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Lord Higgins: I thank the Minister for that extremely comprehensive and sympathetic reply. We are grateful. I was slightly puzzled by the argument that acceptance of the amendment would mean that the recoupment could take place only when the next cash payment was available rather than during the course of the year. I shall read carefully what she said about that. We are pleased that she is prepared to review the problems we have raised and we are grateful for her clarification on telephone calls.
We tabled these proposals in relation to share options and share transactions, which we are all anxious to encourage. I am reassured on that by her answer both with regard to the statutory instrument amendment, which she mentioned, and on Clause 1, line 16,
- "In sub-paragraph (4) (contributions in respect of ex-employees)".
The FURBS issue may be important and I am grateful for her answer on that. It may be that at the end of the tax year a company has reasons for making a FURBS payment at the last minute. We would all want to encourage more pension provision and if that can be covered in the consultations she has kindly agreed to undertake, that, too, would be an advantage.
In the light of that, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 2 [Payment of Class 1 contributions: Northern Ireland]:
Clause 3 [Agreements and joint elections: Great Britain]:
Lord Higgins moved Amendment No. 3:
- Page 2, line 46, at end insert ", or
The noble Lord said: In moving Amendment No. 3, I shall speak also to Amendment No. 4, which covers the situation in Northern Ireland. The measure is
Baroness Hollis of Heigham: But based on profound experience.
Lord Higgins: On profound experiences, having survived 33 years of Finance Bills in the other place. I find this clause as difficult an example as I can remember coming across.
At all events, the amendment extends the election facility to employers with internationally mobile employees from abroad who are resident, but not ordinarily resident—those are terms of art within the tax legislation—who pay class 1 national insurance contributions. The Revenue is currently reviewing the tax treatment of share awards to such employees. The class 1 NICs liability was imposed last year. I forgot to say that this is all due to the appalling increase in national insurance contributions made by the Chancellor, but I would not have introduced an overtly partisan element into the matter. The liability to pay those contributions will not be removed, I presume, and it therefore seems appropriate to take this opportunity to introduce an election facility in the Bill. Owing to other pressures in the legislative timetable, it may not be possible to do so later on.
The Bill has been delayed for four years, following earlier changes, and obviously such a change requires primary legislation. It is desirable that we should do that now, rather than find that we must wait another three or four years before we can sort out the matter. The amendment is linked to Section 4(4)(a) of the Social Security Benefits and Contributions Act 1992 and while it uses the general language of Part 7 of the Income Tax (Earnings and Pensions) Act 2003, it does not refer to any specific part of it. We believe that the change we are proposing ought to go ahead, whatever the outcome of the review being undertaken by the Revenue.
The amendment applies only to the award of a right followed by subsequent acquisition of shares some time in the future—the situation of future uncertainty which the elections machinery in the Bill is designed to address. It would not, for example, apply when shares are immediately acquired and so forth.
The amendment would also apply only where the employee actually acquires shares. It would therefore operate where the share plan rules allow the employer the discretion to award cash in lieu of shares. However, in practice, the employer awards only shares. It is designed, in effect, to ensure that an election can be made in respect of restricted share plans and, as the Bill stands, some of those plans are covered and some are not. We see no justification for that. We believe that in all cases they should be made available in respect of shares acquired from a conversion of units on a later vesting date.
That meets the basic test of a contingent, but unascertainable, obligation of the employer to deliver the shares at a future date. The difficulty is knowing
Baroness Hollis of Heigham: Again, I thank the noble Lord. I shall again seek to put on the record what we are doing in this respect in the hope that no ambiguity will arise for the organisations most obviously affected by the technical detail.
The purpose of the noble Lord's two amendments appears to be to extend the scope of Clause 3 in two ways. First, it seeks to allow the transfer of secondary class 1 national insurance liabilities which may arise on payments of security-based earnings to persons who are internationally mobile but working temporarily in the UK. Secondly, it seeks to allow the transfer of any secondary class 1 national insurance liabilities which may arise on earnings derived from employment-related awards of restricted stock units.
On the first point, while the Government understand why that outcome is sought, we strongly believe that this is not the right way, or time, to address the issue. The amendment attempts to achieve its objective by introducing a statutory fiction that assumes, for national insurance purposes—this is usually where the noble Lord tells me that national insurance is a statutory fiction, too—that the earnings arise under statutory rules that simply do not apply to such earners. We do not believe that the amendment would work.
In addition—I believe, importantly—no evidence has been provided to suggest how widespread or significant is the problem that the amendment seeks to address. In fact, only one substantive representation has been received on this issue—from the Institute of Chartered Accountants of England and Wales. But they have provided no evidence of the scale of the problem in terms of numbers of employers and employees affected. I do not know whether the noble Lord has any such information that he can share with us.
As I am sure the Committee is aware, the Inland Revenue is already undertaking an extensive review of residence and domicile rules as they affect the taxation of individuals. The way in which the tax, and therefore national insurance, legislation applies to payments of security-based earnings to internationally mobile employees is clearly closely related to that work. Therefore, it would be inappropriate and premature to introduce unnecessary complexity and confusion—when we all want simplicity and transparency—by making piecemeal changes, such as that sought by the amendment, to the national insurance legislation in isolation and before any review has been completed.
Our objective, which I know the noble Lord will share, must be a coherent, well thought-through and clearly structured set of rules applying to this form of
In addition, in line with the Government's ongoing objective of aligning as far as possible the national insurance and tax treatment of earnings, any changes that may in the future be made to the tax rules applying to security-based earnings will continue to determine the national insurance treatment of such earnings.
On the second objective of the amendment, we do not consider that the amendment is necessary. The question of whether earnings from "restricted stock units" should be within the scope of the NIC transfer facility was addressed in the other place. As my right honourable friend the Paymaster General clearly explained, the term "restricted stock units" is used to refer to a variety of arrangements for paying earnings to employees by way of securities. Therefore, it is clear that the exact nature in which a restricted stock unit provides an employee with earnings will determine whether the employer's national insurance liability on those earnings may be passed to the employee.
If the earnings so received do not fall into one of the three categories of relevant employment income, as defined by Clauses 3 and 4 of the Bill, we do not believe that allowing the employer to pass his national insurance liability to the employee is justified. For example, if a restricted stock unit is a right to acquire securities, earnings derived from it may already be the subject of a national insurance transfer. But restricted stock units which are, in fact, rights to acquire cash rather than securities are not subject to the same tax and national insurance rules and may not, therefore, be the subject of a national insurance transfer.
The Government's policy objective in introducing the national insurance transfer facility, and the extension of that facility in Clauses 3 and 4, is to remove a barrier to wider employee share ownership, which, as I said earlier, research shows has a link to improved productivity. As the noble Lord accepts, that barrier is the requirement to account for the future unpredictable national insurance liability—an issue which, we understand, almost by definition, does not arise in respect of restricted stock units.
I must stress that the ability to transfer the employer's national insurance liability to the employee is an exception to the fundamental principles of the UK contributory system—that employers must pay their own national insurance liabilities rather than pass those costs on to employees.
It is an exception that is justified only in a small set of circumstances in which an employer wishes to award shares to motivate employees' performance, but faces real problems in terms of accounting for an unquantifiable national insurance liability that will arise on certain future chargeable events.
Extending this facility to other forms of earnings where perhaps no such problem arises would allow employers to reduce their contribution to the cost of funding the NHS and contributory benefits system. That would be unjustifiable and unacceptable as it would significantly increase the financial burden on employees and undermine the fundamental basis for funding the NHS and the national contributory benefits system.
I hope that my explanation as to why we do not feel the amendment is appropriate will satisfy the noble Lord. I do not know that there is anything else I need to say in response to his amendment. If there is, I am sure he will come back to me. I hope that in the light of what I have said, the noble Lord will feel able, particularly when he has had the chance to scrutinise the words in Hansard, not to pursue the matter further after today.
(d) a gain represented by the acquisition of securities which would fall within section 4(4)(a) above on the assumptions that the employee's earnings fell within section 15 (earnings for year when employee resident, ordinarily resident and domiciled in UK) or section 21 (earnings for year when employee resident and ordinarily resident, but not domiciled, in UK, except chargeable overseas earnings) of the Income Tax (Earnings and Pensions) Act 2003 (c. 1) when the right was granted and that the gain resulted from the exercise or satisfaction of a right to acquire securities.""
4.30 p.m.
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