Re: Simplification of the Tax and National Insurance treatment of termination payments

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1 Sarah Radford, Employment Income Policy Team, HMRC, Room 1E/08, 100 Parliament Street, London SW1A 2BQ 16 October 2015 Dear Ms Radford, Re: Simplification of the Tax and National Insurance treatment of termination payments NAHT welcome the opportunity to provide views on this proposal. We represent more than 29,000 school leaders in early years, primary, secondary and special schools, making us the largest association for school leaders in the UK. We represent, advise and train school leaders in England, Wales and Northern Ireland. We use our voice at the highest levels of government to influence policy for the benefit of leaders and learners everywhere. Our new section, NAHT Edge, supports, develops and represents middle leaders in schools. With extensive experience of working within the current arrangements for the treatment of tax and national insurance payments, we fundamentally disagree with the underlying premise for this consultation that the current arrangements are confusing and poorly understood. Our school leader members and their employers are very clear about the difference in the payments that are liable for tax and national insurance and those that are not, and we believe that the current approach is effective in providing additional support to those losing their job and income. The approach is widely known and the risk of confusion is far greater in changing it, so that people may accept redundancy packages without realising that they will be liable to more tax and national insurance than they had believed. We also believe that eroding the level of redundancy payment that individuals can receive will undoubtedly have an impact on the public purse in a number of ways. Firstly, there will be a shift away from agreeing settlement agreements in lieu of pursuing legal action in cases of discrimination or disability employment cases, and the recourse to legal action will draw out the issues and ultimately is likely to cost more. Even where a settlement agreement has been reached, these will inevitably rise to make up for the fact that a far greater percentage will no longer be going to the beneficiary. Overall, we are quite clear that this proposal to reform a policy that is currently well understood and works effectively could instead create greater costs and confusion, and we are fundamentally opposed to it, as outlined in our detailed responses to the consultation questions.

2 We hope that you can consider these points but that you will not hesitate to contact us should you require any further clarification on any of our points. Yours Sincerely Valentine Mulholland Policy Adviser 2

3 NAHT Responses to the consultation questions Q1 Do you agree that the distinction between contractual and non-contractual termination payments should be removed? Please provide reasons for your answer. This question assumes that one accepts that there is a problem with the existing approach and this is not our experience. Our school leader members and their employers are very clear about the difference in the payments that are liable for tax and national insurance and those that are not, and we believe that the current approach is effective in providing additional support to those losing their job and income. The approach is widely known and the risk of confusion is far greater in changing it, so that people may accept redundancy packages without realising that they will be liable to more tax and national insurance than they had believed. Our experience in supporting members in such circumstances is that instead of seeking to actively avoid paying tax and national insurance, our members merely seek clarity about their obligations, and this is extremely easy to obtain. Our members earn an average of 50,000 to 60,000 as school leaders, and as such any reduction in the tax threshold will result in significant loss to members as they will have a larger element of the compensation subject to 40% tax. Whilst higher earners may receive higher redundancy payments, this also reflects the greater financial commitments that they will have built up and must meet with their redundancy payments. Reducing their redundancy pay so significantly will result in financial hardship and misery and increase the likelihood of people losing their home and having to have recourse to the public purse through the benefits system. More significantly, eroding the level of redundancy payment that individuals can receive, will undoubtedly have an impact on the public purse in a number of ways. Firstly, there will be a shift away from agreeing settlement agreements in lieu of pursuing legal action in cases of discrimination or disability employment cases, and the recourse to legal action will draw out the issues and ultimately is likely to cost more. Even where a settlement agreement has been reached, these will inevitably rise to make up for the fact that more than 40% will no longer be going to the beneficiary. We believe that this proposal to reform a policy that is currently well understood and works effectively could instead create greater costs and confusion. Q2 Do you agree that removing the different tax and NICs treatment of different types of PILONs will help remove complexity for termination payments? Please provide reasons. As outlined above we do not believe that there is any case to make a change to the current approach but in addition, the new proposal seems incredibly complex and technical and is not one we would support. Q3 Do you think that the income tax and NICs treatment of termination payments should be aligned? Please provide reasons. 3

4 Again, we would not support a change to an approach that is well understood and works well. Q4 Do you think that aligning the income tax and NICs treatment of termination payments will make termination payments easier to administer and easier to understand? Please provide reasons for your answer. No, we believe that the proposal is more complex and will rely on much more complex individual calculations that are difficult for an individual and for their employer to project without carrying out the full calculation Q5 The government would like to explore what level the threshold for the termination payment tax and NICs exemption should be set and would welcome views. Please provide reasons for your answer. The proposed threshold of 6,000 after two years of service and then a further 1,000 for each additional year would mean that only individuals with twenty five years of service would be receive the same level of exemption as all employees would be eligible for today. This is risible and makes it quite clear that the intention of this policy change is to increase tax and national insurance receipts to the exchequer as the vast majority of employees would have to pay more tax and NI contributions under the proposal. This will most certainly make it difficult to resolve disputes, resulting in increased litigation. As we have outlined above, NAHT is opposed to the proposal to change current arrangements but if they were changed as proposed, the thresholds would have to be far higher. Q6 Do you agree that a relief based on length of service and those who are being made redundant would be easier for employers to administer? Please provide your reasons. We are totally opposed to structuring the relief based on length of service the actual redundancy payment will already be based on length of service and to tie the tax and national insurance exemption in to this as well will compound the discrimination faced by staff who have shorter service with an employer, sometimes because they have been made redundant by a previous employer. Current employment practice is not one of staff staying with one employer for their whole career as suggested by a proposal that only retains the current level of protection for those with over twenty five years of service. Furthermore, in the teaching profession, we often see women teachers leaving the profession for a number of years for caring responsibilities for children or older relatives, and this means that any proposals to base tax exemption on length of service would have a disproportionately higher impact on these teachers. There is no suggestion in the paper of whether and how this proposal has been equality impact assessed and we would suggest that it is critical to do so. We also disagree that this proposal would be easier to administer as outlined above Q7 Do you think that structuring the relief based on length of service and redundancy will be easier for employees to understand? Please provide reasons. 4

5 See response to question 6 Q8 Are there any alternative ways that the income tax and NICs exemption could be structured that would better meet the government s stated aims as set out in at 3.5 of this document. Please provide details with your answer. As we have outlined, we do not believe that there is any reason to change the current approach and we believe that it does meet the aims apart, possibly, from being affordable for the Exchequer. This is a very ambiguous aim: does it mean that it should cost no more than the current approach or does it mean that it should be more advantageous to the exchequer? If the intent is as stated to achieve simplification, then it should be the former but the proposal currently outlined is clearly principally driven by the latter and we oppose a proposal to increase public receipts by taking them from people losing their paid employment and having to guard against unemployment. Q9 Are there any alternative approaches that you can think of that will prevent this payment of salary being disguised as a termination payment? Please provide details with your answer. There are no alternative approaches that we would advocate but we are very concerned at the suggestion that those people employed on fixed term contracts would not benefit from tax and national insurance exemption on their redundancy payments. After two years, even employees on fixed term contracts have full redundancy rights and this proposal would remove those. Those rights to redundancy payment are wholly separate from any contractual bonus or payment due under a contract, and whilst it is right to exclude the latter, there is no justification for excluding actual redundancy payments and we believe that this is discriminatory. Q10 Please can you provide details of the types of payments and people who receive termination payment who would be affected by the anti-avoidance provisions? Please also state which anti-avoidance provision you are referring to. Please see our response to question 9 above Q11 Do you think that the exemption for injury or disability should be maintained? Please provide reasons for your answer. Yes, as outlined those individuals are those least likely to be able to secure further employment so that the redundancy payment is critical to deal with financial commitments. Q12 Do you agree that by removing the requirement to differentiate between the different elements of payments made in connection with injury or disability will provide simplification? Please provide reasons for your answer. This payment is already one that is not considered as contractual so that it is already exempt and we would not want to see this change. 5

6 Q13 Do you think that there should be a cap on the amount of tax and NICs relief that is provided where the payment is connected with injury or disability? If so please provide reasons and suggested amounts. No, as outlined in response to question 11, those individuals need the maximum financial support to allow them to meet their financial obligations with a higher likelihood that they will not return to paid employment. Q14 Do you think that the Foreign Service exemption should be removed? Please provide reasons for your answer. Q15 Do you think any of the other exemptions should be maintained? If so which ones? Please provide reasons for your answer. Yes we see no reason for change Q16 Do you agree that any payments that would usually be exempt from income tax and NICs should remain exempt (subject to the usual rules) when made as termination payments? Please provide reasons for your answer. Yes as this would provide consistency and clarity Q17 Do you think that there should be a financial cap, above which income tax (and possibly NICs) should be payable in cases of unfair or wrongful dismissal? Please provide reasons for your answer. Absolutely not, again these are individuals who have already suffered as a result of being wronged and they need to receive their full compensation. Q18 Do you think that that should be any differentiation in terms of a financial cap where payments have been settled by a tribunal or an arrangement between an employee and employer? Please provide reasons for your answer. What is unclear from the consultation document is what is proposed in terms of exemption and what would count as an award for unfair dismissal or injury. Most of these are settled before proceedings have been issued and if this would mean that they would not be exempt, and only awards made after proceedings have been issued would be, then we would see this resulting in a very large increase in litigation. This would run counter to the Ministry of Justice s efforts to see an increase in early conciliation initiatives rather than litigation, and would drag out unpleasant employment issues to the detriment of both the employer and the employee. We would strongly recommend that there should be no differentiation depending on whether payments have been settled by a tribunal or by an arrangement. Q19 Do you think that there should be a financial cap, above which income tax (and possibly NICs) should be payable in cases of discrimination? Please provide reasons for your answer. Absolutely not for the same reason as in response to question 17. 6

7 Q20 Do you think that that should be any differentiation in terms of a financial cap where payments have been settled by a tribunal or an arrangement between an employee and employer? Please provide reasons for your answer No, for the same reason as given in response to question 18. 7