Clause 49 - Shares acquired on same day: election for alternative treatment

Finance Bill – in a Public Bill Committee at 5:00 pm on 21st May 2002.

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Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs 5:00 pm, 21st May 2002

I beg to move amendment No. 22, in page 34, line 15, leave out 'on same day' and insert 'by employees'.

Photo of Roger Gale Roger Gale Vice-Chair, Conservative Party

With this we may take the following amendments: No. 23, in page 34, line 17, leave out

'on the same day and in the same capacity'

and insert

'in circumstances in which those shares qualify as business assets for the purposes of section 2A by virtue of paragraph 4(2) of Schedule A1'.

No. 24, in page 34, line 17, leave out 'on the same day' and insert

'during any thirty-day period.'.

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

With your indulgence, Mr. Gale, may I point out that amendments Nos. 22, 23 and 24 were tabled as an alternative to amendment No. 21, so I wonder whether I could speak to all of them at the same time.

Photo of Roger Gale Roger Gale Vice-Chair, Conservative Party

Yes, if the Committee is happy for the amendments to be regrouped, given that they all relate to the same clause. We may begin to enter the territory of the stand part debate, but I am happy to include amendment No. 21 with the group that I announced. However, the Committee needs to be aware that if there is to be a Division on amendment No. 21, it will have to be moved separately at the appropriate time.

Therefore, with the amendments that I have announced, it will be convenient to take amendment No. 21, in page 34, line 24, leave out from 'where' to ', or' in line 26 and insert

'paragraph 44, 45 or 46 of that Schedule (exercise of option to acquire shares) applies'.

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

I thank you, Mr. Gale.

Amendment No. 21 is our preferred way of addressing an issue of which the Government may be aware, as it has been raised by the leading lawyer on government law and enterprise management incentive schemes. Amendments Nos. 22, 23 and 24 are less effective alternatives to amendment No. 21.

The amendments attempt to cure what might have been a drafting oversight in the Bill. The intention is to provide employees with the right to elect that certain sales of shares can be charged to capital gains tax where there is a possible gain. The choice arises because, in certain circumstances, the shares may have been acquired under an option without being liable for income tax. The Bill cites two situations in which that can arise--the exercise of a company share option and one category of EMI option--but it omits too further types of EMI options. There is no sensible reason to distinguish between those different cases of EMI option, a category of tax-exempt incentives introduced by the Chancellor in 2000. It makes good sense to ensure consistent treatment, especially in a provision that is designed to be helpful and to simplify the tax position of employees.

Photo of Ruth Kelly Ruth Kelly Economic Secretary, HM Treasury

Clause 49 deals with the specific circumstance on which we received representations. We were told that some employees and companies periodically have a day on which they exercise options to acquire shares under the various share schemes operated by their employers. The employees then arrange to sell some of the shares to pay any income tax liabilities associated with the acquisition. Clause 49 focuses on a small subset of those cases. It typically applies where people who acquire shares in their company through different schemes on the same day have an income tax liability for some of those shares but not for all of them. The effect of the clause is to enable employees to pay that charge by selling some of their shares without incurring unexpected capital gains tax liability on the sale. It does that by changing the relevant rules.

I am delighted that the hon. Member for Arundel and South Downs has recognised that amendments Nos. 22, 23 and 24 are not the appropriate way to deal with the issue, and has decided to concentrate on amendment No. 21. Although we are not minded to accept amendments Nos. 22 to 24, we can accept the hon. Gentleman's amendment--[Interruption.] I am pleased to see that the hon. Gentleman appreciates our acceptance.

We have given the matter careful consideration in the light of representations received after the publication of the Bill. I am satisfied that amendment No. 21 is within the spirit and policy of clause 49. The amendment alters the way that the clause treats shares acquired by exercising enterprise management incentive—EMI--options. The point is that some EMI options incur an income tax charge when they are exercised, and others do not.

Clause 49 divides shares acquired under EMI options into two different categories, depending whether an income tax charge arises when the option

is exercised, and distinguishes between the different types of EMI option. We are concerned that the provision should be simple for people to understand and apply, and the clause keeps things simple by dividing shares into just two categories: those acquired via a share option with no income tax charge attached are in one category; and all other shares are in the other. The different types of EMI option follow that division under the rules that we propose.

That is arguably the wrong result. Instead, all shares acquired via EMI options should be put in the same category as shares acquired via a share option with no income tax charge attached. That is a better result, because it will enable more people to take advantage of the new ordering rule for the disposal of shares.

I must point out, however, that re-shaping the two categories of shares in the way proposed by amendment No. 21 will not always produce a more advantageous result than that currently achieved by the clause. In certain circumstances, some people could find themselves unable to take advantage of the new provisions because of the proposed change.

We have been assured, however, that on balance it is better to make the change. No one will be worse off than they are under the current capital gains tax rules and the change will let some people take advantage of the new provisions in circumstances where they would otherwise not have be able to do so.

There is a second point to be considered: whether amendment No. 21 makes the rules proposed in clause 49 more complicated to operate. We are always concerned with compliance and the complexity of the system. On the face of it, the amendment introduces more complexity because the category of shares acquired by exercising options will include both shares with income tax liability attached and shares without. A mixed category looks more difficult to work out than a plain one. In practice, however, it should not be difficult to work out which category particular shares fall into. People should know whether shares have been acquired by exercising an EMI option, and knowing that will tell them which category of shares they have.

I am therefore persuaded that amendment No. 21 is sensible and would make a worthwhile change to clause 49. I am grateful to the hon. Gentleman for proposing it and invite the Committee to agree to it.

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

I am delighted, and thank the Minister for her kind comments. I seek your guidance, Mr. Gale, on the technicalities. It appears that it would it be appropriate for me to beg leave to withdraw amendment No. 22 so that we can vote on amendment No. 21. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment made: No. 21, in page 34, line 24, leave out from 'where' to ', or' in line 26 and insert—

'paragraph 44, 45 or 46 of that Schedule (exercise of option to acquire shares) applies'.—[Mr. Flight.]

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

I beg to move amendment No. 66, in page 36, line 46, leave out 'acquired' and insert 'disposed of'.

The amendment relates to one of the issues raised by the Institute of Directors. It seeks to apply the relief to all disposals after 6 April 2002, not only to shares barred after that date; hence it would bring forward the relief and let it apply to more people.

Photo of Ruth Kelly Ruth Kelly Economic Secretary, HM Treasury 5:15 pm, 21st May 2002

Despite the Committee's natural enthusiasm for the previous amendment, I cannot support amendment No. 66, and I hope to persuade the hon. Gentleman that it is unnecessary. It would allow the new election to apply whenever the shares were acquired, but there is a strong practical reason for not doing that. It would add considerable and unwelcome complexity to the provisions.

The normal rule for shares acquired before 6 April 1998 requires them to be pooled with all other shares of the same class in the same company. Extending the election to shares acquired before 1998 would therefore necessitate modifying all the rules relating to the pooling of shares. Restricting the new rules introduced by clause 49 to those acquired on or after 6 April 2002 avoids all the complications that modifying the pooling rules would bring. In any case, there was no need for the provisions to have an earlier commencement date, because we have satisfactorily addressed the problem put to us in the representations that we received. The intended target of the provisions are those people who sell some of the shares in question almost as soon as they have exercised the option to acquire them. Indeed, they may sell the shares on the same day. The usual reason for people wanting to make an early sale of some of the shares is, as we have heard, that they incur an immediate income tax liability on the exercise of their option and they want to pay that tax charge out of the proceeds.

There is another reason why amendment No. 66 is not acceptable. If the taxpayer elects for the new identification rule to apply, it affects all disposals of shares acquired on the day in question. The amendment, however, has effect only in relation to disposals on or after 6 April 2002. That would set up a conflict of rules, as some of the shares would have been disposed of before that date. As I understand the amendment, the normal identification rule would apply to disposals before 6 April 2002 and the new rule would apply to disposal of the rest of the shares. That is a recipe for utter confusion, as the rules would conflict with each other.

In any case, the amendment is entirely unnecessary. Given the reasons for clause 49, I recommend that the Committee does not accept the amendment.

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

I accept that the primary intention of the clause is as described--to deal with situations when people are forced to sell shares because of the high taxation on group share option schemes. As I said earlier, the issue was raised by the IOD; it needed an

airing, but it is not fundamental to the main problem that the clauses seeks to deal with. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 49, as amended, ordered to stand part of the Bill.