Schedule 23 - Corporation tax relief for employee share acquisition
Finance Bill
2:30 pm

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Mr Stephen O'Brien (Eddisbury, Conservative)

I beg to move amendment No. 225, in

schedule 23, page 324, leave out line 30.

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Mr Nicholas Winterton (Macclesfield, Conservative)

With this it will be convenient to discuss the following:

Amendment No. 226, in

schedule 23, page 324, leave out lines 31 to 38.

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Mr Stephen O'Brien (Eddisbury, Conservative)

Sir Nicholas, I welcome you back to the Chair until you are temporarily replaced because of having to leave for very eminent matters.

The amendments target the same point and probe the thinking behind the provision. I hope that the Minister's response will not require me to press the matter further, but we must wait and see.

The origin of the ordinary share requirement comes from approved share plans when the state's intention was to ensure that employees received only proper shares. That now sounds a touch patronising, but in the days when share options and share plans were in their infancy it was understandable in order to

encourage that form of added incentive in the remuneration of key employees. The scheme has now spread, so that even the phrase ''key employees'' is redundant, because all parties in the House now want employees to have the widest possible share involvement in the enterprises with which they work.

There is no such limitation on tax changes in schedule 22, and PAYE is extended to any company that does not qualify for schedule 23 relief. The purpose of the amendments is to remove an unnecessary restriction. Paragraph 4(3) is causing problems in the private equity arena in which, as I am sure the Paymaster General is aware, flexibility, fluidity and liquidity are the key points of the approach to supporting enterprise fairly and competitively.

When more than half a company is owned by a private equity fund constituted as a limited partnership, relief will not normally be available because the shares, and thus the voting rights, will be held by the general partner—typically a limited company—on behalf of the partners. That seems unduly restrictive, particularly given the changes to PAYE and national insurance rules under paragraph 15 of schedule 22.

The Chartered Institute of Taxation puts it rather well. It comments that the ''kind of shares acquired'' condition in paragraph 4 must be met when an option is exercised for relief to be available. If an option is exercised over shares in an independent company—a company that is not under the control of another company—the conditions in paragraph 4(3)(b) will be met. However, an issue will arise if an option is exercised immediately following the takeover of a company. As we all know, that is not a rare event, particularly in this country. Thankfully, although there can be extreme pressure in relation to competitiveness and the independence of companies, that demonstrates that competitiveness exists and, above all, that there is liquidity, by sharp contrast with, for instance, the Mittelstand in Germany.

Many share option plans contain a rule that will allow an option to be exercised on a change of control or for a short period thereafter. However, if a company is taken over by another company, the requirement in paragraph 4(3)(b) cannot be satisfied on the date of exercise as, by definition, the company will be under the control of the company that has taken it over. Unless, for example, the acquiring company is listed, no corporation tax relief will be available in respect of the exercise of those options if relief is available under paragraph 4(3)(c). That appears to be an unintended result of the new legislation and seems to distort the takeover of companies in favour of listed acquirers. I dare say that the Paymaster General is not looking to favour listed acquirers over those that are not listed, not least because of the need to maintain a totally transparent and open opportunity.

According to the Chartered Institute of Taxation, a similar issue arises in the context of approved share options. The issue arises if the option is exercised following a change of control or if an option is exchanged for another option immediately following a

change of control. Again, that is not uncommon. In my experience, it can be quite common when a foreign company takes over a UK company, replacement share options are considered to be a benefit for those who continue as employees—very often that provides an incentive—and the share options are in a new company that is a UK subsidiary of the controlling foreign company.

The Chartered Institute of Taxation states:

''We understand that, in these circumstances, the Inland Revenue do not take the point that the shares would fail the test in, for example, paragraph 17 Schedule 4 ITEPA.''

It would be helpful if the Paymaster General confirmed that relief under schedule 23 will continue to be available in those circumstances.

I hope that I have made the main thrust of the two amendments clear. I look forward to the Paymaster General's response. If it is favourable, I certainly will not press the amendments further.

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Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

The amendments seek to remove all restrictions on the types of shares that qualify for relief under the schedule. That defeats the policy aim of providing relief only for shares that give employees a real stake in the company for which they work. It would allow relief in respect of shares used in tax avoidance schemes, which is precisely what we are trying to deal with. The amendments would also leave the heading for paragraph 4 intact, and sub-paragraph (1) would read:

''The shares acquired must meet the following requirements.''

That sub-paragraph would be left in splendid isolation. I shall urge the Committee to resist the amendments if the hon. Gentleman decides to press them to a vote.

The schedule provides corporation tax relief to the employing company for the cost of providing shares to employees that give them a real stake in the business for which they work. Such shares must meet the criteria that they are part of the ordinary share capital, are fully paid up and non-redeemable and are shares in the parent company of a group, or in a subsidiary company, provided that the parent is a quoted company. Shares in independent companies also qualify. We discussed much of that earlier.

Shares in subsidiaries of unquoted companies, and other types of shares excluded by paragraph 4 of the schedule are, unfortunately, frequently used in tax avoidance schemes. The rules in the schedule exclude such shares from the definition of qualifying shares to ensure that those intent on manipulating the value of shares to avoid paying their fair share of tax and national insurance do not gain an unfair advantage in terms of the employing company's corporation tax.

We accept that in a limited number of circumstances relief under the schedule may not be available. That appears most likely to occur as a result of the way in which certain venture capital investments are structured. We touched on that issue in earlier debates. However, relief for the acquisition of shares

by employees is given when the employees are taxed as a result of acquiring the shares, which is often after the venture capital investors have relinquished control of their investment target. In such cases, the employing company or group would not be under the control of another company, and relief would be available.

Alternatively, relief for the cost of providing the shares may be available under rules in schedule 24, if contributions are made to an intermediary to provide shares to employees who do not meet the requirements of schedule 23. The amendments would remove the targeting of the relief to shares that provide employees with a real stake in the company for which they work, and would provide potential for those seeking unfairly to reduce their corporation tax, which I am sure is not the hon. Gentleman's intention.

Although it would be premature to relax the anti-avoidance rules, which are designed to protect the schedule, before the new rules in schedule 22 settle down, we shall closely monitor developments. As I confirmed to the Committee in earlier debates, Inland Revenue officials have already met the British Venture Capital Association and dialogue is taking place to ensure that, while the schedules interact to address the issue raised by the hon. Gentleman, the anti-avoidance rules remain intact. We must also see how the rules operate and how venture capital trusts continue to structure themselves.

I hope that, with that explanation, the hon. Gentleman will not press his amendment. Should he do so, I shall ask my hon. Friends to vote against it.

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Mr Stephen O'Brien (Eddisbury, Conservative)

That was helpful, particularly as the relief will be monitored as a matter of practice. I understand that a balance must be kept between the anti-avoidance intent and the need to retain competitive flexibility, not least through the British Venture Capital Association and others, which will no doubt continue to be consulted and to make representations. From what the Paymaster General said, we can expect guidance from the Inland Revenue, which will be a sensible way to proceed. If the legislation needs to be ameliorated or changed there may well be such measures in the next Finance Bill. The amendments were probing amendments, and the discussion has been helpful. Therefore, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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Mr Stephen O'Brien (Eddisbury, Conservative)

I beg to move amendment No. 227, in

schedule 23, page 325, leave out lines 6 to 7.

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Mr Nicholas Winterton (Macclesfield, Conservative)

With this it will be convenient to discuss the following:

Amendment No. 228, in

schedule 23, page 325, line 26, leave out 'award' and insert 'shares'.

Amendment No. 229, in

schedule 23, page 325, line 35, leave out from 'to' to end of line 41 and insert

'the amount on which the recipient is liable for income tax, or would be if the conditions specified in paragraph 7(2) were met.'.

Amendment No. 230, in

schedule 23, page 326, line 24, leave out from 'recipient' to end of line 28 and insert

'is liable for income tax in respect of the shares, or would be if the conditions specified in paragraph 7(2) were met.'.

Amendment No. 231, in

schedule 23, page 329, line 23, leave out from beginning to end of line 7 on page 332.

2:45 pm
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Mr Stephen O'Brien (Eddisbury, Conservative)

Schedule 23 permits tax deductions for employers where employees receive share rewards, restricted shares or options, but it leaves out a lot of the new provisions introduced by schedule 22. We accept that we are seeking a balance, but because the provisions are anti-avoidance it is harsh to deny a tax deduction for the income. Shares subject to forfeiture are included in schedule 22 as an anti-avoidance provision, which the amendments are designed to address.

The likely answer from the advice that I have received, and my own speculation, is that schedule 23 may have gone out in draft form last Christmas and may have been prepared by people who were not necessarily involved in planning the surprises in schedule 22. I am sure that the Paymaster General will accept that that is not sufficient reason not to align the two schedules to allow employers' tax deductions for any share awards. If the legislation taxes an employee on the grounds that they have received an employment benefit, employers should be allowed a deduction. Amendments Nos. 227 and 228 are admittedly probing amendments, which are mirrored by amendments Nos. 229 and 230.

Amendment No. 231 proposes that part 4 should be left out—apologies are due to the draftsman who worked on it. I shall pray in aid of the amendment a couple of comments. The accountancy firm Grant Thornton says:

''Schedule 22 contains substantial amendments to schedule 23 (paragraphs 59 to 73). As Part 4 has been entirely substituted and a new Part 4A has been inserted, along with the numerous other amendments, it is virtually impossible to interpret the consequences. It is incomprehensible why the changes could not have been reflected in Schedule 23 itself.''

We have specifically sought to address that problem. I hope that the Paymaster General recognises that our approach is helpful rather oppositional.

Ernst and Young says:

''The Revenue are targeting a number of very specific types of planning.''

The Paymaster General used the word ''targeting'' in her previous answer. Ernst and Young goes on:

''It will be interesting to see . . . whether the Revenue have inadvertently caught any 'non-artificial' arrangements in their zeal to close these perceived loopholes.''

The Paymaster General will accept that a broad theme in the debate is our attempt to find, by proper scrutiny of the Bill, where the balance lies and what the Government truly intend by their judgments in putting forward the legislation. The probing amendments are important, not least because there is great concern about the lack of consistency and intelligibility in the interaction between schedules 22 and 23. I reserve judgment on whether we will press the amendments, but at this stage they are probing amendments.

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Mr John Baron (Billericay, Conservative)

I seek clarification from the Paymaster General on paragraph 8(1) of schedule 23, which is somewhat ambiguously worded. One could attach at least two or three different meanings to it and the consequences of following through the equations set out in it. I do not wish to go over old ground but, as we know, schedules 23 and 24 can give deductions in corporation tax for companies only if they provide benefits to employees. We know that schedule 24 restricts deductions, whereas schedule 23 gives deductions if benefits are provided to employees, which includes provisions to employees, to third parties and to employee benefit trusts. That is where paragraph (8) does not help, and I seek clarification from the Paymaster General.

I am thankful to the Law Society of Scotland for making me aware of what may be an anomaly. If I may just test the Paymaster General's patience for a second, I shall take her through an example that, I think, illustrates why paragraph (8) is badly worded. Let us say that a company made a contribution—gave money, or whatever—to an employee benefit trust of £50,000 to allow that EBT to purchase shares from employees at the then market value of £50,000. If the EBT then granted options to other employees to acquire shares from it at their then market value of £1 per share, and the options were exercised at a time when the shares were worth £500,000, it could appear from paragraph 8(1) that the company could claim a corporation tax deduction of £400,000. That is on account of two words in paragraph 8(1)(b), which I think need clarification: ''or another''. Paragraph 8(1)(b) reads altogether,

''the total amount or value of any consideration given, by the recipient or another, in respect of the shares.''

I should like the Paymaster General's clarification, because the meaning of that could be misconstrued.

I should also like to ask the Paymaster General to look at paragraph 8(1)(a). When defining the word ''award'', are we talking about the grant of an option or the exercise of a benefit? Which of the two meanings that one ascribes to the word ''award'' has a direct effect on the calculation. I would appreciate clarification because the meaning of the paragraph has caused some concern in certain circles. For example, it is felt that companies may be able, quite unfairly, to deduct far larger amounts by way of relief from corporation tax than they otherwise should.

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Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

I need to start by posing a question to the Committee, having listened to the hon. Member for Billericay (Mr. Baron), who advanced the point that the Law Society of Scotland wanted to be raised in Committee, and who asked for clarification. Why should the Government provide for an alignment, which would cater for restricted and convertible shares to be used, when they are being used specifically for avoidance? During the six years in which I have held various posts in the Treasury and examined taxation, one of the challenges that I have found most difficult concerns trust. I have been chastised by the hon. Member for Yeovil (Mr. Laws) for that. I trust that the Government write legislation in a particular way and answer questions about the operations. People whom I never see cleverly make

sure that people get relief, even though that was not the intention. In considering the issue, and not wishing to take the hon. Gentleman's name in vain, I think that he questioned whether it was wise for a Government, or a Minister to demonstrate that type of trust, particularly when relief was being put into the system. We are talking about reliefs in the system, and ensuring that they are used for the purpose for which they were provided.

I urge the Committee to resist the amendments because they would remove part 4 of schedule 23. That part provides relief when the shares acquired are restricted shares. The effect of the amendments would be to remove completely part 4 of schedule 23 while appearing to preserve relief for restricted shares by making changes to the wording in part 2 of the schedule. However, they only partially remove references to part 4 where they occur throughout the schedule. That will produce an anomalous result and will not achieve the intended effect. For instance, references to part 4 would remain in parts 1, 3 and 5 of schedule 23, but part 4 itself would no longer exist. That is not what the hon. Member for Eddisbury (Mr. O'Brien) was trying to achieve, and I am sure that he would agree that that would be extremely unhelpful, to put it mildly, for those who would apply the rules in practice.

The amendments do not reflect the impact of the changes being made to schedule 23 by schedule 22. Schedule 22 changes the way restricted shares are taxed on employees and has allowed us to expand the relief in schedule 23. We are trying to curtail what we do not want in the tax system while trying to assist corporation tax relief, which we think is rightly and justifiably in the tax system.

After an appointed day, companies will get relief in relation to all types of restricted shares at the same time and equal to the amount on which the employee is taxed in respect of those shares. Previously, relief was available only in respect of forfeitable shares at the time when the conditions of forfeiture were lifted. Although the amendments would remove part 4 from schedule 23, they would not hinder the introduction of the new and extended part 4 from the same appointed day from which the changes introduced by schedule 22 take effect. The consequence would be legislation with incorrect and ineffective references and signposts, which would be impossible to operate.

Schedule 23 provides relief on the correct basis in respect of restricted shares acquired by employees, and that is why the Government have included the schedule. A number of questions were encapsulated in what the hon. Member for Eddisbury said: first, why is schedule 23 amended by schedule 22? The reason is clarity, and that relates to the fact that schedule 23 is effective from 1 January 2003, with changes being made to it from an appointed day to coincide with the rules introduced in schedule 22. By making the changes to schedule 23 in schedule 22, employers have certainty that the rules in schedule 23 will apply from 1 January until they are changed and extended by schedule 22 on the appointed day. That

avoids the need for the complex transitional rules that would have been required to make all the changes in schedule 23.

Furthermore, because of the changes to the way in which restricted and convertible shares are taxed, it has been possible to extend the scope of the relief provided by schedule 23 to include shares that carry restrictions other than the condition for forfeiture and shares acquired on conversion of convertible securities. Employers who offer employees such shares should welcome the exemption.

The hon. Gentleman asked about alignment. The rules in schedule 22 have been designed to ensure that restricted and convertible shares that are used properly in normal commercial circumstances are subject to a fair taxation system. In such cases, it is right to give the employer the corporation tax deduction. However, if such shares are misused for avoidance purposes through artificial value manipulation, schedule 23 is designed to ensure that no corporation tax relief is given. Surely, that point had to be addressed.

Finally, the hon. Member for Billericay gave an example of the interaction of paragraphs 8(1)(a) and (b) in respect of the grant of options and the exercise of benefit. I wonder whether he will bear with me and allow me to write to all members of the Committee on the matter. My answer will be placed in the Library and, as such, would become part of the record. To be perfectly honest, I cannot just at this moment manage the intellectual acrobatics that are necessary to ensure that I get the answer right.

3:00 pm
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Mr John Baron (Billericay, Conservative)

I fully accept that explanation and shall look forward to receiving the Paymaster General's letter in due course. I just wish to ensure that she understands the point that I am trying to make, because it is extremely important.

I believe that we all agree that a company should get tax relief only on the amount of value that it transfers. The paragraph is worded such that that would not be the case, given the interaction between paragraphs 8(1)(a) and (b). Paragraph 8(1)(b) could allow companies to claim tax relief far in excess of the value of benefits that they had given to employees. It is only fair that the wording should be reconsidered, if only because it creates ambiguity.

I stress the two phrases that need clarification. What is meant by ''award'' in paragraph 8(1)(a)? Is it the grant of an option or the exercise of a benefit? In paragraph 8(1)(b), ''or another'' must be clarified, because it could mean that the actual cost of the transfer is double counted. I look forward to receiving the Paymaster General's clarification on those questions.

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Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

I thought, Sir Nicholas, that it was a helpful intervention. I understood the hon. Gentleman to be asking about the difference between the value of the share when it was transferred and the market value, and about the point at which the employee will be taxed and the company will get relief.

The award of shares is not exercised on an option. It is the giving of the shares to the employee for less than the market value that is the issue. The employee would be taxed on the value obtained, as the hon. Gentleman said. Corporation tax relief would be due on that amount. He asked for clarification of the interaction of those three points. That explanation stands, but I shall write to him on the either/or point to ensure that I have given him the correct answer. However, as I understand it, that is how the clause operates.

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Mr John Baron (Billericay, Conservative)

I thank the Paymaster General for that answer. To help me to understand her answer when she finally writes, I suggest that she uses the example that I have given—the £50,000 and the £500,000—because it would keep the argument consistent and help understanding.

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Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

Yes. I confirm that we will take the details from Hansard to make sure that we follow that example closely, and I shall ensure that all members of the Committee receive that letter. That is no problem.

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Mr Stephen O'Brien (Eddisbury, Conservative)

The Paymaster General has helpfully addressed the points raised by my hon. Friend the Member for Billericay. I welcome her promise of a letter of further clarification to be placed in the Library, using the example that my hon. Friend quoted. My hon. Friend's point about interaction is important and valid, but he will find that some of the principles underlying paragraphs 8(1)(a) and 8(1)(b) will surface in our discussions on amendment No. 232 and the amendments grouped with it. I believe that most of the arguments will be contained in that section, so we may be able to explore the issue a little further.

The issue was touched on in the last debate and we hope that, although the Paymaster General may have been in post for six years, she will not be denied completion of her trenchant defence of the Bill from this day forward. We hope that we shall be able to welcome her to her continuing post.

I shall not go back to the detail of our discussion, which would, to coin a phrase that I have not heard since I was studying at university, be otiose. I hope that it is common ground that nobody is trying to gain relief from corporation tax or to promote anti-avoidance schemes to the detriment of revenue due from the taxpayer to the Government. However, a balance must be struck between what the Paymaster General described as the impossibility of operation and intelligibility, or the impossibility of understanding in the first place. Intelligibility is based on consistency and easy cross-referencing of the provisions. As the Paymaster General admitted, there is an interesting interaction between schedules 22 and 23, not least because some of the provisions are hooked to the appointed day. However, consistency not only improves monitoring but enables those who have to put the provision into practice to understand it and, therefore, to comply. We have been seeking intelligibility, as that is most likely to lead to compliance with the provisions and will help the Government to secure the anti-avoidance mischief that they want to address.

The amendments, which I said at the outset were probing in nature, were deliberately framed to cover alignment. I hope that the Paymaster General does not treat seriously the fact that some drafting inconsistencies may remain. The amendments were intended to elicit a response. I shall not press them to a vote, but I hope that, as a record of the debate will be studied not least for the preparation of the letter, those who have to operate the relief will appreciate any further thoughts that can make the matter clearer. Ultimately, that will also benefit the Government and, in due course, taxpayers who are in receipt of those funds via the Government. I therefore beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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Mr Stephen O'Brien (Eddisbury, Conservative)

I beg to move amendment No. 223, in

schedule 23, page 327, line 27, after 'consideration', insert

', apart from the release of the old option,'.

The amendment relates to old options. A Law Society representation considers that, in determining the amount of relief when there has been a takeover, any consideration given in respect of the grant of the new option that consists of the release of the old option should be disregarded. If the release of the old option is not disregarded, the amount of relief available when the new option is exercised may be unduly restricted. The amendment is intended to enable the release of an old option to be disregarded for the purposes of determining the amount of relief.

The amendment is intended to probe, but as it is simple I hope that the Paymaster General will accept it.

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Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

I understand the hon. Gentleman's point. His amendment seeks to put it beyond doubt that the value of options given up in the circumstances dealt with in paragraph 13 is disregarded from the calculation of the relief in the same way as it is disregarded when taxing the employee.

I am sorry to do this to the hon. Gentleman, but officials have consulted parliamentary counsel—always the ace in a Committee. Parliamentary counsel confirms that the additional words proposed in the amendment are not necessary to clarify the interpretation. However, it would assist the day-to-day application of the new relief if the point were clearly explained in the Inland Revenue guidance on the operation of the schedule.

I said that I was sorry to do that to the hon. Gentleman because, as far as Ministers are concerned, parliamentary counsel is all four aces when it comes to being the final arbiter on the drafting of Bills. Ministers challenge the interpretation at their peril. I sincerely hope that aspiring Ministers in the decades to come will also consider such challenges unwise.

Mr. Michael Jack (Fylde) rose—

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Mr Michael Jack (Fylde, Conservative)

I do not want to intrude on the tremendous interplay of intellect, but it has always been my understanding that Ministers are ultimately responsible for the legislation that goes before the

House and Committees. Parliamentary counsel is wise, but not infallible. Ministers are responsible and it is for them to decide. If, in the judgment of the Paymaster General, the words require further exemplification and clarification in Treasury guidance, that raises the interesting point that there may still be, in the words of my hon. Friend the Member for Eddisbury, some scintillas of doubt. If that doubt remains, on Report a further and entirely clear version of what we are discussing could find its way into the Finance Bill.

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Mr Nicholas Winterton (Macclesfield, Conservative)

Order. I think that the Paymaster General was trying to be helpful and transparent.

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Mr Stephen O'Brien (Eddisbury, Conservative)

That is your unique interpretation, Sir Nicholas. The capacity of parliamentary counsel for the work that they have to undertake to meet the volumes of legislative proposals that emanate from the Government knows no bounds, but when they are prayed in aid it is an extraordinarily difficult area of parliamentary proceedings. Making that advice transparent and available to us is always resisted. The issue is real and serious. When parliamentary counsel is prayed in aid the advice should be available to Members for consideration.

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Mr John Burnett (Torridge and West Devon, Liberal Democrat)

I apologise that I was not able to be here at the start of proceedings today, and I am only just catching up with the debate.

Presumably, there can be a netting down if the transactions are done in the same document. Presumably what concerns the hon. Gentleman is that if there is a netting down, the adjudication office might want to consider the matter. It seems entirely unfair that there should be two doses of duty if there is a set-off cost surrendered against the new price.

3:15 pm
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Mr Stephen O'Brien (Eddisbury, Conservative)

What the hon. Gentleman says is broadly correct, but the thrust of my proposal is to put the matter beyond doubt and ensure that there is clarity. My right hon. Friend the Member for Fylde (Mr. Jack) asked whether Treasury guidance was needed. If it is needed, it is welcome, and we hope that it would be available. The amendment was an attempt to include it in the Bill.

I think that the Paymaster General would agree with me in saying that hopefully the pride of authorship would never creep in to the defence of the drafting of any legislation. I still feel that the amendment makes a helpful clarification to the Bill. It was, after all, Sir Winston Churchill who famously referred to ''advisers on tap, not on top''. It is true that however much parliamentary counsel says guidance is not needed, it is something on which clarification has been sought.

Rather than press the matter to a vote, I shall withdraw the amendment. It may be helpful on Report if we introduce a broader clarification of the matter. The fact that we have placed this on the record, may allow the Paymaster General to reflect on it.

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Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

There is obviously a lesson here for me: do not try to be helpful to the hon. Gentleman.

I was more than surprised by the comments of the right hon. Member for Fylde. I would not care to go through the debates on previous Finance Bills and see how many times he came down on the side of parliamentary draftsmen. Of course I take responsibility for the matter, so let us try another way. Not only is the amendment not needed, but to make it work would require changes in a large number of other areas. New rules would have to be introduced into schedule 22. I was trying to be kind to the hon. Member for Eddisbury. Not only is the amendment unnecessary; it does not even work and would require more changes to schedule 22, which would make the provision more complicated.

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Mr John Burnett (Torridge and West Devon, Liberal Democrat)

Perhaps the Paymaster General would clarify the matter by saying the net price that would be charged to stamp duty.

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Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

I am not sure whether the hon. Gentleman was in the Room when I clarified the position on the point made to me. The takeover is the value of the old option disregarded. That proposition was put to me, and I answered it. I shall not repeat my answer; if the hon. Gentleman checks the record, he will find it.

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Mr Stephen O'Brien (Eddisbury, Conservative)

When the hon. Member for Torridge and West Devon (Mr. Burnett) looks at the record, perhaps he might want to consider the tax we are dealing with. We dealt with stamp duty last week; we are now on to corporation tax. [Interruption.] The Paymaster General says from a sedentary position that she was trying to be even more helpful by not observing that fact. I hear what she says.

Where an amendment is put forward in an attempt to flush out something that is important, I do not claim pride of authorship. A genuine point has been identified. If the Government then table amendments to address any irregularities and make the measure work, that would be welcome. However, there is enough on the record for us to consider the matter again when there has been time for reflection.

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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Mr Stephen O'Brien (Eddisbury, Conservative)

I beg to move amendment No. 232, in

schedule 23, page 328, line 25, at end insert—

14A. Where under generally accepted accounting practice the employing company recognised an expense in connection with the grant of an option, the amount of relief is equal to the amount of the expense recognised on grant.'.

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Mr Nicholas Winterton (Macclesfield, Conservative)

With this it will be convenient to discuss the following:

Amendment No. 236, in

schedule 23, page 329, line 2, at end insert—

'Cancellation of options

15A (1) Where the holder of an option is paid consideration in money or money's worth for the cancellation of an option then relief is available for an amount equal to the amount of the consideration paid together with any NIC charge on that amount charged on the payer.

(2) The payment must be made either by the employing company, or a company which subsequently becomes a qualifying company within the meaning of paragraph 13 following a takeover of the company whose shares are the subject of the option.

(3) Relief under this paragraph shall be claimed by the company which makes the payment in respect of the accounting period in which the payment is made.

(4) In this paragraph—

''NIC charge'' means a liability to pay national insurance contributions under section 6 (Class 1 contributions), section 10 (Class 1A contributions) or section 10A (Class 1B contributions) of the Contributions and Benefits Act; and

''the Contributions and Benefits Act'' means either the Social Security Contributions and Benefits Act 1992 (c.4) or the Social Security Contributions and Benefits (Northern Ireland) Act 1992 (c.7).'.

Amendment No. 235, in

schedule 23, page 329, line 18, leave out from beginning to end of line 22 and insert—

'(1) Relief shall be given for the accounting period or periods in which, applying generally accepted accounting principles, the employing company would recognise an expense or a provision against a future expense (in either case ''the accounting expense'') if—

(a) the employing company were to expend a sum as a payment to the recipient at the time that the recipient exercised the option; and

(b) the amount of such sum were equal to the total amount of relief available under this Part.

(2) The amount of any relief available in any accounting period shall equal the amount of any corresponding accounting expense which would have been recognised for that period.

(3) Where relief has been given under this Part in respect of an option which subsequently lapses or is cancelled without being exercised then—

(a) where the option lapses without any payment being made in money or money's worth, the employing company shall be deemed to have received profits or gains chargeable to tax under Case VI of Schedule D in the period in which such lapse occurs of an amount equal to the deductions claimed in respect of that option for prior periods; and

(b) in any other case, the employing company shall be deemed to have received profits or gains chargeable to tax under Case VI of Schedule D in the period in which such lapse occurs of an amount equal to the deductions claimed in respect of that option for prior periods, less the amount of money or money's worth given in consideration for the lapse of the option.'.

Amendment No. 233, in

schedule 23, page 329, line 18, leave out 'The relief' and insert

'Relief under paragraph 15 (amount of relief on exercise)'.

Amendment No. 234, in

schedule 23, page 329, line 19, at end insert—

'(1A) Relief under paragraph 14A (amount of relief on grant) is given for the accounting period in which the option is granted.'.

I call Sir Stephen O'Brien—he is not that yet. It is Mr. O'Brien.

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Mr Stephen O'Brien (Eddisbury, Conservative)

I think that I am right in saying that I am 27 years behind you in my parliamentary career, Sir Nicholas, and do not aspire to the dizzy heights that you have reached.

The purpose of the amendments is to probe the Government's intention and policy. As my hon. Friend the Member for Arundel and South Downs (Mr. Flight) said during discussion of schedule 22, which allows tax relief for options on exercise only—my hon. Friend the Member for Billericay may hear an echo of some of his arguments on schedule 8—international accounting standards are changing and

companies will have to represent a PNL charge on grant equal to the Black Scholes value of the option.

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Mr George Osborne (Tatton, Conservative)

I do not want to press my hon. Friend, but what is the Black Scholes option?

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Mr Stephen O'Brien (Eddisbury, Conservative)

That is a challenge that I had anticipated would come from a Government Back Bencher. We could spend the rest of the sitting on the Black Scholes value of an option. Suffice it to say that back in 1969 two young, exceptionally clever Americans, Mr. Black and Mr. Scholes, invented a model to value options. They tried repeatedly to have it published and when they eventually succeeded it became probably the leading mathematical model for valuation of all time. Without giving the definition, which might tax the Committee, the model's equation is simply C=SN(d?1?-KeŽ(-rt)? N(d?2?) when C is the theoretical call premium, S is the current stock price, N is the cumulative standard normal distribution and d?1? is 1n(S/K)+(r+sŽ2?/2)t over st.

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Mr Paul Farrelly (Newcastle-under-Lyme, Labour)

On a point of order, Sir Nicholas. Do we have to suffer lectures in amateur corporate finance?

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Mr Nicholas Winterton (Macclesfield, Conservative)

I am not responsible for what hon. Members say so long as they are in order, and the hon. Member for Eddisbury is in order, whether we like it or not. I am only worried whether the Hansard writers can get it right.

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Mr Stephen O'Brien (Eddisbury, Conservative)

I shall make my notes available for the Hansard writers. I hope that the hon. Member for Newcastle-under-Lyme (Paul Farrelly) does not think that corporate finance is boring. I am willing to accept that I am an amateur, but I suspect that every corporate financier, by definition, is an amateur.

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Mr George Osborne (Tatton, Conservative)

I found my hon. Friend's explanation useful. If the hon. Member for Newcastle-under-Lyme thinks that my hon. Friend is an amateur, perhaps he could rise and repeat what my hon. Friend said.

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Mr Nicholas Winterton (Macclesfield, Conservative)

Order. With respect, I want to help the Committee. We have a lot of ground to cover and this discussion is not helpful.

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Mr Stephen O'Brien (Eddisbury, Conservative)

I am grateful to be able to move on.

I was explaining that, under international accounting standards companies will shortly have to represent a PNL charge on grant equal to the Black Scholes value of the option. It is not clear whether that charge will be deductible for employers under general principles or whether the Inland Revenue will try to argue that schedule 22 overrides the deduction. The matter needs to be clarified. The Chartered Institute of Taxation commented that paragraph 17, as amended by paragraph 67 of schedule 22, states that the time when the deduction is available is the time when the employee

''acquires a beneficial interest in the shares''.

That was exactly the point that the Paymaster General confirmed when she responded to my hon. Friend the Member for Billericay. The amount of the tax deduction is quantified by paragraph 15(1), as amended by paragraph 66 of schedule 22, and is based on the market value of the shares when they are acquired.

On options over unissued shares, the date on which the employee exercises the option may be different from the date on which they acquire the beneficial interest in the shares. For example, if an option were exercised on Monday, the shares might not be issued until Wednesday. That would mean that the employee could not acquire the beneficial interest in the shares until Wednesday, as they would not have been issued before then. To save companies from having to perform two lots of calculations to work out the market values of the shares—once on exercise for PAYE purposes and once on the beneficial interest being acquired for corporation tax purposes—it would be helpful if the two days could be aligned. Amendments Nos. 232, 233 and 234 address that point.

As the Paymaster General and Committee members will readily have appreciated, we are also considering amendment No. 235. That is an alternative way of approaching the same issue and addressing the problem. It is a variation, so by definition some of the amendments have to be probing. I hope that those alternatives that are not probed to the point of destruction will be accepted by the Paymaster General. Amendment No. 235 leaves out from the end of line 22 and inserts a large paragraph. The Bill permits a tax deduction for employees for their share option gains, but delays that until the exercise of the option, as we have discussed. As that will lead to uneven tax charges and contradicts the trend in modern accountancy to smooth expenses over time, the amendment would simply allow for deductible provisions prior to exercise, which is the norm under the existing common law planning that the schedule replaces. It would also provide a clawback where the option is not exercised. The arguments that I have set out form one package of points on this group of amendments—Nos. 232, 233 and 234, and amendment No. 235 as an alternative.

Amendment No. 236, which is also in the group, is on a separate point. It would introduce much new wording, and I shall address its rationale. Schedule 23 makes no provision for a deduction for a payment to cancel an option. There might be perfectly sound commercial reasons for doing that, such as local regulatory restrictions on share acquisitions or a defect in the rules of an approved plan that prevent exercise prior to a takeover or afterwards. That might include an unlisted company acquiring an unlisted target, a situation in which the company might want to buy out the options, because under the current effect of schedule 23 the options would cease to qualify for corporation tax relief, as we have discussed. Quite simply, why do we not allow cancellation payments to be deductible? After all, they are taxable and NICable—however one wants to coin that phrase—on the employee.

I hope that those explanations have put complex points—not least the Black and Scholes model, on which I hope I have not added to the mud rather than to clarity—as briefly as possible. I look forward to

hearing what the Paymaster General has to say on the amendment.

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Mr John Baron (Billericay, Conservative)

May I briefly seek clarification from the Paymaster General on one other point? I shall take your guidance on this issue, Sir Nicholas, as I am not sure under which group of amendments one should raise it. It is a very general point on schedule 23.

3:30 pm
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Mr Nicholas Winterton (Macclesfield, Conservative)

I advise the hon. Gentleman that although I may not be in the Chair when we reach the schedule stand part debate, I will advise Mr. McWilliam when he takes over from me that it was my intention—I hope that it will be his—to allow a short stand part debate.

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Mr John Baron (Billericay, Conservative)

With your permission, Sir Nicholas, I will leave my comments for the stand part debate.

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Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

The group of amendments are rather expensive.

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Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

None the less, they provide in their various guises for either double or triple relief. I shall explain to the Committee how that would occur, although I am sure that that was not the hon. Gentleman's intention. If he presses the amendments to a vote, I shall urge the Committee to oppose them.

The amendments seek to change the timing and amount of deduction under schedule 23 and, in some circumstances, would provide relief more than once, which is clearly not a good idea—I presume that it was not intentional.

Schedule 23 provides relief to the employing company for the cost of providing shares to employees to give them a real stake in the company for which they work. It achieves this by matching the deduction for the company in terms of timing and amount with the taxation of the employee as a result of acquiring those shares. The amendments appear to be an attempt to move away from that policy objective despite the fact that the informal consultation carried out over the summer of 2002 showed almost universal support for that approach.

Amendment No. 232 inserts a new paragraph that would provide relief at the time an option is granted. That would be in addition to relief under the existing rules, which provide relief at the time that the option is exercised. Although I am sure that it was not the intention of the hon. Member for Eddisbury, the inevitable consequence of amendment No. 232 would be double relief.

Amendments Nos. 233 and 234 introduce alterations as a result of the changes made by amendment No. 232 to the rules in paragraph 17, which determine the time at which the relief is due. They are irrelevant if amendment No. 232 falls.

The intention behind amendment No. 235 is unclear. The hon. Gentleman suggested that it is an alternative. On one reading, it appears to allow relief at the time a share option is granted; on the other hand, it appears to provide relief instead at the time of exercise.

The proposed changes also appear to ignore the new paragraph that amendment No. 232 seeks to introduce, and they would again provide a duplicate relief. Whichever way the hon. Gentleman takes his combination of amendments—all of them or some of them—they produce double relief.

Amendment No. 232—amendment No. 235 is an alternative to it—inserts a number of deeming provisions that would add significant complication to the interpretation of the new relief. The amount of relief would no longer be based on the amount on which the employee is taxed. Instead it would be deemed to be the amount that the employee would be paid when the option was exercised if the employee received cash rather than shares. If an option lapsed or was cancelled, the employing company would be deemed to receive taxable income equal to the amounts already deducted. Any compensation paid as a result of the option being cancelled would be ignored in arriving at the deemed income, which would provide a double deduction and further opportunities for tax avoidance.

Amendment No. 236 would also provide greater opportunities for avoidance, as there could be a triple deduction for the same amount. It seeks to insert another half page of rules to provide relief for compensation paid to employees when options are cancelled. That not only runs contrary to the policy of providing corporation tax relief for employee share acquisitions but also leads to double deductions for the same amounts, not only for the amount of compensation payable but also for the employer's national insurance contributions. The rationale for the latter relief is completely unclear, because an employer will always obtain relief for employer's national insurance contributions.

If an employee is paid cash compensation for the cancellation of a share option, relief may be available under normal accounting and tax principles, in which case the amendment would again lead to excessive and multiple deductions. I am sure that the hon. Gentleman had no intention of doing that—in fact, he has confirmed that.

The hon. Gentleman also referred specifically to the date of exercise differing from the date of acquisition. The point is not necessary. The employee is taxed on acquisition, not on exercise; therefore, there is no mismatch.

I understand the hon. Gentleman's point about the complexities of the share ownership arrangements in the schedules. However, the legislation deals with the best way to deliver the reliefs, about which for several years there have been discussions and consultation. I understand the hon. Gentleman's reluctance to support the Government on the matter, but I say in all honesty that, should he press the amendments to a vote, they will not be carried, because I will encourage my hon. Friends to oppose them. He would find himself defending a policy position that is, frankly, indefensible.

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Mr Stephen O'Brien (Eddisbury, Conservative)

I listened carefully to the Paymaster General, who will have noted that I introduced the amendments as probing amendments. She also

knows—I believe that she sought to ensure that this was placed on the record—that I am happy to confirm that there is no intent on my part or that of Conservative Members to seek in any way to assist avoidance that is not considered to be proper in the due relationship between the taxpayer and the Government.

The amendment was intended to clarify the matter. I recognise her latter point that consultations have taken place over a period of time, but it is our role as parliamentarians not only to scrutinise the Bill to seek to make it as clear as possible but also, given the enormous amount of work that is done by a host of professional and other bodies, as well as interested parties, which have to read a Finance Bill very rapidly after it is published, to reflect representations made to us that we believe deserve exposure through the course of our deliberations.

On that basis, I have ensured that not only these but alternative amendments were on the amendment paper, in case one approach had more merit than another. Therefore, I hope that no point is made of the inconsistencies between amendments, given that I have sought at times to discuss in the usual ways the fact that one cannot flag alternatives on the amendment paper. That might be a helpful thing for the Procedure Committee to think about on a future occasion.

Amendments Nos. 232, 233 and 234, with the alternative to those, amendment No. 235, were probing, and we have listened to what the Paymaster General had to say. The record of these proceedings will assist those who have to contend with the provisions in the future and they may be able to tease out more guidance and clarification from the Revenue. However, amendment No. 236 raises a more substantive point. I shall not press it, as I had not flagged in my earlier remarks that I might want to separate it out, but as I have before, I should like to reflect on what has been discussed today and reserve my position over coming back to this issue either on Report or in a future Bill.

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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Mr Stephen O'Brien (Eddisbury, Conservative)

I beg to move amendment No. 224, in

schedule 23, page 333, line 10, after 'shares', insert

'and, in a case where the shares are acquired under an employee share scheme, corporation tax shall not be chargeable on any amount paid or payable by the employing company in respect of the participation of the employee in that scheme.'.

Paragraph 25 of schedule 23 provides that where relief is available under the schedule, no other deduction is allowed in respect of the cost of providing the shares. That includes a deduction for any amount paid or payable by the employing company for an employee's participation in an employee share scheme. I have given this some thought—the Law Society has made representations on it—and consistent with the disallowance of any amount paid or payable by the employing company for its employee's participation in an employee share scheme, we consider that any amount received by a parent company from that company for its participation in such a scheme should be exempted

from tax if it would otherwise give rise to taxable income or a capital gain in the parent company.

If that is not done, the legislation will discriminate against cases in which payments are made by subsidiaries for their employees' participation in an employee share scheme. Let us suppose that a UK parent company has a wholly owned UK subsidiary whose employees participate in a scheme enabling them to acquire shares from the parent company—a very common situation. If the subsidiary makes no payment to the parent company, the subsidiary will obtain a statutory deduction for the market value of the shares acquired by its employees, less any payments made by the employees. The parent will obtain no tax deduction but, equally, will have no taxable receipt in respect of the subsidiary's employees' participation in the share scheme. If, by contrast, the subsidiary does make a payment to the parent company, the subsidiary still obtains a statutory deduction of the same amount in respect of the award of shares to its employees. Paragraph 25 prevents the subsidiary from obtaining a tax deduction for its payment to the parent company. Nevertheless, unless the payment is structured as a capital receipt for the issue of the shares, it may be taxable in the hands of the parent company, resulting in a greater overall tax liability than if no payment had been made. I believe that the legislation should achieve neutrality between those two situations.

Although that may have sounded a little convoluted, I have tried to encapsulate the situation as briefly as possible. The Law Society has been extremely helpful in its representations. Amendment No. 224 would prevent discrimination where payments are made by subsidiaries for their employees' participation in an employee share scheme.

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Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

I hope that I can deal with the amendment quite briefly because I think that it is based on a misunderstanding of the way in which the rules will work. The hon. Gentleman raised the specific question of payment from a subsidiary to a parent for shares awarded to the subsidiaries' employees, and asked whether that would be excluded from tax. Perhaps I can explain.

The amendment would have the effect of excluding from tax any amount received by a parent company from the employing company in respect of the participation of its employees in the parent company's share scheme. The result would then be a double deduction for the cost of shares. Paragraph 25 ensures that relief is given only once. It does this by disallowing all other deductions in company accounts in respect of the

''cost of providing the shares''.

Where the parent company uses a trust to purchase shares on the open market, the cost of the shares will be borne by the employing company, because it will reimburse its parent for those shares. The parent company will not bear the cost of the shares and so there is no deduction to be disallowed in its corporation tax computation. Schedule 23 ensures

that the employing company gets the relief for the cost of the shares. It operates with the mechanisms, which answers the hon. Gentleman's question about the subsidiary company.

I will not respond in detail to the amendment because the hon. Gentleman said that it is a probing amendment. Issues of cost or double taxation are not particularly relevant because he was trying to tease out the issue of a subsidiary to a parent, which I hope that I have dealt with.

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Mr Stephen O'Brien (Eddisbury, Conservative)

I am grateful to the Paymaster General. The discussion is on the record and I am satisfied by her response. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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Mr Stephen O'Brien (Eddisbury, Conservative)

I beg to move amendment No. 237, in

schedule 23, page 334, line 26, at end insert—

''Transfer pricing

29A Any provision made by any company on the basis of the rules in this Schedule is an arm's length provision for the purposes of Schedule 28AA to the Taxes Act 1988 (provision not at arm's length).'.

This is a bit more important. The amendment deals with transfer pricing, which is an important commercial matter. The transfer pricing rules in schedule 22AA to the Taxes Act 1988 allow the Inland Revenue to rewrite the pricing of intra-group transactions if it suspects that companies are avoiding UK tax by shifting expenses into high tax jurisdictions and shifting profits into low tax jurisdictions by not using an arm's-length price. Such schemes are familiar to all those who have examined that area.

The Inland Revenue has recently started to attack multinational share option plans on the grounds that they are business facilities and UK parent companies should be charging a taxable profit down to those subsidiaries. The converse case is that the UK subsidiaries should be making deductible payments to foreign parents, but the Revenue seems to be far less concerned about that. It is helpful to refer to the decision of the special commissioners in the Waterloo case, with which the Paymaster General and her advisers will be familiar. The Inland Revenue is probably—I say this without hesitation—technically correct, but the policy raises the question of what constitutes an arm's-length price, which is not unique in tax law. In practice, most people use the option gain and have parent companies recharge it to their subsidiaries, mainly because it is more tax efficient than using—I hardly dare mention this again—a Black-Scholes option valuation on grant, which is recharged. I hope that no one asks me about that because I have handed my crib sheet, which is downloadable from the internet, to the Hansard writers.

Some people have gone as far as describing the policy as stupid, which is a bit strong, but it is amazing that the Inland Revenue has said that it wants to see option gain recharging into the UK but Black-Scholes valuations for payments going out, which is illogical but increases the UK tax net. I understand that the

Revenue may be interested in the policy to raise revenue, but it does not appear to sit well with the continuing defence, which the Paymaster General is entitled to present to us, that anything that we do to scrutinise the Bill and to gain clarification through amendments attacks her anti-avoidance proposals. The amendment does not relate to the anti-avoidance issues. In parenthesis, I worry that those issues are pedalled out to see me off, but they cannot be genuinely presented on this occasion because they would be easy words and not relevant. Frankly, a lot of frantic planning is going on at the moment.

[Mr. John McWilliam in the Chair]

Under the legislation, UK subsidiaries will be automatically entitled to an option gain deduction in contravention of apparent Inland Revenue policy. It is much simpler to have one across-the-board UK rule for transfer problems. I dare say that the Paymaster General would rightly prefer to have consistency in an across-the-board UK rule, rather than let the matter remain dependent of ministerial interpretation, which carries the risk of being open to further challenge. Amendment No. 237 would provide clarity on the transfer pricing issue, and would provide consistency.

While I have been speaking, Mr. McWilliam has arrived in the Chair. I take this opportunity to welcome you.

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Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

Good afternoon, Mr. McWilliam; it is nice to see you back.

If amendment No. 237 is pressed to a vote, I shall ask my hon. Friends to resist it. When the amendment was tabled, I was a little unclear on its purpose in this part of the Bill. The amendment would make a statutory link between the new corporation tax relief and the rules that apply to cross-border transactions between connected companies. The intended purpose of the amendment was not entirely clear, although the hon. Gentleman has spoken to it. It does not appear to change how an employing company obtains relief under schedule 23, but it does seem to result in double taxation, not double relief, in certain cases, which is clearly contrary to the policy intention of schedule 23. I do not think that companies would be enamoured with that prospect.

Perhaps an example would illustrate that problem. A UK employing company might provide workers to its overseas affiliate and charge for that service. To conform to the UK transfer pricing laws, that charge should be at an arm's length rate. The amendment would require the service company to charge any amount calculated by the rules in schedule 23 if relief is available in respect of shares acquired by those employees. That would result in the charge not conforming to the arm's length rate. The other tax authority would be within its rights not to allow the payer a full deduction for that amount, resulting in the same amount being taxed twice.

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Mr Stephen O'Brien (Eddisbury, Conservative)

I was following what the Paymaster General was saying carefully. She used the phrase ''an overseas affiliate'' rather than subsidiary. It is a bit unlikely whether share options would be granted if the parent company was not the majority owner, and the affiliate was a minority owned interest. If ''affiliate''

was intended to convey that it was not majority owned, the example seems not to stack up.

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Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

It does stack up. The hon. Gentleman knows that from debate on the previous schedules when he raised the issue about a group of companies. The problem for the hon. Gentleman is that he is trying to make an interaction between two sets of rules that do not interact. The Organisation for Economic Co-operation and Development guidance sets out what an arm's length price is for cross-border transactions between connected persons, but it is open to individual Governments to provide the reliefs that differ from those arm's-length prices in their own jurisdictions. Schedule 23 does that by providing relief to companies that exceed the amount allowable by OECD guidelines. I assure the hon. Gentleman that if I go back through that sentence so that it reads ''A UK-employing company might provide workers to its overseas subsidiary and charge for that service'', the example still stands. Therefore, if the company does not conform to arm's length rates, it will find itself liable to tax from the other tax authority.

Schedule 23 is designed to provide relief to companies offering their employees a real stake in the business for which they work. The hon. Gentleman's amendment appears to be unrelated to that policy objective, and could result in the international groups concerned being double-taxed. The amendment simply does not work and the schedule does, so I urge my hon. Friends to oppose the amendment.

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Mr Stephen O'Brien (Eddisbury, Conservative)

I have listened carefully to the Paymaster General and I agree with her re-reading of the sentence with the words ''overseas subsidiary'' rather than ''affiliate''. She has given an example that works with the term ''an overseas subsidiary''. I did not think that it worked for something that was not a subsidiary, which was why I questioned the word ''affiliate''. In an annual report and accounts it is normal parlance to use the word ''affiliate'' deliberately, to ensure that one is referring to something other than a subsidiary.

However, having given the example, I think that I have made my position clear. Initially, I had thought that we might press amendment 237 to a vote, but the last thing that the official Opposition want to do is get involved in the question of double taxation. I do not want to encourage the Paymaster General to think that every time she says ''anti-avoidance'' or ''the amendment seems to provide a double taxation opportunity'' I shall immediately retreat. We have never intended to impose double taxation—where it does not already exist—or anti-avoidance.

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Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

It seems that, whatever I say this afternoon, I cannot win. If I tell the Opposition honestly why their amendment does not work, they say that I am pulling rank with the parliamentary counsel; and if I tell them that it breaks the anti- avoidance rules, they say that I am hiding behind the anti-avoidance issue. If I am absolutely honest and gentle with them and tell them that their proposal would allow double taxation, which in my humble opinion would be unwise, they complain about that as

well. How am I to answer their amendments if they do not allow me to describe the position?

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Mr Stephen O'Brien (Eddisbury, Conservative)

I hope that the Paymaster General is not misinterpreting me. I am saying that, given those answers, the official Opposition do not intend to press to a vote an amendment that she has just explained would have the unintended consequence of giving rise to double taxation. Hence, we are listening to her very carefully.

I take the Paymaster General at her word—I would not want that to be misunderstood—but the specific issues raised, and therefore addressed by amendments, are answered not simply on those grounds but on the ground of the clarification sought in relation to the schedule? Ultimately, the practitioners, if they can understand it, will be the Government's best friends in relation to compliance in seeking to address the anti-avoidance mischiefs in the clauses.

I was anxious to put two matters on the record, having had this discussion. Although I had thought that we might press the amendment to a vote, I do not intend to do that, because I have taken seriously the Paymaster General's comments about possible double taxation in certain circumstances. She gave an example, which we have had clarified, and also made the important statement that in trying to scrutinise the Bill and the interaction between schedules 22 and 23 we are being inconsistent. She said that that interaction between the two schedules is causing misconceptions on our part. It is only right to say that we are not alone. People in practice and knowledgeable professionals in this area have made representations about the interplay and interpretative skills necessary to understand how schedules 22 and 23 are likely to operate, and they have said that it is one of the most difficult matters to interpret in the Bill.

I shall not press the matter to a vote, but I hope that this discussion has made it clear that this is a genuine attempt to gain clarification. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

4:00 pm
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Mr John McWilliam (Blaydon, Labour)

I assure the Committee that when I was trying to get my head round the schedule this morning, it took me a quite a long time.

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Mr Stephen O'Brien (Eddisbury, Conservative)

I beg to move amendment No. 238, in

schedule 23, page 334, line 41, after 'shares', insert

'that is not a warrant'.

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Mr John McWilliam (Blaydon, Labour)

With this it will be convenient to discuss the following:

Amendment No. 239, in

schedule 23, page 334, line 41, after 'shares', insert 'including a warrant'.

Amendment No. 240, in

schedule 23, page 334, line 44, leave out from 'includes' to end of line 1 on page 335 and insert

'has the same meaning as ''securities'' in section 420 of the Income Tax (Earnings and Pensions) Act 2003.'.

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Mr Stephen O'Brien (Eddisbury, Conservative)

Amendments Nos. 238 and 239 are deliberately contradictory in that if one is right, the other cannot be right. We are testing the Government and hope that one of the amendments will be adopted.

This group of amendments was designed to probe and to establish the scope of schedule 23, and to test a possible uncertainty. As the Paymaster General is aware, the Law Society identified in schedule 22 a possible anomaly in that warrants come within the new definition of securities but options do not. Under the previous law, both would have been taxed as options.

We tabled a Law Society technical amendment to schedule 22, and it is worth making a equivalent point on schedule 23. If an employee holds warrants rather than pure options, is the employer within the relief? I direct the Committee's attention to the discussion on 22 May at column 249, which was ably led by my hon. Friend the Member for Arundel and South Downs, when we considered amendments Nos. 107 and 108. The Paymaster General's response at column 255 was for consistency of application.

It would be more sensible to align the definition of shares to match securities in schedule 22. If something is considered a taxable employment benefit, it is only fair and reasonable that it should be deductible as an expense for the employer. Amendment No. 240 addresses that point separately from the deliberately contradictory amendments Nos. 238 and 239.

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Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

I gently point out to the hon. Gentleman before he takes offence that if the amendments or any combination of them were accepted, they would be very expensive and cost around £500 million. I am just putting that on the record very gently, but not to provoke him.

I accept the hon. Gentleman's points that some of the amendments involve either/or suggestions, but they would produce similar results. If he presses them to a vote, I shall ask my hon. Friends to resist them.

Amendments Nos. 238 and 239, which may be alternatives, seek to change the meaning of ''option'' for schedule 23 purposes. Amendment No. 238 would exclude warrants from the definition of ''option'' and amendment No. 239 would specifically include them. The definition of ''option'' in schedule 23 is widely worded to ensure that any right acquired by an employee that later gives rise to the acquisition of qualifying shares will allow the employing company to qualify for relief. Amendments Nos. 238 and 239 would, respectively, exclude or include warrants from the definition and would serve no purpose except to add complexity and confusion.

Amendment No. 240 would change the definition of shares to include any securities defined for the purposes of the new rules introduced in schedule 22. As I have said many times, schedule 23 provides relief for companies in respect of shares acquired by employees that give them a real stake in the company for which they work. Other securities, while admittedly awarded to employees as part of their remuneration package, do not fall into that category. To include such securities within the rules of schedule 23 would undermine the policy objective.

It should also be remembered that assets other than shares can be purchased and held by the employing company prior to being awarded to employees, and the cost of acquiring those assets might be allowable for tax purposes in accordance with ordinary accounting and tax principles. That change might also require additional rules to ensure that companies could not obtain a double deduction, hence the cost. Those additional rules do not exist, so the double deduction would stand. I urge my hon. Friends to resist the amendments.

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Mr Stephen O'Brien (Eddisbury, Conservative)

Not dissimilarly to the Paymaster General's response to my hon. Friend on 22 May, she sought to clarify the position concerning warrants, which is not as simple as some representations to us suggested. In the light of her explanation, I am happy to withdraw the amendment. As our discussion is on the record, guidance may be forthcoming. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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Mr Stephen O'Brien (Eddisbury, Conservative)

I beg to move amendment No. 241, in

schedule 23, page 335, line 29, at end insert

'The award of shares or grant of an option prior to that date shall not prevent relief being given under this Schedule in respect of those shares or that option.'.

This may be the tail-end Charlie amendment and it should be the shortest. It is unquestionably a probing amendment to obtain a ministerial statement with belt-and-braces clarification that awards made prior to commencement are not outside the new rules. The matter has been raised by a number of people who made representations to us, and the point is obviously worth making given the apparent confusion over commencement dates and so on elsewhere in the Bill. I look forward to hearing the statement that the Minister has already prepared, and I shall not press the amendment to a vote.

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Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

The cost of the amendment would be between nil and £1 billion. The hon. Gentleman said that it is a probing amendment, and understanding his sensitivities on such matters, I have said that the amount could be nil or £1 billion. The amendment seeks to add an additional phrase to the commencement rules to provide that relief would be available in respect of shares awarded or options granted before the start date in January 2003. It appears to be an attempt to add further certainty to the new rules, but in reality it would serve only to increase unnecessarily the length of the legislation. Also, and rather unfortunately, as I am sure that the hon. Gentleman will agree, the amendment's wording could mean that in the first year of the new relief a company would receive a corporation tax deduction in respect of every share that it has ever awarded to its employees. Hence the cost. That cannot be the result that the hon. Gentleman or the Committee would wish to endorse.

I assume that the hon. Gentleman is seeking clarification that the new reliefs apply to shares awarded or options granted before the 1 January 2003 start date. I can assure him that if shares are acquired after that date pursuant to an option granted

before that date, or if the employee becomes chargeable for tax as a result of having acquired shares before that date, the relief will be available to the employing company. The transitional rules will apply to ensure that the same amount is not relieved more than once. I think that that directly answers the question that the hon. Gentleman asked, so I shall conclude my remarks on the amendment and hope that that has dealt with the point that he was trying to tease out.

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Mr Stephen O'Brien (Eddisbury, Conservative)

The statement that the Paymaster General has made and the concluding part of her remarks are satisfactory. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That this schedule be the Twenty-third schedule to the Bill.

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Mr Stephen O'Brien (Eddisbury, Conservative)

As indicated earlier by the previous Chairman—I know that he was going to have a word with you, Mr. McWilliam—we intend to have just a brief stand part discussion. That is because there are no amendments that deal with one particular aspect of the schedule. We have received several representations from people who will have to deal in practice with paragraph 33, particularly the question of the transitional provisions. Although we have had some discussion on those, one of the most important things to keep in mind—this goes to the points raised by my hon. Friend the Member for Billericay—is that under schedule 23(33) relief is not available in respect of shares to the extent that a deduction has already been claimed under the old rules.

KPMG, backed up, so far as I have seen, by the Institute of Chartered Accountants in England and Wales, Grant Thornton and Ernst and Young, has said that there is a lack of clarity over how the rule will apply and how the relief already claimed will be calculated, particularly if a QUEST—qualifying employee share ownership trust—has been used and if shares have been acquired at various times and at various prices using tax relief from the company. I can go into greater detail if that is of any assistance, but I think that the Paymaster General will be aware of the point that I am making, because representations have already been made directly to the Treasury. What is sought, at the very least, is a commitment that the Revenue will clarify how paragraph 33 will be applied as part of the overall schedule. If that commitment is given, I dare say that there will be satisfaction all round.

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Mr John Baron (Billericay, Conservative)

I rise to support my hon. Friend's remarks and to seek clarification on two matters. One I have already raised, and I know that the Paymaster General, very generously, is going to respond to it in writing using the examples that I have given. It is on the clarification required over paragraph 8, which my hon. Friend has alluded to.

My second point relates to those paragraphs in which schedule 23 appears to allow companies to claim a corporation tax deduction if the acquisition of shares by, for example, an employee benefit trust, has been funded by a loan from the company. That is when a company has lent money to an EBT for it to purchase

shares. I will take the Paymaster General's guidance on this, but I would suggest that if a loan is secured, it is unclear whether schedule 23 allows it to be set off by way of relief against corporation tax. Can she clarify that? It is an interesting point that does not seem to be covered by the schedule, unless I have missed it.

4:15 pm
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Mr Howard Flight (Arundel and South Downs, Conservative)

May I add my welcome to you as you chair our endeavours this afternoon, Mr. McWilliam?

I have a brief question for the Paymaster General. To what extent have the provisions of the schedule been crafted to interact with the expected results of the Accounting Standards Board guidelines on accounting for share schemes as charged for profit and loss? Has any of that led to the particular nature of these arrangements, or will there be the potential for considerable differences between the expected accounting treatment and tax treatment?

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Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

Three sets of questions have been asked: the first about loans offset, the second about the new accounting standards and the third on the transitional rules. To start with the latter, the hon. Member for Eddisbury wants to have confirmed on the record the discussions that have already taken place between the Revenue and companies. I am happy to do that for the record. The transitional rules, as we have explained, have been kept as simple as possible. They are intended to ensure that companies do not achieve a deduction twice for the same amount, but they do not create a tax charge if the amount already obtained for a share is greater than the relief due under the new rules, because that could be argued to be retrospective.

There were many ways in which companies achieved deduction before the new rules came into force, and it will be difficult to write detailed rules to cover every circumstance while ensuring that the right amount of deduction already claimed is justified under those rules. Several companies and tax practitioners have asked the Inland Revenue for guidance on how the transitional rule will operate in practice. It would be unusual if a company were to apply that rule before completing its next tax return in 2004. The Inland Revenue will, therefore, work with the interested parties who have expressed views on the issue, to develop the guidance on it. The main thrust will be to achieve a reasonable result based on the circumstances of each case. That has been the discussion to date.

The hon. Member for Billericay asked whether the loan for purchasing the shares will be offset against corporation tax. There is no relief for the principal loan, but the ancillary finance costs of obtaining the loan will qualify, together with any interest on it. I have been advised that that is the position.

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Mr John Baron (Billericay, Conservative)

May I be absolutely clear? For a loan, the simple answer is no. Will the Paymaster General confirm that schedule 23 does not actually restrict deductions to outright payments? For example, it does not appear to exclude loans. Does she agree that that should be clarified? Otherwise, it is ambiguous.

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Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

I do not think that schedule 23 is ambiguous or needs clarification. However, as the hon. Gentleman has already asked that that should be part of my written response—as well as the earlier point that I said I would write to him about, notwithstanding my comments on it in Committee—I shall certainly revisit the matter and ensure that he gets an appropriate answer.

The final question was from the hon. Member for Arundel and South Downs on the alignment with accountancy treatment. The timing and amount of the corporation tax deduction is matched as far as possible with the tax charge on the employee. Although the rules depart from the proposed new accountancy treatment, they should not give rise to significant extra work for companies. The hon. Gentleman may know that the accounting treatment of share-based payments is undecided.

The timing and amount of the statutory tax deduction will be clear and accurate, and the new provisions will make no distinction between listed and unlisted or large and small companies. The companies that were consulted were not unduly concerned about timing issues or the fact that the relief does not follow the accounts treatment, favouring certainty above all else. The issue was touched on, but it also impinges on other areas of tax legislation as well as accountancy treatments and standards.

I hope that those remarks have dealt with the three outstanding queries on the schedule. There are no further remarks that I can make, as I have covered through the amendments the pertinent points that are contained in the schedule.

Question put and agreed to.

Schedule 23 agreed to.