Schedule 21 - Approved share plans and schemes

Finance Bill – in a Public Bill Committee at 9:30 am on 22nd May 2003.

Alert me about debates like this

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury 9:30 am, 22nd May 2003

I beg to move amendment No. 13, in

schedule 21, page 246, line 4, leave out from 'participants' to end of line 6 and insert

'identifying by name and national insurance number those participants who have participated in the approved SIP and the awards made to them.'.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

With this it will be convenient to discuss the following:

Amendment No. 103, in

schedule 21, page 246, line 4, after 'participated', insert

'in the same tax year'.

Amendment No. 104, in

schedule 21, page 246, line 6, at end insert

'but only to the extent that the necessary information is available to them or has been provided to them by the participants or the company'.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

We, and the commercial community, welcome many of the simplification measures contained in schedule 21—I discussed the less welcome measures on the Floor of the House.

Government amendment No. 166, which we shall discuss shortly, will cancel the proposed new share incentive plans dividend share arrangement, which did not work. The Confederation of British Industry, the Law Society and others have raised other issues that our amendments seek to address. There are problems with the trustees of share incentive plans having to police the new anti-avoidance rules. In particular, the new national insurance contributions liability on employers and employees, which contains a withholding obligation in respect of shares acquired on or after 9 April 2003, presents a significant problem.

It seems to the CBI, and to us, that the proposed arrangements are an unfair piece of overkill. They were not announced before Budget day and are retrospective for grants made before then. They are especially unfair on employees, who may not be able to recover tax and NIC liabilities from employees. The practical legal provision for employers to seek out employees' agreement to bear the employer's NICs is insufficient, assuming that the employees are still being employed.

On SAYE option schemes, the legislation does not achieve anything. New paragraph 34(5A) will give a scheme company the choice of arrangement A or arrangement B. Arrangement A is currently on offer; arrangement B would allow the relevant employees to exercise their options only if they are good leavers. Those who remain employed until their bonus date cannot exercise their options because a constituent company or an associated company of the scheme organiser will not employ them. It seems inconceivable that a company would choose arrangement B, because, by so doing, it would deprive all stayers of the opportunity to exercise their options.

Most company share option plan schemes allow for options to be exercised on retirement. A special retirement age is referred to in very few cases, and

most references are to normal retirement age. If a company fails to insert a specific retirement age in its CSOP rules, those who exercise on retirement before the third anniversary of grant will not qualify for the new exemption from income tax. I am sure that the Government did not want that outcome, which could be avoided if the legislation provided that any exercise on retirement permitted by the scheme rules on or after the age of 55 would enjoy relief from income tax.

Finally, many companies may be unable to collect NICs on the exercise of CSOP options. That raises particular problems for international companies—this is not a question of avoidance—which may have three-year option scheme arrangements over which there is no statutory authority for the deduction of tax under PAYE because the new withholding power in new paragraph 34 applies only to non-PAYE income. Furthermore, the provision applies only if the employee does not object to it.

Amendments Nos. 13, 103 and 104 are alternative ways to achieve the same objective. They seek to address the fact that the changes in schedule 21 are intended to simplify the operation of approved share schemes. The new provision in the SIP legislation requires the independent trustee to police the new anti-avoidance measures. That will not simplify the operation of SIPs because the trustees are in no position to police the employers. The trustees, probably acting through their lawyers, will ask the employers to confirm the position and to indemnify them against risk, and the employers will ask their tax advisers to write back with the answer as a form of independent audit. Tax advisers can only rely on what employers tell them; everything depends on honest information from the employer, who will be behind any non-compliance in the first place.

All the provision achieves is the racking up of professional costs. It is not particularly workable and the simplification will not encourage employee share ownership. Surely it would be much simpler for trustees to compile records of participants and their national insurance numbers—trustees must compile such information in order to do their jobs—to catch any double awards through the employer's national insurance scheme.

Amendments Nos. 103 and 104 address the same problem by ensuring that any record-keeping obligation on the trustees is reasonable.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield 9:45 am, 22nd May 2003

I welcome the Paymaster General back to the crease, which is an appropriate phrase to use today.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I hope that the weather improves to allow us to see some dynamic batting.

In introducing the amendment, the hon. Member for Arundel and South Downs made several general points about schedule 21 to which I shall quickly respond. The schedule's purpose is to produce a balanced package aimed at simplifying and modernising the operational schemes. The majority of the proposals are a response to industry

representations and have been welcomed. The operation of the PAYE mix on early exercise of existing options to close a loophole in legislation has not been welcomed. Anti-avoidance measures rarely are, because those exploiting the loophole wish to continue to do so. The proposal has been balanced with withdrawal of the tax charge under the second three-year rule, which has been welcomed. We shall come to all those changes at various points in our debate.

There are four changes to the share incentive plans provided for in the schedule: the one-off payment allowing the purchase of partnership shares, which is welcomed; flexibility in the amount of salary to be used for purchase of partnership shares; employees who move between companies in a group can participate in more than one SIP, which is welcomed; and simplifying the dividend share holding period, to which the hon. Gentleman has referred. I will come to that later during debate on the Government amendments.

There are five changes to the company share option plans. There is a change to PAYE and national insurance, operated if options are exercised within three years of grant. The definition of material interest has been aligned with that for SIP and SAYE. Only changes to key features in the scheme rules need to be approved. We will provide for what we call good leavers, touched on by the hon. Gentleman, which are injury, disability, redundancy and retirement. In those cases, people are able to exercise an early option tax-free. The second three-year rule has been removed. There are three administrative changes not requiring legislation, and there are two changes to SAYE.

Overall the changes have been welcomed. There is a particular issue with the company share option plan, which the hon. Gentleman has touched on, regarding the closure of the loophole and the PAYE mix. Some people think that we should not do that without giving a year's notice, so that others may continue to use it. We will debate that later. The changes to SAYE have been generally welcomed, but there are some concerns about the changes, particularly in relation to demergers. I know that the hon. Gentleman will want to touch on that. Schedule 21 has been welcomed overall, and it provides for many good improvements in the operation of the schemes.

I turn to amendment No. 13. Currently, if employees participate in a share incentive plan, they are unable to participate in another SIP in the same tax year. That is the point I made about connected companies. We have been told by the industry that that rule penalises employees who have moved between connected companies in the same tax year. They have to leave one SIP but they cannot join the next until the next tax year.

We are proposing to allow employees who move to a connected company following a group restructuring to participate in the SIP of the connected company, even if they have participated in another SIP plan in the same year. At the same time, the trustees of the SIP must keep records of the share award limits, to check

that those are not exceeded in any tax year. That is perfectly reasonable and an obvious step. We have not specified how the records should be kept, as trustees already have to keep records and details, which they report to the Inland Revenue. Amendment No. 13 seeks to specify and so limit the records that share incentive plan trustees need to keep for people who have participated in more than one SIP established by the same company or connected company. That is unnecessary, and it is unusual for legislation to specify the types of record that are to be kept.

The legislation needs to provide the general framework for the administration of the SIP, while allowing the practical details of administration and record keeping to be determined, as has always happened in the past, by those who know the field best: the trustees and administrators, in conjunction with the Revenue. The amendment is simply unnecessary and, if I may say this ever so gently to the hon. Member for Arundel and South Downs, an overreaction to the good suggestion in the proposals.

Photo of John Baron John Baron Conservative, Billericay

I seek clarification from the Paymaster General on that point. Is she saying that trustees will be allowed to police these share schemes in the manner suggested in the amendment if they wish? That is the important point. She suggests that trustees have much greater freedom than is, perhaps, detailed in the Bill. If that is the case, it is an important point on which the Committee should dwell.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I am not talking about whether the rules in the amendment are better. The rules that currently operate—which are not the rules in the amendment—have been negotiated and discussed, are understood by the Revenue, administrators and trustees, and are perfectly reasonable. They operate now and there have been no developments to suggest that we need to change them. Therefore, the amendment is simply unnecessary, going against the grain of the current procedure that operates between the Inland Revenue, the administrators and SIPs. The amendment would change that and disturb a balance that is clearly operating well. I cannot see the reason for pursuing the system in the amendment, when the current system operates correctly. I am sure that there are continued discussions between the administrators, SIPs and the Revenue in making the returns each year. We want to ensure that the limit is not exceeded and that the rules are properly applied in a scheme that has been widely welcomed as progressive.

Amendment No. 103 seeks to limit the trustee record-keeping requirement to the same tax year for participants who have participated in one or more approved SIPs established by the company or by a connected company in that year. The amendment is not necessary, which harks back to the point that I have just made, because trustees need to keep records of all participants—not just those participating in one or more incentive plans—in order to report details of the share awards to the Inland Revenue. The information required in the amendment is already reported each year.

Amendment No. 104, if accepted, would mean that the trustees would not need to keep any records of participants in one or more approved SIPs established

by the same or a connected company in the same year if the company or participant did not inform the trustees of the participation. That would mean that the trustees would have no way of knowing whether the share award limit had been exceeded. In developing the proposal to allow participation in one or more approved SIP plans established by the same or a connected company in the same year, we were assured by the industry that, in general, there would be only one trustee acting in such a situation and that the keeping of records and reporting would be relatively straightforward. The situation envisaged by the amendment should not, therefore, arise.

I have explained to the Committee how the rules operate now. In making the change to a connected company, there was negotiation and discussion with the people who represent those who operate the schemes. They asked for this change and believe that it is the best way forward. Therefore, it seems entirely inappropriate to disturb that scheme now by accepting the amendments.

Clearly, discussion between the Revenue and the trustees and administrators of SIPs is a constant dialogue. I have every confidence that that collection of organisations is perfectly capable of ensuring that the rules are applied and the limits adhered to in the most efficient, simplest and best way for all concerned. I ask the hon. Member for Arundel and South Downs to withdraw the amendment.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury 10:00 am, 22nd May 2003

The ability to participate in two different SIPs in one year is welcome, but throws up the possibility that considerable legal costs will be incurred for trustees to maintain records, even though that might not necessarily result in their always having accurate records. I hope that that issue can be thrashed out with the Revenue before the Bill becomes law.

If trustees, in the event, do not have perfect records because they have not received the necessary information from the company or from participants, that ought not to be a breach of the plan conditions. In response to the good point raised by my hon. Friend the Member for Billericay, the Paymaster General said that it was up to trusts to decide how to go about keeping their records. Amendment No. 13 is a probing amendment designed to put forward an approach that would provide appropriate record keeping. I think that it is the only approach that would not rely on a whole circle of information and much compliance administration—which would deliver nothing better than that which employers will eventually feed back anyway. It would be helpful if the Paymaster General could confirm that it will be a satisfactory approach for trustees to compile records for participants including their national insurance industry number, which they have to compile anyway, and which affords checking.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I thought that I made it absolutely clear to the Committee that when we were approached over the change to connected companies, the industry itself accepted the arrangements and operation that we have put in place, and requested no changes. Therefore, however persuasive the hon. Gentleman

might be, I am not about to disturb or change that agreement. If he is seeking a confirmation from me, I am afraid that I am not going to give it. The measure is the result of negotiation and careful planning, and, notwithstanding some of the points that he has made, the industry has accepted that this is the correct way to proceed.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

Unfortunately, the Paymaster General's comments contradict what she said in the first part of her response. I take the point that there is an effective trade body that represents businesses in this field, whose primary job is to negotiate the arrangements that it wants. However, our points, one of which, as she is aware, was raised by the Law Society and one by a different part of the industry, are practical ones. It is entirely reasonable to want to have arrangements that, without merely going through the motions or being unsatisfactory, are as simple as possible.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I make two simple and very clear points: first, the information has already been collected; secondly, we have been assured by the very industry to which the hon. Gentleman now refers that there is no extra work or cost—that is why the changes have been proposed. Therefore, there is no reason why I should doubt the industry's word as given to the Inland Revenue in the discussions, or why I should relax the arrangements that are clearly necessary to deal with SIPs.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

The Paymaster General ought to think behind the representations that she receives about potential problems. The representatives of the industry with whom the Revenue has been in negotiation have themselves created the problem with dividend shares by not thinking things through fully. Therefore, just as a matter of principle, it is not wise always to rely on discussions between a particular body of people and the Revenue and conclude that there is not a problem and that, therefore, this is how things will work.

The amendments are designed to expose what could be a problem. That is why the Law Society and lawyers have focused on them. This is not a huge issue, but a better principle would be to permit, if nothing else, the simplest and most reliable approach to deal with the basic needs that are involved in such a case.

I wish to return to one technical point, which was raised by the Law Society and which is behind amendment No. 103. New paragraph 71A appears to relate to new paragraph 18A, inserted by paragraph 2 of the schedule, but new paragraph 71A ought to refer to the period to which it applies.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I am grateful to the hon. Gentleman for passing on the Law Society's observation on whether the sections are correctly cross-referenced. An answer does not immediately spring to mind, which is hardly surprising, but I shall double-check and come back to him. I believe that the Law Society has misunderstood the interaction of the paragraphs, but it would not be difficult to do that, because this is a complex area.

On the points that the hon. Gentleman and I have been discussing, certain records must be maintained in order to ensure adherence to the rules of SIPs. Clearly, requirements should be kept to a minimum and should

ensure the smooth operation of the plan. Discussions with the industry indicate that the present balance has been struck correctly.

As the hon. Gentleman rightly knows, there are continuing discussions about how the arrangements may be improved. However, for the purposes of the amendments, I do not propose to change the arrangements for connected companies, because I have been assured that they work correctly.

Photo of Michael Jack Michael Jack Conservative, Fylde

I am listening carefully to the Paymaster General's arguments. I understand her concern about changing an agreement, but my hon. Friend the Member for Arundel and South Downs has put forward some important concerns. She mentioned the groups with which the Revenue and the Treasury have had discussions about the practicalities and the operation of existing and revised arrangements. Can she give the Committee an assurance that the interested parties will meet, perhaps every six months, to review the practical operations in order to ensure that her view is correct or that if changes are necessary they may be made at some time in the future?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I am sure that the right hon. Gentleman will remember from when he was Financial Secretary that Ministers do not need to set time limits to encourage people to make representations. If they believe that a scheme is not running smoothly, they make representations regardless of time limits. He will also appreciate that this area of taxation requires close and consistent work between the Revenue and the representative bodies, and I have no doubt that that will continue. I do not want to set a six-month limit because, if they chose to speak to us before the six months, that would be agreeable.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

The matter has been well aired and I shall sum up by saying that what is new is that the trustees are required to police the new anti-avoidance provisions in the schedule. Those provisions present problems of greater record keeping and the trustees are not in a position to police employers. Much depends on the honesty of the employers, and if they or the employees decide to act improperly the trustees may not be able to find that out. The industry may not have thought about this, but it is sensible to consider a practical arrangement—it need not be written into law—to provide access to accurate information. The new arrangements go slightly beyond the situation as it has been. There is an issue to sort out, whether regularly or more frequently, and the representatives of share incentive plans may not have thought about that because they are not necessarily the same people as the trustees.

On the basis that the matter will be considered further, it is not appropriate to put the amendment to a vote. We have had a full discussion and a potential problem has been recognised. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I beg to move amendment No. 166, in

schedule 21, page 246, line 28, leave out from beginning to end of line 17 on page 247.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

With this it will be convenient to discuss the following:

Amendment No. 14, in

schedule 21, page 246, leave out lines 29 to 35.

Amendment No. 15, in

schedule 21, page 246, line 33, leave out from first 'the' to end of line 35 and insert

'fifth anniversary of the award of the shares on which the relevant dividend was paid'.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

We might call this a score draw between the Government and the Opposition, given the way in which the amendments would operate. Government amendment No. 166 withdraws the proposal to alter the tax-free holding period for dividend shares in a share incentive plan. That is the period during which the dividend shares must be held in a plan before they can be taken out tax free. Although the proposed change achieves the simplification that the industry asked for, it seems that those asking for the change did not establish with the administrators the full impact of the change. Feedback from the industry is that the proposed change would increase rather than decrease the amount of administration for employers, and they would prefer to remain with the existing rules. Our amendment responds to that and withdraws the new rules.

Amendments Nos. 14 and 15, which were tabled by the hon. Member for Arundel and South Downs, refer to the proposed changes to the rules of SIP dividend shares.

I said that this was a score draw, because the Government have the advantage of parliamentary draftsmen. Amendment No. 14 seeks to remove the proposed changes to the tax-free period for dividend shares. It is defective because it would fail to remove the consequential changes to paragraphs 10 to 15 in schedule 21. Amendment No. 15 would redefine the tax period, but Government amendment No. 166 also does that.

I hope that the hon. Member for Arundel and South Downs will welcome our action in tabling Government amendment No. 166, and will understand why we needed to table it. However, he can take some comfort from the fact that had he had access to parliamentary draftsmen he might have beaten us to it, and I might have been accepting his amendment. None the less, I hope that he welcomes our amendment.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury 10:15 am, 22nd May 2003

We raised the issue on the Floor of the House, and we are pleased that the Government's amendment will get rid of the problem. Our amendments Nos. 14 and 15 are not longer relevant.

Amendment agreed to.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

I beg to move amendment No. 16, in

schedule 21, page 247, line 17, leave out

'the day on which this Act is passed'

and insert '1st January 2004'.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

With this it will be convenient to discuss the following:

Amendment No. 18, in

schedule 21, page 249, line 27, leave out '9th April 2003' and insert '1st January 2004'.

Amendment No. 19, in

schedule 21, page 249, line 38, leave out

'the date on which this Act is passed'

and insert '1st January 2004'.

Amendment No. 21, in

schedule 21, page 250, line 32, leave out 'of the right' and insert

'of a right to acquire shares granted after 9th April 2003 where that right is exercised'.

Amendment No. 22, in

schedule 21, page 250, line 32, leave out 'of the right' and insert

'of a right to acquire shares granted on or after 1st January 2004 where that right is exercised'.

Amendment No. 194, in

schedule 21, page 250, line 38, after 'acquired', insert 'under options granted'.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

It is no compliment to the Paymaster General to be mistaken for me.—[Laughter.]

Amendments Nos. 21, 22 and 194 offer a slightly different approach to the same problem, but the key amendments are Nos. 16, 18 and 19. The latter offer the choice of deferring the changes to next year to enable employers to adapt their systems, especially in view of the chaos that could arise if there were different sorts of dividend shares. That has now gone, but a year's delay would allow time for problems to be solved. Amendments Nos. 16, 18 and 19 are slightly outdated as a result of Government amendment No. 166, but I would like to press amendment No. 194.

Amendments Nos. 21, 22 and 194 offer three different approaches to the provision that the Bill introduces for PAYE on approved options exercised before the third anniversary of grant. Unlike previous changes, options in existence at the time of the change are not grandfathered under the present rules. The usual method of handling PAYE is to include a rule in the scheme permitting the employer to sell some of an employee's shares to fund the tax, but options already granted will not include that rule. Employers cannot be certain that employees would agree to its provision. Amendments Nos. 21 and 22 suggest two ways of grandfathering to protect options granted before Budget day or to protect options granted before January 2004. In essence, they address the same problem.

Amendment No. 194, which was suggested by the CBI, would be the best way in which to deal with such issues. I emphasise to the Paymaster General that it is not only lawyers who are worried about the problems. The CBI has expressed extreme upset at the proposal and, after all the Government's efforts to befriend business over the past five years, it will be yet another cause célèbre if a compromise were not achieved. Until the Budget announcement, the tax laws that applied to approved CSOP schemes meant that the exercise by

employees of options granted by employers under an approved scheme were not subject to national insurance regardless of when the CSOP options were exercised. Companies that granted such options formally communicated the applicable tax rules to employees at the time of grant, and employees had to take such tax rules into consideration when deciding whether to accept such grants formally.

As a result of the Budget announcement, the law now applies a new employee and employer NIC liability for options granted under an approved CSOP scheme if such options are exercised prior to three years from the grant. Those new rules apply retrospectively, in that we are not talking about grants made since 9 April last, but those made before then. Employers can seek the agreement of employees to accept employers' NIC liability in respect of new option grants, but that is not practicable for existing CSOP grants because it is unlikely that employers would be willing to accept such liability.

The new employers' withholding obligations may be impossible to implement in the case of existing CSOPs, as they are unlikely to permit collection of tax and NICs while the plan remains approved. The employer's right of deduction would therefore be limited to net of tax paid due in the same month as the option is exercised. The deduction of tax and NICs in subsequent months without specific written authorisation by employees would involve breaches by employers of the wage reduction provisions under part 2 of the 1996 Act.

It is worth my referring to one or two specific points that have been highlighted by the CBI. Many multinational companies have implemented approved option schemes that permit the exercise of options within three years after the date of grant. There are many business reasons surrounding the decision not to impose a vesting restriction until the third anniversary of the date of grant. For example, companies that do not impose a three-year exercise restriction may do so to maintain some consistency between the terms and conditions associated with the stocks granted to UK-based employees and stock options offered to employees in other countries.

The further imposition of a three-year fifth vesting restriction merely to ensure that employees take advantage of the personal tax benefits of CSOPs would impose a tax planning decision on employees and would not allow them to weigh share price volatility risk against the benefit considerations. The NIC liability, in particular, was first imposed on the exercise of unapproved stock options in April 1999. It was imposed only on grants made prospectively after the change in legislation. It was not imposed on retrospective gains.

I come now to deduction problems. An employer's right to deduct income tax and NICs pursuant to the regulations is limited to net of tax pay due to employers during the same month in which an option is exercised and to the arrangements as they stand. The employer, through no fault of his own, could leave companies with quite substantial NIC and tax bills as a result of a retrospective change to arrangements. The NIC charge introduced by the

Budget is retrospective, and as a minimum the application of NICs and withholding procedures should not apply retrospectively. The current wording should therefore be amended to apply only to grants made after 9 April 2003, which is what amendment No. 194 would achieve.

We are aware that the reasons for the changes were to block what the Government perceived as avoidance. It is overkill if that creates unjust liabilities for employers in an environment in which many companies are not likely to be in a strong cash flow position if such retrospective liabilities may arise.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

We, too, are happy with most elements of schedule 21. We welcome the fact that the Government, in introducing amendment No. 166 and others, have clearly been willing to listen to the views of those people who will be affected by the proposals in the schedule. We hope that the Government will show a similar willingness to listen to tax practitioners and business in relation to the amendments that we are debating, and pay heed to their views. I notice that the Paymaster General already looks enthusiastic about that prospect.

Our concerns relate to amendment No. 194, which we agree is the most important of the amendments being debated. Our concerns are those set out very clearly by a number of tax practitioners: the Chartered Institute of Taxation, the Institute of Chartered Accountants, and the CBI. The concerns relate to the retrospective elements of schedule 21, and have been set out clearly by the Chartered Institute of Taxation in the briefing document that it has helpfully prepared on the Bill. It found less than welcome a particular aspect of the change to PAYE and the NIC treatment of company share option plans exercised within three years of grant. The institute has said that the change should apply to options granted on or after 9 April 2003 rather than options exercised. It says that applying the change to options exercised after 9 April 2003 has two key implications for companies that are retrospective in nature.

Those two key implications have already been set out thoroughly by the hon. Member for Arundel and South Downs, so I shall not go into them in great detail. First, the new rule will mean that employers will often have to pay the PAYE and NIC to the Inland Revenue without, in some cases, having any practical method of recovering it from employees. We hope that the Paymaster General will respond to the practical issues that are raised by those concerns, which have also been touched on by the CBI and the Institute of Chartered Accountants.

The second issue is the NIC liability that will fall to the employer under the new elements of schedule 21. That is described by the Chartered Institute of Taxation as a new liability that it could not have previously provided for. When the Paymaster General introduced schedule 21, she said that the Government were seeking to close a loophole by bringing in the measure related to the NIC charge. We had a debate the other day, which you will be pleased to know I shall not revisit, Sir Nicholas, about the difference

between tax loopholes, the ordinary application of the tax system as it is at any point in time and measures that the Government bring in that might be described as tax loopholes, but which are there to serve a particular purpose. Without going back over the argument, I merely note that the CBI points out in its submission to the Committee that the change operates as a retrospective application of a new NICs liability. That is to say, as a new tax as opposed to an avoidance reduction measure. The thrust of the explanatory notes in this area is different from the clearly anti-avoidance thrust of the explanatory notes that relate to some of the VAT measures.

We do not question the fact that the Government are bringing in the change and that, in future, NICSs will be applied in such a way. However, we question whether it is fair in the circumstances to introduce a change retrospectively. We appreciate, and can anticipate, some of the Paymaster General's arguments on retrospection. We can all think of many tax changes introduced in Budgets that have had, to some extent, a retrospective impact. However, I hope that the Paymaster General will accept that, when possible, Governments should avoid retrospective tax elements in Budgets and Finance Bills because they are unfair to taxpayers, who, before the measures were introduced, were simply trying to order their affairs in perfectly legitimate way under the tax system at that time.

In responding to those concerns, will the Paymaster General address a number of other specific issues? My understanding from this year's Red Book is that the revenue effect of the schedule, and presumably this measure, will be to raise some £20 million in the 2004–05 financial year, rising to £40 million in the 2005–06 financial year. Can the Paymaster General tell us what the effect would be on those revenues if amendment No. 194 were agreed? In other words, how much revenue would be lost if the retrospective element were not included?

It would be helpful to know what the Government's principles are in relation to retrospection. I suspect that we will have an argument over whether the measure constitutes retrospective taxation or the legitimate closing of a loophole. Does the Paymaster General accept that, as a working rule, the Treasury should avoid retrospective taxation? How does she justify the change in question in relation to other retrospective changes that might be made? Has she considered the matter, and have her officials given advice on other ways of introducing the schedule so that it has a less draconian element of retrospection, while still respecting the Government's desire that, after the date in the schedule on which the measure becomes effective, there should be an NICS charge—probably perfectly legitimately—in respect of new transactions?

Photo of John Baron John Baron Conservative, Billericay 10:30 am, 22nd May 2003

I share the welcome given by my hon. Friend the Member for Arundel and South Downs and the hon. Member for Yeovil (Mr. Laws) to many aspects of the schedule. The change that means that the Inland Revenue does not have to be consulted

before plans can be altered simplifies administration plans and, therefore, costs.

However, I share the concerns of those who have already spoken. There are retrospective elements to the schedule, relating particularly to the PAYE and national insurance contribution treatment of options under the company share option plans, which could make bad law. I ask the Paymaster General to address one or two of those elements.

The example on which we have focused so far has been the change to PAYE and NICS treatment of options exercised within three years of grant. That is a case in point. Applying the change to options exercised on or after 9 April has two retrospective implications for companies. The first, which has been adequately dealt with, appears to make the employer responsible for withholding PAYE and NICSs from the employee. The new rule will mean that employers often will have to pay PAYE and NICSs without having any practical method of recovering it from the employee. I ask the Paymaster General to address that point.

However, I wish to focus on the second implication of the proposed changes, which is that the employer will now have his own NICS liability on the exercise of options. It has been mentioned that that is a potential liability, but it is more than that—it is a real liability. I suggest that it will typically amount to 12.8 per cent. of an employee's option gain.

As the new rules apply to options exercised on or after 9 April 2003, the employer will have a new liability for which it could not have previously provided. The key point is that when NICS rules were amended to allow employers to transfer NICSs liability on unapproved share options to employees, many companies attempted to include similar provisions in their approved share option plans in case NICSs became due on exercise, as is now the case. However, the Inland Revenue refused to approve share option plans that contained such a provision.

For that reason, I ask the Paymaster General to consider this important point. It could be argued that these paragraphs in schedule 21 are nothing other than yet another stealth tax imposed by the Government. That that is how it is being viewed in many sections of industry. A small change is being introduced in the small print, so to speak, via the schedule, but the effect on the bottom line will be an additional cost for employers. In addition, the fact that the change is retrospective makes it particularly damaging. I ask the Paymaster General to address the specific point about additional costs and the Committee to support the amendment.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I need to put two important points to members of the Committee so that they can understand that this is neither a stealth tax—actually, it is an anti-avoidance measure—nor retrospective. Company share option plans were introduced by the Conservative Government to encourage giving share options to employees for three-year periods in order to connect them to the development and improvement of a company, from which they would benefit. I shall come in due course to amendment No. 194, which

seeks to overturn the rules that deliver those objectives.

In the ever-inventive tax planning methods that appear continually to develop, ways were found around the three-year rule. To answer the hon. Member for Yeovil, the schedule is not a stealth tax. It seeks to restore the rules to their originally intended form. The people who exercised their options before three years should have paid tax on them. The intention has always been that the tax charge should fall after three years

Photo of George Osborne George Osborne Opposition Whip (Commons)

I am relatively new to the House and did not follow the matter closely at the time. When the Conservative Government brought in the original measures, did the Labour Opposition support them?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I must admit that I cannot remember, but the point is not particularly relevant—the hon. Gentleman can inspect Hansard and answer the question for himself. The rules by which the schemes should operate have not been complied with, and the changes will rectify that. The integrity of the tax system, which has developed over many years, is based on the Government of the day taking responsibility for the system that they inherit.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

May I turn to the amendments? The hon. Gentleman can intervene when I address the appropriate amendment, when I will willingly give way.

My point, which I have tried to make clear from the beginning, is that a three-year limit has supposedly been operating since the scheme was introduced. Some have sought to get round the rules, which is what the Government seek to prevent.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

The Paymaster General made that point clear when she framed her introductory remarks to the schedule on anti-avoidance. Some of those outside the Committee who are following our proceedings—there are more of them than I had imagined—have wondered whether the Government truly recognise that there are three categories: tax planning, tax avoidance and tax evasion. All of us abhor and would condemn tax evasion. Tax planning is perfectly legitimate and is expected. Tax avoidance is not illegal, and, at its very worst, it involves finding ways in which to exploit loopholes. Can the Paymaster General confirm that she does not regard tax avoidance as being illegal but as a continuing debate between the taxpayer and the Government?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I can absolutely confirm to the hon. Gentleman that tax evasion is illegal while tax avoidance is not—hence the need for anti-avoidance legislation. I am more than happy to debate the matter, but this is not the appropriate time to discuss the differences between those three categories. I will therefore return to the amendments.

As the hon. Member for Eddisbury (Mr. O'Brien) said, it is surprising how closely those outside this place follow every dot and comma of discussion on the Finance Bill. I want, therefore, to put on the record an

omission that I made in responding to the hon. Member for Buckingham (Mr. Bercow) in the Committee of the whole House on 14 May, on the early exercise of company share option plans. In case there is any doubt, I should like to make it clear that employees exercising their company share options within three years of grant can no longer do so tax-free and national insurance-free, which is the subject that we are discussing. Employers who have been using company share option plans in the intended way—they should be used to encourage employees to have a long-term stake in the company for which they work—will not be affected by the changes.

We can put amendment No. 16 to one side because it harks back to Government amendment No. 166.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield 10:45 am, 22nd May 2003

Order. May I help the Committee? The Paymaster General should perhaps direct her main remarks to amendment No. 194, which is the amendment in which the Opposition parties are most interested and on which they would most like to vote.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

Indeed, Sir Nicholas. That is why I said for the record that I would not refer to amendment No. 16, which has already been dealt with.

Amendments Nos. 18, 21 and 194 seek to limit and delay the introduction of PAYE and national insurance on company share option plans. I have made it clear that it is right for employees to pay their fair share of tax and national insurance on all forms of employment-related remuneration. Only to bring options granted after 9 April 2003 within PAYE and national insurance rules would mean that companies and their employees who have sought to avoid paying their fair share of tax and national insurance would continue to do so. It would effectively reward those employers and employees who have exploited loopholes in the legislation by awarding options that are exercised early to avoid paying national insurance.

As the hon. Member for Yeovil said, the scale of the avoidance and the use of such share awards is substantial. It costs the Government, and therefore the taxpayer, more than £35 million a year. It cannot be right to allow those who apply the rules and pay their fair share to be put at a disadvantage because of those who are not following the rules in order to gain financial advantage. The Government do not want to send out a message to the majority of employees and employers who are paying their fair share of tax that we will allow others disdainfully to avoid their tax liability.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

In terms of the Government's broad intentions on tax policy, can the Paymaster General make it clear that if a particular individual or entity has been involved in tax avoidance, the Government will always seek to claim back the tax retrospectively, if they are in a position to do so? Is that the broad principle?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

The hon. Gentleman has not been listening. There is no retrospection; the gain arises when the option is exercised. Employees who exercise

their options on or after 9 April 2003 will do so in the full knowledge of the tax consequences, which we seek to restore. The principle of retrospection goes much wider than that, and I do not intend to go down that path.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

May I make the point that there are perfectly valid situations in which approved options may have to be exercised early—the takeover of a company is an obvious example? The broad principles of the scheme that the last Conservative Administration introduced required, for obvious reasons, a minimum of three years because it was all about working hard to build up a company. However, not everything was necessarily taken account of at that time. Is the Paymaster General saying, as I understand her to be, that where there is what I would call a bona fides exercise prior to three years, that is regarded as avoidance?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I referred in my opening remarks to employees who have left their employment for reasons other than injury, disability, redundancy or retirement. I call those the ''good leaver'' points. Therefore, the new relief applies only to employees who have to exercise their option within three years of the grant because they have lost their job through injury, disability, redundancy or retirement.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

An equally common situation might be an enforced takeover of a company when, we hope, an employee keeps his or her job. My understanding is that that is regarded as avoidance, but I think as a matter of principle that it would fall most unfairly on such an individual if that situation was not one of the exclusions.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

Indeed. We are getting into some complicated matters here, on the inter-relationship between pieces of legislation. Where an employee has to exercise an option because of a company takeover, which was the point that the hon. Gentleman made, he or she may be able to take advantage of the option roll-over provision included in most plans. The option roll-over provision allows the existing option to be held in the new company and exercised after three years. It is quite unusual for no option roll-over provisions to be available on a company takeover, but where that is the case, an employee may be able to take advantage of the new relief if the takeover means that the employees are made redundant, then re-employed by the new company. Employees who may be allowed by the company to exercise their option early because they have been dismissed will have to pay tax and national insurance. My understanding is that such provisions tend to be in the plans themselves, as agreements between employer and employee.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Does the Paymaster General agree that that point was a complete red herring? If a company is taken over and the employee loses a job, he or she is protected under the provision that my hon. Friend has already outlined. If the employees continue to work for their former company, albeit with a different majority shareholder, they are still working for the company. If they end up working for the new company, they are protected by the Transfer of Undertakings (Protection of Employment) Regulations 1981.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I am grateful for my hon. Friend's comments. If Committee members will forgive me, I prefer the way in which I have explained the matter for the record. However, my hon. Friend reinforces many of my points, especially with regard to the option to roll over the provision.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

My recollection is that the protection mentioned does not apply. I have also observed situations in which the acquirers of a company wanted full control, and did not want to roll over options. My underlying point is that it seems potentially unjust in itself for any exercise, quite aside from leaving within three years, to be considered automatically to be some form of tax avoidance.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

There is considerable improvement in the rules in the changes that we are making. I am not sure where the hon. Gentleman is coming from. If people exercise their options before the end of the three years, they do so in the sure knowledge of the tax and national insurance situation. If a period of three years cannot be fulfilled, as in the examples that I gave, the case is clear. If the hon. Gentleman says that he would like the provisions relating to takeovers of companies to be clearer, I have to say that the rules are those that we had before, and that is not the subject of any of the amendments. If he is looking for ways to improve the legislation, I am happy to take a representation from him in writing, as I would from any taxpayer who sought to make such changes, but that is not the subject of the amendments that we are discussing. I have tried to be as helpful as I can about the points that he raised.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

Order. The hon. Gentleman may intervene as long as it is to do with an amendment and not the wider issue.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

My point is precisely about the amendment and picks up on the points that both the hon. Member for Wolverhampton, South-West (Rob Marris) and my hon. Friend the Member for Arundel and South Downs made. Both the amendment and the discussion that we have just had sought to address the point and it may be worth looking the precise application of the TUPE provisions in greater detail because I think they are not quite as cut and dried as the hon. Member for Wolverhampton, South-West said.

There is a great phenomenon now of takeovers by foreign companies, and the characterisation of the schemes that apply may not necessarily be as uniform as the Paymaster General, whom I thought was trying to be helpful in her reply, was saying. That may be worth further investigation, without our pursuing the point directly within the context of the amendment.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I will not pursue the point directly. I take note of the point that the hon. Gentleman made about takeovers by foreign companies. I shall reflect on it and respond to him and other Committee members in writing. I have said why we do not accept that the charge is retrospective. For that reason, simply out of fairness, we do not accept that we should delay implementation.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I want to return to the amendments, and it is quite difficult to refer to them in a logical order. I shall give way at this point, but if the hon. Gentleman would then allow me to make a little more progress, I would be grateful.

Photo of John Baron John Baron Conservative, Billericay

I thank the Paymaster General for her generosity. Would she re-examine the point about retrospection? Because we are discussing options that are exercised, as opposed to granted, on or after 9 April, there is surely an element of retrospection. Many of those options existed before 9 April, perhaps for many years, so I return to my point about this being an additional unforeseen cost for employers—I used the terminology stealth tax—because the employer will now have to face a new liability that it could not have previously provided for. That is the central point when we talk about retrospection. I ask the Paymaster General to address that point specifically.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 11:00 am, 22nd May 2003

I am doing my best to get to the point at which it would be logical to address that, but I am struggling with this concept of retrospection. When there were rules in place that said how the schemes should operate, there were those who did not operate those rules, even though they should have. They are now being required to operate by the rules that existed all the time; how that amounts to retrospection I do not know, but I will come to that point in more detail in a moment.

The amendments would delay several beneficial changes, and I do not understand why the hon. Gentleman would want that. Let us take amendment No. 19, for example. A rule under company share option plan law prevents a person from participating in a company share option plan if he or she has a material interest of more than 10 per cent. of the ordinary share capital in the company offering the plan. For SAYE and SIP plans, the rule applies only to a person who has a material interest of more than 25 per cent. in the ordinary share capital of the company.

There is no good reason for the amendments. As I have said, I have difficulty understanding why the hon. Gentleman would wish to block or delay the change, when it is clearly beneficial.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

The issue to which I briefly referred on those amendments was systems. It has certainly been put to us that several smaller and medium-sized businesses may have difficulty getting their systems in place to cope with a degree of complexity. I completely agree in principle that no one wants to delay improvements, but my point was really about systems, and, more widely, about sorting out the major issue of amendment No. 194.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I dealt with that point when I talked about the consultation. I hope that the hon. Gentleman accepts that amendment No. 19 is unfortunate. It would delay the implementation date for a number of beneficial changes that have been roundly asked for.

On retrospection and the points made by the hon. Member for Billericay, the charge arises if employees exercise their options after 9 April 2003 and within three years of grant. Employees who exercise in those circumstances will do so in the full knowledge that they will pay tax and national insurance, on the basis of the law as it applies when exercised. Employees knew when they were granted company share options that they would need to hold them for three years to qualify for tax relief. As I have said, the change will not prevent employees from exercising before three years have passed if they have good reason. I have referred to those as good leavers—retirement being one example.

On whether employers and employees knew that, it is for employers and employees to make arrangements for the recovery of any PAYE or NICs, if that is what they want. The Inland Revenue has approved some company share option rules that have withholding provisions to allow the recovery of PAYE and NICs.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

Yes, some were applying the rules correctly; that is precisely the point. Where that is not the case, companies can make such arrangements with their employees.

I doubt whether there would be costs of £35 million if amendment No. 194 were made. He also raised the question of unfairly hitting international companies that operate worldwide. which is a CBI point. The change to the company share option rules levels the playing field. It is the company's choice whether to give employees a right to exercise their options within three years of grant. It is only right, therefore, that companies that use the company share option plan as intended—to encourage their employees to take a long stake in the company—can expect us to ensure that PAYE and national insurance are paid when company share option plans are not used in that way.

What will the hon. Gentleman say to companies and employees who have correctly applied the rules and paid their tax and national insurance at the correct time? Why should they apply the rules fairly and allow others not to do so? What would we say to those employees and employers?

The hon. Member for Yeovil referred to the question to which he keeps returning. He will have to do a lot more work. It takes a lot of work to define the fine line between avoidance, evasion and tax planning, and between understanding what is retrospection and what is not. No British Government have operated active retrospection as a matter of policy. The Bill does not provide for it, and the Government do not do it.

The opportunity to avoid PAYE and NICs is being marketed by the industry. It is possible to find it on the internet. It is publicised in the specialist press and on the websites of a number of practitioners. The schemes being marketed are drafted to allow early exercise of company share option plans when that was clearly not the policy intent.

The company share option plan return submitted to the Inland Revenue also provides tangible evidence that that is increasingly the case, and that company share option plans are being exercised within three years of grant. In 1997–98, approximately 40 per cent. of them were in that category. By 2000–01, the figure had risen to 60 per cent. In a previous debate, the hon. Member for Arundel and South Downs asked whether any Government have responsibility when putting reliefs into the tax system. Those reliefs cost us in excess of £1 billion each year. That is a good reason to encourage employers to benefit from the growth of their companies.

It is the responsibility of the Government to ensure that rules operate correctly. We had a scheme where the rules were not operating correctly, and the changes in the schedule ensure that they will.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

Can the Paymaster General be more specific? Is she referring to 60 per cent. of schemes, or scheme values? Is she saying that 60 per cent. of all the outstanding approved option schemes are exercising within three years? I do not believe that that is correct.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

The information that I have been given by the Inland Revenue is that, in 1997–98, approximately 40 per cent. of company share option plans options fell into the category of trying to exercise within three years that I have described. In 2000–01 the figure had risen to 60 per cent. That means that in 2000–01 about 16,500 company share options were exercised within the three years of grant without national insurance and PAYE being paid. That cannot be allowed to continue.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

Order. I am conscious of pressure of time. I seek to represent the best interests of the Committee as a whole. I am sure that hon. Members are aware that a knife falls at 5 pm and that critical matters should be debated between now and then. I hope that the Committee will not get bogged down. We have had a reasonable debate. I must therefore ask the hon. Member for Arundel and South Downs to wind up his speech.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

Thank you, Sir Nicholas. I respect your comments. Notwithstanding what the Paymaster General has said, it is clear that the arrangements will impose new NICs liabilities on employers and a situation in which they may not be able to recover the liabilities from employees under the provisions. It was the general practice of the Revenue to refuse to allow companies to put into schemes arrangements to protect themselves against NICs liabilities on approved schemes. In that context, we take the view that the measure is retrospective. We shall later wish to put amendment No. 194 to the vote, but for now I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

I beg to move amendment No. 17, in

schedule 21, page 247, line 22, at end insert—

'( ) Omit paragraph 5 (unnecessary and non-incidental features)'.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

With this it will be convenient to discuss amendment No. 20, in

schedule 21, page 249, line 28, at end insert—

'( )Omit paragraph 5 (unnecessary and non-incidental features).'.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

The Bill introduces measures that we understand are intended to streamline the approval of changes to approved schemes by requiring Inland Revenue vetting of changes only to key features, such as those in schedule 3 of the Income Tax (Earnings and Pensions) Act 2003. It is my understanding that paragraph 5 of that schedule states that an approved scheme cannot include any feature that is not essential or not reasonably incidental. As interpreted by the Inland Revenue, that surely means that only the statutory key features will be included in the scheme rules. I cannot quite see the meaning of streamlining changes. Surely it means that streamlining changes are ineffectual and meaningless unless paragraph 5 is deleted.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 11:15 am, 22nd May 2003

We have covered much ground already. The schedule contains several proposals that simplify and modernise the operation of save-as-you-earn schemes or company share option plans. On the subject of our previous discussion, we have also acted to prevent employers and employees from exploiting loopholes in the law to avoid paying their fair share of tax and national insurance. Unfortunately, and I am sure that that was not the intention, the amendment could undo much of the good work that we have undertaken in preventing employers and employees from avoiding their tax and national insurance contributions. The provisions that the amendments seek to remove stop employers including in their save-as-you-earn schemes and company share option plans features that have nothing to do with the award of share options to their employees.

To relax that narrow requirement might mean that employers and employees could put in place arrangements through, for example, approved tax advantage schemes, enabling them to provide for employees to receive cash payments as an alternative to shares. That is not what the legislation intended. If the hon. Gentleman wishes to push the amendment to a division, I will ask my hon. Friends to oppose it.

The hon. Member for Arundel and South Downs raised the matter of simplification. A balance must be maintained between simplification and modernisation, but I agree that we should seek it wherever we can. However, we must ensure that that does not weaken the rules to the point at which they open up opportunities for employers and employees to avoid their fair share of tax. I am afraid that although the amendment is motivated by the best of intentions on simplification, it would go further than the hon. Gentleman intended and open up such avoidance possibilities. I therefore ask the Committee to oppose it.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

This is not a huge issue, so I shall waste no time debating it further. In essence, our perception is that schedule 3 of the Income Tax (Earnings and Pensions) Act 2003 covers the kinds of restrictions that

we accept are needed. However, that is a legal point that is not fundamental to the objectives of the schedule. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment proposed: No. 194, in

schedule 21, page 250, line 38, after 'acquired', insert 'under options granted'.—[Mr. Flight.]

Question put, That the amendment be made:—

The Committee divided: Ayes 5, Noes 13.

Division number 14 Adults Abused in Childhood — Schedule 21 - Approved share plans and schemes

Aye: 5 MPs

No: 13 MPs

Ayes: A-Z by last name

Nos: A-Z by last name

Question accordingly negatived.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

I beg to move amendment No. 23, in

schedule 21, page 250, line 39, at end insert—

'Part 4

Updating of scheme rules to reflect this Schedule

26 Where before 1st April 2004 the scheme organiser of an approved SIP, or of an approved SAYE scheme, or of an approved CSOP scheme, applies to the Inland Revenue to amend the rules of that scheme to reflect the provisions of this Schedule then, at the election of the scheme organiser, any such amendment may be deemed to have been included in the original rules of the scheme in question and the terms of any award or grant made under it.'.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

Schedule 21 makes significant changes to the running of approved schemes, and when past Conservative Governments made equivalent technical revisions there was always a window for employees to adopt the new rules—for example, the introduction of roll-over rules that permitted SAYE options to be exercised after a merger.

Schedule 21 has no such rule, which could create a problem: existing rules and awards may have terms that are incompatible with the new imposed rules. That would have been the case with the dividend shares. The CSOP options are now subject to PAYE: without rules to permit collection of PAYE, the Revenue would refuse to accept that on the grounds that they were unnecessary.

If employers try to implement these new rules for existing awards, the judgment of the Eurocopy case suggests that they are open to the charge from the employee or the Revenue that the alteration has the effect of scrapping the existing award and creating a new grant. The amendment would do the sensible thing: it would permit employers to adopt the new rules as they see fit and to simplify appliance issues if they so wish.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I shall ask my hon. Friends to oppose the hon. Gentleman's amendment because the powers that it gives employers go much further than he intends.

Amendment No. 23 would give employers the power to amend their share scheme rules to give effect to changes in schedule 21 and to deem that the changes made had always had effect. The start dates of the proposals included in schedule 21 would also be delayed: we have already had a debate about that, and it is another reason for opposing the amendment.

The amendment would mean that the changes proposed in the Finance Bill will be deemed always to have been included in the approved share option scheme rules and the terms of the options and shares awarded under those rules. However, it goes further: it gives the employer the right to vary those schemes. That would cause difficulty with options and shares that have already been awarded. Under the SIP, we are allowing people to participate in successive SIPs if they move between connected companies. Does the amendment mean that it would be backdated through time?

Most importantly, the deeming power provision is very general and can affect the terms of the options granted. That could lead to the old options being cancelled and new options being issued with all that that would mean for the tax-free holding periods, so it could leave the employee worse off.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

We do not want to propose anything that could leave the employee worse off. However, the

general intent of the amendment—that schemes can be updated to meet the new rules—is appropriate, so we might return to this matter, but, at present, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 21, as amended, agreed to.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

May I congratulate the Committee on the expeditious way in which it has dealt with the Bill so far? It is clear that there will be some very serious debates on the schedule that we are about to come to.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

On a point of order, Sir Nicholas. I understand that you will not be with us in Committee this afternoon. May I take this opportunity, on behalf of all Committee members, to wish you a pleasant short break and to thank you for the excellent way in which you have stewarded the Committee to this point? We have greatly benefited from your knowledge and expertise.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

Further to that point of order, Sir Nicholas. I second what has been said, and I wish you a refreshing break so that you can deal with the challenges that will have to be faced when we return.

It being twenty-five minutes past Eleven o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

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