Social Security Contributions (Share Options) Bill

[back to previous text]

Mr. Burnett: We support this helpful provision. It is a useful and sensible solution to what would have proved a problem to those companies whose liabilities were nil. Such companies will now be deemed to have notified, so they will not be adversely affected.

Amendment agreed to.

Clause 1, as amended, ordered to stand part of the Bill.

Clause 2

Effect of notice under s. 1

Mr. Flight: I beg to move amendment No. 21, in page 3, line 6, after `(a)', add `not manifestly less than'.

The amendment is designed to deal with a technical point rather than a point of principle. The liability on share options is defined in section 135 of the Income and Corporation Taxes Act 1988 by reference to the gain reasonably expected to be made. Other taxation provisions—the approved options in section 9 to the 1988 Act—refer to an amount not manifestly less than market value. However, the Bill implies a need for pinpoint accuracy that exceeds the normal requirement in exercising an option on national insurance contribution liability, especially in respect of unlisted companies. In that regard, the amendment is designed to put the Bill in line with other relevant tax statutes.

Mr. Timms: I believe that I can reassure the hon. Gentleman that the Bill does not require employers to observe a level of accuracy that is not demanded elsewhere in tax or social security legislation. In respect of share options gains, the method of calculating the special contribution is the same as for any secondary class 1 contributions. As drafted, the clause specifies that the special contribution is calculated in the same way as a class 1 contribution that would have been payable

    ``by virtue of section 4(4)(a) of the Contributions and Benefits Act if the right had been exercised in full on 7th November 2000''.

That section is then calculated by reference to the taxable gain under section 135 of the Income and Corporation Taxes Act 1988. That deals with the level of accuracy referred to by the amendment, because it considers

    ``the amount that a person might reasonably expect to obtain''

from the sale of the shares on the open market at the time. The wording is covered—admittedly at two steps removed—by the wording in the 1988 Act. As the point raised by the hon. Member for Arundel and South Downs is covered, the amendment is unnecessary.

11.45 am

Mr. Flight: I am very pleased to hear that the point is covered, no matter how obscure it might appear. I accept the Minister's undertaking that the principles and approach of section 135 are covered in the Bill and will not require tighter drafting. He has now clarified the matter on the record, and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mr. Flight: I beg to move, amendment No. 22, in page 3, line 20, leave out `amount' and insert `gain'.

The Chairman: With this it will convenient to take the following amendments: No. 23, in page 3, line 21, leave out from `release' to `by' in line 22.

No. 24, in page 3, line 22, at end insert—

    `as determined by section 135(3)(a) of the Income and Corporation Taxes Act 1988'.

No.25, in page 5, line 6, leave out `amount' and insert `gain'.

No. 26, in page 5, line 7, leave out from `release' to `by' in line 8.

No. 27, in page 5, line 9, at end insert—

    `as determined by section 135(3)(a) of the Income and Corporation Taxes Act 1988'.

No. 28, in page 5, line 10, leave out `amount' and insert `gain'.

No. 29, in page 5, line 11, leave out from `right' to `by' in line 12.

No. 30, in page 5, line 13, at end insert—

    `as determined by section 135(3)(a) of the Income and Corporation Taxes Act 1988'.

Mr. Flight: These are essentially technical amendments, drafted in response to what we believe to be a weakness in the Bill. The key element in valuing options is the inherent gain in the option—the market value of the underlying shares, less the amount paid for them. The same section 135 of the Income and Corporation Taxes Act 1988 has such a provision. The Bill refers merely to the value of the underlying shares, which could lead to a technical breakdown in what the Government are trying to achieve.

There is at least one flaw to consider. The intention of clause 2 is to prevent tax avoidance by electing to pay in advance the NIC, followed by a cash payment to buy out the option for a larger amount. As drafted, the Bill makes it easy to avoid that tax, as it seems to have forgotten to deduct the exercise price from the value of the shares. If someone wants to avoid his tax liability, he has only to buy out the option for less than the value of the shares but for more than the inherent profit in the option. The Bill will assist tax avoidance rather than hinder it.

The intention of clause 3(5)(b) is to determine whether an option roll-over has been enhanced, by exchanging a more valuable option for a less valuable one, to prevent the advance payment on NIC from being carried over to the new option. The error may have occurred because there was an assumption that the NIC provisions for option roll-overs were dealt with in the 1979 regulations, which are also in somewhat of a mess.

Mr. Timms: I am extremely grateful to the hon. Gentleman for drawing the Committee's attention to an avoidance loophole that exists in the Bill as drafted. Our intention is clear: we want to protect the national insurance liability when an option is exchanged for a consideration that may be of a higher value. We have received representations that clauses 2 and 3, as drafted, could lead to the opportunity to avoid national insurance contributions. The clauses are intended to leave a class 1 liability on the excess value given for a settled option, but national insurance payments could be avoided through manipulation of the exercise price.

I am happy to accept these helpful amendments in principle, but not as drafted. They would close one loophole but open another, which I know is not the hon. Gentleman's intention. I undertake to introduce a Government amendment on Report, so I hope that he will withdraw the amendment.

Mr. Flight: I thank the Minister for his comments. Far be it from me to help to draft such Bills, but I am glad that the Government will address the issue on Report. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mr. Flight: I beg to move amendment No. 19, in page 3, line 23, after `(5)', insert `and subsection (5A)'.

The Chairman: With this it will be convenient to take the following amendments: No. 20, in page 3, line 46, at end insert—

    `(5A) Where a person becomes liable to pay to the Inland Revenue a special contribution, subsection (4) shall not apply if the person has paid an amount in respect of the special contribution (such amount being the sum which the person believes on reasonable grounds to be owing by him to the Inland Revenue) but, prior to the expiry of the deadline mentioned in paragraph (b) of subsection (4), the Inland Revenue have neither confirmed nor agreed the amount of special contribution due.'.

No. 31, in page 3, line 46, at end insert—

    `(5A) Unless the contrary can be shown, for the purposes of paragraph (c) of subsection (5) above, it shall be assumed that a person employed by a body corporate, or a person who is a body corporate, which is under the control of a body corporate resident outside the United Kingdom has a reasonable excuse.'.

Mr. Flight: Amendments Nos. 19 and 20 are important in terms of fairness towards individuals who may be affected by the Bill. If the Revenue has not confirmed the amount due and the special contribution has not been made within the specified period, the election fails and individuals and companies are exposed to the full NIC liabilities. Towards the end of the 92-day notice period, a dispute could arise over share valuation, especially for companies that are not listed but have readily convertible assets and are close to a listing. It would be wrong for taxpayers to be penalised either because of an Inland Revenue delay or because a perfectly bona fide argument was in the process of being thrashed out. It would be much fairer for the law to provide that the election was safe, but if the Revenue were to win the argument that the price was too low, a top-up could be payable subsequently. It would be unreasonable to put the whole election at risk.

Amendment No. 31 concerns a different issue, which the Minister touched on. In the case of the growing number of foreign-owned companies, especially in the high-tech sector, individuals will frequently have options in the parent company—predominantly in the United States—and they are kept out of the loop of the United Kingdom company. Often the administration of the UK company will not be aware of the option arrangements with the UK-based staff of the parent company. Such companies may not be on the ball in time to respond to the proposed legislation. Amendment No. 31 would give a second wind to companies in that category.

The extension from 60 to 92 days will help, but the Minister has already accepted that this is a problem category of companies, because the US parent will have to address the requirements of UK law.

Mr. Timms: We have already accepted an extension to 92 days, so further amendments in that regard are unnecessary. There may also be a misunderstanding about how the Bill deals with notification and payment procedures. The submission of notification and payment of the special contribution do not require prior Inland Revenue approval or confirmation. An employer could not claim that a delay in payment of the contribution was due to delay in such a process.

The hon. Gentleman makes the point that if a share valuation is required, but the valuations are not agreed in time, companies could be penalised. If the amount paid proves to be wrong, there are appeals provisions in the Bill that will enable the correct amount to be paid after 92 days, provided that the original estimate was reasonably made.

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