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Baroness Hollis of Heigham: My Lords, surely not with New Labour!

Earl Russell: My Lords, while the Minister was speaking I recalled the days when the noble Lord, Lord Peston, was in Opposition, observing that the Government's basic policy was, "It'll be all right on the night". There is a great deal about government which does not change with a change of party.

Of course, I understand the distinction that the Minister is making between how the money reaches the post office and how it reaches the claimant. But I think the Minister also understands the point made by the noble Baroness, Lady Byford, about the income of the sub-postmaster. At present I do not understand how a saving of £400 million is compatible with a continuing secure income for a sub-postmaster. It is perfectly possible that that question may have an answer. It is perfectly possible--

Baroness Hollis of Heigham: My Lords, I should have thought that my noble friend Lord Sainsbury gave the noble Earl and other noble Lords that answer during discussion on the Postal Services Bill about the capacity of the Secretary of State to devise a subsidy where he and POCL thought it was appropriate.

Earl Russell: My Lords, I touched on that point in moving my amendment. The words are "the Secretary of State may". It does not say he will; it does not say what he may do. The Minister is asking us to take a good deal on trust. I appreciate that before the publication of the PIU report she may have no other option. But it is not that long since she was in Opposition. She cannot have completely forgotten what it felt like. If, in the meantime, we do feel a desire for belt and braces, or, if she prefers it, for elastic and safety pins, I do not think that she should be too surprised.

I heard the points made by the noble Lord, Lord Warner. Those were serious points and I listened to them carefully. I appreciate the force of what he says. But what concerns us is that we should not be too far embarked on the new method of doing that before a secure method of making the post offices work has been worked out. We have come very close to that already. We on these Benches have no wish to come any closer.

It may be that by the time we come back again there will be no need to return to this matter. We will read with an open mind what the Government have to say

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in the PIU report. In the meantime, I shall withdraw my amendment. But should I be justified in the suspicions I see of the fullness of the Benches opposite, we are quite ready to stretch our legs if the Government wish us to. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 122 not moved.]

Schedule 7 [Housing benefit and council tax benefit: revisions and appeals]:

Baroness Hollis of Heigham moved Amendment No. 123:


    Page 144, line 37, leave out ("(4)") and insert ("(3)").

The noble Baroness said: My Lords, in moving Amendment No. 123, perhaps I may speak also to Amendments Nos. 124 to 126. These are minor and technical amendments to Schedule 7.

I apologise for trying the patience of the House with further amendments, but I can assure noble Lords that these amendments, although minor and technical in nature, effect a necessary correction to an oversight in the current draft. They ensure that standard parliamentary procedure is followed in respect of all regulations made under Schedule 7 and clarify the scope of those regulations. I therefore ask noble Lords to accept the amendment. I beg to move.

On Question, amendment agreed to.

Baroness Hollis of Heigham moved Amendments Nos. 124 to 126:


    Page 144, line 39, leave out ("of the Secretary of State").


    Page 144, line 40, leave out ("his powers") and insert ("any power").


    Page 144, line 48, leave out ("by the Secretary of State").

On Question, amendments agreed to.

[Amendments Nos. 127 and 128 not moved.]

Clause 75 [Contributions in respect of benefits in kind: Great Britain]:

[Amendments Nos. 129 to 132 not moved.]

Baroness Hollis of Heigham moved Amendment No. 133:


    Page 76, line 40, at end insert--


("( ) In paragraph 8(1)(ia) of that Schedule (power to provide by regulations for repayment in prescribed cases of the whole or a part of a Class 1B contribution), after "part" there shall be inserted "of a Class 1A or".").

The noble Baroness said: My Lords, in speaking to Amendment No. 133, perhaps I may speak also to Amendments Nos. 139 and 142 to 145. This group puts into effect a technical, consequential amendment which was unfortunately missed when the legislation was drafted. The purpose is to allow refunds of Class 1A national insurance contributions to continue to be made where relevant information reaches the employer late and leads to him overpaying Clause 1A NICs through no fault of his own.

Paragraph 8(1)(i) of Schedule 1 to the Contributions and Benefits Act confers powers on the Treasury to provide by regulations for the refund of Class 1A

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NICs, in particular where an employer is told relevant information about his employee's business mileage which affects the valuation of a car benefit after he has paid his Clause 1A NICs. The change in valuation for tax in turn affects the liability for Class 1A NICs so, where appropriate, a refund is made.

I could go into further detail on what I promise noble Lords are technical amendments, but perhaps I may ask that the amendment be accepted. I beg to move.

On Question, amendment agreed to.

Lord Goodhart moved Amendment No. 134:


    After Clause 75, insert the following new clause--

PAYMENTS TREATED AS REMUNERATION OR EARNINGS

(" .--(1) For paragraph (a) of subsection (4) of section 4 of the Social Security Contributions and Benefits Act 1992 there shall be substituted--
"(a) the value, at the date when it is obtained, of a right to acquire shares in a body corporate obtained by the earner as a director or employee of that or any other body corporate,".
(2) After that subsection there shall be inserted--
"(4A) The value referred to in subsection (4)(a) shall be taken to be the difference between the amount that a person might reasonably expect to obtain from a sale of the right in the open market immediately after it was obtained and the amount or value of the consideration (other than the performance of any duties in or in connection with the office or employment by reason of which the right was granted) given for the grant of the right.
(4B) Subsection (4)(a) shall apply to rights obtained after 5 April 1999 if and in so far as those rights have not been exercised or released before 19 May 2000."
(3) Where subsection (4)(a) of that section (as substituted) applies to any rights obtained after 5 April 1999 but before this section came into force, the contributions in respect of those rights become due on the date on which this section comes into force but shall be treated as bearing interest from the date on which the contributions would have become due if this section had been in force on the date when the rights were obtained.").

The noble Lord said: My Lords, I apologise for raising a technical and complicated issue late at night. However, I suppose that I would need also to apologise for raising it earlier in the day when even more Members would be bored by it.

This amendment, along with Amendment No. 135, concerns national insurance contributions paid on share options granted to employees as a part of their remuneration packages. As I am sure noble Lords know, this is a common practice among the staff of e-commerce dot.com companies and other businesses involved in the IT world. Indeed, I believe that the practice is pretty much universal among the more senior employees. Perhaps I should declare an indirect interest here. I have a son-in-law who works for an IT company and receives share options as a part of his remuneration package.

Until 6th April 1999, no NICs were payable on share options forming part of a remuneration package even though they were, particularly in high-tech businesses, an important part of that package. I believe that the Government rightly regarded that as a loophole which

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needed to be closed. They went about it in a way that has subsequently raised a number of problems. For options granted on or after 6th April 1999 the Government imposed Part I NICs on gains from the exercise of the share options except where they were exercised as part of an Inland Revenue approved scheme. That meant that not only did an employee have to pay the primary contributions for NICs--in many cases that was probably not an important factor because many of the employees had earnings in cash above the upper earnings limit and therefore had nothing extra to pay--but also that the employer had to pay secondary Class I contributions on which there is no upper earnings limit.

If one imposes NICs on an option when it is exercised, at the date of the grant the employer is going to be very uncertain indeed both about the date at which he will have to pay the secondary contribution and the amount to be paid. But under accountancy rules he has to make provision for future liability to pay NICs on the options. The accountants insist on what might be called a gloomy view of the liability being undertaken.

A company called QXL, which provides auctions on the Internet, had to make provision in its last year accounts for future liabilities for secondary NICs on options of £11.6 million. This was on a total turnover for that year--not profits--of £6.9 million. The consequences for the ability of a company in that position to raise money from the market is very obvious indeed.

In Clause 78 the Government have taken some steps to deal with the problem. They did so by introducing at Committee stage an extremely complicated amendment. The identical Clause 82 deals separately with the same situation for Northern Ireland businesses. The Government introduced these amendments at very short notice.

The main purpose of these amendments is to allow employers, by agreement with their employees, to transfer the liability for secondary contributions on the share option gained to the employees so that they pay both the primary and secondary contributions. That applied to agreements entered into after 19th May. One can see, in that situation where the employee is offered the choice between paying the secondary contribution himself or getting no option at all, that it is going to be pretty easy to reach agreement.

At Committee stage I did not object to the amendment, but I said that if there were going to be problems I would expect to hear from those who were concerned about the government amendments. Indeed, that is exactly what happened. I was approached by QXL and also by a well known public relations firm representing a number of major clients in the e-commerce world. I saw them and I was persuaded that they had a case which required discussion and which was a proper matter to raise in your Lordships' House. I should say that the amendment was drafted by me and has not been discussed with the businesses concerned.

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It is, I think, agreed by firms in the e-commerce world that the government amendments in Clauses 78 and 82 are an improvement on the status quo. But there are two serious complaints. First, the amendments provide no relief from the unexpectedly large liabilities for secondary contributions incurred by those granting options since 6th April 1999. Those liabilities are unexpectedly large as a result of the enormous increase in the value of e-commerce shares and, therefore, the value of options which have occurred after April 1999; and although it has declined from its peak earlier this year, it is still a long way above what it was in April 1999.

The second complaint by those companies was that the effect of the transfer of liabilities for secondary contributions from employers to employees is to create an effective tax rate of 47 per cent on gains, even taking into account the fact that, for tax purposes, the secondary contributions will be allowed as expenses against tax before the tax liability is computed. So there is an effective tax rate of 47 per cent, taking income tax and NICs together. In the view of those companies, that is likely to discourage the mobile and very expert workforce required in businesses of that kind from taking jobs in the United Kingdom, and it may lead some of the companies to move their operations abroad. The companies are highly mobile. They can, of course, set up in virtually any part of the world that they choose.

The amendment seeks to deal with both those problems. It proposes that the NIC liabilities are to be charged on the value of the option rights when the option is granted and not when it is exercised. That will leave the liability for secondary contributions with the employer, but on a much smaller amount and on a more easily ascertainable basis, not on an open-ended basis as to the ultimate liability.

The amendment proposes, secondly, that the new basis of calculation will be made retrospective, subject to a liability to pay interest. It seems in principle fair to charge the NICs on the option value at the date of the grant because that is the value of the remuneration package when it is paid, and it seems that it is perfectly legitimate to treat the subsequent increase in value of an option as something in the nature of a capital gain, on which NICs are not charged. It is obvious that an option has a value, even if the option is to buy shares at a price at, or even above, the level at which those shares stand at the date when the option is granted. It is a one-way bet: if it is not in your interest to exercise the option, you do not have to; if it is, you can exercise it. The amendment also preserves the liability for secondary contributions on the employer, which seems to us to be the place where it belongs.

I have to say that I was subsequently approached by another company, NTL, which is also in the IT business and which prefers the Government's formula to the formula in my amendment. So it is clear that there is no consensus in the world of high-tech. It may be that the issue could be solved by giving a right to elect to pay either on the value of the option at the date of the grant or to transfer the liability to the employee and base it on the gain on the exercise of the option.

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I think that everyone in this world is agreed that it is desirable that this extremely high, unforeseen liability which has arisen as a result of the great increase in the value of Internet shares over the past 14 months should be brought back to more manageable levels because of the serious effect that these outstanding and wholly unpredictable liabilities will have on the financial situation of high-tech companies.

I would normally have tabled the amendment in Committee but had no opportunity to do so, so I have brought it forward for discussion now. Have the Government considered charging NICs on the value of the option at the date of the grant? If so, why was that option rejected in favour of the alternative that they have adopted? Are the Government prepared to give some relief to companies that have incurred high and unpredictable liabilities for future NICs that they would not have done, had they granted options under the formula that will take effect from 19th May? I beg to move.


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