Schedule 10 - Chargeable gains:

Finance Bill – in a Public Bill Committee at 12:45 pm on 21st May 2002.

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Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs 12:45 pm, 21st May 2002

I beg to move amendment No. 30, in page 179, line 30, at end insert—

'Conditions for shares to qualify as business assets

1A (1) Paragraph 4 (conditions for shares to qualify as business assets) is amended as follows.

(2) In sub-paragraph (2) for ''if at that time'' substitute ''if at the time it was acquired''.

(3) In sub-paragraph (3) for ''if at that time'' substitute ''if at the time it was acquired''.

(4) In sub-paragraph (4) for ''if at that time'' substitute ''if at the time it was acquired''.'.

This is the amendment to which I referred during the stand part debate on clause 45. It is designed to deal with what we still consider to be a potential unfairness in the treatment of people who work for a business, people who have been made redundant and people who have retired. As the Minister pointed out, if the holder of the shares leaves the qualifying appointment, the shares become non-business assets. On a later sale, the proceeds are divided into business and non-business gains and taxed at different rates. It is quite a complicated calculation. A person who sells while employed could easily pay a lower level of capital gains tax than a person who held the shares for a longer period and sold them in retirement.

The Economic Secretary's justification did not entirely stand up. I refer to an earlier debate, in which the Government seemed to have no qualms about imposing a tax rate that is now 52 per cent. on the main options, which are designed to encourage people to work hard and to make a success of business. The Government speak with a forked tongue about

motivating employees in smaller and medium businesses.

The amendment seeks to clarify the position by freezing the status of the shares by reference to whether the person was an employee or a trustee acting on behalf of an employee at the time the shares were acquired. It would not apply to someone who had inherited the shares, who is clearly in a different position. Nor would it apply to non-share assets, because qualification relates to use in a business. The Chartered Institute of Taxation has suggested that paragraph 4 is deemed to have had effect from 6 April 1998, which would deal with the problems.

Photo of Mark Hoban Mark Hoban Conservative, Fareham

May I add to my hon. Friend's comments? In many respects, there is a world of difference between the circumstances of someone who has shares as a consequence of his or her employment and retires, choosing not to sell the shares but to enjoy their income, and someone who is no longer an employee of the firm but is required to hold on to the shares, or is forced to make a sale as a consequence of their employment being terminated. In private companies, there may be agreement that an employee must sell their shares if they resign from the firm. Clearly, if they take a while to reach agreement with the employer, some part of the gain may be taxed on the basis that the shares are non-business assets. There is an issue if a sale is forced on an employee.

There are other situations, perhaps as a consequence of a flotation, in which certain shareholders are locked in for a period. For employees at the time of flotation, the lock-in agreement is not lifted on their departure from the company. They may be forced to hold on to the shares for one or two years after they cease to be an employee. On the basis of current legislation, the shares are treated as business assets for the period as an employee, but are treated as a non-business asset and, as a consequence, incur a high capital gains tax charge for the period after they left employment, even though they cannot realise the shares until the lock-in agreement has expired.

The amendment addresses a series of anomalies in which people must account for a non-business asset gain. It is important that the Government recognise cases in which employees, through no fault of their own, must pay a high capital gains tax charge as a consequence of the distinction between non-business and business assets.

Photo of Ruth Kelly Ruth Kelly Economic Secretary, HM Treasury

I remind the Committee that the generous business assets taper relief, which is available to all employees of companies, is designed to achieve productivity benefits. The relief encourages employees to hold shares in the company for which they work. That in turn leads employees to align their interests with those of the company and its owners. Clearly, we cannot obtain such benefits once employees have retired, or moved to employment somewhere else. No matter how closely their interests are aligned with their former company, there is no productivity gain to be had there. We had that debate earlier. On those grounds, we would have nothing to gain from the cost of the relief. As I explained earlier,

in order to pay for that relief, other taxpayers would have to pay more in tax.

Of course, business assets taper relief is not all lost when an employee ceases to work for the company concerned. The ex-employee continues to obtain the benefit of business assets taper relief on a disposal in the following 10 years, if he or she does not qualify for business assets taper relief on other grounds—for example, if the company is an unlisted trading company.

I am not sure that amendment No. 30 helps the situation or does what the hon. Member for Arundel and South Downs wishes it to do. By focusing merely on the status at the time of acquisition, it means that an asset that was not a business asset at that time could never become a business asset. For example, those assets that were not business assets in 1998 but became business assets from 6 April 2000 thanks to the Finance Act 2000 reforms would now revert to being non-business assets. I know that the Opposition Members did not like the way in which those reforms took effect, but this amendment would not provide a solution to their concerns.

In addition, the amendment opens up an avoidance risk. A company might turn from trading to investing, and business assets taper relief would still be retained. The amendment fails to support the policy aim of encouraging employees to align their interests with those of their employer, is wasteful, and risks tax avoidance.

The hon. Member for Arundel and South Downs suggested that apportionment is extremely complex in some senses. I would like to reassure the Committee that the Inland Revenue has published tables detailing the apportionment fractions for an asset that was a non-business asset up to 6 April 2000, and an business asset from that point on. I hope that those tables will be help to reduce the complexity for individuals who seek to use them.

Photo of Mark Field Mark Field Conservative, Cities of London and Westminster

I appreciate that the Government want to ensure that there is an alignment of interests, as the

Economic Secretary rightly says. However, the concern is that at the time of the acquisition those interests may be very much aligned. As set out powerfully by my hon. Friend the Member for Fareham, it may be increasingly the case that acquisition, or options passed on, can only vest some years ahead. The provisions on the acquisition of such options may be being put into place for all the right reasons. However, as my hon. Friend rightly pointed out, if a company then gets taken over, an employee may find himself in very difficult situation several years down the line before he is able to develop the option.

Photo of Joe Benton Joe Benton Labour, Bootle

Order. It is becoming a speech now.

Photo of Mark Field Mark Field Conservative, Cities of London and Westminster

I was wondering whether it was getting close to 1 o'clock.

Photo of Ruth Kelly Ruth Kelly Economic Secretary, HM Treasury

Opposition Members have raised a variety of situations in which people lose out through no fault of their own. Of course, there will always be situations that are complex. In the legislation, we have sought to put things as simply as possible. I have explained the rationale behind the clause, and on those grounds I suggest that the Committee rejects the amendment.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

I was interested to note that the Economic Secretary repeated the trading versus investment argument referred to earlier, and automatically subscribed to the argument that there is something wicked about investment, which a company desperately needs, and something virtuous about trading in relation to business assets. Capital gains tax arrangements have become a nightmare for citizens, and have been so structured it will be quite tricky for us to reform them in due course. We still think that that is a serious issue.

It being One o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Four o'clock.