Social Security Contributions (Share Options) Bill

[back to previous text]

Mr. St. Aubyn: I would like to add a few words to my hon. Friend's comments on amendments Nos. 32 and 33. He should reserve until later the decision whether to withdraw them. If he withdraws them now, will my comments be out of order? If—

The Chairman: Order. The amendments cannot be dealt with now. We are dealing with amendment No. 6.

Mr. Flight: I was in the middle of saying that we are unlikely to win a Division on amendments Nos. 32 and 33. Nevertheless, the principles that tax liabilities should be payable when they arise, and that there should not be an element of gambling in the tax system, are, in our view, correct.

Last May's measures had the net effect of putting a 47.3 per cent. tax charge on employees' unapproved options. The thinking behind that assumed that option remuneration is the same as pay, when in fact it is entirely different. If a talented person, working for a mature company such as Unilever, is considering working for a new, small, high-tech company, it will be unable to pay him his previous salary, so it will attempt to attract and motivate him with an options package. Whether those options will ever be worth anything is a complete risk. If he works hard and the company succeeds, they could be worth a great deal, but large numbers of new businesses, especially in the high-tech sector, do not succeed. The safe pay packet and perks offered by a mature company are different from the risky options that form part of the package from new businesses.

If the Minister talks to the many accounting firms that specialise in employment, they will tell him that a 47.3 per cent tax charge has altered the risk-reward ratio for unapproved options, which will kill their use. New businesses will be forced to increase pay, which they cannot afford. The overall impact will be to discourage entrepreneurial endeavour.

Mr. Timms: The rate of 47.3 per cent. is not dissimilar from the rate in the US, and less than that in a number of European countries. The key point is that the enterprise management incentives that we have provided for address precisely the type of high-risk start-up companies to which the hon. Gentleman has referred. He is right to say that people who leave a secure, well-paid job in a big company to contribute to a start-up company are taking a substantial risk, but that is precisely the situation that the enterprise management incentives address, so the inference that he is drawing is incorrect.

Mr. Flight: I recollect that the Red Book provided £20 million to £30 million for the enterprise management incentives scheme. It sounds attractive but, again, out there in the real world there has been little take-up, because of the exclusions and complexities and because a company that succeeds is quickly disqualified if it has grown too large. The issue has not yet been dealt with practically.

As the Minister is aware, in the United States there are enormously more generous approved option schemes. Staff can have $100,000 each year, as against a total limit of £30,000 here. Even with unapproved schemes in the US, while the tax rate is 39.6 per cent. or more with state taxes, companies can offset the tax that employees pay against their own corporate tax liabilities, so the net combined tax is 10 or 15 per cent., which makes companies much more generous with the volumes of unapproved options that they are willing to issue. The suggestion that our tax regime for share options is now parallel to that of the US is a travesty. The approach in the US is much more generous, particularly with new economy high-tech companies that may not have the profits to offset in the case of the tax rules on unapproved schemes, they generally use approved schemes where they can offer more than enough options to satisfy individuals.

I put it to the Minister that, while I do not question his good faith, he must be aware that the venture capital industry is extremely critical of the Government's measures. I have a letter from the chairman appointed by the Government's small business investment taskforce, in which he comments that the current national insurance arrangements are ``punitive'', so even one of the Government's own helpers in their entrepreneurial endeavours accepts that point.

I am grateful that the Government have accepted that the 92-day period is practical. It would, however, be theoretically correct for these NIC liabilities, if we are stuck with them, not to arise until exercised.

Mr. Burnett: I welcome the Minister's comments and his acceptance of amendments Nos. 6 to 9. He made a typically thoughtful contribution. It is always a pleasure to debate with him, because he has considerable knowledge in matters of tax law. I shall try to tempt him to go a little further, or at least to address the point to which I alluded earlier: why not give individuals a choice to pay either at the value on 7 November 2000 or at the value on the date of exercising the option? I realise that in most circumstances the payment of tax will be deferred to the date of the exercise of the option, but there would be advantages to the Revenue, which would save on bureaucracy; there would be no time limits; there would be flexibility; the small and medium-sized business sectors would be saved considerable effort, problems and fees; and it would be simpler. I do not know whether the Revenue is concerned that such a change would encourage tax avoidance. If so, I would welcome the Minister's comments on that point. It is fairer to the taxpayer to pay at exercise because the value could be lower and the tax less.

The Bill is welcome, as it ends uncertainty. I welcome the Minister's acceptance of amendments Nos. 6 to 9, especially because it may help the smaller business and the smaller company to avoid some of the bureaucracy that this small Bill will create.

Mr. St. Aubyn: I, too, thank the Minister for going some way towards responding to our pleas. Certainly, an extra period for people to make a decision is helpful. However, since the announcement in November of the concession behind the Bill, the outlook has changed: there has been a change in the world economy, particularly in the United States. There are reports this week of a crisis of confidence in the US economy: there have been dramatic cuts in US interests rates and there may be more to come this week and thereafter to try to revive confidence.

In those circumstances, particularly as the loss of confidence relates to uncertainty about the future of the new economy and the new economy companies, many of which will be the sort that the Minister described—overseas companies that have come to this country and granted the options to attract employees—it seems a little harsh that they should pay now for the certainty that he tantalisingly offers them in respect of their tax liability. He appears to be saying that they can have the certainty if they are prepared to pay for it, but it is the companies that cannot afford to pay for the certainty now that most need it to get through the coming year or so. The Government are offering certainty to those for whom it matters least.

I am sure that the Minister, who has a great deal of expertise in this area, knows that if the Government were really concerned about the new economy, they would extend a helping hand not only to those who can easily produce the cash in a few months' time but to those for whom every single penny counts, as they try to realise the potential of their business. At a time when the capital markets have dried up for them and they face a great deal of uncertainty in their business world, the last thing they want is continuing uncertainty in their tax affairs, but because of the nature of the deal on offer, that may be the only choice open to them.

Mr. Timms: The hon. Member for Arundel and South Downs suggested that enterprise management incentives had not been widely taken up. More than 100 companies have already taken them up, and the number is rising rapidly. As he will know, we are currently consulting on changes to make the arrangements more generous, and we will announce the outcome at the time of the Budget. That is proving an effective device for targeting the kind of companies about which he expressed concern.

I also draw the hon. Gentleman's attention to the Arthur Andersen survey, carried out for the Brussels-based GrowthPlus organisation, which exists to promote entrepreneurship throughout the European Union. Arthur Andersen undertook research on nine European countries and the USA to examine the conditions for the companies that it supports in each of those countries. The survey included not only an assessment of the treatment of share options, but all the other influencing factors. Its conclusion, published last week, was that the United Kingdom was the best country of all those examined in which to establish and grow an entrepreneurial business. That is a pretty fair assessment of the current position. The hon. Gentleman should reflect on its conclusions in forming a view.

I do not believe that it would be appropriate to accept amendments Nos. 32 and 33. Let me remind the Committee of the background. When the options were issued by the companies, the law was clear: there was no ambiguity about the national insurance position. We are now offering companies the ability—another avenue, if they wish to take it—to settle those liabilities early and obtain the benefit of certainty, but with the clear quid pro quo of early payment. That is a fair settlement. The Committee should bear it in mind that several companies did not award options during the period in question because they understood perfectly well the difficulties that they might encounter in doing so.

The proposal is a fair one. The hon. Member for Arundel and South Downs said that he would not insist on amendments Nos. 32 and 33, but if he changes his mind, I urge the Committee to resist them.

11.15 am

Previous Contents Continue

House of Commons home page Parliament home page House of Lords home page search page enquiries ordering index

©Parliamentary copyright 2001
Prepared 30 January 2001