Clause 2 - Effect of notice under s. 1
Social Security Contributions
11:45 am
Mr Howard Flight (Arundel and South Downs, Conservative)
These are essentially technical amendments, drafted in response to what we believe to be a weakness in the Bill. The key element in valuing options is the inherent gain in the option—the market value of the underlying shares, less the amount paid for them. The same section 135 of the Income and Corporation Taxes Act 1988 has such a provision. The Bill refers merely to the value of the underlying shares, which could lead to a technical breakdown in what the Government are trying to achieve.
There is at least one flaw to consider. The intention of clause 2 is to prevent tax avoidance by electing to pay in advance the NIC, followed by a cash payment to buy out the option for a larger amount. As drafted, the Bill makes it easy to avoid that tax, as it seems to have forgotten to deduct the exercise price from the value of the shares. If someone wants to avoid his tax liability, he has only to buy out the option for less than the value of the shares but for more than the inherent profit in the option. The Bill will assist tax avoidance rather than hinder it.
The intention of clause 3(5)(b) is to determine whether an option roll-over has been enhanced, by exchanging a more valuable option for a less valuable one, to prevent the advance payment on NIC from being carried over to the new option. The error may have occurred because there was an assumption that the NIC provisions for option roll-overs were dealt with in the 1979 regulations, which are also in somewhat of a mess.