Further Supplementary Memorandum from
First Tuesday on the budget
Share options were a huge concern for British
entrepreneurs, and the budget did little or nothing to address
their issues. First, it did not solve the most threatening problem
of the existing regulations: employer's NIC contributions on the
profit made on option sales. This creates huge potential liabilities
for small companies, for which cash flow is the key to survival.
Privately the government is being told that it could easily put
a small company out of business. The budget says that the financial
secretary will seek "a technical solution". But clearly
a promise is not a solution in itself; nor does the term "technical"
promise the sort of radical change that entrepreneurs wantwhich
is to tax options as capital gains rather than income.
It was a tiny step in the right direction for
the budget to increase the amounts of options allowed in "approved"
schemes, which do tax options as capital gains, to £100,000
each for up to 15 key employees. But this is inadequate on both
practical and moral grounds. In practical terms, British companies
are competing for key talent on international markets. And £100,000
in options just won't cut it for key peopleor even semi-key
people. They can get more abroad, particularly in the United States.
In the US, all options are taxed at capital gains rates and the
amounts granted are much, much higher. Microsoft has made thousands
of millionaires. At Yahoo, the average value of options per employee
is several million dollars. Even in absolute terms, £100,000
isn't much when adjusted for the risk that the options will be
worth nothing and the time required for the options to vest.
Increasingly, though, I'm less bothered by the
uselessness of government policy than by its injustice. Taxing
share options as income and share investments as capital gains
implicitly privileges money over labourwhich is exactly
what I thought a Labour government was against. Most new economy
companies have no assets apart from the talent and brainpower
of their employees. Microsoft, for example, has assets on its
books of only about $30 billion ($20 billion of that cash) for
a market capitalisation of well over $400 billion. What the stock
market values in the company is the talents of its employees.
It is precisely by letting employees share in the value that they
create that Microsoft and its ilk win their loyalty and dedication.
By taxing those options as capital gains, the United States puts
talent on level footing with the financiers who provide the cash
to fuel their original ambitions. But by taxing share options
as income and share investments as capital gains, Britain taxes
talent far more heavily than money. That seems just plain wrong.
On the plus side of the budget, faster approvals
for immigration is a good move. And faster write-offs for computer
equipmentthough they will do little for fast-growing firms,
will help traditional small businesses move on to the Net.
28 March 2000