Schedule 21 - Approved share plans and schemes
Finance Bill
9:30 am
Mr Howard Flight (Arundel and South Downs, Conservative)
We, and the commercial community, welcome many of the simplification measures contained in schedule 21—I discussed the less welcome measures on the Floor of the House.
Government amendment No. 166, which we shall discuss shortly, will cancel the proposed new share incentive plans dividend share arrangement, which did not work. The Confederation of British Industry, the Law Society and others have raised other issues that our amendments seek to address. There are problems with the trustees of share incentive plans having to police the new anti-avoidance rules. In particular, the new national insurance contributions liability on employers and employees, which contains a withholding obligation in respect of shares acquired on or after 9 April 2003, presents a significant problem.
It seems to the CBI, and to us, that the proposed arrangements are an unfair piece of overkill. They were not announced before Budget day and are retrospective for grants made before then. They are especially unfair on employees, who may not be able to recover tax and NIC liabilities from employees. The practical legal provision for employers to seek out employees' agreement to bear the employer's NICs is insufficient, assuming that the employees are still being employed.
On SAYE option schemes, the legislation does not achieve anything. New paragraph 34(5A) will give a scheme company the choice of arrangement A or arrangement B. Arrangement A is currently on offer; arrangement B would allow the relevant employees to exercise their options only if they are good leavers. Those who remain employed until their bonus date cannot exercise their options because a constituent company or an associated company of the scheme organiser will not employ them. It seems inconceivable that a company would choose arrangement B, because, by so doing, it would deprive all stayers of the opportunity to exercise their options.
Most company share option plan schemes allow for options to be exercised on retirement. A special retirement age is referred to in very few cases, and
most references are to normal retirement age. If a company fails to insert a specific retirement age in its CSOP rules, those who exercise on retirement before the third anniversary of grant will not qualify for the new exemption from income tax. I am sure that the Government did not want that outcome, which could be avoided if the legislation provided that any exercise on retirement permitted by the scheme rules on or after the age of 55 would enjoy relief from income tax.
Finally, many companies may be unable to collect NICs on the exercise of CSOP options. That raises particular problems for international companies—this is not a question of avoidance—which may have three-year option scheme arrangements over which there is no statutory authority for the deduction of tax under PAYE because the new withholding power in new paragraph 34 applies only to non-PAYE income. Furthermore, the provision applies only if the employee does not object to it.
Amendments Nos. 13, 103 and 104 are alternative ways to achieve the same objective. They seek to address the fact that the changes in schedule 21 are intended to simplify the operation of approved share schemes. The new provision in the SIP legislation requires the independent trustee to police the new anti-avoidance measures. That will not simplify the operation of SIPs because the trustees are in no position to police the employers. The trustees, probably acting through their lawyers, will ask the employers to confirm the position and to indemnify them against risk, and the employers will ask their tax advisers to write back with the answer as a form of independent audit. Tax advisers can only rely on what employers tell them; everything depends on honest information from the employer, who will be behind any non-compliance in the first place.
All the provision achieves is the racking up of professional costs. It is not particularly workable and the simplification will not encourage employee share ownership. Surely it would be much simpler for trustees to compile records of participants and their national insurance numbers—trustees must compile such information in order to do their jobs—to catch any double awards through the employer's national insurance scheme.
Amendments Nos. 103 and 104 address the same problem by ensuring that any record-keeping obligation on the trustees is reasonable.