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10.30 am

Dr. Jenny Tonge (Richmond Park): Before the debate, I was told that the Government had graciously agreed in another place to drop the relevant clauses. I therefore feel that I have wandered into a hornet's nest without much armour to protect me from the stings.

I agree with the comments of the hon. Member for Salisbury (Mr. Key). The Government must accept that there are serious reservations about military police invasion, if I may use that word, of civilian territory. It is important to deal with the matter in much more detail, and at leisure, not in a great hurry at the end of a Parliament.

Some people cynically expressed the view that lack of civilian police has led the Government to believe that it might be helpful if the military police moved into their territory. The Government must therefore accept that there are genuine reservations about the provisions, calm down and reflect on them after the election.

Lords amendment agreed to.

Lords amendments Nos. 2 and 3 agreed to.

Clause 37

Orders and regulations

Lords amendment: No. 4, in page 36, line 33, at end insert--
"( ) an order under section 8(2),"

Mr. Spellar: I beg to move, That this House agrees with the Lords in the said amendment.

11 May 2001 : Column 382

After considering the order-making powers in the Bill, the Delegated Powers and Deregulation Committee in another place recommended that the power in clause 8 should be subject to affirmative procedure. The relevant order-making power will allow the Secretary of State to prescribe the powers and duties of a judicial officer when undertaking a review of a commanding officer's decision to authorise a search without a warrant.

We are happy to accommodate the Select Committee's recommendation, and the amendment achieves that. I should like to place on record the Government's thanks to the Committee for its customary careful consideration.

Mr. Key: The amendment improves the Bill's accountability and transparency, and we welcome it.

Lords amendment agreed to.

Lords amendments Nos. 5 to 11 agreed to.

Social Security Contributions (Share Options) Bill (Programme) (No. 3)


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11 May 2001 : Column 383

Social Security Contributions (Share Options) Bill

Lords amendments considered.

Clause 3

Special provision for roll-overs

Lords amendment: No. 1, in page 5, line 5, leave out
"(assuming it to be exercisable at that time)"

10.33 am

The Financial Secretary to the Treasury (Mr. Stephen Timms): I beg to move, That this House agrees with the Lords in the said amendment.

Mr. Deputy Speaker (Sir Alan Haselhurst): With this we may discuss Lords amendment No. 2.

Mr. Timms: As hon. Members know, the Bill forms part of the Government's response to companies' legitimate anxieties about the effects of aligning income tax and national insurance treatment of employee share options. We debated the matter with great care during earlier stages of the Bill's passage.

In Committee in the House of Lords, the Government tabled a small number of amendments. Lords amendment No. 1 would clear up a possible misreading of the rules. We were worried about the rules for an option that had not vested by 7 November 2000 or was in a holding period that prevented its exercise. It might have been possible to argue that, because the option could not be exercised on that date, a nil charge should arise under the Bill. That was clearly not the Bill's intention, and the simplest way of clarifying the matter was to omit some words from clause 3 and add an overall provision to clause 5, which is the interpretation clause. That provision would apply to the whole measure.

I am grateful to the specialists outside the House who drew our attention to the possible difficulty. I am pleased that it was possible to agree the helpful amendment in another place.

Mr. Howard Flight (Arundel and South Downs): We support the amendment and the Bill, which are both remedial measures. I remind hon. Members that the Bill is a consequence of a Labour stealth tax on options and constitutes the third attempt to solve the resultant problems.

In April 1999, the Government introduced the employers' national insurance charge at 12.2 per cent. on the gains realised on the exercise of unapproved options. They were taken aback because many small businesses, especially new businesses, could have been landed with unknown, potentially damaging cash liabilities. The Government wisely responded to that and, in May 2000, introduced measures to enable companies to transfer their employers' NIC liability to the employee. However, there was a problem, because that created a 47.3 per cent. tax charge on exercising unapproved options. Again, the Government forgot the options that were issued between April 1999 and May 2000. The Bill therefore introduced a provision that limited the gain on which NIC was payable to the increase in value between exercise and 7 November last year.

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As the Financial Secretary said, outside specialists have pored over the Bill usefully and in depth. It is not unfair to say that, initially, the Bill was not technically well drafted. I give the Government credit for accepting most of the key amendments that we tabled to increase the notice period to 92 days and remove the unnecessary provision to give notice when no NIC arose.

Clause 3 remained the controversial provision, which tackled the technically difficult territory of the roll-over of options in takeovers. In Committee, the Opposition stressed that the clauses were not satisfactorily drafted. On Report, we were not happy with the redrafts that the Government proposed. As the Financial Secretary said, the amendments are the result of substantial consultation with the relevant officials during the Bill's progress in another place, especially Lords amendment No. 1, which was designed to clarify a specific point. We support the amendments and the Bill, which has made the best of a bad job on which the Government should not have embarked.

The result is that we now have an extremely unattractive share option regime, particularly for small companies. The enterprise management incentive scheme is fine for small businesses worth up to £15 million, but for the important group of businesses valued up to £100 million unapproved option schemes have to be used. A scheme that charges 43.6 per cent. tax on gains realised is, as the Government's own small business expert said, punitive. It places companies in this country in a highly uncompetitive position, given the arrangements in the United States.

For that group of companies, the most appropriate share option scheme is the approved share option scheme, which is a capital gains tax regime. That is why the Conservative party is committed to increasing the limit per person from £30,000 to £100,000 for companies valued up to £100 million participating in the approved share option scheme. That is designed to solve the whole problem created by the imposition of NICs on approved options.

We are relieved that the Bill is to reach the statute book in the dying embers of this Parliament. It is remedial and helpful to British commerce.

Mr. Timms: I should like to respond to some of the points made by the hon. Member for Arundel and South Downs (Mr. Flight), although I must say that I found his tone disappointingly churlish.

I remind the House that we are giving companies the chance to settle their national insurance liabilities on options granted in advance of the date when a gain is made by the employee. Companies that choose to take advantage of that will calculate the amount of national insurance due by reference to the accrued gain up to 7 November 2000--the date before the proposals were announced.

This measure effectively caps the national insurance contribution liability by reference to a company's share price on 7 November. The benefits to the company are that it will be able to remove the on-going provision for the liability on its balance sheet, thus achieving certainty, and save national insurance contribution costs in relation to any further upward movement of the share price.

I do not accept the criticism made by the hon. Member for Arundel and South Downs about the drafting of the Bill. The Bill has benefited from substantial consultation

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with a wide range of people who follow these matters closely and I am pleased that we have been able to take on board their suggestions and proposals. We are a listening Government, as the Bill demonstrates clearly.

The question has been raised as to whether we have chosen an appropriate date--7 November 2000 was the day before the proposals were announced in the pre-Budget report. A date had to be chosen for crystallising the gains, and 7 November may turn out to be a favourable date for many of the companies using the measure.

It is not obvious how an optimal date could be found because it is impossible to predict how long the fall in high-technology share prices--a precipitative fall--will continue. Setting a later date could conceivably disadvantage many companies that have planned to use the measure based on the previously announced date of 7 November. Some 550 companies have already expressed an interest in taking advantage of this legislation and any change in the date would risk upsetting their business plans. Companies whose share price has risen since November 2000--there are some such companies--could lose out if the date were changed.

Another problem with moving the date forward is that it could disadvantage unquoted companies that have commenced plans to float subsequent to the 7 November date. Companies whose shares were not readily convertible assets on 7 November 2000 would have their liability on the gap options extinguished as a result of the Bill. They would have to reassess whether their shares were readily convertible assets on the new date and might find themselves having to pay special or class 1 contributions as a result.

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