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Lord Higgins: I am sorry to interrupt the Minister, but could she just repeat the numbers in this grouping? She very courteously sent me a note on this group of amendments, but I understood that she was going to move amendments on Report.
Baroness Hollis of Heigham: No. I am moving Amendment No. 193A and speaking to Amendments Nos. 198ZA, 200A, 200B and 203. The Government have given an undertaking as far as they can not to introduce new material on Report which, therefore, is not available for full discussion. That is why I consulted noble Lords as much as I could over the weekend. I contacted the noble Lords, Lord Astor and Lord Goodhart, and said that I was very sorry that we were tabling such amendments late. I apologised for that fact but I thought that, on balance--and bearing in mind that these measures are welcomed by industry--it was more helpful to noble Lords to table them for tonight to enable discussion to take place, rather than leave them to the Report stage.
Obviously, I tried to reach the noble Lord, Lord Higgins, over the weekend. I am sure it was my fault that I was unable to do so. However, perhaps I may suggest to him that he allows me to move and to speak to those amendments. I hope that the noble Lord will not be unhappy about any aspects of them but, if he is, I shall be more than happy to set up a meeting with officials to enable him and the noble Lord, Lord Goodhart, to discuss the implications of the amendments in greater detail. Thereafter, if the noble Lord, Lord Higgins, wishes to return to the matter by tabling clarifying amendments, so to speak, on Report, he will be entitled to do so. Can I suggest that to the noble Lord as the possible way forward?
Lord Astor of Hever: There may have been a breakdown in communication here. I had understood that the amendments would be tabled but that the debate would take place on Report. I also understood that the Minister would provide officials to brief us between now and that time, with the general debate taking place at Report stage. That was the tenor of our discussion on the telephone.
Baroness Hollis of Heigham: If I was going to table them on Report, they would not normally have been tabled at this stage. Indeed, I would not have been running around during the weekend telling noble Lords that I was tabling these amendments. I did so because we were doing precisely what we had sought not to do; namely, tabling amendments at quite short notice. I was very anxious that noble Lords should have the benefit of that information. I certainly sent the identical letter to both the noble Lord, Lord Astor, and the noble Lord, Lord Goodhart. Obviously, I tried to reach the noble Lord, Lord Higgins, but through no error on either side--he was perfectly entitled to be away--I was unable to reach him. I give way.
Lord Goodhart: I am grateful to the Minister. From my point of view, although I had not thought about this in very great detail, I should say that my assumption was that if these amendments were to be tabled today, they would, in accordance with normal practice, also be moved today. That was my assumption.
Baroness Hollis of Heigham: As I say, it is the Government's fault, so to speak, that these amendments are tabled so late. I do not like that situation. However, I hope that the noble Lord will allow me to explain the amendments. As I say, I am happy to offer the noble Lord a meeting with officials to discuss matters. He may return to the matter at Report stage with amendments either to clarify or to seek to amend the Government's proposals.
I say in my defence that employers are pressing us on this matter. I believe that the measure is broadly regarded as entirely benign. Therefore I hope that the Committee will allow me to cut corners, so to speak, on introducing it tonight.
Lord Higgins: I am perfectly content for the noble Baroness to proceed as she has suggested. If she wishes to proceed with her explanation now, that is fine. We shall then consider the matter further at Report stage.
Since 6th April 1999, gains made by employees when they exercise share options granted after 5th April 1999 are subject to Class 1 NICs, unless the share options are awarded and exercised under an Inland Revenue approved scheme or the shares acquired are not readily convertible into cash.
The Committee may be aware that under accountancy rules companies are required to make a provision in their accounts for the anticipated NICs liability on share options based on the market price of the shares on the date that they prepare the accounts.
Many companies have informed us that while they can plan for NICs on regular pay, it is more difficult for them to plan for NICs on share option gains, particularly where the share price is volatile, as it is in the high growth sector of the economy, such as the new Internet companies. The exposure to so unpredictable a NICs liability could put at risk these companies' investment strategies and even make some companies technically insolvent. The unpredictability of accounting provisions is a severe worry to employers. As a result, a number of these companies are now questioning their investment plans for the UK and have told us that they might consider moving jobs elsewhere.
Class 1 NICs consist of a primary contribution, which is payable by the employee and a secondary contribution which is payable by the secondary contributor, which, in most circumstances, is the employer. Current social security legislation provides a statutory bar to prevent employers from recovering any part of their secondary Class 1 liability from the employee. This amendment strengthens that protection for the employee but at the same time introduces an exception for NICs arising on share option gains.
The amendment does three things. First, it allows employers and employees to reach an agreement that a secondary contributor (usually the employer) may recover some or all of the secondary NICs in respect of rights to acquire shares from the employee. Secondly, and as an alternative, the employer may make an application for approval of an election to the Board of the Inland Revenue. If approval is obtained, the employer and employee can jointly elect to transfer all or some of the liability to pay the secondary NICs on the share option gain to the employee. Elections can be
We shall introduce the ability to transfer the liability to the employee to overcome accounting difficulties for companies that report in the United States which would otherwise arise if the employer simply recovered the NICs. This flexibility has been provided in response to requests made to us during the consultation period.
Thirdly, the proposed amendment strengthens the existing statutory bar that prevents the employer recovering any part of the secondary NIC in respect of all forms of earnings (subject to the new exception for share options). It extends protection to the employee by ensuring that the person liable to pay the Class 1A NICs (on benefits in kind) or Class 1B (on pay-as-you-earn settlement agreements) cannot recover his liability from the employee.
I emphasise that this amendment seeks to put in place a solution that a number of companies have requested and we are meeting those requests. I should also add that the Government have consulted widely on the solution and it is clear that many of the companies that we have spoken to will welcome it. I can assure the Committee that the employer may only transfer or recover his liability from the employee if the employee so agrees.
The merits of the solution are such that it completely eliminates the unpredictability of the charge to the company and it moves the liability to the person with funds to pay for it. We believe that it is needed to attract business and jobs to the UK and to help UK companies compete in the global market. It goes towards meeting the Government's aim of a fairer national insurance system by ensuring that NICs are paid on share options and not treated more favourably than other kinds of remuneration.
As I said, I am very happy to expand on that to Members of the Committee, either by letter or by meeting. Given that explanation, I hope that the Committee will accept this measure and these amendments. I beg to move.
Lord Higgins: It is helpful to have that on the record. No doubt we shall wish to consider the matter between now and Report stage. A number of thoughts immediately occur to one--for example, does the Revenue refund the money if the share option goes, in the jargon, under water? However, I leave that to another occasion. We appreciate what the Minister has said.
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