(Except Clauses 1, 4, 5, 9, 14, 22, 42, 56, 57, 124, 130 to 135, 138, 139, 148 and 184 and Schedules 5, 6, 19 and 25, and any new Clauses and Schedules tabled by Friday 9th May 2003 relating to excise duty on spirits or RÿD tax credits for oil exploration.) - Schedule 22 - Employee securities and options

Part of Finance Bill – in a Public Bill Committee at 3:30 pm on 22 May 2003.

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Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury 3:30, 22 May 2003

Amendment No. 109 seeks to provide consistency with the rewrite of the income tax legislation, which led to the Income Tax (Pensions and Earnings) Act 2003. It was provided in section 168(3) that all provision made by an employer for members of his family or household was deemed to be by reason of employment. Household was defined to include dependants and guests. That definition of household remains in the 2003 Act, but is not used in relation to the share-related changes in the benefits provision. The reference to household seems to have crept back into the provision. That definition should surely not be perpetuated in the clauses. It is antiquated and somewhat uncertain in its scope.

Amendment No. 111 would prevent additional securities acquired on or after 16 April 2003 in respect to securities acquired before that date from being within the new provisions, and would also prevent unforeseen results of the extended provisions in subsections (5) and (6), which deem increases or reductions in interests and security to be by reason of employment, and would give rise to charges under the new provisions. Under the existing income tax provisions that provide for share-related income, only the provisions applying to post-acquisition benefits and shares in chapter 4 contain provisions that treat additional securities acquired in a company reorganisation, for example, as being acquired in the same way as the original employment-related securities.

The effectiveness of the other share-related provisions could, therefore, be reduced by large bonus issues, for example, being made after employment-related securities had been issued. For example, if an employee were to receive 100 shares by reason of employment that fell within the conditional shares regime, the issue of a further 900 shares in a bonus issue to that employee would not fall within the regime. Such additional shares would be acquired qua shareholder, and not qua employee.

New section 421D makes a general provision applying to all the share-related income provisions whereby such additional shares are treated as acquired by reason of the same right or opportunity as the original shares. The provision is sensible and would remove anomalies in the existing rules.

We would like to see a ministerial statement on what new section 421D(5) is supposed to mean and how the Government intend to operate it. Where, for example, a beneficial interest grows over time and someone else's correspondingly withers, does the Inland Revenue propose to raise a tax charge on a

continuing basis? In the interests of time, I have resisted going through the extended comments of the Law Society on the matter, but there is a lack of clarity.

Amendment No. 112 would limit the application of chapters 3A and 3B to employees who are ordinarily resident in the UK, and would restore the status quo under the existing legislation. If anti-avoidance provisions are extended to all non-resident employees, any liabilities will fall on to the company in question and the Inland Revenue will be obliged to proceed against the employer. I assume that that is the intent, but I suspect it is a step too far in the area of anti-avoidance measures. Those are the objectives of amendments Nos. 112 and 113.

Amendment No. 25 deals with a practical point where a ministerial interpretation would be helpful. Employees may acquire shares in a public offer but still be required to enter into lock-in agreements not to dispose of the shares after admission to the market. It would clearly be undesirable to discourage employees from participating in such public offers, if there is a threat of adverse tax treatment.