I beg to move amendment No. 15, in page 141, line 2, at end insert—
'1A At the end of that section insert—
''(10) Where tax is chargeable on any gain under this section by reason of the exercise of any right then that tax shall be payable as if that gain had been made in the year of assessment in which the person concerned disposes of the shares acquired on the exercise of that right, and sections 202A to 207 inclusive shall be applied accordingly.''.'.
As Committee Members may be aware, during the last Parliament three pieces of legislation concerned adding employer and employee national insurance contribution charges to unapproved share option schemes. When it was realised that the cash flow cost to younger, new economy businesses could be disastrous, because those companies could transfer the employer liability to the employee, we were left with unapproved share option schemes where the employee paid approximately 49 per cent. tax charge, which had to be paid on exercise.
Within the gambit of share option centred arrangements, there is the old approved scheme that is still subject to capital gains tax, which has been frozen now for more than 10 years, or there is the new enterprise management incentive share option scheme, which is extremely attractive if businesses can meet the fairly demanding qualifications, and have the time to spend money on a lawyer to implement it. The schemes overwhelmingly used are unapproved share option schemes because of the restrictions on the two above.
One of the aspects of the Chancellor's presentation and policy of which we approve has been his focus on entrepreneurship in the United States economy and his understanding of why better growth has been achieved, and what is needed to do that. Many measures have been introduced in that area. However, as the venture capital industry continues to complain, one area that is unsatisfactory is that of share option schemes. Such schemes are particularly intended to enable medium-sized businesses to recruit top-quality people who would otherwise work for bigger businesses at higher direct pay on a basis of less pay today and the hope of reward from share options in the future.
The changes to national insurance contributions have put the bill up further to about 53 per cent. net. That is extremely uncompetitive when compared with, for example, the overall US tax arrangements for approved share option schemes. The various bodies in the venture capital industry have put it to me that, at the very least, it might make sense to change the time at which the tax liability is paid to when the shares are sold rather than on exercise. As things stand, people
cannot achieve the objective of becoming a shareholder in the business. They have to sell the shares of unapproved options on exercise in order to pay the 53 per cent. tax. The net tax effect on the Revenue would be neutral, and many people may decide that they still need to sell because they would not want to run the risk that the value of the shares might fall if their tax liability was set by the value at the time of exercise. Amendment No. 115 would give the individual the option either to behave as he is forced to now—sell and pay immediately—or to own the shares and pay the 53 per cent. tax when he sells them.
We had a very short debate on the clause before considering the schedule. The amendment would change that schedule. I want to explain why we are proposing the changes. The provision is put forward in conjunction with the next tax law rewrite Bill, which is in schedule E. The focus of the amendment is that the rewrite considerations of schedule E to date have thrown up the need to make changes, which are covered in schedule 6. Those changes are to address anomalies or fill small gaps in schedule E legislation that would normally be outside the scope of the fix that the rewrite Bills can undertake but that, none the less, will greatly assist the rewrite. They cover such matters as share options, credit tokens, benefits in connection with the termination of employment, taxation of benefits where income is received free of tax and priority of changes between sections 148 and 595. The amendments about that matter are simply for tidying up.
The hon. Gentleman seeks something entirely different in his amendment. It concerns not tidying up, but a new principle which would relieve the obligation of tax on the receipt of, in this case, shares.
No, it is not on the exercise. Perhaps I should explain what the amendment would do, why it is not possible and why it is perhaps not quite what the hon. Gentleman is speaking to.
At the moment, if an employee obtains any asset as a direct result of their employment, it is taxable on its value at the time that it is received. For example, if a valuable oil painting is given to an employee as a reward for services, liability arises on the value of the painting at the time. The award of shares is no different where it is basically being paid as a salary—a payment—to an employee.
The hon. Gentleman is discussing shares received outside an approved scheme, perhaps those paid as a form of salary sacrifice, which is a different way of paying them, basically to avoid tax—that is perhaps a less charitable way of interpreting the reason for paying them like that. If an employee who receives shares outside of an approved share scheme, which is when the tax liability that arises is different, those shares are taxable on their value in the year in which the award is made, not the year in which they are disposed of. Inside an approved tax scheme, the rules
are different. The Government have a wide range of approved schemes on offer, having undertaken extensive consultation with employers about the types of scheme that they want.
The existing legislation puts an employee who has acquired shares through exercising an option granted by reason of their employment in the same position as one who is awarded the shares directly. Liability arises on any gain in the year in which the shares are received, through the exercise of the option. It would be wholly inconsistent and unfair to defer the assessment of a gain arising through the exercise of an option simply because the taxpayer chose to retain the shares rather than sell them. We are talking about unapproved schemes.
The amendment goes further. It wants the tax so chargeable to be deferred, but does not make it clear when that tax would become payable. Would it be on the disposal of the first share, on disposal of all the shares or not until the very last share had been sold? The amendment would operate so that, in effect, the payment of any tax arising could easily be deferred indefinitely. I am not attracted to that. I want to make it very clear that I am not attracted to an amendment that allows tax to be deferred indefinitely by the manipulation of how many shares have or have not been sold.
The amendment does not make it clear whether or how PAYE should be operated at the same time as the disposal of the share. The employer should know when an option is exercised, because he or she provides the share. It may be inconvenient to have to monitor employees to whom options are granted, although it is feasible, but how can an employer be expected to know, in time to operate PAYE properly, when an employee or ex-employee disposes of his shares?
I understand the hon. Gentleman's point, but such an amendment would not be acceptable. It would enable people to be paid in shares rather than a salary, not to be taxed on those shares when they are awarded and then to manipulate over an indefinite period the disposal of some or all of the shares, without the disposal ever incurring a tax charge.
Accurate as the hon. Member for Arundel and South Downs sometimes is, on this amendment I must say to him absolutely no, not under any circumstances. If he wishes to make further points about the disposal of shares, I shall be happy to consider them, but I shall ask my hon. Friends to vote against the amendment if the hon. Gentleman chooses to put it to the vote.
I am surprised that the Paymaster General's reaction should have been thus, because she knows, and I specifically went through it, that the approved share option scheme is now extremely modest. Its usage is limited by the fact that it has a £30,000 maximum, frozen for the past 12 years and, as I said, usage of the EMI scheme is also extremely limited. The majority of businesses have to use unapproved share option schemes.
friendly to enterprises as the US. That is not the case. Moreover, the situation has been worsened by the NIC charges, to an effective tax charge of 53 per cent. on exercise.
The Paymaster General made much of the fact that this was an arrangement to defer the tax. That is not so. The amendment refers to the disposal of shares. Whatever shares are disposed of, the tax charge would have to be paid on the bit acquired under options.
The object is simple. It is to get round the problem, which I should have thought the Paymaster General was aware of as it is making many of the entrepreneurs whom the Chancellor is trying to woo exceedingly upset with the Government, that people are forced to sell the shares that they acquire under unapproved share option schemes: they cannot afford to continue to have an ownership stake in the business that they are driving. The point of giving them share options is to make them perform. Therefore, the regime for what constitutes the overwhelming majority of share option incentivisation in the country is unacceptable and must be looked at.
The main area that constitutes fairness is the concept, as in the US, that the tax liability does not arise until the shares are disposed of. Indeed, in the US that is the case throughout in a more generous way than in this country. It is not a device. Moreover, to talk about share options as a form of pay is completely to misunderstand their purpose. The prejudice was based on the exploitation by certain individuals in privatised industries in the past. Share options may or may not be worth something as a result of what has happened to markets in the past three years. Most share options are substantially under water. Therefore, at the time of an award sum, they are in no way an alternative to cash in the bank. Clearly, they are there to lock in and motivate key management.
If the Government really are committed to entrepreneurial spirit, they must address the issue, not necessarily by the amendment. We would want to press the amendment to a vote out of principle, unless we get a more constructive response from the Paymaster General on an issue that is widely acknowledged, particularly among medium-sized businesses.
We have the lowest starting rate of corporation tax in the European Union; we have already discussed that. The UK has a range of extremely generous tax-advantaged employee share incentive schemes, other tax-efficient arrangements to encourage venture financing and the new capital gains tax business asset taper, which we have yet to discuss, to encourage long-term shareholding. In addition, we have one of the lowest income tax rates in the world. That combination of factors makes the United Kingdom an extremely attractive place for large and small businesses.
I disagree with the hon. Gentleman, but it is entirely his prerogative to put the amendment to a vote—I would not argue with that for a minute. However, if he scrutinises what he has tabled and considers what he is
seeking to achieve, he will realise that he is creating a situation in which a tiny proportion will have an opportunity to do very well, but employee share ownership and the incentives in the rest of the tax system will be damaged—precisely what he said in earlier debates that the Government should avoid. After what has been a constructive debate through most of the day, I am very sorry that we should end with a failure to agree. However, we do disagree and I ask my hon. Friends to oppose the amendment.
Question put, That the amendment be made.
The Committee divided: Ayes 6, Noes 13.
I beg to move amendment No. 16, in page 141, leave out lines 20 to 24.
The amendment seeks to remove paragraph 4 of the original schedule, which extends the scope of section 144A of the Taxes Act 1988. It seems that the Government are seeking to use the paragraph beyond the reasons for which it was originally intended. It was introduced in 1994 as an anti-avoidance measure and was part of the package to stop the type of abuse to which the Paymaster General referred earlier of paying executives in non-cash forms, such as gold, in order to gain a tax advantage outside the PAYE system. It provides that an employee is obliged to hand over the PAYE, which is due in 30 days, or is taxed as if in receipt of benefit, which means, in effect, that he is taxed twice. That provision was subsequently extended to share option gains.
There have been suggestions that section 144A of the Taxes Act 1988 is being used as a tax-collecting measure in its own right, which is beyond the original intention. Schedule 6(4) is a clear example of that stealth approach—it seems innocuous, but the effect could be to penalise the less well-off employee. The Law Society and various other bodies have raised that issue.
At present, a series of tax provisions for benefits apply only to what are called higher-paid employees—those who earn more than £8,500 a year. Unless things have changed, the Government propose that items covered under section 144A should count towards whether an employer is higher-paid. If a low-paid employee receives a non-cash benefit, such as a share option from his employer, the Government want to swoop down and charge him under the provisions that
apply to company directors—and until today, I thought that the Government believed that share options were a good thing. Non-cash benefits by nature are somewhat unpredictable in value and employers are unlikely to know in advance whether an employee falls under the heavier compliance regime for the higher paid.
Paragraph (4) adds to regulatory uncertainty for employers, and it is a mean-spirited attack on the lower paid. Using the word ''emoluments'' may also make the charge under section 144A liable to class 1A NICs.
The Government are keen on approved share schemes, which is why we give so much tax relief—taxpayers' money—to encourage them. When the hon. Gentleman reads the record, he will see that we were disagreeing about whether some people should have complete relief on tax.
The amendment would remove paragraph (4) and leave section 144A of the 1988 Act as it stands. The hon. Gentleman concentrated first on whether greater value would be chargeable, and secondly on whether class 1A NICs would be liable. First, under section 144A, income tax is charged on certain amounts of employees' tax liability that have been met by the employer. Other employee benefits, such as payment of expenses or the provision of a company car, are treated as emoluments. Paragraph (4) brings benefits arising under section 144A into line with the legislation. There is only one consequence of that change: a section 144A benefit is currently left out of account in deciding whether an employee is earning £8,500 a year, although most employees with a section 144A tax charge are earning well above that figure. As the hon. Gentleman suggested, there is no way of bringing extra amounts into consideration.
Secondly, the paragraph does not change the national insurance position. There can be a class 1A charge only if there is no class 1 national insurance charge, and I am advised that there is a class 1 national insurance charge here.
In the case of an employee's tax paid by their employer, the Inland Revenue takes the view that the employee has received an advantage under sections 3 and 6 of the Social Security Contributions and Benefits Act 1992, and class 1 NICs are payable if a person does not reimburse their employer within the relevant period. That does not relate to class 1A as the hon. Member for Arundel and South Downs suggested. The position with regard to national insurance already applies and there will be no change to it. Re-labelling the benefit as an emolument would also not change it.
In the face of continuous, and very loud, calls from business to align the tax and national insurance rules where possible, I cannot see any reason not to align those particular benefits because that would not change tax or liability arising from class 1 national
insurance and the situation for employers will remain the same. I hope that I have put the facts clearly on to the record, and that the hon. Gentleman and the Law Society, which seems to be troubled by that point, are reassured. The point is exactly as it seems and there will be no change to the national insurance provisions that are currently operating.
On that basis, I hope that the hon. Gentleman will withdraw his amendment and think about the point again.
I thank the Paymaster General for her response and her clear statement on class 1A NICs. Although I agree that there are not going to be many people earning £8,500 to whom these matters will apply, such a person would be brought into the regime of draconian penalties if they did not pay the PAYE on time. Other Members and I raised the point that although such people are in a minority, they are the people most likely not to know that they have such a liability. The Government should think about that.
Perhaps I did not put the point clearly. Section 144A applies to people who are on £8,500 or more, and by definition his concern about an attack on the low paid does not apply. Very, very, very few people, although I cannot say that there will not be any, who will be affected by section 144A would be considered to be low paid—I have to say that on the basis that I can never say never or none because somebody is bound to discover one such case. I hope that that description will help the hon. Gentleman.
I thank the Paymaster General. The point that she confirmed was that the benefit would be included for the purposes of the £8,500 floor, which is a change from the past. I may be wrong, but a subtle change is going on here even though it may not affect more than a very small number of people. If my understanding is correct, it needs to be flagged up at the very least because self-evidently anyone of modest means who happens to get caught will be subject to an inappropriate degree of penalty out of ignorance. I take it that the Paymaster General is saying that the Government intend to communicate what this is all about so that the relevant employers will be absolutely clear. The issue is not major enough to press to a vote, so I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Schedule 6 agreed to.
Clause 39 ordered to stand part of the Bill.