Clause 3 - Agreements and joint elections: Great Britain
National Insurance Contributions and Statutory Payments Bill
10:00 am
Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)
The purpose of the clause is to extend the opportunity for employers to ask their employees to bear the employer's national insurance liability that may arise some time after an award of restricted or convertible shares, but which cannot be quantified when those shares are awarded. The clause does not introduce anything new; rather it extends the use of a facility that has been used by employers and employees with respect to earnings from share options since its introduction in 2000. The facility to allow employers and employees to agree to transfer the employer's national insurance liability arising from share option gains has been widely welcomed and successfully used by many employers. More than 1,800
employers have applied to the Inland Revenue for approval to use that transfer facility for employees receiving share options.
The Government keenly support the measures that encourage employee share ownership. Research shows that there is a link to improved productivity. The Government also provide significant income tax and national insurance reliefs when businesses award shares to their employees through one of several Inland Revenue-approved schemes. Such reliefs amount to more than £1 billion a year and affect about 2.5 million employees. Employers do not have to limit themselves to such tax and national insurance advantage schemes. However, any awards to employees that are outside the limits and rules of such approved share schemes will, like any other form of earnings from employment, attract income tax and national insurance liabilities.
Perhaps it would be helpful if I briefly explained the history to the relevant facility. In 1999, the Government aligned the national insurance treatment of share options with income tax treatment, so that both income tax and national insurance liabilities arise when the employee exercises the option and acquires shares. However, for some employers that led to accounting difficulties. Following consultation with those affected businesses, the Government introduced a technical solution to allow employers, with the consent of their employees, to transfer any employer's national insurance liability that arose on share options earnings to the employee receiving those earnings.
In 2001, the Government again demonstrated that they had been listening to the concerns of the business community by introducing legislation to give employers the opportunity to crystallise their employer's national insurance liability to share options granted between 6 April 1999 and 19 May 2000. That was done to meet the needs of employers who faced unpredictable national insurance liabilities on the exercise of share options, but who were unable to take advantage of the facility to transfer the employer's national insurance liability to the employee.
In continuing discussions with employers, we have become aware of the increasing attractiveness of restricted and convertible shares as a form of incentive that employers could use to motivate and reward their employees. However, employers and their representatives have said that problems in accounting for the employer's national insurance contributions on share-based earnings are not limited to share options. Employers also face difficulties in accounting for the employer's national insurance liability that may arise as a result of certain events following the award of restricted and convertible shares.
Those difficulties arise because the national insurance charge may be triggered by certain events that occur after the shares are acquired by the employee. Such events are commonly referred to as post-acquisition chargeable events, and they include the lifting of restrictions applying to the shares or the conversion of shares to another more valuable form of
shares. Because of the time gap between the award of the shares and the post-acquisition chargeable event, and the unpredictability of changes in the share value during that period, the consequent size of the national insurance liability arising on post-acquisition events is also unpredictable.
Clause 3 provides a technical solution for employers who face unpredictable national insurance liabilities on awards of restricted or convertible shares. The solution is similar to that currently available for share options granted to employees; as I have said, more than 1,800 employers have already made applications to take advantage of that facility. By extending the facility to transfer employers' national insurance liability to post-acquisition earnings from restricted and convertible share awards, the measure will give employers greater flexibility in choosing how to use shares to motivate and reward their employees.
I shall be happy to respond to questions from the hon. Member for Hertford and Stortford, but I must again make it absolutely clear that the clause is intended to provide options to allow employers to continue to provide—or, in some instances, to begin to provide—share options to their employees, ensuring that they are protected with regard to the unpredictable national insurance liabilities that may subsequently arise.