Schedule 2 - Employee securities: anti-avoidance
Finance Bill
4:30 pm
Mark Field (Shadow Minister, Treasury; Cities of London and Westminster, Conservative)
Notwithstanding the Paymaster General's warm words of a few moments ago, I believe that where these proposals do most damage is in the inadvertent bias against smaller companies and entrepreneurs, who will perhaps be unable to take the necessary complex accounting advice in setting up their employment security schemes. There is therefore a risk that they will come under the banner of being ''contrived''.
The arbitrary, uncertain and subjective nature of many of the proposals in schedule 2 betrays the sense that the all-important determination of whether a scheme is subject to capital gains tax, and therefore a 10 per cent. charge, or income tax, with a 41 per cent. charge, hinges on the random outcome of which tax office or officer is dealing with the file.
We have learned that the Inland Revenue, as part of its clearance process, has in the past given smaller companies assistance in determining pay-as-you-earn liabilities and consideration on sale, but we understand that this may soon be discontinued. I hope that the Paymaster General will provide guidance on that.
We would like assurances that in analysing the operation of the schedule proper attention will be paid to the entrepreneurial set ups that the much-vaunted capital gains tax regime was supposed to benefit most. We fear that these small operations have most to lose from the arbitrary element, which places the taxpayer at the whim of the Inland Revenue inspector, who can decide whether moneys earned, and therefore liable for tax charge, are considered as remuneration or as a return on investment.
We need to stress that, without falling foul of the Treasury's accusation of contrivance, it is inevitable that many smaller businesses will, from day one, structure themselves so as to have an exit strategy in sight. That is not wilful tax avoidance but the practical reality of commercial life. I ran a small business for seven years before I entered Parliament, and I remember that at the end of each tax year, when we went to see our accountant, we would consider the pot of moneys left in the company and determine whether we should take it out as some sort of dividend. We considered those issues—issues of, at one level, tax avoidance—fundamentally and from first principles. I do not think that those discussions with our accountant were contrivance in any way. None the less, I suspect that they would run the risk of falling foul of a clear definition, unless we are assured to the contrary by the Minister. If we are not, those schemes would no longer be seen as providing proper dividends, but would be subject immediately to the rather higher charge of income tax.
It seems that the Government remain determined to close tax planning, rather than just tax contrivance, which reduces the PAYE and national insurance charge paid on salaries. Most measures have in the past been aimed at bonus payment structures, most visibly those implemented by large investment banks. No one on the Opposition Benches will defend the payment in wine, gold or in other ways that was clearly an abuse of the system.
We are concerned that the impact may well cover securities issued by employee-controlled companies. There are concerns that there will be fewer fiscal incentives to reward employees in much smaller operations in ways that align their interests with employers. That simply cannot be the intention of what is being proposed under the schedule.
Most of the structures being closed are being shut down following the introduction of the disclosure of tax avoidance schemes legislation. A main cause of these changes is the result of the Government having made capital gains tax treatment for individuals so much more attractive than income tax receipts by introducing the business asset taper relief in 1998.
I come to the specifics of the first three amendments, Nos. 1 to 3, which relate to insurance contracts. On amendment No. 1, the Government claim that the measures relating to insurance contracts in paragraph 2 of schedule 2 are needed to counteract wilful tax avoidance. If that is so, it should not be objectionable to have a motive test—in other words, one that would look at the main purpose. It would have to be shown that the main purpose was the avoidance of taxation, and that is set out in our first amendment.
These amendments seek to ensure that the new rules do not apply to contracts issued by insurance companies, who sell such contracts in the normal course of their business to the general public—that is set out in amendment No. 2—or to existing insurance contracts that were in place on 2 December last year. That is our third amendment.
The definition of securities in part 7 of the Income Tax (Earnings and Pensions) Act is widened to include certain instruments to prevent the Bill from being used to pay tax-free bonuses. They include rights under certain insurance contracts as well as redeemable shares, to which we shall return.
The schedule already introduces a purposive test under paragraph 4(3). Accordingly, there seems little reason why the Government should object to the insertion of a main purpose test for insurance contracts. Naturally, the main problem with a main purpose test is the element of subjectivity. Inevitably, that leads to a potential for uncertainty, about which I am sure the Paymaster General will wax lyrical—at least, until the time comes to deal with paragraph 4(3).
The purpose of amendment No. 2 is to exclude from the definition of employment-related securities contracts of insurance that are provided to employees by their employers, when those employers are insurance companies and provide contracts on the same terms to members of the public. As the Paymaster General will be aware, part 7 of the Income Tax (Earnings and Pensions) Act contains charges that relate to employment-related securities to charge to income tax gains from securities that are awarded to employees by reason of their employment. Employment-related securities include such items as shares and loan stock. We are worried—a concern that has been reiterated by the insurance business—that tax is being avoided by entering into similar arrangements with insurance contracts. We believe that there should be an additional exemption to protect employees from being offered insurance contracts by their employers, when those employers would offer those contracts to the public on the same terms.
We tabled amendment No. 3 to prevent an unanticipated national insurance and PAYE liability for employers. As the Paymaster General is aware, the restricted securities regime came into place just more than two years ago on 16 April 2003. Under that regime, charges to income tax under PAYE and national insurance can arise when restrictions cease to apply to securities or when restricted securities are disposed of. Securities were not restricted by reason only, although they could be redeemed on payment of an amount. From last December—the reason why we set the date in the amendment—the exemption for redeemable securities is to be removed for securities that were issued before that date as well as on or after it. Our worry is that that is likely to lead inadvertently to a national insurance and PAYE liability for employers. The Association of British Insurers has been in touch with the Treasury about the issue and I hope that it will take account of what the association said. I should like the Paymaster General to give us some guidance on such matters and I look forward to hearing her comments.