Mr. Timms: The clause is inevitably somewhat complex, because we must ensure that there is a level playing field for all kinds of options. To exchange one option for another at parity will create no problems, but we must ensure that the favourable new rules are not misused to escape liability where the exchange is not at parity. Otherwise, there would be nothing to prevent a settled option on one share from being extended for an option on 10,000 shares, with no further national insurance liability. The rules also need to be able to deal with a situation where one option is exchanged for another in the same or a different company, where other assets and cash may form part of the deal and the option is rolled over more than once.
The Bill must address those complex situations to ensure that, where the exchange is at parity, the settlement is still valid.
The amendments reveal what may be technical defects in the wording of the clause, so I give the Committee an undertaking that we will reconsider the clause to ensure that it achieves the necessary result and will make any necessary changes on Report. I hope that, on that basis, the hon. Gentleman will withdraw the amendment.
Mr. Burnett: Is it the thrust of Government policy that, if there is a bona fide exchange of shares on a takeover at approximate parityprovided that it is not part of an overt tax avoidance measureit should be treated, to use capital gains tax jargon, as no gain, no loss, so no charge comes into play for national insurance contributions?
Mr. Timms: The hon. Gentleman is right. If the roll-over is at parity, there should be no additional charge.
Mr. Flight: I thank the Minister for his comments. This is highly technical territory where I cannot claim any particular expertise. The bottom-line concern is that the valuation rules could produce a notional enhancement, even if the unapproved scheme uses a roll-over formula that the Revenue has agreed meets the equivalent test for the purposes of the approved scheme.
Mr. Burnett: We perhaps have an opportunity now to influence the Bill. Does the hon. Gentleman agree that valuation is an art, not a science, so that in any legislation there must be tolerance in valuation? The shares valuation division values might not always coincide with the company's accountant's valuation.
Mr. Flight: Indeed, there must be that tolerance. The law generally already provides for that and that is part of the point. Also, subsection (6) specifically seems to exempt only the roll-over and not the subsequent exercise of the roll-over option.
Without detaining the Committee with technicalities that I do not fully understand, I am grateful to hear from the Minister that the Government will re-examine the wording and no doubt consult the lawyers who specialise in the area so that we can all be happy with it. On that basis, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 3 ordered to stand part of the Bill.
Consequential changes to tax relief provisions.
Mr. Flight: I beg to move amendment No. 16, in clause 4, page 6, line 44, leave out `or (4)'.
There is a potential drafting error in subsection (3). The words ``or (4)'' seem misconceived. As drafted, the subsection seems to be intended to prevent tax relief for the payment of NIC in a number of areas where the Bill removes the obligation to pay full NIC on option exercise, and the list includes clause 2(4), which in fact does not remove the obligation to pay full NIC but reimposes it. There is a double negative point that will not prevent a liability from arising if the payment is not made within 60 days, or now 92 days.
Mr. Timms: This amendment, too, relates only to options that were granted in the gap period between 6 April 1999 and 19 May 2000 and to cases in which there has been an election to transfer the liability for the class 1 national insurance contributions to the employee. It is based on the assumption that the reference in subsection (3) to clause 2(4) is superfluous because no double deduction would in any case be possible when payment of the special contribution was not made within the 92-day notice period.
Income tax relief is given in section 187A of the Income and Corporation Taxes Act 1988 when an election has been entered into that transfers a liability for secondary national insurance to the employee. The clause here ensures that relief will be given if that liability is converted to that of a special contribution. If the special contribution is not paid within the 92-day notice period, so that the liability is subsequently extinguished, the wording in subsection (3) that is the subject of the amendment is still required in order to review any possibility of double income tax relief.
There would be very few circumstances in which this part of the legislation would take effect, but it is still required to remove any possibility of double income relief. I hope that, on that basis, the hon. Gentleman will withdraw the amendment.
Mr. Flight: I thank the Minister for his comments and I agree that the focus is on not getting double taxation relief. Will he re-examine the point before Report stage? Clause 2(4) does not remove the obligation to pay full NIC but actually reimposes it. He may have persuaded me that our concern is not justified, but I should be grateful if he would undertake to re-examine the clause to ensure that my concern is covered. On that basis, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Mr. Flight: I beg to move amendment No. 17, in page 6, line 48, leave out `not'.
The Chairman: With this we may take amendment No. 18, in page 7, line 2, at end add
`(5) Where a person pays a special contribution pursuant to section 4 above then, as the case may be, that payment shall comprise either
(a) a deductible expense wholly and exclusively laid out or expended for the purposes of any trade, profession or vocation carried out by him; or
(b) a deductible expense of management of an investment company (where that person is an investment company); or
(c) an amount expended wholly, exclusively and necessarily in the performance of the duties of any office or employment held by him.'.
Mr. Flight: The amendments are alternative suggestions designed to put right what we believe is a lacuna in the drafting of the Bill. The Bill states that tax relief will not be given when the option is exercised, presumably as part of the attempt to prevent double-counting NIC relief, but it does not say when the relief is to be given. To avoid any suspicion that no personal income tax relief is intended, which I am sure is not the Government's intent, these alternative amendments either remove the original provision or allow tax relief at the time of payment, which would probably be the norm under present legislation.
Mr. Burnett: I endorse the hon. Gentleman's points, which to some extent go to the point that I made earlier, when the Minister was able to put on record the exact tax treatment of those contributions.
Mr. Timms: The amendments provide alternative changes to the way in which the clause acts in relation to income tax relief for special contributions paid by employees. I hope that I shall be able to persuade the hon. Member for Arundel and South Downs that they are unnecessary and that income tax relief will continue to be available on special contributions.
Section 187A of the Income and Corporation Taxes Act 1988 gives relief to an employee in respect of the secondary class 1 national insurance contributions that he has agreed to bear on the share option gain through paragraphs 1(3)(a) or (b) of schedule 1 to the Social Security Contributions and Benefits Act 1992. The relief is given as a deduction against the amount chargeable to income tax on the option gain under section 135 of the 1988 Act.
The employer is obliged to operate pay-as-you-earn on the gain on exercise in these cases and, in doing so, is required to take into account the amount of the tax relief under section 187A in calculating the PAYE deduction. The employer can do that in a normal case, because the liability for the secondary class 1 NICs arises at the same time as the requirement for the PAYE deduction on the gain itself.
The clause ensures that the employee will still be entitled to an income tax deduction in respect of the special contribution to which he or she becomes liable under the Bill. It does that in subsection (2) by deeming that section 187A has effect in respect of those liabilities. However, subsection (4) provides that the PAYE obligation on the employer in respect of the gain on share option exercise need not take account of the income tax relief given under section 187A for the special contribution. That is because the employer may be required to operate PAYE on the gain many years after the special contribution is made. The clause reduces the administrative burden on the employer. The amendment would increase that burden, because employers would have to maintain records of amounts of special contributions paid in one year by each employee and link those to the option gains that might be achieved at some time in the future.
The clause does not remove the entitlement to tax relief from the employee nor does it affect the amount or the timing of that relief. Income tax relief will still be given against the share option gain through the employee's self-assessment tax return. I hope that the hon. Members for Arundel and South Downs and for Torridge and West Devon will find those remarks reassuring.
Mr. Flight: When an employer pays this special NIC, which he will do in the relatively near future, when will his income tax be offset? My lurking concern is that, if the employer pays but the share option is never exercisedeither because the employee has left the company or because the option is constantly under watersuch an individual might fork out the special NIC payment and receive no income tax deductibility against it, which would be extremely unjust. If the formula relates income tax deductibility to realising a gain on the option, that is exactly what would happen.