Finance Bill

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The hon. Gentleman is discussing shares received outside an approved scheme, perhaps those paid as a form of salary sacrifice, which is a different way of paying them, basically to avoid tax—that is perhaps a less charitable way of interpreting the reason for paying them like that. If an employee who receives shares outside of an approved share scheme, which is when the tax liability that arises is different, those shares are taxable on their value in the year in which the award is made, not the year in which they are disposed of. Inside an approved tax scheme, the rules

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are different. The Government have a wide range of approved schemes on offer, having undertaken extensive consultation with employers about the types of scheme that they want.

The existing legislation puts an employee who has acquired shares through exercising an option granted by reason of their employment in the same position as one who is awarded the shares directly. Liability arises on any gain in the year in which the shares are received, through the exercise of the option. It would be wholly inconsistent and unfair to defer the assessment of a gain arising through the exercise of an option simply because the taxpayer chose to retain the shares rather than sell them. We are talking about unapproved schemes.

The amendment goes further. It wants the tax so chargeable to be deferred, but does not make it clear when that tax would become payable. Would it be on the disposal of the first share, on disposal of all the shares or not until the very last share had been sold? The amendment would operate so that, in effect, the payment of any tax arising could easily be deferred indefinitely. I am not attracted to that. I want to make it very clear that I am not attracted to an amendment that allows tax to be deferred indefinitely by the manipulation of how many shares have or have not been sold.

The amendment does not make it clear whether or how PAYE should be operated at the same time as the disposal of the share. The employer should know when an option is exercised, because he or she provides the share. It may be inconvenient to have to monitor employees to whom options are granted, although it is feasible, but how can an employer be expected to know, in time to operate PAYE properly, when an employee or ex-employee disposes of his shares?

I understand the hon. Gentleman's point, but such an amendment would not be acceptable. It would enable people to be paid in shares rather than a salary, not to be taxed on those shares when they are awarded and then to manipulate over an indefinite period the disposal of some or all of the shares, without the disposal ever incurring a tax charge.

Accurate as the hon. Member for Arundel and South Downs sometimes is, on this amendment I must say to him absolutely no, not under any circumstances. If he wishes to make further points about the disposal of shares, I shall be happy to consider them, but I shall ask my hon. Friends to vote against the amendment if the hon. Gentleman chooses to put it to the vote.

Mr. Flight: I am surprised that the Paymaster General's reaction should have been thus, because she knows, and I specifically went through it, that the approved share option scheme is now extremely modest. Its usage is limited by the fact that it has a £30,000 maximum, frozen for the past 12 years and, as I said, usage of the EMI scheme is also extremely limited. The majority of businesses have to use unapproved share option schemes.

In our previous sitting the Government boasted that the unapproved share option scheme regime in the United Kingdom was comparable with the US regime and argued that the Labour Government was as

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friendly to enterprises as the US. That is not the case. Moreover, the situation has been worsened by the NIC charges, to an effective tax charge of 53 per cent. on exercise.

The Paymaster General made much of the fact that this was an arrangement to defer the tax. That is not so. The amendment refers to the disposal of shares. Whatever shares are disposed of, the tax charge would have to be paid on the bit acquired under options.

The object is simple. It is to get round the problem, which I should have thought the Paymaster General was aware of as it is making many of the entrepreneurs whom the Chancellor is trying to woo exceedingly upset with the Government, that people are forced to sell the shares that they acquire under unapproved share option schemes: they cannot afford to continue to have an ownership stake in the business that they are driving. The point of giving them share options is to make them perform. Therefore, the regime for what constitutes the overwhelming majority of share option incentivisation in the country is unacceptable and must be looked at.

The main area that constitutes fairness is the concept, as in the US, that the tax liability does not arise until the shares are disposed of. Indeed, in the US that is the case throughout in a more generous way than in this country. It is not a device. Moreover, to talk about share options as a form of pay is completely to misunderstand their purpose. The prejudice was based on the exploitation by certain individuals in privatised industries in the past. Share options may or may not be worth something as a result of what has happened to markets in the past three years. Most share options are substantially under water. Therefore, at the time of an award sum, they are in no way an alternative to cash in the bank. Clearly, they are there to lock in and motivate key management.

5.15 pm

If the Government really are committed to entrepreneurial spirit, they must address the issue, not necessarily by the amendment. We would want to press the amendment to a vote out of principle, unless we get a more constructive response from the Paymaster General on an issue that is widely acknowledged, particularly among medium-sized businesses.

Dawn Primarolo: We have the lowest starting rate of corporation tax in the European Union; we have already discussed that. The UK has a range of extremely generous tax-advantaged employee share incentive schemes, other tax-efficient arrangements to encourage venture financing and the new capital gains tax business asset taper, which we have yet to discuss, to encourage long-term shareholding. In addition, we have one of the lowest income tax rates in the world. That combination of factors makes the United Kingdom an extremely attractive place for large and small businesses.

I disagree with the hon. Gentleman, but it is entirely his prerogative to put the amendment to a vote—I would not argue with that for a minute. However, if he scrutinises what he has tabled and considers what he is

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seeking to achieve, he will realise that he is creating a situation in which a tiny proportion will have an opportunity to do very well, but employee share ownership and the incentives in the rest of the tax system will be damaged—precisely what he said in earlier debates that the Government should avoid. After what has been a constructive debate through most of the day, I am very sorry that we should end with a failure to agree. However, we do disagree and I ask my hon. Friends to oppose the amendment.

Question put, That the amendment be made.

The Committee divided: Ayes 6, Noes 13.

Division No. 3]

Chope, Mr. Christopher
Field, Mr. Mark
Flight, Mr. Howard
Hoban, Mr. Mark
Jack, Mr. Michael
Luff, Mr. Peter

Boateng, Mr. Paul
Casale, Roger
Cruddas, Jon
Cunningham, Mr. Jim
Curtis-Thomas, Mrs. Claire
David, Mr. Wayne
Luke, Mr. Iain
Marris, Rob
Pond, Mr. Chris
Primarolo, Dawn
Ryan, Joan
Southworth, Helen
Sutcliffe, Mr. Gerry

Question accordingly negatived.

Mr. Flight: I beg to move amendment No. 16, in page 141, leave out lines 20 to 24.

The amendment seeks to remove paragraph 4 of the original schedule, which extends the scope of section 144A of the Taxes Act 1988. It seems that the Government are seeking to use the paragraph beyond the reasons for which it was originally intended. It was introduced in 1994 as an anti-avoidance measure and was part of the package to stop the type of abuse to which the Paymaster General referred earlier of paying executives in non-cash forms, such as gold, in order to gain a tax advantage outside the PAYE system. It provides that an employee is obliged to hand over the PAYE, which is due in 30 days, or is taxed as if in receipt of benefit, which means, in effect, that he is taxed twice. That provision was subsequently extended to share option gains.

There have been suggestions that section 144A of the Taxes Act 1988 is being used as a tax-collecting measure in its own right, which is beyond the original intention. Schedule 6(4) is a clear example of that stealth approach—it seems innocuous, but the effect could be to penalise the less well-off employee. The Law Society and various other bodies have raised that issue.

At present, a series of tax provisions for benefits apply only to what are called higher-paid employees—those who earn more than £8,500 a year. Unless things have changed, the Government propose that items covered under section 144A should count towards whether an employer is higher-paid. If a low-paid employee receives a non-cash benefit, such as a share option from his employer, the Government want to swoop down and charge him under the provisions that

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apply to company directors—and until today, I thought that the Government believed that share options were a good thing. Non-cash benefits by nature are somewhat unpredictable in value and employers are unlikely to know in advance whether an employee falls under the heavier compliance regime for the higher paid.

Paragraph (4) adds to regulatory uncertainty for employers, and it is a mean-spirited attack on the lower paid. Using the word ''emoluments'' may also make the charge under section 144A liable to class 1A NICs.

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