Schedule 2 - Employee securities: anti-avoidance
Finance Bill
5:45 pm
Mark Field (Shadow Minister, Treasury; Cities of London and Westminster, Conservative)
I am glad that we had a close run battle on the last vote. This group of amendments deals with convertible securities. In summary we want to ensure that taxpayers who receive convertible are not ultimately taxed on a greater value than the true value.
The purpose of the convertible securities regime is to charge—to tax—convertible securities, but the basis of the regime is that the initial acquisition of convertible securities acquired by reason of employment should be charged on the assumption that they were not convertible. On conversion, therefore, it is effectively the value of the conversion right that is charged, and the market value of the securities into which the securities are converted is deducted from the market value of those securities before conversion, ignoring any conversion right. Also deducted is any consideration that might be paid for the conversion. It is to be treated as income and not capital in the first place.
The regime has been used in the past, as the Paymaster General will be aware, for avoidance purposes. Accordingly a provision is to be introduced under which, if avoidance motives are present, the right to convert will not be ignored, but instead the convertible securities will be assumed to be immediately convertible. That will inevitably lead to a higher tax charge on the acquisition of those securities. However, we believe that it will be wrong for taxpayers to lose out if the notional calculation values prove to be above the conversion value ultimately, when any conversion takes place.
The proposal for an amount to be repaid to the associated person may perhaps be argued to be objectionable, as the provision applies in the case of tax avoidance. However, we believe that by the time conversion occurs the purpose of the provision will have been served. The main purpose of the amendments is to clarify the proposed changes to section 437 of the Income Tax (Earnings and Pensions) Act and to amend the charge under section 440.
We accept that the method is somewhat cumbersome, but it is surely better than the present method of creating taxable income gain, followed by an unutilisable capital loss. Section 437 taxes the securities as though they had the market value that they would have had if they were not convertible. That is turned off if the convertible factor is intended for tax avoidance. Securities must be taxed as though they were immediately and fully convertible.
I hope that we have made that case fairly clear. It was brought to us by a number of the professional bodies that are concerned about the regime for convertible securities. We look forward to hearing what the Paymaster General says about the amendment and about those aspects of convertible securities, as set out in the schedule.