(Except Clauses 1, 4, 5, 9, 14, 22, 42, 56, 57, 124, 130 to 135, 138, 139, 148 and 184 and Schedules 5, 6, 19 and 25, and any new Clauses and Schedules tabled by Friday 9th May 2003 relating to excise duty on spirits or RÿD tax credits for oil exploration.) - Schedule 22 - Employee securities and options
Finance Bill
2:30 pm
Mr Howard Flight (Arundel and South Downs, Conservative)
Welcome to the Chair, Mr. McWilliam.
On the Floor of the House, I broadly expressed our criticism of the provisions in schedule 22, particularly their complexity, their potential for unintended consequences and the element of overkill. I shall draw attention to some of the comments made by the Institute of Chartered Accountants in that context because they should be considered with the amendments and as a point of principle.
The institute welcomes the repeal of the dependent subsidiary charge and, up to a point, the acceptance that it is not right for the charges on conditional interests and removal of restrictions to catch the whole post-acquisition appreciation in value. However, it wants to register a strong protest against the relevant clause and schedule. It understands the Government's need to prevent avoidance, but is disappointed that the legislation, other than the provisions on approved schemes, has been fundamentally redrafted without prior consultation or notification. It is unhappy about the great complexity of the new provisions, which take up 72 pages, and suggests that the amendments were not drafted by the rewrite team because it would not
have done so in this way. Many of the amendments are incomprehensible—for example, new section 428—and the institute points out that its members will question the commitment of time and resources to the redrafting project. The result is that the case for continuing its involvement in the rewrite is undermined.
The institute believes that as the new provisions were not subject to prior consultation it is vital that the explanatory notes provide assistance, but they barely scratched the surface of the more complicated provisions. It said that warrants are treated as securities but options are excluded and there is a muddle between the two. The commencement rule for the new provisions on convertibles seems to give rise to a double charge on shares issued at less than market value. The institute believes that the reference to payments for group relief in the relevant new sections should include a reference to the analagous payment for transfer under section 179 of the Taxation of Chargeable Gains Act 1992 liability. It finds it difficult to follow the interaction between new sections 428 and 446E and questions the justification for the latter. It also questions the justification for imposing a charge every 5 April for six years by reference to the same depreciatory transaction, which it believes will happen if the transaction has a lasting effect on the value of the shares. It feels that section 446L imposes a charge on non-commercial increases of value on each 5 April when nothing else happens and the employer receives no benefit. It also feels that new section 446L(7)(b) has the effect that non-commercial increases are taxed with no set-off for non-commercial reductions. Finally, it points to the typographical error, which the Government have already acknowledged, where ''2002'' should read ''2003'' in new section 446F(2)(b).
The amendments all deal with four key areas. The first is employment-related securities. New chapters 2 to 4 of the Income Tax (Earnings and Pensions) Act 2003 appear to catch many situations where one would not normally expect the shares to be employment-related securities. For example, if an entrepreneur sets up a company, subscribes for shares and becomes a director, it seems that the shares would be caught as shares made available by the company that became his employer. If the definition is not changed, we would welcome guidance on the application of the legislation there.
Secondly, there are problems with the restricted securities territory. The definition of restricted securities is wide and appears to include provisions placed in a company's articles of association. Many companies that operate share schemes contain bad-leaver provisions in their articles, which require shares to be sold at less than market rates when an employee leaves employment in defined circumstances. It must be remembered that the usual purpose of providing employees with equity is to motivate them to perform. If an employee leaves the company, the other shareholders will not want them to continue to benefit from the company's performance.
New section 424 (b) gives a limited exception from the restricted securities chapter where an employee is required to sell his securities at less than market value
if his employment ceases due to misconduct, but a bad leaver is normally defined as a leaver who does not leave of his own choice or owing to death, redundancy or retirement. If the intention is to provide companies with the scope to contain bad leaver conditions in their articles of association, the exception in 424 (b) should be widened. It is not clear whether shares with different rights from ordinary shares also fall within these provisions. We assume that they do not, but clarification is needed.
Thirdly, there are issues surrounding the timing of elections. The proposed elections in new sections 430 and 431 in chapter 2 are welcome as they provide employees with the opportunity to disapply, but 14 days is a short time scale for an election given that employees must consider whether it would be beneficial. As it is a joint election, employer and employee have to agree. Is 14 days sufficient in principle? I shall come anon to timing for the immediate future.
Finally, new sections 430 and 431 require that elections be made ''in a form approved'' by the Revenue. I believe that such forms are not available, but chapter 2 applies to securities acquired on or after 16 April and more than 14 days have already elapsed since then. I think that the Government have dealt with that issue in one of the amendments, but it raises the whole question of the time limit.
A wider point is that we appreciate that most of schedule 22 is billed as anti-avoidance. It will make unapproved option schemes a nightmare, which will demotivate companies from using them. That, together with the problems with which we dealt this morning, implies that the Government are really anti option schemes, other than EMI—enterprise management incentive—options. The Chancellor is frequently on record as wanting the UK to learn from the United States in the world of entrepreneurial success. If we end up with a highly complex fiscal nightwear regime on options, which can be extremely important for medium-sized companies, that will take us in the other direction.