Schedule 16 - Relief where national insurance contributions met by employee

Finance Bill – in a Public Bill Committee at 10:45 am on 20th May 2004.

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Question proposed, That this schedule be the Sixteenth schedule to the Bill.

Photo of Richard Bacon Richard Bacon Conservative, South Norfolk

Having taken note of your careful guidance on when I should make my comments, Mr. McWilliam, I shall now comment on the schedule, which puts into effect the clause 85 provisions.

The new forms of share incentive schemes plainly have some advantages over traditional share options, such as various kinds of restricted and convertible securities for employees. To exercise a traditional share option one must either have the money to purchase the shares, borrow the shares or sell the shares to crystallise the gain, and then be able buy back the proportion that one wishes to hold. I think that my hon. Friends and I, the Government and major institutions, such as the Association of British Insurers, share a desire to encourage senior executives in this area; I also think that this should be spread to all employees, which is what my hon. Friend the Member for Tunbridge Wells (Mr. Norman) did successfully when he was in charge of Asda—so successfully, in fact, that the Treasury had to take another view on the matter, because he had interpreted the provisions for senior executives rather more broadly than some of his fellows in industry.

Surely the advantage of the schemes—which the ABI is strongly in favour of—is the ability to ensure that executives build up meaningful shareholdings in the businesses that they direct. Anything that enables them to do that more easily is to be welcomed, other things being equal; and a system that does not require them to sell their shares in order to crystallise the gain is, other things being equal, a better one.

There are a couple of other advantages to restricted and convertible securities—depending, obviously, on the covenants and restrictions put on schemes. Notably, one can in effect abolish the money problem, and the problem of traditional share options going under water. Such securities also typically result in less dilution for the shareholders, although that depends on the exact structure chosen, and that is broadly to be welcomed.

It would seem that there are few objections in principle to extending the national insurance provisions that apply to share options to restricted and convertible securities. Presumably, the Government are taking a more favourable view of restricted and convertible security share incentive schemes. If so, is it their intention to introduce Inland Revenue-approved restricted and convertible schemes, such as those that exist for traditional share option schemes, and if not, why not?

It is hard to see anything bad about share incentive schemes involving restricted or convertible securities that would not also apply to traditional share option schemes. Perhaps the Paymaster General could illuminate the Committee on that. Is there an economic difference between the newer—I might even say more new Labour—share incentive schemes and traditional share incentive schemes? Of course, as I have pointed out, there is a certain economic difference for the shareholder, because of the lesser dilution effect, and that is to be welcomed.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Why does the hon. Gentleman see lesser dilution as desirable, when wider share ownership is itself often seen as desirable?

Photo of Richard Bacon Richard Bacon Conservative, South Norfolk

Very simply, the answer is this: the ABI's guidance on executive share incentive schemes says that they should entail the minimum possible dilution for shareholders who are not executives. A share incentive scheme that can achieve the same effect with lesser dilution is, other things being equal, a better scheme from the point of view of all other shareholders, including members of the public and institutions. Plainly, we want senior and other executives to be rewarded under share ownership schemes, but preferably ones that result in minimum dilution. I repeat my two questions: is the Inland Revenue proposing to introduce an approved scheme for convertible and restricted securities, and if not, why not?

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

The major debate on the new share schemes legislation and the reasons for restrictions in certain areas was held when we considered schedule 22 to the Finance Act 2003. In that debate, there was extensive discussion about the use of shares and other securities in what, at times, amount to complex commercial transactions. The Government were seeking to encourage and support reliefs for employee share ownership and schemes. They, on all our behalves—and indeed the taxpayer—put a great deal of money into that. The schemes need to be directly linked with the employees having a stake in the future of the company. As the hon. Member for South Norfolk (Mr. Bacon) rightly said, it should not be restricted to any one section of the work force. He gave the excellent example of the way that some companies—he mentioned Asda, but there are others—have sought to ensure that there are employee share-ownership schemes for the whole of their work force.

There are various types of specialist schemes, and this Government have done more than any other to provide for their expansion. The other problem with the area that we are discussing is that it is fraught with avoidance, where individuals are rewarded in ways

that are only a substitution for their salary in order to access a lower level of taxation or more reliefs. That is a highly complex area, and when schedule 22 was discussed last year I made it clear, and I think that the Committee accepted this general point, that it is difficult to strike a balance to ensure that there is not a loss to the taxpayer from contrived schemes, but the investment in employee share ownership is important. This schedule does not reopen any of that debate. Following the tax law rewrite and last year's schedule 22, it implements commitments to change national insurance and allow tax to follow it in the one specific area that we are discussing.

I will comment on the two general points raised by the hon. Member for South Norfolk. Restricted and convertible shares may be used in certain approved share schemes that are currently cleared by the Inland Revenue. However, this House, through the Finance Act 2003, introduced certain hurdles before that approval can be granted.

As I said, in future those approved schemes may extend. There are already a number of approved schemes and both I, as a Minister, and the Government are comfortable that that strikes the balance between giving flexibility in a very dynamic area and encouraging, as the hon. Gentleman is right to, giving employees a real stake in their company and allowing them to share in its growth, as well as protecting the taxpayer. That is the answer in a nutshell. If schemes fall within the criteria they can be approved schemes. The Government are carefully watching that area, as they always do. I have forgotten the exact amount of relief that is given in that area each year—but it is hundreds and hundreds of millions of pounds—to millions of employees, and it is working well.

Photo of Richard Bacon Richard Bacon Conservative, South Norfolk 11:00 am, 20th May 2004

I am very grateful to the Paymaster General for her explanation. I hope that she will just elucidate one point a little further. What can she offer to those employers who set up restricted and convertible security schemes some time ago, not necessarily in Revenue-approved schemes, who, because of the rising value of the securities over a number of years, now face a substantial national insurance charge? What can she offer them in terms of their ability to visit that liability on the employee, admittedly by election or by agreement?

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

Well, it must be done by election or by agreement, and the hon. Gentleman is right to touch on that point. I am sure that he realises that what the fair balance between the responsibilities of the employer and those of the employees to pay is, has been a matter of debate and consultation for some time, particularly in the area of national insurance.

At the time of the consultation on the measures that the Government took in last year's Bill, not all the consultees were entirely happy—some wanted the Government to go further—but we decided that the changes that we are making are welcome. There has, to my knowledge, been no criticism, and we have received no submissions about clause 85 and the connected schedule saying, ''We do not like it and it is unfair.'' Of

course, taxpayers are always pressing the Government for more in every area, and this is no exception.

I say to the hon. Gentleman that all the guidance, support and discussion with scheme providers have struck the correct balance, but that does not remove the fact that there is still a delicate discussion to be had about how large a liability is being transferred.

During the discussions on the National Insurance Contributions and Statutory Payments Bill, the proposals for the elections on the national insurance contributions, which can be large, were discussed in terms of ensuring that the employee was not put under undue pressure by an employer and that a decision was reached correctly and by agreement. The elections may be used to transfer future employer's national insurance to the employee on restricted and convertible shares already awarded, as long as that liability has not yet arisen.

We built in as much as can to give both the employee and the employer the flexibility that they need, with a safeguard for the employee of not being under undue duress, and a safeguard for the employer to ensure that, when a contribution has been transferred, it has been done properly. I say to the hon. Member for South Norfolk that the Government's judgment is that that is as far as we can go at this point.

This is a changing and highly dynamic area, and we work closely to maintain consultation with scheme providers to ensure that the legislation is appropriate. I think that that is what the Committee and the House will accept, and it may mean subsequent changes to the legislation in future Finance Bills. I do not know, but I will not hesitate to bring the issue back if I think it appropriate.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

I cannot resist chiming in that I addressed a large group of business men this week, and their complaints all related to schedules 22 and 23 to the Finance Act 2003 and to the problems that we highlighted. They complained that unapproved share options are a shambles, giving people a tax charge of more than 50 per cent. and driving up pay.

This is just a tidying up of the territory, but the notion that tax law and the drafting of that law are all hunky-dory is a complete illusion. In the real world, the arrangements are causing many problems.

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

The proposals in the clause and schedule impose no additional obligations on employers or employees. Part of the debate that the hon. Member for Arundel and South Downs just referred to is the heated debate that rages about whether privileged schemes, which may affect only a small number of employees, should have reliefs that are designed to be available to all-employee schemes. It is very interesting that he says that the end result will drive up wages. That might reflect the point that I made earlier, which is that some of the schemes are wages in disguise, and it is not unreasonable that we should seek to tax them in that way.

The area is highly complicated—not in this clause and schedule—but it is part of the wider debate, and I am sure that debate on it will continue in the House, and I am sure that Opposition Members will not hesitate to table amendments relating to it in the future.

Question put and agreed to.

Schedule 16 agreed to.

Clause 87 ordered to stand part of the Bill.

Schedule 17 agreed to.