Ruth Kelly: I have already spelled out how clause 48 improves the way in which capital gains tax and corporation relief work. The clause is being introduced in response to representations, and it is simple and straightforward to understand. On those grounds, I have to say that I am not attracted to new clause 5.
First, the clause aims to assign the taper history of the business assets to the shares received on the transfer, thus removing the need to opt out of incorporation relief. I would argue, however, that the assets of the businessfor example, the buildings and goodwillare not the same as the shares issued in exchange for them. It is right in principle that the taper clock on the shares should start when they are issued.
Secondly, the assets might in practice have several different histories for taper purposes. They might have been acquired at different times or be classified as a mixture of business and non-business assets. It would be extremely complex to translate accurately and fairly the different taper histories of the business assets into one value that could be applied to the shares received. New clause 5 deals with that neatly by ignoring the assets altogether and focusing instead on the earliest time after 5 April 1998 when the business was held by the person claiming incorporation relief. That is certainly a simple way of dealing with the issue, but it is also entirely inappropriate. It would, in effect, enable gains on all assets transferred to the company to benefit from a taper history extending back several years, irrespective of how long they had been assets of the business.
Clause 48 will allow a business owner to elect to opt out of incorporation relief and incur the immediate capital gains tax charge on the transfer of the assets to the company, but with the appropriate taper relief intact. That straightforward and simple change, which has been sought by representative bodies, will reduce tax charges in the majority of cases when the shares in the company are sold within two years after the transfer. On those grounds, I have no hesitation in recommending that the Committee reject new clause 5 and agree to clause 48 standing part of the Bill.
Mr. Flight: In simple terms, the Minister is saying that the clause is an improvement on the present situation, which is the case. In new clause 5, we raise the potential unfairness that, in the example, 11 months could be lost if the election were made. The Minister says that it is not worth the complication of trying to deal with that. It is not a fundamental issue of the new regime, but it is worth thinking about.
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As we are debating clause stand part as well as new clause 5, I also raise the fact that the time limits imposed might be relaxed by a year. The limits proposed in the Bill are meant to tie in with deadlines for filing returns. The Institute of Directors has suggested more relaxed limits in order to correspond to the normal patterns for other claims such as trading loss relief, so that taxpayers can finalise all their elections together to optimise their tax positions.
Ruth Kelly: I believe that the deadline is long enough to enable people to make elections in time to obtain the most favourable tax treatment that could apply to their circumstances. That is the critical point. The longer the election period, the more complicated the record keeping and tax calculations will be and, in the end, the higher the interest payments become. The time limit is reasonable and representative bodies seem to be content with it.
Question put and agreed to.
Clause 48 ordered to stand part of the Bill.
Shares acquired on same day: election for alternative treatment
Mr. Flight: I beg to move amendment No. 22, in page 34, line 15, leave out 'on same day' and insert 'by employees'.
The Chairman: With this we may take the following amendments: No. 23, in page 34, line 17, leave out
'on the same day and in the same capacity'
'in circumstances in which those shares qualify as business assets for the purposes of section 2A by virtue of paragraph 4(2) of Schedule A1'.
No. 24, in page 34, line 17, leave out 'on the same day' and insert
'during any thirty-day period.'.
Mr. Flight: With your indulgence, Mr. Gale, may I point out that amendments Nos. 22, 23 and 24 were tabled as an alternative to amendment No. 21, so I wonder whether I could speak to all of them at the same time.
The Chairman: Yes, if the Committee is happy for the amendments to be regrouped, given that they all relate to the same clause. We may begin to enter the territory of the stand part debate, but I am happy to include amendment No. 21 with the group that I announced. However, the Committee needs to be aware that if there is to be a Division on amendment No. 21, it will have to be moved separately at the appropriate time.
Therefore, with the amendments that I have announced, it will be convenient to take amendment No. 21, in page 34, line 24, leave out from 'where' to ', or' in line 26 and insert
'paragraph 44, 45 or 46 of that Schedule (exercise of option to acquire shares) applies'.
Mr. Flight: I thank you, Mr. Gale.
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Amendment No. 21 is our preferred way of addressing an issue of which the Government may be aware, as it has been raised by the leading lawyer on government law and enterprise management incentive schemes. Amendments Nos. 22, 23 and 24 are less effective alternatives to amendment No. 21.
The amendments attempt to cure what might have been a drafting oversight in the Bill. The intention is to provide employees with the right to elect that certain sales of shares can be charged to capital gains tax where there is a possible gain. The choice arises because, in certain circumstances, the shares may have been acquired under an option without being liable for income tax. The Bill cites two situations in which that can arise--the exercise of a company share option and one category of EMI option--but it omits too further types of EMI options. There is no sensible reason to distinguish between those different cases of EMI option, a category of tax-exempt incentives introduced by the Chancellor in 2000. It makes good sense to ensure consistent treatment, especially in a provision that is designed to be helpful and to simplify the tax position of employees.
Ruth Kelly: Clause 49 deals with the specific circumstance on which we received representations. We were told that some employees and companies periodically have a day on which they exercise options to acquire shares under the various share schemes operated by their employers. The employees then arrange to sell some of the shares to pay any income tax liabilities associated with the acquisition. Clause 49 focuses on a small subset of those cases. It typically applies where people who acquire shares in their company through different schemes on the same day have an income tax liability for some of those shares but not for all of them. The effect of the clause is to enable employees to pay that charge by selling some of their shares without incurring unexpected capital gains tax liability on the sale. It does that by changing the relevant rules.
I am delighted that the hon. Member for Arundel and South Downs has recognised that amendments Nos. 22, 23 and 24 are not the appropriate way to deal with the issue, and has decided to concentrate on amendment No. 21. Although we are not minded to accept amendments Nos. 22 to 24, we can accept the hon. Gentleman's amendment--[Interruption.] I am pleased to see that the hon. Gentleman appreciates our acceptance.
We have given the matter careful consideration in the light of representations received after the publication of the Bill. I am satisfied that amendment No. 21 is within the spirit and policy of clause 49. The amendment alters the way that the clause treats shares acquired by exercising enterprise management incentiveEMI--options. The point is that some EMI options incur an income tax charge when they are exercised, and others do not.
Clause 49 divides shares acquired under EMI options into two different categories, depending whether an income tax charge arises when the option
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is exercised, and distinguishes between the different types of EMI option. We are concerned that the provision should be simple for people to understand and apply, and the clause keeps things simple by dividing shares into just two categories: those acquired via a share option with no income tax charge attached are in one category; and all other shares are in the other. The different types of EMI option follow that division under the rules that we propose.
That is arguably the wrong result. Instead, all shares acquired via EMI options should be put in the same category as shares acquired via a share option with no income tax charge attached. That is a better result, because it will enable more people to take advantage of the new ordering rule for the disposal of shares.
I must point out, however, that re-shaping the two categories of shares in the way proposed by amendment No. 21 will not always produce a more advantageous result than that currently achieved by the clause. In certain circumstances, some people could find themselves unable to take advantage of the new provisions because of the proposed change.
We have been assured, however, that on balance it is better to make the change. No one will be worse off than they are under the current capital gains tax rules and the change will let some people take advantage of the new provisions in circumstances where they would otherwise not have be able to do so.
There is a second point to be considered: whether amendment No. 21 makes the rules proposed in clause 49 more complicated to operate. We are always concerned with compliance and the complexity of the system. On the face of it, the amendment introduces more complexity because the category of shares acquired by exercising options will include both shares with income tax liability attached and shares without. A mixed category looks more difficult to work out than a plain one. In practice, however, it should not be difficult to work out which category particular shares fall into. People should know whether shares have been acquired by exercising an EMI option, and knowing that will tell them which category of shares they have.
I am therefore persuaded that amendment No. 21 is sensible and would make a worthwhile change to clause 49. I am grateful to the hon. Gentleman for proposing it and invite the Committee to agree to it.