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House of Commons

Friday 21 June 2002

The House met at half-past Nine o'clock


[Mr. Speaker in the Chair]

Orders of the Day

Employee Share Schemes Bill

As amended in the Standing Committee, considered.

New Clause 1

Deductions: income tax and capital gains tax

'(1) Schedule 8 to the Finance Act 2000 is also amended as specified in this section.
(2) In paragraph 88 (income tax), after sub–paragraph (4) there is inserted—
"(4A) In the case of shares acquired by the trustees by virtue of a payment in respect of which a deduction is allowed under paragraph 112A, the period applicable to the shares is (notwithstanding sub–paragraphs (3) and (4)) the period of ten years beginning with the date of acquisition."
(3) In paragraph 98 (capital gains tax), after sub–paragraph (3) there is inserted—
"(3A) In the case of shares acquired by the trustees by virtue of a payment in respect of which a deduction is allowed under paragraph 112A, the relevant period is (notwithstanding sub–paragraphs (2) and (3)) the period of ten years beginning with the date of acquisition."
(4) In paragraph 100 (classes of share for the purposes of capital gains tax), at the end there is inserted—
"(4) For the purposes of that Chapter, any shares which—
(a) were acquired by the trustees by virtue of a payment in respect of which a deduction is allowed under paragraph 112A, and
(b) have not been awarded under the plan,
shall (notwithstanding that they would otherwise fall to be treated as of the same class) be treated as of a different class from any shares held by the trustees that were not so acquired by them."—[Mr. Lazarowicz.]

Brought up, and read the First time.

9.33 am

Mr. Mark Lazarowicz (Edinburgh, North and Leith): I beg to move, That the clause be read a Second time.

When I realised a few weeks ago that this morning's debate would coincide with other events thousands of miles away in the far east, I was somewhat alarmed. I was even more concerned when the eventual participants were confirmed a few days ago. I am therefore grateful to the Members who have come to the Chamber this morning and dragged themselves away from the analysis of the

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game. As a Member representing a Scottish constituency, I extend my commiserations on the result to colleagues representing English constituencies.

Moving quickly to the substance of the new clause, I declare first as an interest support from the Co-operative party and Job Ownership Ltd. in the preparation and development of the Bill, which I have declared in the Register of Members' Interests. If we reach Third Reading, as I hope we will, I shall say a little more about that support.

New clause 1 was tabled following a welcome offer by my hon. Friend the Paymaster General in Committee. When the somewhat lengthy Committee proceedings were drawing to a close, I told Committee members that the Government were willing to extend the scope of tax advantages in the Bill—an offer that I and people supporting the Bill both inside and outside the House welcomed. It was not possible to introduce an amendment in Committee, but new clause 1 gives effect to the change proposed by the Paymaster General. As hon. Members can see, the new clause was tabled in her name and mine.

To clarify the purpose of the new clause, I shall make brief reference to the provisions in the Bill that it seeks to amend. The Bill includes a provision allowing corporation tax relief to be granted upfront where a significant block of shares—10 per cent. or more—is transferred to an employee trust. Under the share incentive plan provisions that give taxation advantages to encourage employee share ownership, such corporation tax relief is available only when shares are transferred from an employee share trust to individual employees. However, such a transfer of shares to individual employees may take a long time when a large part of a shareholding in a company is transferred at the outset for the benefit of employees. As a result, the current taxation concession would not be available in such circumstances, making such a route expensive and in many cases so prohibitive that the transfer of shares would not take place.

Clause 1(3) allows a period of 10 years in which shares can be held by an employee share trust if it is to gain the benefit of corporation tax relief. That measure makes it much more feasible for an employee trust to acquire shares and gradually distribute them to employees if it wants to do so. The trust will therefore be more easily able to plan the acquisition and distribution of shares in the best way for the development of the business and the trust itself. No doubt it is also in the interest of the employees and may encourage the trust to act as their corporate voice, particularly when the provisions in clause 1(2) are utilised.

New clause 1 seeks to give a further tax concession to trustees holding employee shares. It does so in two ways. First, subsection (2) ensures that the dividend and other distributed income arising from shares held by the trustees during the 10-year period and not otherwise appropriated will be charged to income tax at the special rates applicable to such trusts as set out in section 686 of the Taxes Act 1988. Secondly, subsections (3) and (4) ensure that such shares will not be charged to capital gains tax during the time in which they are held by the trustees in the 10-year period.

Mr. Tom Watson (West Bromwich, East): I am grateful to my hon. Friend for giving way, and I am particularly pleased by his kind comments at the start of

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his speech. I assure him that there is no more solid return to reality than discussing new clause 1, after a heroic performance by England that was none the less disappointing. How does my hon. Friend think the new clause will affect take-up by companies?

Mr. Lazarowicz: It is impossible to give a precise estimate of the number of firms that might benefit from the new clause, but a number of businesses have told me that they would welcome the package of measures contained in the Bill as a whole. I shall refer to that at greater length on Third Reading, if we get to that stage. There is certainly some evidence of companies wanting to make use of the entire package. I hope that hon. Members accept that we are discussing not just the measure, but a change in the culture and attitude of business, financial institutions and the tax regime to employee share ownership. We are pointing the way for changes in the future which, I hope, many companies will take advantage of.

Mr. Andrew Love (Edmonton): I add my voice—which may seem a rather strange voice, coming as it does with a regional accent—to that of other hon. Members who have commented on England's sad loss today. The players put up a heroic performance, but the run of play did not quite go with them.

Does my hon. Friend recognise that there was concern that if we had continued with the tax advantages for only the two and five-year periods, as set out in the original legislation, that would have been a significant disincentive, given how long it takes to set up a trust—

Mr. Deputy Speaker (Sir Alan Haselhurst): Order. Even on a Friday, that is going beyond the bounds of an intervention.

Mr. Lazarowicz: My hon. Friend makes a good point—so good that I was about to make it myself. As he pointed out, provisions for such tax concessions already exist under the Finance Act 2000 for shares held in an employee trust, but they apply only for periods of up to two or five years, depending on the specific circumstances. There was concern that, with the welcome 10-year concession applying to the company that transferred the shares to the employee trust, but with the trustees not having a similar 10-year concession, the effect of the measure could be restricted. He made that point well.

The combined effect of the provisions in the new clause is to bring the treatment of shares acquired with the benefit of upfront corporation tax relief into line with the treatment of shares acquired by the trustees of the employee trust, in respect of both taxation of dividends on the shares held by the trust and capital gains for a period of up to 10 years, depending on how long the shares are held. In other words, when the shares are transferred to an employee share trust, the company transferring them gets the up-front corporation tax relief and when the trustees have acquired those shares, they get those advantages also.

Such a concession will greatly increase the utility of what I might term the 10-year period of grace before shares must be distributed to individual employees by a

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trust. That will make the concession much more attractive and of much greater assistance to businesses and owners of businesses who want to go along this route. I am grateful to the Government for volunteering a further tax benefit to encourage the holding of shares by employee trusts, and I commend the new clause to the House.

9.45 am

Ms Meg Munn (Sheffield, Heeley): I, too, welcome the new clause, which was ably moved by my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz). I shall not say anything about the football. I do not know much about it, other than the result, so let us move on to more important and long-lasting matters.

The new clause is complex. When I first read it, I thought that I would never be able to understand it, but fortunately I was a member of the Standing Committee, where my hon. Friend the Paymaster General explained in great detail what the new clause would mean and why the Government were offering the concession to further the aims that my hon. Friend the Member for Edinburgh, North and Leith is trying to achieve. The commitment was made at that stage, and it was most welcome. It clarifies the position, by bringing the extended period of 10 years for shares acquired with the new corporation tax relief into line with other tax provisions. The new rules will improve matters for everybody concerned.

As we discussed at length on Second Reading, there is an important role for share incentive plans. The measure adds to the incentives for companies to go down that route. The early deduction of corporation tax is particularly important on the money that is provided by the company to a share incentive plan trust, so that it can buy a block of shares that, over the longer period, it can begin to transfer to its employees.

I support the new clause, which improves a strong and welcome Bill. I hope that the House will endorse it.

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