I beg to move amendment No. 16, in clause 4, page 6, line 44, leave out `or (4)'.

There is a potential drafting error in subsection (3). The words ``or (4)'' seem misconceived. As drafted, the subsection seems to be intended to prevent tax relief for the payment of NIC in a number of areas where the Bill removes the obligation to pay full NIC on option exercise, and the list includes clause 2(4), which in fact does not remove the obligation to pay full NIC but reimposes it. There is a double negative point that will not prevent a liability from arising if the payment is not made within 60 days, or now 92 days.

This amendment, too, relates only to options that were granted in the gap period between 6 April 1999 and 19 May 2000 and to cases in which there has been an election to transfer the liability for the class 1 national insurance contributions to the employee. It is based on the assumption that the reference in subsection (3) to clause 2(4) is superfluous because no double deduction would in any case be possible when payment of the special contribution was not made within the 92-day notice period.

Income tax relief is given in section 187A of the Income and Corporation Taxes Act 1988 when an election has been entered into that transfers a liability for secondary national insurance to the employee. The clause here ensures that relief will be given if that liability is converted to that of a special contribution. If the special contribution is not paid within the 92-day notice period, so that the liability is subsequently extinguished, the wording in subsection (3) that is the subject of the amendment is still required in order to review any possibility of double income tax relief.

There would be very few circumstances in which this part of the legislation would take effect, but it is still required to remove any possibility of double income relief. I hope that, on that basis, the hon. Gentleman will withdraw the amendment.

I thank the Minister for his comments and I agree that the focus is on not getting double taxation relief. Will he re-examine the point before Report stage? Clause 2(4) does not remove the obligation to pay full NIC but actually reimposes it. He may have persuaded me that our concern is not justified, but I should be grateful if he would undertake to re-examine the clause to ensure that my concern is covered. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

I beg to move amendment No. 17, in page 6, line 48, leave out `not'.

With this we may take amendment No. 18, in page 7, line 2, at end add—

`(5) Where a person pays a special contribution pursuant to section 4 above then, as the case may be, that payment shall comprise either

(a) a deductible expense wholly and exclusively laid out or expended for the purposes of any trade, profession or vocation carried out by him; or

(b) a deductible expense of management of an investment company (where that person is an investment company); or

(c) an amount expended wholly, exclusively and necessarily in the performance of the duties of any office or employment held by him.'.

The amendments are alternative suggestions designed to put right what we believe is a lacuna in the drafting of the Bill. The Bill states that tax relief will not be given when the option is exercised, presumably as part of the attempt to prevent double-counting NIC relief, but it does not say when the relief is to be given. To avoid any suspicion that no personal income tax relief is intended, which I am sure is not the Government's intent, these alternative amendments either remove the original provision or allow tax relief at the time of payment, which would probably be the norm under present legislation.

I endorse the hon. Gentleman's points, which to some extent go to the point that I made earlier, when the Minister was able to put on record the exact tax treatment of those contributions.

The amendments provide alternative changes to the way in which the clause acts in relation to income tax relief for special contributions paid by employees. I hope that I shall be able to persuade the hon. Member for Arundel and South Downs that they are unnecessary and that income tax relief will continue to be available on special contributions.

Section 187A of the Income and Corporation Taxes Act 1988 gives relief to an employee in respect of the secondary class 1 national insurance contributions that he has agreed to bear on the share option gain through paragraphs 1(3)(a) or (b) of schedule 1 to the Social Security Contributions and Benefits Act 1992. The relief is given as a deduction against the amount chargeable to income tax on the option gain under section 135 of the 1988 Act.

The employer is obliged to operate pay-as-you-earn on the gain on exercise in these cases and, in doing so, is required to take into account the amount of the tax relief under section 187A in calculating the PAYE deduction. The employer can do that in a normal case, because the liability for the secondary class 1 NICs arises at the same time as the requirement for the PAYE deduction on the gain itself.

The clause ensures that the employee will still be entitled to an income tax deduction in respect of the special contribution to which he or she becomes liable under the Bill. It does that in subsection (2) by deeming that section 187A has effect in respect of those liabilities. However, subsection (4) provides that the PAYE obligation on the employer in respect of the gain on share option exercise need not take account of the income tax relief given under section 187A for the special contribution. That is because the employer may be required to operate PAYE on the gain many years after the special contribution is made. The clause reduces the administrative burden on the employer. The amendment would increase that burden, because employers would have to maintain records of amounts of special contributions paid in one year by each employee and link those to the option gains that might be achieved at some time in the future.

The clause does not remove the entitlement to tax relief from the employee nor does it affect the amount or the timing of that relief. Income tax relief will still be given against the share option gain through the employee's self-assessment tax return. I hope that the hon. Members for Arundel and South Downs and for Torridge and West Devon will find those remarks reassuring.

When an employer pays this special NIC, which he will do in the relatively near future, when will his income tax be offset? My lurking concern is that, if the employer pays but the share option is never exercised—either because the employee has left the company or because the option is constantly under water—such an individual might fork out the special NIC payment and receive no income tax deductibility against it, which would be extremely unjust. If the formula relates income tax deductibility to realising a gain on the option, that is exactly what would happen.

If an option is never exercised, income tax relief for special contributions paid by an employee will be given in the same way as relief for class 1 contributions where a notice is not made. In other words, it will be given against the option gain at the time that the option is exercised, and relief will be given through self-assessment. If they have employees who are affected, employing companies must, in the time allowed by the Bill, use their best judgment to decide whether to give a notice in relation to special contributions.

Even when employees have elected to pay class 1 national insurance contributions on the eventual share option gain, their employer can, under the Bill, decide to give a notice. In such a case, the employer will be responsible for paying the crystallised special contributions. We are giving companies and, where applicable, employees a chance to finalise their liability and obtain certainty. Giving notice is not compulsory under the Bill. In deciding whether to take the opportunity, employers need to weigh all relevant factors, including the likelihood of the option lapsing.

Relief will be obtained when the option is exercised, and the relevant mechanism is the self-assessment arrangements.

The position is as I feared, and the Minister must surely accept that it is unfair. If, for whatever reason, the employer is able to lean on the employee so that he stumps up the special NIC payment, and if the employee is subsequently fired and his options lapse, he will have paid NIC that would never have arisen and will have no income tax deductibility. That seems extremely unfair. I do not deny that such a circumstance is rather unlikely, given that it is mainly employers who will operate the provision, but it could arise and the law should provide for it in a fair way.

On the timing of the income tax deduction, the paying employee could be out of the money for some time. I assume that there is no suggestion that he should get an interest credit. Again, the provision forms part of a quid pro quo that is stacked somewhat in the Revenue's favour. As well as being asked to take a gamble, the paying employee will be out of income tax relief until the option is exercised. I understand the mechanics, but I do not feel that it is a fair arrangement.

It is, as the hon. Gentleman has said, part of the quid pro quo—the benefit of certainty in exchange for early payment. I do not understand why he thinks that an employer might lean on an employee to avail himself of this opportunity. As far as we can tell, in the small number of cases when the employee has taken on liability, it would be a matter for the employee to determine. In most cases, it would be a matter for the employer, in which case that concern would not arise.

I can easily think of situations where, specifically in relation to the Bill, a company might say to an employee, ``Look, you've got these options that were issued before the power existed, as of last May, for us to transfer our liability to you. We will issue you with more options only if you accept liability.'' It is perfectly possible for companies to apply leverage to their employees to transfer the liabilities. In that situation, the employee is treated unfairly if the firm subsequently gets rid of him and he never exercises his options. He will have paid his national insurance contributions, but lost them, and he will have lost his options, but received no income tax offset.

Question put and negatived.

Clause 4 ordered to stand part of the Bill.

Clauses 5 and 6 ordered to stand part of the Bill.