I beg to move amendment No. 13, in schedule 21, page 251, line 9, at end insert

"and insert 'or 4 (in respect of shares acquired under approved CSOP schemes pursuant to rights granted before 9th April 2003)'.".

With this it will be convenient to take the following amendments: No. 14, in page 251, line 14, after "schemes)", insert

"pursuant to rights granted on or after 9th April 2003".

No. 19, in page 251, line 22, at end insert

"pursuant to a right acquired on or after that date.".

Amendments Nos. 13, 14 and 19 offer alternative ways of addressing an issue raised in Committee. Since then, a number of US multinationals and their legal representatives have expressed strong objections to the Paymaster General's response to matters that we raised with her. The issue, as we all know, is the imposition of employer NICs on approved options granted in the three years until 9 April in this Budget year. The multinationals and, indeed, the Conservatives regard the Government's measures as retrospective, and we object to the Paymaster General's reference to people breaking the rules by exercising options before the three-year period and not paying NIC charges on them. The rules and the law are clear and well known. Indeed, the Government could have applied three recent pieces of legislation, which were designed to apply NICs to unapproved schemes, to the early exercise of approved schemes, had that been their wish and intent. The problem of NICs and options, as well as the Government's failure to address all the issues related to unapproved schemes have taken up a lot of parliamentary time. Because the rules were clear, the Inland Revenue positively objected to the inclusion of tax withholding and NIC transfers from employers to employees in approved option schemes. For a long time, certain benefits have been subject to income tax, but not NICs. Although the Government have narrowed the territory, some still remain.

It has not been suggested by anyone, let alone the Revenue, that before paragraph 25 of schedule 21 was drafted not paying NICs on benefits not subject to such contributions was equivalent to breaking the rule. In particular, US multinationals frequently included the possibility of early vesting before the three year period in their UK-approved schemes, reflecting standard parent arrangements in the USA. For example, they would allow 25 per cent. of options to be exercised each year after the granting of rights. UK-approved schemes required Revenue approval, and many multinationals discussed early vesting with the Revenue. The tax rules were clear—early vesting resulted in an income tax charge in place of a capital gains tax change on gains that were realised. The view was that the main protection here was the fact that approved schemes were limited to a value of only £30,000 per participant.

In those circumstances, clever avoidance was not the issue. The law was the law, and the Revenue was well aware that many multinationals had such early vesting provisions. The Paymaster General told me in a recent letter that multinationals were advised in the past by the Revenue that shorter shareholding periods were not in the spirit of the rules for approved schemes. However, that was not generally the case. Some multinationals may recently have received such advice, but certainly that was not general practice going back three years. The fundamental issue is, what was the law at the time? The Government, as I said, had ample opportunity in the past four years to add an NIC employer and employee charge to the early exercise of approved share options.

Schedule 21 would clearly introduce a stealth tax, as it imposes a retrospective NIC on employers for the early exercise of options granted within the three years up to 9 April. I was greatly surprised that the Paymaster General's letter to me concluded:

"When employees choose to exercise their approved options within three years and employers have given them that choice, they do so with the full knowledge that income tax and NI is payable".

That is simply not the case. Schedule 21 makes provision for that, but until it was drafted there was no suggestion from the Government that that would be so. When multinationals included early vesting in their approved schemes in the past three years, that was cleared with the Inland Revenue. The law was the law, and the tax result was quite simple—early exercise resulted in income tax rather than a capital gains tax on employees, and did not result in NIC for employers.

I am afraid that the provision will introduce retrospective taxation as part of the Government's desperate drive for tax revenues. They have made enemies of many US multinationals, which feel that the Government have acted in bad faith. More generally, deliberate anti-avoidance usage of approved schemes has been limited, as the schemes themselves have tight limits, and circumstances do not usually allow for approved schemes to be used for such purposes—they have to be blessed by the Revenue. Penalising employees retrospectively is wrong and, moreover, there is no evidence that making the proposals prospective would result in any substantial tax cost. I urge the Government to accept one of the routes proposed in our amendments and also to recognise the truth of the situation.

I urge my colleagues to vote against amendments Nos. 13, 14 and 19 which, in various ways, seek to stop the application of PAYE and national insurance to company share option plans granted before 9 April 2003. Let me make it clear that the Government believe that it is right that employees should pay their fair share of tax and national insurance on all forms of employment-related remuneration. Bringing options granted after 9 April 2003 within PAYE and NICs rules would mean that companies and employees who have sought to avoid paying their fair share of tax and national insurance will continue to do so.

rose—

I will not give way to the hon. Gentleman, as I want to put this on the record.

Such a change would effectively reward employers and employees who have been using company share option plans instead of unapproved options, allowing them to be exercised early to avoid paying NICs. Companies should not be able to gain an advantage over their competitors by failing to operate their company share option plans within the spirit of the legislation. It is right that companies that have used CSOP options as a means of providing short-term, share-based remuneration should be expected to pay PAYE and national insurance. As I said in Committee, I do not accept that the change is retrospective. The hon. Gentleman is wrong to assert such a thing on the Floor of the House. The change is not retrospective. If employees hold their options for three years after grant, they will not pay tax and national insurance. That has always been so and is not changed. Where employees choose to exercise their options within three years and employers have given them that choice, they do so in the full knowledge that tax and national insurance is payable.

The proposed change in the schedule and clause means that businesses will no longer be able to gain an unfair advantage over their competitors by failing to operate within the spirit of the company share option plan legislation. It is right that companies that proceeded to use company share option plan options as a means of providing short-term share-based remuneration should be expected to pay their PAYE and national insurance. Company share option plan options have been used to undermine the principle that tax and national insurance should be paid on such employment remuneration. By tackling that and ensuring that company share option plan options exercised early are subject to PAYE and NICs for both existing and future options, we are correcting the unfair position that has arisen when employers have used company share option plan options as a substitute for unapproved options.

It is clear that in the name of fairness to taxpayers and the operation of the rules as they are expected to be operated—on the basis of fairness to all taxpayers—the hon. Gentleman seeks, through the amendments, to give a huge advantage to the few, while the rest of us pay for it. That is not acceptable. I ask the House to reject the amendments.

The Paymaster General is quite incorrect to assert that the situations that I described were about tax avoidance. They were cleared with the Revenue, the tax position was understood, and if the Government wanted a regime where employer NICs were payable on early exercise, they should have put that into the law when they changed the general rules on NICs and unapproved schemes.

What is retrospective is the NIC charge on employers. I can tell the Paymaster General that the overwhelming majority of lawyers in the City of London specialising in these matters agree strongly with that. She has made an enemy of the very type of US multinational companies that we need to go on investing in this country. She is mistaken in her views and there will no great tax gains to the Revenue as a result. We therefore intend to press the amendment to a Division.

Question put, That the amendment be made:—

The House divided: Ayes 189, Noes 309.

Question accordingly negatived.

It being more than five and a half hours after the commencement of proceedings on the first Ways and Means motion relating to the Bill, Madam Deputy Speaker, pursuant to Order [this day], proceeded to put forthwith the Questions necessary for the disposal of the business to be concluded at that hour.