Schedule 2 - Employee securities: anti-avoidance
Finance Bill
4:45 pm
Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)
I thought it important when responding to this first set of amendments this afternoon to attempt to make it crystal clear to the Committee the target of the arrangements under schedule 2. We are discussing employment-related income, of which some £1½ billion to £2 billion are paid to a small number of highly paid people in certain industries per year. I will not take long to explain matters, but I shall cite a few examples with dates. Systematically, over a long time, contrived schemes have been developed to ensure that those individuals do not pay national insurance and income tax on that employment-related income.
I defy any member of the Committee to parade before us higher rate taxpayers who do not understand that their employment-related income is subject to income tax and national insurance. Given the comments of the hon. Gentleman about small business, I shall give the Committee an example of an avoidance scheme. This is what happens. The employer pays the cash bonus into a bank and gets gilt futures in return, which he gives to the employee with a minor forfeitable condition. The employee transfers them to a special-purpose company that he already owns—let us call it Newco—in exchange for partly paid shares at a high premium, on call, equal to the amount of the bonus, plus a loan equal to the amount of the bonus. The employee then sells his shares in Newco to another, unrelated company—let us call it Purchaser—for their market value, which is very little as the gilt futures are matched with debt and the huge outstanding call on partly paid shares.
Newco then calls on Purchaser to pay out the partly paid shares so that it can repay the loan to the employee. Purchaser is now worth the market value of the gilt futures. Newco then becomes unlimited to increase its distributable reserves, which are then distributed in specie so that the gilt futures end back with Purchaser. Purchaser refunds money to the bank by way of the gilt futures, and that completes the circle. In that way, the individual receives his bonus without paying tax or national insurance.
Forgive me for saying this, but that is a highly complex contrivance—[Interruption.] I am glad to hear that Committee members are struggling with it. The purpose of that highly complex contrivance is to get round the payment of tax and national insurance.
This challenge started quite a long time ago. In 1995, the then Conservative Minister announced measures to stop a national insurance dodge that operated by paying employees tradeable assets. One year, a scheme was closed down in which an employee was given an interest in platinum sponge—I had to find out what that was; I am sure I still do not know. If all the platinum sponge had been in the employee's possession, and he had hung on to it, there would have been a commercial problem because it would not have been available. In fact, it seems never to have left either Schiphol airport or Jersey. There were also payments in fine wines—the list goes on.
Let us be clear: successive Governments of both main parties have attempted regularly to make it clear that the payment of employment-related bonuses is subject to income tax and national insurance. That seems a perfectly reasonable proposition—everybody else pays tax and national insurance on their income. I want to break the link, once and for all: sometimes, hon. Members seek to advance the idea that small businesses carrying out innocent activities and striving against the odds will be caught by the provisions. The provisions specifically target the disclosed schemes of which the Government have been made aware.