Schedule 23 - Corporation tax relief for employee share acquisition

Part of Finance Bill – in a Public Bill Committee at 3:15 pm on 12 June 2003.

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Photo of Stephen O'Brien Stephen O'Brien Conservative, Eddisbury 3:15, 12 June 2003

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.