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Mr. Burnett: As the hon. Member for Arundel and South Downs (Mr. Flight) has pointed out, we probed this matter extensively in Committee. However, it is worth revisiting.

I speak to amendments Nos. 137 and 138, because they are designed to correct a glaring anomaly that directly contradicts both the Government's principles and the philosophy that underlies their capital gains tax changes--that an individual should be rewarded according to the length of time that he has held an asset. The longer he holds the asset, the less tax he pays.

A simple example of the mischief to which the Bill would give rise is that if an individual, a Mr. Smith, had acquired shares before 6 April this year--now converted by the Bill into business assets, and we welcome that--he would have to wait until about 2010 to receive full CGT relief. However, if a Mrs. Brown acquires the same class of shares in the same company, she will receive full relief in 2004. The continuance of that anomaly is preposterous.

In Committee, I suggested that the problem could be remedied by a simple election by the taxpayer, who could then be deemed to have sold and reacquired the value for no gain, no loss as at 6 April 2000, thus allowing that

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individual, on those shares converted into business assets, to have the time running from 6 April this year. That would have given that taxpayer no advantage whatever.

I am sure that the Economic Secretary understands that the intention is not to advantage the person who acquired his asset before 6 April 2000, but to put that person in exactly the same shoes as a person who acquired an asset after 6 April 2000. I do not have exact costs for the amendment, but I do not think that they would be significant. Does the hon. Lady have any information about the costs of those proposals to the Treasury?

The Economic Secretary was good enough to give the matter a fair airing in Committee. I hope that she will have had a chance to think again, and that she can avoid that dramatic anomaly and put all such shareholders in the same position, at little or no cost to the Treasury.

6.45 pm

Mr. Edward Davey: Notwithstanding the comments of my hon. Friend the Member for Torridge and West Devon (Mr. Burnett), I thank the Government for tabling amendment No. 97--especially on behalf of my right hon. Friend the Member for Yeovil (Paddy Ashdown).

We raised the matter in Committee--as did Conservative Members. It hits GKN and Westland especially because of the nature of the defence industry and the need for companies to enter joint ventures. I understand that the Government--through their officials--have held detailed discussions with GKN and Westland that, partly, resulted in the amendment. We are grateful to the Government for listening on that point.

Will the Minister confirm that it is the Government's understanding that, in such joint ventures, employees of GKN and of Westland will benefit from taper relief under the amendment? Clearly, that is the Government's intention; that is why they have worked so hard on the provisions. It would be helpful--especially if a Pepper v. Hart challenge were mounted--for the Government to make it clear that it is their intention that employees of GKN and Westland, and similar companies involved in joint ventures, should benefit from taper relief. I am advised that amendment No. 97 would provide for that, but--adopting a belt and braces approach--will the Economic Secretary confirm the point?

Mr. Geraint Davies (Croydon, Central): I speak briefly on amendments Nos. 136 and 137. There seems to be no indication of the cost impacts of the provisions. Furthermore, they might offer a slightly perverse tax incentive for premature retirement.

Mr. Burnett: That would not be the case. The provisions would operate on a straight line basis. The period during which a person has held an asset is the period for which he receives relief. If the asset was held for four years, full relief would be obtained if the person had acquired it after 6 April and it was a business asset.

Mr. Davies: I am not completely convinced by that point.

Under amendment No. 137, it would not be very beneficial to backdate the more generous taper for business assets, if the idea behind such a taper is that it would produce a positive effect on behaviour. By retrospectively backdating it, the asset holder would

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receive a windfall profit without any special benefit in respect of behaviour--because the event would already have taken place. There would thus be a windfall tax loss with no investment benefit.

Mr. Flight: Whether there was a windfall would obviously depend on what happened to the asset. The problem lies in another direction. Let us consider the case of two individuals who work for a company in which they hold shares: one is a loyal employee who first acquired his shares two years ago and the other has only just joined and obtained his shares. During the next eight years, the performance of the shares will be the same, but under the apportionment rules, the longer-serving employee, who bought his shares first, will end up paying more tax than the person who held them for a lesser period.

If the hon. Gentleman reads the debate we held in Committee, where that point was illustrated, he will appreciate the problem. We considered how to address it, and the only way is to backdate business asset relief to April 1998, when the taper started. We can argue whether there may be a windfall gain, but we must work from the point when taper relief started.

Mr. Davies: I accept that there is an issue about fairness in the way in which the provision applies. The difficulty arises once one starts going into retrospective benefits. As we cannot change previous behaviour, there is no benefit in terms of future investment and its duration and depth. It simply means a tax loss. Again, I do not know whether any costings have been done.

Mr. Burnett: In relation to amendments Nos. 137 and 138, if an individual acquired a class of shares in one company before 6 April this year and subsequently acquired shares in the same company of the same class, the recently acquired shares would get full relief in four years, whereas the previously acquired shares would get full relief in 2010. Does the hon. Gentleman not agree that that is glaring anomaly and that it should be corrected?

Mr. Davies: No, I do not agree. Over time, the tax system will change, and different tax regimes may apply. I do not think that the hon. Gentleman makes a compelling argument for the proposals. What is more, as soon as one opens the Pandora's box of retrospective taxation as a precedent, difficulties will arise. It would mean that if a portfolio of assets had been sold under a previous regime, the people affected would immediately want a tax reassessment. That would be a tax man or woman's nightmare and an accountant's dream.

I do not think that the benefits proposed are compelling. The costs have not been thought out and the administrative overheads would be ridiculous. I urge right hon. and hon. Members to resist the amendment.

Miss Melanie Johnson: I thank Conservative Members for their welcome for the change outlined in amendment No. 97. We said that we would bring forward such a measure when we discussed the matter in Committee. Officials have consulted GKN and the Chartered Institute of Taxation in drafting the amendment, and have consulted more widely among other companies.

My understanding is that everyone is content with the amendment. It would be rash for me to say definitely that GKN employees will benefit, but the company is well

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aware of the amendment. There has been much communication, both formal and informal. I wrote some days ago to various notable members of the Standing Committee--including, I think, the hon. Member for Kingston and Surbiton (Mr. Davey)--and to right hon. and hon. Members with a local interest who had raised the matter with me. We believe that GKN is content with the amendment. That is as far as I can go in giving the hon. Member for Arundel and South Downs (Mr. Flight) an assurance, but I am sure that he will find it as satisfactory as is possible at this stage.

Of the three Opposition amendments, amendment No. 136 stands on its own, while amendments Nos. 137 and 138 stand together. Amendment No. 136 is unnecessary and unfair, because it would add unwelcome cost and complexity. It would make some people worse off, and is technically defective. I think that the hon. Member for Arundel and South Downs accepted that it would make some people worse off.

With regard to the amendment being unnecessary, where the employee's shares are in an unlisted trading company, or in a listed company in which the employee owns at least 5 per cent. of the voting rights, the assets will continue to be business assets after retirement. Where the assets change their status, as long as the retired employee disposes of them within 10 years of retirement, he or she will obtain some credit for the period for which those assets were business assets under the normal apportionment rules. So the amendment addresses only a small sub-set of cases.

The amendment would add complexity. If it was accepted, there would be two different systems of apportionment. They might apply to the same asset. Right hon. and hon. Members have indicated that one system of apportionment is already too complex. I cannot accept that, but I am nervous about expecting taxpayers to apply two different systems. Adding a bonus two years to the period in which the asset has been a non-business asset seems to be wrong in principle and to add further complexity. The bonus year added in 1998 for assets held at 17 March 1998 was added for quite different reasons.

The amendment would increase taxpayers' resource costs. Taxpayers would need to value the asset at the time of retirement. For listed shares, that is a hassle rather than a cost, but the amendment could also apply to some unlisted shares and securities, and to assets other than shares. Valuations would be needed, and taxpayers would have to bear the cost.

The amendment would make some people worse off. I quite understand that some would be made better off--broadly, those who keep their assets for a long time after retirement and those whose gains are unevenly distributed and arose predominantly when they were employed. However, there would be losers too--people whose gains arise mainly after retirement, people who acquire their shares shortly before they retire and people who sell their shares soon after they retire, for whatever reason.

Let us consider an employee who acquires shares 11 months before retirement and disposes of them one month after retiring. Under the amendment, that employee would receive no taper relief at all. Under the normal rules, he would pay tax on only 88 per cent. of the gain.

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Let us consider--I will exaggerate to make the point--an employee whose shares do not increase in value at all in the four years that he or she is an employee, and then double in value in the four years after retirement. It is possible. Under the normal rules, he or she would pay tax on 47.5 per cent. of the gain; under the amendment, he or she would pay tax on 80 per cent. of the gain.

My point is not that the normal method of time apportionment always leads to winners. There are winners and losers under both systems of apportionment. However, it is fairer to have a single system that applies to all apportionment cases across the whole taper system.

The amendment is technically defective. What if the asset later becomes a business asset again? Perhaps the employee returns to work for the company or a listed company becomes unlisted. It is not clear that the amendment would allow a further period of business assets status to accrue.

The amendment does not define its terms. What are "ill health", "injury" and "disability", and who will decide? Is the amendment meant to cover all retirement or just retirement due to ill health, injury of disability?

The interaction of the amendment with the normal market value uplift on someone's death is less than clear. No capital gains tax is payable on that uplift at death. The personal representatives of the deceased pay tax only on gains after the death. Under the amendment, however, they might have to pay tax on gains pre-death as well.

The amendment is similar to one put forward in Committee. It is a better and more worthwhile version, but I still give it only seven out of 10 and do not feel moved to support it.

The purpose of amendments Nos. 137 and 138 is backdating, so that the period between 6 April 1998 and 5 April 2000 is counted as a period of business use. That would produce no increase in productivity or benefit to the economy, as my hon. Friend the Member for Croydon, Central (Mr. Davies) remarked a few moments ago. It would be expensive, which I shall come on to shortly. I will therefore ask the House to reject the amendments if they are pressed.

In clause 67 we are providing a real and positive encouragement to entrepreneurial investment and greater employee share ownership in the future. The amendments seek to reward past activity, where there is no scope for incentivisation.


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