I beg to move amendment No. 242, in
clause 141, page 82, line 8, at end insert—
'(1A) Section 68 of that Act (principal charges to tax) shall be amended as follows:
(a) in subsection (2)(c) for ''the rate applicable to trusts'' substitute ''the chargeable rate'';
(b) insert a new subsection (8)—
''(8) For the purposes of this section the 'chargeable rate' is—
(a) in respect of a chargeable event occurring before 1st January 2003, the rate applicable to trusts, and
(b) in respect of any other chargeable event, the average marginal rate of corporation tax of all qualifying companies''.'.
With this it will be convenient to discuss amendment No. 243, in
clause 141, page 82, line 17, at end insert—
'(ba) in subsection (5) insert—
''(dd) the payment of any sum or transfer of any asset, after 31 December 2002, to the trustees of another trust for the benefit of the same or substantially the same beneficiaries as the trust'';'.
I should like to record my appreciation of all members of the Committee for having had the patience to wade through the most difficult area of schedule 23. I was glad to have the
opportunity to place the arguments on the record and to gain such clarifications as were possible. That has been a major part of our proceedings this afternoon, and I hope that we will now be able to make more rapid progress.
Clause 141 ends relief for contributions to QUESTs—qualifying employee share ownership trusts—which are a special type of employee trust introduced in 1989 with specific statutory corporation tax deductions for contributions. Because of the restrictive statutory rules on how they could operate, they were mainly used as part of a tax planning scheme and not necessarily for their intrinsic merit. The statutory deduction has been replaced by the rules in schedule 24.
One draconian aspect of QUESTs is the clawback, whereby money going in attracts a deduction of 30 per cent. but is re-taxed at the trust rate of 34 per cent. if it is applied for a non-qualifying purpose, thus creating a net loss to employers. That is particularly harsh when, for example, a takeover of the group could leave cash stranded in a QUEST with no possibility of using it for a qualifying purpose, because QUESTs cannot buy shares in a company that is controlled by another company. Unquestionably, that will be common ground.
Given that relief for QUESTs has now gone, amendment No. 242 would remove the draconian aspect by reducing the clawback rate from 34 per cent. to the group's average corporation tax rate.
I am certainly content with your advice, and I dare say that all the other members of the Committee are too, Mr. McWilliam. We can treat this as a combined discussion.
''It will make it easier for companies to stop using QUESTs if the definition of 'original funds' in''—
section 69(3AD) of the Finance Act 1989—
''is expanded to include cash received from option-holders on the exercise of SAYE options granted before 27 November 2002 (but not options granted or company contributions made after that date). For example, if a company wants to stop using a QUEST on 1 February 2003, it will have to deal separately with any cash that may arise on the exercise of options between November 2002 and 1 February 2003.''
Amendment No. 243 is being taken at the same time for the convenience of the Committee. The background arguments are exactly the same and, as you have rightly indicated, Mr. McWilliam, they effectively contribute to a stand-part debate. Given that QUESTs have now gone, the amendment removes one of the draconian aspects by allowing trustees simply to clear out whatever is in the trust, transfer it to a less restrictive common-law trust and start again.
Those are common-sense proposals and I hope that the Paymaster General will consider them a useful contribution.
I urge the Committee to resist the amendments. They seek, as the hon. Gentleman says, to change the qualifying employee share ownership trust rules in the Finance Act 1989. QUEST works by providing generous, up-front corporation tax relief for payments into the trust. There are detailed rules, including allowing up to 20 years to distribute shares to the beneficiaries, that determine whether relief is already claimed and will be lost.
Relief for future payments into QUEST is being ended by clause 141 to coincide with the start of the new corporation tax deduction, while leaving the other rules unchanged. Companies that have already claimed QUEST relief will not lose it if they continue to satisfy the QUEST rules. Ending future QUEST relief when the new corporation tax deduction is introduced is another step in simplifying the corporation tax treatment of employee share schemes. It avoids the potential for excessive relief and the associated need for complex anti-avoidance rules, and reduces the administrative burden on employers operating share option schemes.
Amendment No. 242 is intended to change the rate at which tax is charged if a chargeable event occurs because the QUEST rules are breached. An inevitable consequence of the amendment would be lost tax to the Exchequer, because the rate resulting from the proposed new wording could be as low as zero. That would be an open invitation to those who abuse the generous relief for avoidance purposes to extract funds from their QUEST without risk of losing the generous relief already enjoyed. Clearly, the Government are not attracted to that and I urge the Committee not to be attracted to it or allow it. I urge my hon. Friends to vote against the amendment.
Amendment No. 243 is intended to change the rules that determine whether relief already claimed should be clawed back. It would allow any asset held by the QUEST to be transferred to another trust without any risk of relief being lost. The amendment would make the current clawback rules ineffective.
I urge my hon. Friends to reject both amendments and to leave the rules as they apply intact.
I have listened to the Paymaster General. It would not necessarily be appropriate to press for a vote. That said, there will be continuing concern and representations about tidying up the residual consequences of the cessation of QUESTs. In withdrawing the amendment, I urge the Paymaster General to ensure that the Revenue gives as much guidance as possible.
I really do not think that guidance is needed. The rules on QUESTs have always been in place. All clause 141 does is end future relief, but there is no reason to go back and change the rules, which the hon. Gentleman is trying to do, on how QUESTs operate. Everybody knows how QUESTs operate, but his amendment would change the rules. If we reject his
amendment the rules will remain the same and no guidance will be necessary.
I may not understand the situation clearly, but given that QUEST is ending, people with money in QUEST funds may wish to move to the new arrangements. However, the old tax rules mean that the money will be blocked in the old fund because if they took it out they would suffer a net tax loss. Is that a correct understanding of the issue? Is that why the issue comes up in the context of moving to the new arrangements?
My hon. Friend understands the position. The word ''blocked''—I am sure that the Paymaster General will intervene if I have got this wrong—indicates a serious disadvantage and disincentive given the incentive to move on to new arrangements following the cessation of QUEST. It is therefore an in-built penalty. If I understand the Paymaster General's response correctly, her answer is ''That is where the current law stands and that is where it will therefore be left.'' The clarification is on the record, although many people will not want to hear it. My intention to withdraw the amendment has not altered, but I daresay that representations will continue to be made. If nothing changes and QUESTs that have ceased have a lot of cash in them, the subject may have to be revisited.
I understand the situation, but it depends on whether we are leaving things in aspic or whether there is an incentive for people to move towards the new arrangements. The clause preserves the situation in aspic without giving people an incentive and an obvious opportunity to move to the new arrangements. The Paymaster General has clearly stated the position, and those who need to consider their dispositions will have paid heed to what has been said in Committee. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 141 ordered to stand part of the Bill.