that. Do you share my slight concern that employers who currently do not use any benefits in kind, so do not have any liability for class 1A, will potentially be brought into liability by this change?

Colin Ben-Nathan:

It is true that if they do not deal with benefits in kind, if there is a termination point and it falls within the special rules and is above £30,000, class 1A national insurance from next year will be payable. That is the way the Bill is presented.

Photo of Kirsty Blackman Kirsty Blackman Shadow SNP Spokesperson (Economy), SNP Deputy Leader

Q My second question is around the different language used in the two parts of the Bill. I raised this issue earlier in questions to the Minister. Will you explain more about your concerns or queries around this?

Colin Ben-Nathan:

In relation to the termination payment part of the Bill, we have a cross-reference back to the taxing section that refers to the £30,000 limit and so forth. That seems pretty clear to us in terms of what should and should not be subject to class 1A national insurance. When we look at sporting testimonials, it is not so clear because we are effectively saying that the amount of general earnings should be subject to class 1A national insurance. The question therefore is: is it all the general earnings that are brought in by section 226E, which is effectively everything that is coming in, or is it those earnings, less the £100,000 reflected in section 306B, which is the exempting section? It is simply a question for the draftsmen to clarify that we have actually got that right. I cannot believe it has not been thought about, but it did occur to us in looking at the Bill.

Photo of Kirsty Blackman Kirsty Blackman Shadow SNP Spokesperson (Economy), SNP Deputy Leader

Q I have a couple of questions for Mr Dodwell. On the implementation of these changes, I am not sure how much evidence or guidance the Office of Tax Simplification provides to Government. In referring to equality of treatment between NIC liability and tax liability, did you suggest that the way to sort this out in this case would be for the Government to use class 1A contributions?

Bill Dodwell:

No. All our reports are on public record and published on our website. That report did not specifically suggest class 1A.

Photo of Kirsty Blackman Kirsty Blackman Shadow SNP Spokesperson (Economy), SNP Deputy Leader

Q Do you think that using class 1A contributions liability to make this change will be simpler for employers, or might it make it more complex for them?

Bill Dodwell:

I think arguably it makes it more complex. But it has been done specifically to preserve an employee relief. That is the logic. If we had no reliefs at all, it would be a simpler system, but reliefs are there for a purpose. We do not just want to argue purely for the simplest system always.

Photo of Kirsty Blackman Kirsty Blackman Shadow SNP Spokesperson (Economy), SNP Deputy Leader

Q I have one last question for both of you. I have been raising issues about road maps and where the Government intend to get with anything that they are doing, and how they intend to get there. I am concerned that in many cases, there does not seem to be a grand plan. In relation to tax simplification, generally and also specifically around income tax and national insurance changes, are both of you comfortable that you know where the Government are looking to get to and how they are looking to get there? Or are you not comfortable about that?

Bill Dodwell:

I do not think there is evidence that the current Government have a plan to align the income tax and national insurance base completely. There is no evidence to support that. There are revenue-raising and revenue-losing parts of all that, so I am sure that the Government will be thinking about that.

We have also talked about trying to make the collection and enforcement mechanisms simpler to understand, at least on the national insurance side. We understand that HMRC is doing some work on that. Again, it is not a simple system, because national insurance is not the same as income tax. The two came from a different place; maybe we should argue that they should be one, but they are clearly not identical at all. We have to preserve those differences unless we go for a full-blown merger.

Colin Ben-Nathan:

Whether it is this Government or any Government, there is a need to look not just at national insurance and income tax, but—speaking as chairman of the employment taxes sub-committee—at the whole question of employment, self-employment and the gig economy. Matthew Taylor’s work and the Government’s response are ongoing and very important. We need a road map—I think that would help us. There have been attempts to move towards some sort of coalescence, for example around national insurance, employees and employers. It is a difficult area and there are strong views one way and the other, but further moves in that direction would be really helpful, because the gig economy is here and we have to deal with it.

We have to look at these questions; I think that the Government are looking at that. The sooner we can do that, the better, but obviously other matters are occupying us at the moment.

Bill Dodwell:

The OTS is about to publish a report—on Thursday, I hope, subject to everything going well—that I think will allude to some of that difference. The biggest financial part of the equation is, of course, employers’ national insurance, which is levied on employment but clearly does not apply where there is self-employment or qualifying freelance work. That is such a major and material issue that going from zero to a lot of money would not—for any Chancellor, I am sure—be a simple solution.

Photo of Bill Grant Bill Grant Conservative, Ayr, Carrick and Cumnock

Q In relation to termination awards, the Chartered Institute of Taxation has made some negative comments about collection methodology and timing of collection. It suggests that there is an administrative burden and that it is quite complex—colleagues have touched on some of that. Is the institute justified in its concerns? Can they be overcome by information or guidance from you to employers?

Colin Ben-Nathan:

We, as the Chartered Institute of Taxation, make points and the Government then decide what the policy will be. We have the Bill in front of us; I am sure that guidance will be issued, and I hope it is helpful. It is useful to have examples in guidance—we might come on to that in relation to other matters as well. Yes, ultimately employers will follow the rules as set down. We simply make the point that it is unusual for a class 1A charge to be imposed under real-time information, because normally that is not the case; the charge is paid after the end of the year.

Photo of Bill Grant Bill Grant Conservative, Ayr, Carrick and Cumnock

Q One supplementary question: will that guidance be timeously delivered to the employers or those responsible, rather than as an afterthought?

Colin Ben-Nathan:

It is very much for HMRC to answer on the timing. All I would say is that if guidance is prepared in draft, the Chartered Institute of Taxation will be very happy to comment on it.

Photo of Anneliese Dodds Anneliese Dodds Shadow Minister (Treasury)

Q I am grateful to our experts for their very helpful testimony. I am sorry to return to testimonials and the concept of “customary”, but our previous witnesses suggested that there was a body of case law around it and that the concept was well understood. However, I understand that there is some concern about lack of clarity in the scope of how “customary” is defined—whether it relates to a particular team and its previous practice, or to sport as a whole. I note that there have been some high-profile football players recently who have not received testimonials when one might have been expected. I wonder whether, on your understanding, the concept is sufficiently fleshed out, or whether additional guidance might be useful.

Colin Ben-Nathan:

Again, I am happy to comment from the CIOT point of view. That is really difficult area, because one is effectively trying to look at whether something is either contractual or quasi-contractual by way of customary expectation, and is taxable because it is earned from employment, or if it is not such, and is to do with personal esteem and so on. All those issues were raised in Reed v. Seymour in 1927, which was mentioned.

That is a difficult area and in our evidence, we made the point that if we do not legislate along those lines, it would be really helpful—I am not suggesting that it would be easy, but that is why we need to do it—to have at least some examples of what HMRC believes is and is not customary. For example, if something regularly happens to somebody and they know and expect it to happen after they have served 10 years, maybe that is customary, but what if it is not 10 years? What if it is eight years, seven years or five years? We make that point because we think it is very difficult when it comes down to it.

Photo of Anneliese Dodds Anneliese Dodds Shadow Minister (Treasury)

Q Thank you—that is very helpful. I was intrigued by comments in some of the testimony provided to us about there being an analogy with the treatment of tips in restaurants. They might be viewed, to some extent, as a discretionary payment made by those who have enjoyed a service, and fans do the same thing when they buy a ticket.

The big difference is that there are many costs associated with a testimonial, and if those costs end up being much bigger than expected, they can almost swallow up all the revenue that comes from the testimonial. I wonder, on the first part of the equation—before one gets to the issue of tipping into £100 k—whether you feel that the allocation of costs is sufficiently watertight. The different players set the fee for which they will play for their teams. Is there sufficient clarity in that area?

Colin Ben-Nathan:

Obviously, testimonials work in different ways. Essentially, one is looking at the relationship between the testimonial committee and the individual who would receive the money in the first instance, and at the nature of the amount of money at the gross point and whether or not it is earnings. Yes, you are right; there will be costs attached to that. The Bill really speaks to the gross amount that actually comes through to the individual.

The point about tips is interesting. It has been noted that an individual who receives an amount in relation to the position on income tax can use payroll giving, or possibly gift aid, to ensure that the amount effectively goes to a charity with no tax leakage. The interesting thing about national insurance is that is not the case. There is a point there, particularly about the amounts that go to charity.

Bill Dodwell:

We covered the difference between gift aid and give-as-you-earn in our March 2016 report. We did not recommend that it was a high-profile case to try to resolve. There is essentially no national insurance saving for gift aid. Gift aid is something like £4 billion or £5 billion a year, whereas payroll giving is something like £130 million, so they differ by a significant order of magnitude. Obviously, gift aid does not just come out of earnings, but can come out of broader income.

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury

Q On the argument about what is customary, let us say that a footballer starts with club A when they are 16, 17 or 18, moves on to another club when they are 21 or 22, where they stay until they are 26 or 27, before moving on to another club. Now, when they are about 32 or 33, they might have a testimonial—people used to be much older when they had them. Testimonials might not be customary in a particular club, but are they not customary for players in the sporting world, whoever they are? It seems to me to be fairly straightforward and simple. Clearly, the expectation that is on the clubs is the expectation from the sport and the history going back—way beyond the 1927 judgment, in fact, to the end of the previous century. That was when testimonials were introduced, because the money players used to get was pretty abysmal.

Colin Ben-Nathan:

Yes. I think we also need to remember that the National Insurance Bill we are looking at does not use the word “customary” or talk about “normal practice”. It is simply talking about whether something is general earnings in the context of the income tax legislation. What we are really trying to work out is whether something that is received is received in the course of an employment, in relation to an employment, by virtue of an employment or all the glosses on the words and the judgments we have had over the years, or whether it is outside that and effectively relates to personal esteem, qualities and so forth. That is a really difficult line here.

In some ways, the income tax legislation is trying to draw a line and say, “In principle, we’re going to tax everything, whatever it is, if it’s not already taxed.” The first thing that will happen is that they will tax it; the second thing is that there will be an exemption of £100,000, but the exemption will apply only to that which is not ordinarily taxed. We have a question where some sort of guidance, comment or examples would be helpful, for all the reasons that you and others have expressed.

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury

Q In relation to the point you made about national insurance contributions, one of the questions asked earlier, which you may have heard, was about the loss—or whatever phrase we want to use—to the charity sector. Do you accept, do you think or do you believe that there will be a loss to the charity sector as a result of this legislation?

Colin Ben-Nathan:

I have not done the numbers. I think we were trying to get to some of the numbers before in relation to payments that would be above £100,000 in circumstances where a donation was envisaged to be given to charity. Clearly, in that context, there will be a class 1A national insurance charge and therefore there will be an amount going to the Exchequer rather than necessarily in full through to the charity. The amounts mentioned are negligible, but in principle—in theory—one would say there is a measure of loss.

Bill Dodwell:

We would hope that there would be good HMRC guidance, which would make the point that the testimonial committee should register for payroll giving and hand the money over that way. Then, as the Minister said, there would be no loss whatsoever. However, that is administration, so the importance of good, straightforward HMRC guidance is to the fore here.

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury

Q Do you think it adds a layer, given that a testimonial committee would have to register? Do you acknowledge that there is an extra layer—I do not like to use the word bureaucracy, but another layer—on top of what those testimonial committees already have to do?

Colin Ben-Nathan:

Yes, of course, if any additional registration is required.

Photo of Siobhain McDonagh Siobhain McDonagh Labour, Mitcham and Morden

Unless I have missed anybody, and I hope I have not, that brings us to the end our oral evidence session for this Bill. I thank the witnesses for giving their evidence to the Committee.

The Committee will meet again at 2 pm to begin our line-by-line consideration of the Bill. I point out to members of the Committee that that will not be here in the Boothroyd Room, but in Committee Room 12.

Ordered, That further consideration be now adjourned. —(Amanda Milling.)

Adjourned till this day at Two o’clock.