Social Security Contributions (Share Options) Bill

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Mr. Burnett: The Minister's observation that companies have refrained from granting options is doubtless correct in respect of the large company sector, but my particular concern is the smaller company sector, in which advisers are perhaps not as shrewd and far-sighted, and where the opposite might therefore be true.

Mr. Timms: I can reassure the hon. Gentleman that small companies are also considering the opportunities that the measure will provide, and I do not expect them to hold back from taking such advantage. Many will find it very attractive, because their accounts already provide for the sum relating to national insurance obligations.

Mr. Burnett: The Minister's argument about companies holding back from granting options might be true in respect of larger companies with advisers of great expertise and foresight, but given the period allowed, smaller companies could rush matters and thereby prove vulnerable to associated problems.

Mr. Timms: I do not think that that is right. I know a number of large companies that issued options in the period in question, so the distinction that the hon. Gentleman draws between small and large companies is not correct.

Mr. Bill Etherington (Sunderland, North): A couple of questions passed through my mind during this debate. Companies in Britain pay less tax than those in any other EU country, and, as I understand it, their liabilities are to be passed to their employees. Does my hon. Friend agree that it is clear that whatever is offered is never enough? We never hear those companies saying that the Government have given them too much and should take some of it back. Has anyone consulted the employees? We hear a lot about employers, but has research been carried out on the opinions of those who, in certain cases, will be paying? Many of my constituents would say that, if anything, the Government are being overly generous.

Mr. Timms: My hon. Friend is absolutely right: the survey to which I referred concluded that the UK is the best place in which to set up and develop a small business, and the tax environment forms an important part of the necessary background. We have received representations from some employees who will be affected by the provision. Of course, in small firms there is often a close coincidence between the company's interests and those of the employee. Many employees have willingly signed up to the scheme that enables them to take on an employer's national insurance liability for share options gains, because they stand to gain substantially on exercising those options.

Mr. Flight: Given that only 100 companies have taken up the EMI scheme, from a target of several thousand—if not more than 100,000—the success ratio is well below 1 per cent. I urge the Minister to consult fully the relevant accounting firms, so that take-up can be rendered more effective. Moreover, it is no surprise that the regime in this country is more attractive for new business than the regimes in continental Europe, which involve employment taxes and generally higher tax rates.

The United States has been far more successful than this country—in terms of the proportion of the economy involved and the proportion of investment measured against population weighting—in creating new businesses through venture capital investment. In February, Gouldens, a law firm that specialises in such matters, will publish a report in which its senior partner powerfully argues that the key difference between the United States and ourselves in this respect is the considerably more generous option arrangements that pertain in the former. Moreover, people in the United States are not taxed on approved options until they sell. If they join a business, work with it and get their options and shares, they can continue to own part of the business. In this country, one is virtually forced to sell in order to pay the tax, because the tax liabilities crystallise on exercise.

We still believe that it is wrong in principle that the NIC liability should not crystallise on exercise. However, we did not expect to be able to persuade the Government of that, given that they are apparently keen to encourage pension funds to gamble with our pension money in respect of whether companies should have such quid pro quo arrangements, so we shall not press amendments Nos. 32 and 33 to a vote.

Amendment agreed to.

Mr. Flight: I beg to move amendment No. 1, in page 1, line 13, leave out `is passed' and insert `comes into force'.

The Chairman: With this it will be convenient to discuss the following amendments: No. 2, in clause 2, page 3, line 27, leave out `is passed' and insert `comes into force'.

No. 3, in clause 2, page 4, line 6, leave out `passing' and insert `coming into force'.

No. 4, in clause 3, page 6, line 3, leave out `passing' and insert `coming into force'.

No. 5, in clause 6, page 7, line 39, at end add—

    `(3) This Act shall come into force on the day appointed in regulations made by the Inland Revenue pursuant to subsection (5) of section 1 above.'.

Mr. Flight: The amendments essentially cover the same point about 60 days, but they include a slightly more subtle aspect. As the Bill is drafted, the arrangements will come into force immediately on Royal Assent. However, further regulations will clearly be required in order to determine how the detailed arrangements will be implemented. The Minister assured me that they will be published in the near future, but no draft regulations are yet available. It is not practical to ask companies to operate a scheme without knowledge of their contents.

The Inland Revenue takes about 10 days to process applications that are made under the measure that was introduced last May to pass NIC liabilities on to employees. The volume of people making such applications is still extremely low, but once the Bill is enacted there will be a flood of applications. Not only should there be a reasonable time period, but it should start when the regulations come into force to ensure that there is not a mess-up if they are not available in time.

Mr. Burnett: Presumably, the regulations will be extremely lengthy and detailed, and I hope that the Minister will confirm that they will be subject to widespread consultation. I support the hon. Gentleman's point: as the regulations will have an important impact on the working of the Bill, people should know the details before it comes into force.

Mr. Timms: The amendments would simply introduce the possibility of a delay into what I think the whole Committee has accepted as a helpful and necessary measure that gives companies additional flexibility and freedom.

The hon. Member for Torridge and West Devon will be pleased to know that the regulations will not be complex. They will set out the precise nature of the notification required from employers who wish to take advantage of the Bill. It is a straightforward measure, and the regulations can be produced quickly.

I want to clear up one misunderstanding that might also crop up later. The hon. Member for Arundel and South Downs referred to a flood of applications. We are talking here about notifications. Companies will be required to inform the Inland Revenue of what they are doing: there will not be an application process in which the Inland Revenue has to say yes or no. It is simply a question of notification.

I can understand the concern that the regulations may be delayed. We plan to lay them on the day that the Bill receives Royal Assent. I assure hon. Members that notification will be straightforward and that there will be no delay in laying the regulations. Given that reassurance, I hope that the hon. Gentleman will withdraw the amendment.

Mr. Flight: There is in effect an application—I should have used the word ``notification''—for the category of company that is not listed, but does not qualify as a not readily realisable asset, because it may be close to a listing, and the Revenue must agree a valuation with it under the Bill. Such a company is likely to be time-consuming to the Revenue unless the Government accept our later amendments to address the problem.

Clearly, it is on trust that the regulations will be laid at the time of Royal Assent. I simply ask the Minister what his plans are in the event that, for reasons beyond his control, that does not happen. The wording ``coming into force'' still seems to us to make more sense. It is not a huge issue of principle on which to divide the Committee, but a practical problem with which the Government will have to live. The amendments do not make major points, but they would avoid the danger of the regulations not being available in good time.

Mr. Timms: I am entirely confident that the regulations will be available on time, so I do not have a plan B if they are not.

Mr. Flight: On the basis of that assurance, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mr. Flight: I beg to move amendment No. 11, in page 2, line 15, after `election', insert

    `, to the extent of that election'.

The Chairman: With this we may take amendment No. 12, in page 2, line 17, after `force', insert

    `, or to the extent not covered by any such election'.

Mr. Flight: The amendments are designed to cure what we think is a mechanical defect in the Bill. Under the set of national insurance charge changes introduced last May, which enabled employers to agree with employees to pay the employer's national insurance charges, the legal liability for part rather than all of the NIC charge payable by the employer could be agreed to be charged on exercise. Where that occurs, the Bill requires the employee and the employer to make an election to pay the NIC in advance. That is likely to be inconvenient in practice and it would make more sense to allow employers to advance-pay their residual liability for the options and leave it to employees to advance-pay their own liability. It would be unfortunate for delay or refusal by either side to prevent the other from taking advantage of the Bill. In essence, this should not be a joint approach: each side should be free to make its own election.

11.30 am

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