Schedule 6 - Minor amendments to Schedule E charge
Finance Bill
5:00 pm
Mr Howard Flight (Arundel and South Downs, Conservative)
I beg to move amendment No. 15, in page 141, line 2, at end insert—
'1A At the end of that section insert—
''(10) Where tax is chargeable on any gain under this section by reason of the exercise of any right then that tax shall be payable as if that gain had been made in the year of assessment in which the person concerned disposes of the shares acquired on the exercise of that right, and sections 202A to 207 inclusive shall be applied accordingly.''.'.
As Committee Members may be aware, during the last Parliament three pieces of legislation concerned adding employer and employee national insurance contribution charges to unapproved share option schemes. When it was realised that the cash flow cost to younger, new economy businesses could be disastrous, because those companies could transfer the employer liability to the employee, we were left with unapproved share option schemes where the employee paid approximately 49 per cent. tax charge, which had to be paid on exercise.
Within the gambit of share option centred arrangements, there is the old approved scheme that is still subject to capital gains tax, which has been frozen now for more than 10 years, or there is the new enterprise management incentive share option scheme, which is extremely attractive if businesses can meet the fairly demanding qualifications, and have the time to spend money on a lawyer to implement it. The schemes overwhelmingly used are unapproved share option schemes because of the restrictions on the two above.
One of the aspects of the Chancellor's presentation and policy of which we approve has been his focus on entrepreneurship in the United States economy and his understanding of why better growth has been achieved, and what is needed to do that. Many measures have been introduced in that area. However, as the venture capital industry continues to complain, one area that is unsatisfactory is that of share option schemes. Such schemes are particularly intended to enable medium-sized businesses to recruit top-quality people who would otherwise work for bigger businesses at higher direct pay on a basis of less pay today and the hope of reward from share options in the future.
The changes to national insurance contributions have put the bill up further to about 53 per cent. net. That is extremely uncompetitive when compared with, for example, the overall US tax arrangements for approved share option schemes. The various bodies in the venture capital industry have put it to me that, at the very least, it might make sense to change the time at which the tax liability is paid to when the shares are sold rather than on exercise. As things stand, people
cannot achieve the objective of becoming a shareholder in the business. They have to sell the shares of unapproved options on exercise in order to pay the 53 per cent. tax. The net tax effect on the Revenue would be neutral, and many people may decide that they still need to sell because they would not want to run the risk that the value of the shares might fall if their tax liability was set by the value at the time of exercise. Amendment No. 115 would give the individual the option either to behave as he is forced to now—sell and pay immediately—or to own the shares and pay the 53 per cent. tax when he sells them.