I beg to move amendment No. 14, in page 4, line 15, leave out from beginning to end of line 15 on page 6 and insert—

`(1) In this section—

(a) an ``original right'' is a right to acquire shares in a body corporate granted after 5th April 1999 and before 20th May 2000 (and which includes a new right which is subsequently exchanged for a further new right);

(b) a ``new right'' is a right to acquire shares granted or acquired in consideration for the assignment or release of an original right (whether comprising all or part of the consideration for that assignment or release);

(c) a ``parity exchange'' occurs on the grant of a new right where the gain which could reasonably be expected to be made on the exercise of the relevant new right immediately after the grant or acquisition of that right, together with the value of any other consideration given for the assignment or release of the original right, is not manifestly less than the gain which could reasonably be expected to be made from the exercise of the original right immediately prior to the assignment or release of that right;

(d) an ``enhanced exchange'' occurs on the grant or acquisition of a new right where a parity exchange does not occur; and

(e) the gains which might be reasonably expected to be made on the exercise of a right to acquire shares shall be determined by section 135(3)(a) of the Income and Corporation Taxes Act 1988.

(2) On a parity exchange

(a) any notices made, or deemed to have been made, under this Act in respect of the original right shall be deemed to have been made in respect of the equivalent new right;

(b) any special contribution paid, or deemed to have been paid, under this Act in respect of the original right shall be deemed to have been paid in respect of the equivalent new right; and

(c) the Income and Corporation Taxes Act 1988 shall apply to the new right as they applied to the original right.

(3) On an enhanced exchange the new right shall be apportioned on a just and equitable basis agreed with the Inland Revenue into two rights, the first of which representing the new right which would have been granted or acquired as the result of a parity exchange (which shall be treated according to subsection (2) above) and the second of which representing the balance of the actual new right (which shall be treated under this Act and the Income and Corporation Taxes Act 1988 as if no notice had been made and no special contributions paid in respect of that right). On any subsequent partial exercise of the new right the second apportioned right shall be treated as having been exercised in priority to the first apportioned right.

(4) Where a new right is granted or acquired as a result of the change of control of a body corporate then a parity exchange shall be deemed to have occurred if the relative terms of the new right and equivalent original right correspond to the terms offered to the holders of shares in that body corporate (``control'' being construed in accordance with section 840 of the Income and Corporation Taxes Act 1988).

(5) Where prior to the coming into force of this Act payments have been made in respect of Class 1 contributions due on the exercise of any new right, then on a claim being made by the person who paid them all such repayments of those contributions shall be made, less any amount representing the special contributions which would be due under section 2 above.'.

With this it will be convenient to discuss amendment No. 15, in page 5, leave out lines 21 to 38 and insert—

`(7) For the purposes of this section shares in relation to any right (``the new right'') constituting or comprised in the consideration for the assignment or release of another right (``the old right'') are additional shares in the same proportion that any enhanced gain in that right bears to the entire gain in that gain immediately after the grant or acquisition of the new right.

(8) For the purposes of subsection (7) above

(a) the gain in the new right is the gain that would be chargeable to income tax under section 135 of the Income and Corporation Taxes Act 1988 on an immediate exercise of that right; and

(b) an enhanced gain is the amount by which the gain in the new right exceeds the gain that would have been chargeable to income tax under section 135 of the Income and Corporation Taxes Act 1988 on an exercise of the old right immediately prior to its assignment or release.'.

Clause 3 stand part.

Without wishing to offend anyone, the drafting of the clause is rather a mess, and it does not make the correct provision for roll-overs. It seems to assume that section 136(1) of the Income and Corporation Taxes Act 1988 is a taxing section, whereas it is an explicitly non-taxing section, and says that an option exchange is not treated as a payment to buy out the original option. The Government apparently want to allow for the advanced NIC payment to be carried over on an exchange of options of equal value but to retain an NIC charge where the new right is more valuable—in other words, where there has been an injection of value.

That could be done simply, with our amendments addressing a technical issue on post-takeover exchanges, where the roll-over generally occurs on the same terms as the takeover but after control has passed, so that, strictly, all post-takeover exchanges have an enhancement element. As matters stand, that is ignored for approved option exchanges, an approach that should surely be followed here.

Amendment No. 15 follows the previous arrangement. If there has already been an NIC payment on new options, surely there cannot be a claim for repayment of any excess.

This is a highly technical area. I assume that the Government do not intend that, in roll-overs, special NIC arrangements and wider arrangements should follow a different path from the accepted approach. Those in such a case should not be subject to additional NIC taxation.

The clause is inevitably somewhat complex, because we must ensure that there is a level playing field for all kinds of options. To exchange one option for another at parity will create no problems, but we must ensure that the favourable new rules are not misused to escape liability where the exchange is not at parity. Otherwise, there would be nothing to prevent a settled option on one share from being extended for an option on 10,000 shares, with no further national insurance liability. The rules also need to be able to deal with a situation where one option is exchanged for another in the same or a different company, where other assets and cash may form part of the deal and the option is rolled over more than once.

The Bill must address those complex situations to ensure that, where the exchange is at parity, the settlement is still valid.

The amendments reveal what may be technical defects in the wording of the clause, so I give the Committee an undertaking that we will reconsider the clause to ensure that it achieves the necessary result and will make any necessary changes on Report. I hope that, on that basis, the hon. Gentleman will withdraw the amendment.

Is it the thrust of Government policy that, if there is a bona fide exchange of shares on a takeover at approximate parity—provided that it is not part of an overt tax avoidance measure—it should be treated, to use capital gains tax jargon, as no gain, no loss, so no charge comes into play for national insurance contributions?

The hon. Gentleman is right. If the roll-over is at parity, there should be no additional charge.

I thank the Minister for his comments. This is highly technical territory where I cannot claim any particular expertise. The bottom-line concern is that the valuation rules could produce a notional enhancement, even if the unapproved scheme uses a roll-over formula that the Revenue has agreed meets the equivalent test for the purposes of the approved scheme.

We perhaps have an opportunity now to influence the Bill. Does the hon. Gentleman agree that valuation is an art, not a science, so that in any legislation there must be tolerance in valuation? The shares valuation division values might not always coincide with the company's accountant's valuation.

Indeed, there must be that tolerance. The law generally already provides for that and that is part of the point. Also, subsection (6) specifically seems to exempt only the roll-over and not the subsequent exercise of the roll-over option.

Without detaining the Committee with technicalities that I do not fully understand, I am grateful to hear from the Minister that the Government will re-examine the wording and no doubt consult the lawyers who specialise in the area so that we can all be happy with it. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 3 ordered to stand part of the Bill.