I beg to move amendment No. 1, in page 1, line 4, leave out subsections (2) to (4).

With this it will be convenient to take amendment No. 8, in page 3, line 9, leave out subsection (7).

I declare my thanks for the support that I have received in drafting my Bill from the Co-operative party and Job Ownership Ltd., both of which are recorded in my entry in the Register of Members' Interests.

Amendment No. 1 reflects the commitment that I made on Second Reading to take account of various concerns that my hon. Friend the Paymaster General had raised by removing subsections (2) to (4), which had been designed to allow the introduction of a share incentive plan by companies that are owned wholly by employees or by a majority of employees, such as the John Lewis Partnership.

The amendment reflects the Government's concern, shared on Second Reading by the Conservative party, about the cost of extending share incentive plans to such groups. It also reflects the Government's concern, which I accept is a real one, that a share incentive plan should not allow employees to be awarded shares that are inferior to those held by other shareholders. Given the welcome commitment by the Paymaster General on Second Reading actively to consider extending the share incentive plan scheme to trusts and employee-owned companies, I ask the Committee to agree to amendment No. 1.

Amendment No. 8 is consequential.

Amendment agreed to.

I beg to move amendment No. 2, in page 2, leave out lines 26 to 32 and insert—

'112A(1) A deduction is allowed to a company under this paragraph where—

(a) on or after the day on which this paragraph comes into force the company makes a payment to the trustees of an approved employee share ownership plan in order to enable them to acquire shares in the company or a company which controls it,

(b) the payment is applied by the trustees to acquire such shares,

(c) the shares are not acquired from a company, and

(d) the condition in sub-paragraph (3) is met in relation to the company in which the shares are acquired.'.

With this it will be convenient to take amendments Nos. 3 and 4.

Amendment No. 2 is intended to amend subsection 1(6) to bring the Bill's wording in line with the Finance Act 2000, which governs the

operation of share incentive plans. It is meant to ensure that the provisions are used in good faith by the individuals, such as family owners, for whom they are intended. It is designed, therefore, to deal with the fears expressed on Second Reading that the proposed relief might be open to abuse by companies, a problem that arose with the QUEST—qualifying employee share trust—scheme. Amendment No. 2 therefore has an anti-avoidance purpose.

Amendment No. 3 makes clear the point at which tax relief would be allowed. Amendment No. 4 is consequential on amendment No. 3.

Amendment agreed to.

Amendments made: No. 3, in page 2, leave out lines 33 to 35 and insert—

'The condition in this sub-paragraph is that, at the end of the period of twelve months beginning with the date of the acquisition, the trustees hold shares in the company for the plan trust that—'.

No. 4 in page 3, leave out lines 3 to 6.—[Mr. Lazarowicz.]

I beg to move amendment No. 5, in page 3, line 6, at end insert—

'(5A) A deduction allowed under this paragraph—

(a) is of an amount equal to the amount of the payment referred to in sub-paragraph (1), and

(b) must be made for the period of account in which the condition in sub-paragraph (3) is met.'.

The amendment is designed to clarify the amount of deduction that will be available and the accounting period for which the condition of a 10 per cent. minimum holding requires to be satisfied. It is primarily a technical, tidying-up amendment.

Amendment agreed to.

I beg to move amendment No. 6 in page 3, leave out lines 7 and 8 and insert—

'(6) No other deduction is allowed for any amount in respect of which a deduction has been made under this paragraph (except as specified in paragraph 112B(3)).'.

The amendment is designed to ensure that no double deduction be allowed for corporation tax purposes.

Amendment agreed to.

I beg to move amendment No. 7 in page 3, line 8, at end insert—

'( ) After paragraph 112A (as inserted by subsection (6) above) there is inserted—

''Withdrawal of deduction under paragraph 112A

112B (1) The Inland Revenue may by notice direct that the benefit of a deduction made under paragraph 112A is withdrawn where—

(a) 30 per cent of the shares acquired by virtue of the payment in respect of which the deduction is made have not been awarded under the plan before the end of the period of five years beginning with the date of acquisition, or

(b) all the shares acquired by virtue of that payment have not been so awarded before the end of the period of ten years beginning with that date.

(2) The effect of a direction under sub-paragraph (1)(a) or (b) is that the amount of the deduction is treated as a trading receipt of the company for the period of account in which the direction is given.

(3) However, where—

(a) the Inland Revenue give a direction under sub-paragraph (1)(a) or (b) in respect of any deduction, and

(b) at any time after the giving of the direction, all the shares acquired by virtue of the payment in respect of which the deduction was made are awarded under the plan,

a further deduction is allowed under this sub-paragraph to the company which made the payment.

(4) A deduction under sub-paragraph (3)—

(a) is of an amount equal to the amount of the payment referred to in that sub-paragraph, and

(b) must be made for the period of account in which sub-paragraph (3)(b) is first satisfied.

(5) No other deduction is allowed in respect of any amount for which a deduction has been made under sub-paragraph (3).

(6) Where—

(a) a deduction is made under paragraph 112A or sub-paragraph (3) in respect of a payment for the acquisition of shares, but

(b) shares are awarded under the plan to an individual who at the time is not a Schedule E taxpayer (as defined by paragraph 108(2)),

an amount equal to the appropriate proportion of the deduction is treated as a trading receipt of the company for the period of account in which the shares are so awarded.

(7) For the purposes of sub-paragraph (6), the appropriate proportion of the deduction is the proportion which the number of shares awarded to the individual bears to the total number of shares acquired by virtue of the payment.

(8) For the purposes of this paragraph, where shares are acquired by the trustees on different days, it shall be assumed that those acquired on an earlier day are awarded to employees under the plan before those acquired by the trustees on a later day.''.'

This amendment reflects the view, expressed by my hon. Friend the Paymaster General on behalf of the Government on Second Reading, that the availability of a corporation tax deduction should be linked to redistribution of the shares, which the Government believed was required to maintain the link between productivity and employee benefits. The amendment sets out the terms and limits by which shares acquired with up-front corporation tax relief should eventually be distributed. It provides the condition that 30 per cent. of shares acquired with the payment for which a deduction is given should be distributed to employees under the share investment plan within five years, and the balance within 10 years, of the initial acquisition. If distribution does not take place within those limits, the deduction will be withdrawn and a charge to corporation tax will be raised in the period of account within which withdrawal occurs.

The amendment also allows that, in the event that all the shares in question should be distributed at a later date, the deduction can thereafter be reinstated, which allows for the difficulty that might arise if, for good technical reasons, the shares cannot be distributed within the 10-year period.

I appreciate that this is a technical issue, as the hon. Gentleman has suggested, but there might be strong commercial reasons why, towards the end of a five-year period, it would not be an appropriate time to distribute the shares. For example, some employees may have broken away from or left the company. The company concerned might well intend to distribute the shares and be able to do so in the sixth, seventh or eighth year. Has any thought been given to trying to ensure that small companies, in which such distribution might be an

important part of a long-term incentive plan, do not lose out?

As the hon. Gentleman will appreciate, we need to strike a balance between the wish to see an eventual distribution of shares and the wish to encourage the development of employee share schemes in the way proposed in the Bill. It is fair to say that the interests lead in different directions. For distributions, a short time limit would be appropriate. For the ease of the business involved, a longer time limit would be appropriate. The issue is where to place the cut-off point. The specific provision in sub-paragraph (3) of the amendment makes it clear that a fairer deduction is allowed after the end of the period, if the shares are later distributed. That takes account of the example of the company that might have understandable technical or business difficulties of the type that the hon. Gentleman suggests. That provision is probably the best compromise that can be achieved between the different objectives that are being pursued.

I wish to inform the Committee of some further consideration that the Government have given to these provisions and to indicate some further beneficial changes—normally we would call them concessions, but that sounds more combative and the Government support the Bill and the amendments. The hon. Gentleman asked about the 10 and five-year periods. As my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz) explained, setting up a SIP can take some time. Discussions about share ownership centre on what is an appropriate vehicle, which is why we said that 30 per cent. had to be distributed within five years. The Government are trying to recognise, as companies have asked us to do so, how long it takes to set up a SIP and make it work sensibly. Other vehicles give a much shorter period.

Two more changes to the rules exempting SIP trustees from a special tax charge trusts pay on dividend income would also help. The present rules exempt the trustees from the charge, provided that they distribute the shares that they hold within two years of acquisition—I may be edging towards the point made by the hon. Gentleman—if the shares can be readily converted into cash, or five years if that is not the case. I propose to extend that period to 10 years for shares acquired with the new corporation tax relief contained in the Bill.

The second change is to the rules that exempt the trustees from capital gains tax on any gain on plan shares. At present, the rules allow the exemption only if the trustees distribute shares that are readily convertible into cash within two years of acquisition and shares that are not readily convertible, within five. I propose to bring that completely different set of rules in line with the proposals for up-front payment of corporation tax in the Bill, so that there is no contradiction as regards the different elements of the tax system and supporting my hon. Friend's objectives.

We could not produce an amendment to the Bill in time for this Committee. My hon. Friend and his advisers will want to consider my proposal, although I

should not imagine that he will want to look a gift horse in the mouth. I hope that suitable amendments can be agreed when the Bill returns to the House on Report. However, it is correct to inform the Committee today that the Government, in the spirit of the commitments made on Second Reading, are seeking to progress that matter.

I welcome the further changes that my hon. Friend has outlined. They may deal with the concerns of the hon. Member for Cities of London and Westminster more directly than measures to extend the 10-year period, which I think was what he was getting at.

Amendment agreed to.

Amendment made: No. 8, in page 3, line 9, leave out subsection (7).—[Mr. Lazarowicz.]

Clause 1, as amended, ordered to stand part of the Bill.