With this it will be convenient to discuss the following:
Clause 4 stand part.
Amendment 2, in clause 5, page 5, line 39, at end insert—
“(3A) No regulations may be made under subsection (3) to bring section 3 or 4 into force until the Secretary of State has made a Statement to the House of Commons on the expected effects of the provisions of this Act on donations to charities by the recipients of sporting testimonial payments.”.
New clause 2—Report on the impact of Class 1A National Insurance Contributions on sporting testimonials—
“(1) The Secretary of State must, within 12 months of section 3 of this Act (sporting testimonials: Great Britain) coming into force, lay before Parliament a report on the expected impact of the provisions of this Act on sporting testimonials.
(2) That report must contain an assessment of the expected impact on—
(a) the total amounts received by individuals from sporting testimonials; and
(b) donations made to charity from sporting testimonial proceeds.”
New clause 5—Review of the impact on different sportspeople—
“(1) The Secretary of State must undertake a review of the impact of this Act on sporting testimonial payments made to—
(c) rugby league players;
(d) rugby union players; and
(e) other sportspeople.
(2) The review under section 1 must be laid before both Houses of Parliament within 12 months of section 3 of this Act (sporting testimonials: Great Britain) coming into force.”.
Before I address amendment 2 and new clauses 2 and 5, it may help the Committee if I briefly explain the background to clauses 3 and 4. As we have heard at length over the course of the day, a sporting testimonial is a one-off event, or a series of related events, held on behalf of sportspersons who have played for a certain club, usually for a long time. The testimonial can be used to raise money for the sportsperson before their retirement, in the event of their injury or, sometimes, to raise money for charity.
The historical tax treatment of sporting testimonials relied on the outcome of a tax case from before the second world war, which my officials referred to this morning. That case established the broad principle that the proceeds of a testimonial organised to demonstrate affection and regard for the personal qualities of a sportsperson are not earnings. Since then, other legislation has moved on, and income not directly from an employer is now typically subject to tax and national insurance contributions.
Prior to 2017, HMRC effectively operated an extra-statutory concession, which is clearly not sustainable over the long term, since HMRC must ensure that it operates within the law. As such, the Government announced at the summer Budget in 2015 that they would consult on proposals for clarifying the tax and national insurance contributions treatment of payments made from sporting testimonials. A consultation was published shortly thereafter, and the Government received responses from a range of groups, including tax professionals, accountancy firms and sporting interest groups, including the Football Association, the Professional Footballers’ Association, the England and Wales Cricket Board and the Rugby Players Association. In addition, two consultation meetings were held to discuss the detailed proposals, and the Government published draft legislation for consultation, adapting our approach, as I will describe, in response to further feedback.
The changes we are considering are part of that package of legislation, which puts the tax treatment of proceeds from sporting testimonials on the statute book and beyond doubt. This will provide clarity and certainty for sports clubs, sportspersons and those individuals who form the sporting testimonial committee that organises the event—if they are different—and ensure that there is limited impact on a practice that I think all of us support and want to continue.
The relevant income tax changes that form the first half of this package came into force from April 2017, following legislation in the Finance Act 2016. This confirmed that, while income from non-contractual, non-customary sporting testimonials would become taxable, there would be a generous £100,000 exemption to ensure that the change had a limited impact in most cases.
The rules governing sporting testimonials are changing to give clarity to the NICs treatment and align it with the changes to income tax that Parliament has already approved. At present, where a sporting testimonial is non-contractual or non-customary, it can be organised by a third party, rather than the employer, to raise money. As I mentioned earlier, although existing legislation implies that NICs liability already applies, the amounts raised through the third party may not have been subject to NICs because of this long-standing practice and ambiguity. Therefore, this concessionary treatment will end with the passage of this Bill on
From April 2020, non-contractual and non-customary testimonials arranged by third parties will be subject to NICs above the £100,000 threshold. The third-party testimonial committee will be liable to pay an employer class 1A NICs charge on the amount raised above £100,000, and not on any amount paid below that.
These types of testimonials will not be subject to employee NICs, to ensure that the sportsperson is not adversely affected. I would like to reassure hon. Members that we expect the vast majority of these payments to be unaffected by the Bill, as they will not exceed the threshold of £100,000.
I have a question that the Minister may not be able to answer now; if he cannot, hopefully he will answer it when he sums up. I am wondering about the definition of sporting testimonials. We are talking about sportspersons, but a lot of people said “sports players” earlier. Does this apply only to those people who have played sport, or does it apply if there is a sporting testimonial arranged, for example, for a manager? It would be incredibly helpful if the Minister could clarify that, either now or when he sums up.
I will ask my officials for a better answer, but my understanding is that this measure applies only to sportspersons. Although there might be arguments for it, it does not apply to managers and auxiliary staff, just as it would not apply to other people who, as I said in answer to a question this morning, are also engaged in careers that can be cut short, such as a ballet dancer, a performing artist or a Minister, and who might deserve it, but who are not sportspeople.
Although this measure will bring in negligible revenue, its value comes in the alignment and simplification of the tax and NICs treatment of sporting testimonials. I cannot emphasise enough that our motivation here is not to raise revenue but to provide greater alignment and simplification. As has been said repeatedly, this measure will bring in only a negligible sum, as certified by the OBR.
The primary purpose of clause 3 is that, with effect from April 2020, the rules determining the NICs treatment of these payments will be aligned with the income tax treatment that has already been legislated for in the Finance Act 2016. This means that a 13.8% class 1A secondary (Employer) NICs charge will be applied to income derived from a sporting testimonial that is already subject to income tax. Clause 4 makes the corresponding changes for Northern Ireland, ensuring that these changes apply throughout the United Kingdom.
In relation to the brief discussion that we had this morning about the definition of a customary testimonial, I would point out that this measure has now been in place, from an income tax perspective, for some time, and we have not had any feedback from sportspersons, sports clubs, sporting testimonial committees or indeed from sports bodies to suggest that there is a problem with that definition.
I can reassure the Committee that clauses 3 and 4 do nothing to affect the ability of sportspersons to make donations to their charitable foundations as part of a testimonial when it is organised by an independent committee and the donation is made through payroll giving. Given the line of questioning from the Committee this morning, and further to the point that I made earlier to the hon. Member for Aberdeen North, it is worth noting that our decision to choose class 1A helps with payroll giving, as this is the class to which it applies, and it would not have been possible if we had chosen another class of national insurance.
I turn now to amendment 2 and to new clauses 2 and 5, which tackle broadly similar issues. These provisions request that the Government report on the impact of the measures in the Bill on the amount of income received from sporting testimonials by sportspeople themselves and by any charities that receive donations linked to a sporting testimonial. I will explain briefly to the hon. Members who tabled the provisions why the Government consider that, on this occasion, they are not necessary.
First, we expect that there will be a very limited impact on sporting testimonials and charitable giving linked to this practice. We expect the majority of non-contractual and non-customary sporting testimonials to fall below the generous £100,000 threshold, with the average income received from a sporting testimonial being around £72,000, based on the work that we did in 2013, although we admit that it is not easy to form a clear judgment, because we had to survey the details of those sporting testimonials that were in the public domain. We then doubled the tax-free and NICs-free threshold for testimonials following the consultation to ensure that there would be a very limited impact indeed. That appeared to supported and welcomed by sporting bodies. As I said earlier, donations made from sporting testimonials via payroll giving will not be subject to income tax and NICs at all—in which case, there would be no impact whatever. It is worth noting that the tax changes affecting this income have been in effect since 2017. As I said earlier, we have not had any representations since that point to suggest there has been a significant adverse impact.
Secondly, we have subjected this measure to detailed consultation, including on both the initial proposals and the draft legislation. The Government expressly considered the impact on charities and individuals as part of that.
Lastly, I can reassure the Committee that the Government will continue to keep these issues under review once this measure is in force. The published TIIN—tax information and impact note—commits the Government to reviewing the policy through communication with taxpayers’ groups affected by the measure, and the Government are committed to carrying out post-legislative scrutiny three to five years after an Act has been passed, as I have said on a number of occasions today.
Clause 3 makes a sensible, proportionate change to the NICs treatment of sporting testimonials, putting their treatment beyond doubt. Given the reassurances that I have provided to hon. Members, both now and in answer to questions this morning, I hope that they will not press their proposals. I beg to move that Clauses 3 and 4 stand part of the Bill.
It is a pleasure to serve in the Committee with you in the Chair, Sir Henry. I am grateful to the Minister for those explanatory comments. However, I would like to speak in favour of the official Opposition’s amendment 2 and new clause 5, as well as the SNP’s new clause 2, which overlaps with our amendment 2. I do not want to repeat what we have already covered in our discussions today or, indeed, in the House. None the less, even after all that, we surely require more information about the impact of these measures to make a proper judgement about them.
As the Minister acknowledged, our amendment 2 and the SNP’s new clause 2 ask for additional information about how the Bill would affect charities, and individual sportspeople and charities, respectively. There are quite a few elements that still remain unclear, even after the discussions we have had. I am sorry to drag us back yet again to the topic of what is customary and what is not, but, surely, when we are looking at the design of tax measures, we need to ensure that there is crystal clarity about what every concept could mean, particularly when there might be manipulation of some of those different concepts.
When we debated the meaning of “custom” in the House, the then Minister, after questioning by the hon. Member for Aberdeen North, said that funds from a testimonial above £100,000 would be subject to NICs where such a payment was “customary”. He described “customary” as referring, for example, to cases where, in a particular sports club,
“there is a testimonial every year for a particular player or group of players, and that had been going on for some time”.
He said that
“that would be a customary testimonial situation”—[Official Report,
I explained in the previous session why I think that that kind of circumstance is extremely unlikely to occur. We need to have a reality check about how things are operating in different sports, so that we can assess them.
I looked at some of the information that has been provided by the Professional Footballers’ Association. It noted that, in 2015, about 0.5% of professional footballers had a testimonial to celebrate them, whereas on an average career length of about eight years—that is the average career length, which, as was mentioned before, is much shorter than it was historically, certainly in the professional game—12% of footballers should finish their career each season. Very roughly, that means that about one in 25 of the professional football players we would anticipate being eligible for a testimonial actually receives one. That is clearly a very small proportion of those who could qualify for one, which suggests that this is a very unusual process, so the use of the term “customary” does not have much weight.
I then looked at the evidence from the England and Wales Cricket Board, which states explicitly that there must be no pattern to the granting of testimonials and no specific connection with the player’s number of years’ service at the club, and that there is no specific period of time that should be seen as an automatic trigger for a testimonial. It appears, in the case of that organisation, that it is not possible for there to be a customary testimonial. It just cannot exist.
As I understand it, the difference is between something that is contractual and the fact that it is customary, in the general sense, to have what are called “benefit games” or “testimonials”. That does not mean that there has to be a specific number; in fact, if there were, that would presumably be contractual. The fact is that those payments are customary when someone has made a contribution or has been with a team for a long time, however that is defined or specified. It is a tradition of sport; surely that is all we are saying.
I am grateful to the hon. Gentleman for his passion about this issue, and—I am sure—about the sport of cricket, but he has underlined the point that I was trying to make. He has talked about a particular period of time, “however that is defined”. My point is that the quote I read out indicates that, according to the England and Wales Cricket Board, there can be no definition of the period of time that can be used for these testimonials, because if there is an automatic trigger for such an event, that should not be grounds for a testimonial. One assumes that it should instead be due to the fans themselves, the people who are calling for such a testimonial, but there is not an automatic trigger for it. That leads again to the question of what the term “customary” actually means. When we make legislation, it is important that we are clear about what those concepts mean, and whether they have any content. If it is just an empty placeholder, I think we would all agree that the term should not be used.
The Minister maintains that HMRC provides guidance about this. In my lunch break, I tried to look this up—I know how to live, Sir Henry—and I found the information about income tax. This language is already applied to income tax liability, exactly as the Minister mentioned, and reference is made to “normal practice” and case law. However, that information does not specify what the case law is, or indeed what the normal practice is. If there is a pattern to testimonials, one concern is that it would potentially be possible to argue that a pattern somehow is not there, and that a particular testimonial is non-customary, in order to get around having to pay the employer’s NICs. Equally, there could be pressure on employers to reduce the number of testimonials that are called for—to dissuade calls for testimonials in order to make them less likely to occur.
Picking up on that point, we are relying on HMRC guidance, which can be changed in the future. The word “customary” is written here, but that is reliant on guidance alone. If there had been more explanation in the Bill of what “customary” means, or if it had just said “contractual and not customary”, we probably would not be in this situation. We would not be relying on guidance that may or may not be accessible, and may or may not change in the future.
I absolutely agree with that point. Looking at that guidance, it is interesting that there is a lot of detail about certain issues, such as what happens if there is a second testimonial for whatever reason. Let us say that £70,000 was received from the first one, and then the second one goes over the £100,000 threshold; there is detail about what the tax treatment should be. There is detail about what the tax treatment would be if the testimonial was for a player who had, very sadly, died on the pitch, and the money was going to their family. Just about every eventuality is covered, apart from this issue of “customary nature”. In the interests of clear tax policy, it would help if we had more detail about that.
Secondly, explicitly concerning the tax treatment of charitable giving, we had a discussion about this before and the Minister referred to it again in his comments. It was argued that testimonial committees could use payroll giving from the testimonial to route funds to charities, given that they would be class 1A employer NICs. Indeed, he mentioned that players could use the gift aid procedures if payments were made directly to them. My hon. Friend the Member for Bootle rightly pointed out—and it was confirmed during the session—that this would add an additional layer of complexity and administration to the process. To inform those reading Hansard, the Minister is shaking his head. Perhaps he can explain why that would not be the case. We are talking about potentially large sums here that could provide the largest of any cash boosts received by a player’s foundation. We need more detail.
Finally, new clause 5 asks for an assessment of the Bill’s impact on testimonial payments made to professionals from different sports, including footballers, cricketers, rugby league players, rugby union players and other sportspeople. It is important that all varieties of sport receive adequate support and it would be helpful to have a better understanding of the likely incidence of the charge in that regard—for example, whether there is a similar rate of use in other sports to that provided by the PFA for professional football, and whether a similar proportion of those testimonials are contractual or non-contractual. As I said before, the implication of the information provided by the England and Wales Cricket Board is that there would be no customary non-contractual testimonials. Is that the case in other sports? We do not know. It would be useful to understand that. We also need that information because favourable tax treatment is still being provided for that first £100,000 of non-contractual, non-customary testimonial payments.
It may well be the case that in different sports, the employment opportunities on retirement as a professional player are very different. Within football, some go on to be agents, coaches, commentators and so on; many others do not. Such roles may not be as available in other sports. It would help if we understood more of the background to this.
I will not add a huge amount to what the Opposition spokesperson has said on this. I am particularly concerned about the effect on donations to charities that would result from the sporting testimonial changes contained in the Bill. New clause 2 requests a report on the assessment of the expected impact of
“the total amounts received by individuals from sporting testimonials” which is the other concern here, and also
“the donations made to charity from sporting testimonial proceeds.”
If the Government are contending that there will be no change in the amount of money given to charity from sporting testimonial proceeds, it would be useful if they said that. If they believe it is unquantifiable, it would be useful if they said that too, so that we are clear what the Government expect—or what they think they expect—from the changes they are putting forward in the Bill. Once again, the Government have said they are expecting a negligible Exchequer impact from this. It would be useful to know the trade-off: how much they believe charitable organisations will be losing in order to generate a negligible Exchequer impact.
I agree with both of the Labour party positions: on amendment 2, which is similar to mine on donations to charities, but also on the one on the review of different sportspeople. It is important that we work out what is almost a distributional analysis. We all know that footballers in the male professional game get paid an awful lot more money than any other individuals. If we see that people who are getting paid far less are subject to the highest percentage of impact, there is a problem in what the Government are suggesting.
Lastly, on clauses 3 and 4, I raised the issue this morning and I got an answer—but not a very descriptive one—on the reason that the Government have used the term “general earnings”, which is different from the wording used in part 1 of the Bill. I was told that there is a good reason for it, but I am still not clear what that good reason is, although I understand that the Minister believes there is one. It would be useful to know why that change has been made, and whether it makes it easier or harder for the Government to change the threshold level. If changing the £30,000 threshold level in part 1 is by affirmative secondary legislation, how does the difference in language affect whether or not affirmative secondary legislation is required to change the £100,000 threshold as well? Is there a different process because of the choice of language?
I agree entirely with Labour Front Benchers on issues around “customary”. I asked about that on Second Reading, because I could not quite get my head round it. I do not think the definition of that is clear enough. It may have been easier for the Government not to do customary testimonials, but only to do contractual ones in this circumstance. We could end up with people being caught by this who should not be caught, just because every single person who has played striker and spent over 10 years in that role at that club has always received a testimonial, although there might have been only two of them.
On the example that I think the hon. Lady was starting to give, until fairly recently Reading football club had a tradition that anybody who had played for the club for 10 years received a testimonial. It was not a contractual term, but it is difficult to see how that is anything other than expected earnings as part of employment. Is it not right that it should be taxed accordingly?
The problem is working out the grey areas in this. It may be the case with everybody at Reading, but if there were only one or two people in that role before who filled the same criteria and this is the third person who happens to fill the same criteria and they get a testimonial, is it the case that that could be considered customary, despite the fact that they had no expectation of the testimonial? I understand that this is only for a certain group of people who have a supported testimonial through third-party organisations, rather than through the club itself. I get that we are not discussing the widest possible definition here, but I am concerned that that particular part of the language is incredibly woolly and could have been made better so that all of us and sportspersons, clubs and third-party organisations could understand the meaning of “customary”.
Let me respond to as many of those points as possible. We have had a discussion of the impact of these measures on charities. Without repeating myself too much, we expect this to have a minimal impact. Where the sporting testimonial committee and the sportsperson make use of payroll giving, there would be no impact whatsoever. Were an individual to receive the money themselves and then pay tax and take advantage of gift aid, there would be a different tax treatment. Obviously, that would be the choice of the individual. The sportsperson and the sporting testimonial committee could and should choose to use payroll giving, which is a very generous and unlimited relief.
The hon. Member for Oxford East queried whether the measure would create a new bureaucratic impact on testimonial committees. It should not create any more impact than is already in place because we have already legislated for this from an income tax perspective; that is on the statute book. If a sportsperson wanted to use payroll giving today to avoid the income tax liability and ensure that the greatest possible amount of money went to the charity, the sporting testimonial committee today would already have to register for payroll giving, which they would then be able to use a second time for income tax and for the employer’s national insurance liability. This measure does not add bureaucracy. One could argue about the measure that has already been legislated for, but that is already on the statute book and the level of bureaucracy involved is pretty low.
We have had another debate around the definition of customary or non-customary sporting testimonial. The hon. Lady has already used her lunch break to root out the guidance, in her usual assiduous manner. If Members look at it, they will see that it is thorough. It is several pages long and goes into a degree of detail. I am happy to circulate it to other members of the Committee. It sets out that while the concept of “customary” is not defined in legislation, it has its ordinary, everyday meaning. The guidance says that in general, “customary” means a practice that is recognisable as the norm and where a failure to observe it would be exceptional. I think that is pretty clear. That suggests that if it is normal practice, a sportsperson would have a legitimate expectation of that as part of their employment at the club, and if the sportsperson did not receive the testimonial that they were expecting, that would be an exceptional occurrence.
I am grateful for that explanation, but I am sure the Minister will recall that in the expert evidence session, note was taken of the fact that the scope of that norm is not clearly indicated. One could look at the norm for a whole sport, the norm for a particular club, the norm for one year, and so on. Does he accept the need for greater clarity in the guidelines about what the norm is defined with reference to?
I am happy to review the guidance and see whether we can give more examples. There are a number of examples within the guidance on a range of different issues, but if it would be helpful to give one or two examples on this specific issue, I am happy to do so. Without sounding as though I am not giving serious consideration to the issue, it is worth restating that this has not arisen as an active issue. Sporting bodies, sportspeople and sporting testimonial committees have not raised it. The practice is of long standing; it dates back to 1927. We legislated for it from an income tax perspective two years ago, and we have not had any adverse feedback since then.
Playing devil’s advocate, the whole point surely is that under the rules, if a testimonial is customary, the tax is payable. Therefore, if there is any ambiguity, one would not necessarily want to go stirring hornets’ nests to try to resolve that. Surely the Minister understands what I am trying to get at: the bias would surely be towards not seeking advice, rather than going out of one’s way to have the joy of paying tax.
I understand that, although those sporting testimonial committees would want a degree of certainty that they were following the law, particularly if large sums of money were involved. They might seek the guidance of sporting bodies, or HMRC, perhaps on an anonymous basis, and that does not appear to have occurred.
Earlier in the day, the hon. Lady asked whether the customary test is specific or exclusive to sporting testimonials or whether it has a wider basis in law. There are other examples of the use of the customary test in tax law and case law, one being employer accommodation, where two factors are taken into account: first, how long the practice had existed, and secondly, whether it had achieved general acceptance with the relevant employers. There is therefore a history, as we have already described. I am happy to take away from today’s debate that we will review the guidance and ensure that there is a sufficient number of examples to provide clarity, should anyone require it, although it is not our experience that individuals have requested further clarification in the past.
The hon. Lady also questioned the wider point about the impact on different sports, which is one of the objectives of new clause 5. HMRC has announced that testimonials for sports other than football are all likely to be unaffected, as they are likely to be below the threshold. The measure is most likely to impact footballing testimonials. As I said earlier, the average testimonial, to the best of our knowledge, is around £72,000 a year and is therefore unaffected by the measure.
Without repeating myself, we have consulted many of the sporting bodies, and in fact, I met some of them. It is worth restating that in this instance, sporting bodies expressed a legitimate concern that the proposed threshold of £50,000 was too low. The Treasury responded by not just increasing it, but doubling it to £100,000. We have to be careful not to create unfairness for other members of society and taxpayers in the way that their payments are treated at the end of their career, or when one occupation ends and they unfortunately have to move on to another.
The hon. Member for Aberdeen North asked this morning, and again this afternoon, why there is a difference in language between part 1 and part 2 of the Bill. My experts at HMRC have looked into that, and the difference in language between the legislation for termination awards and sporting testimonials is accounted for as follows. First, in respect of termination awards, it is a charge on the employer. Secondly, termination awards are treated as earnings of the employment. Thirdly, the liability in respect of sporting testimonials is a charge on a third-party controller of a testimonial. Fourthly, there is no link between sportspeople and the testimonial committee. Fifthly, general earnings include earnings from the employment and any amount treated as earnings in, for example, the testimonial payment. I hope that provides some explanation. If the hon. Lady would like further information, I am happy to write to her and the Committee.
The hon. Lady also questioned the amount of revenue that is likely to be raised from the measure. We have said that it is negligible, which means, in the terminology of the Treasury and the OBR, less than £3 million per annum; but in all likelihood, it will raise significantly less than that. When we modelled it prior to doubling the threshold from £50,000 to £100,000 it was also negligible—less than £3 million a year—so it is likely to be closer to zero than to £3 million, now that the threshold has doubled. Once again, our motivation in introducing the measure is to clean up, and provide certainty and clarity to individuals and those organising such matches, rather than to raise revenue.
No—with respect, I did not say that there would be zero income. I said that within the spectrum of zero to £3 million, the likely amount of revenue raised would be closer to zero than to £3 million. The sums involved are very low—negligible, in our terminology—so I do not have more precise figures, but it helps to give some guidance that it is unlikely to be closer to £3 million. Clearly, the vast majority of testimonials will be excluded, and will be below the £3 million level. I hope that I have been able to allay some of the concerns, and that the amendments will not be pressed.