Clause 6

Finance (No. 2) Bill – in a Public Bill Committee at 5:00 pm on 19th October 2010.

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Question proposed, That the clause stand part of the Bill.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

This clause, as a relative of other clauses in the Bill, is rooted in the European Union’s drive to ensure that any tax concessions or reliefs given to firms that might be construed as a state aid are compliant and consistent throughout the European Union and therefore are drawn up fairly. The technical shift in the definition of a firm qualifying for enterprise management incentive options moves from the notion of a “wholly or mainly” UK basis to a “permanent establishment” in the UK basis. In some respects, this mirrors the points that my hon. Friend the Member for Wirral South has raised.

Again, I want to pick up on a point highlighted in the submission from the Institute of Chartered Accountants, which raises a set of questions on the meaning of “permanent establishment”. In particular, it implies that there is a query concerning the criteria by which a company obtains the definition of permanent establishment. It suggests that the Bill could be interpreted to mean that a company employee who makes a sale in the UK on behalf of the company would thus define the whole company as having permanent establishment status in the UK. There appears to be no requirement for that employee to be resident in the UK, yet a visitor carrying on business on behalf of the company would seem to achieve that qualification.

Is there therefore a risk—perhaps because of injudicious drafting—that foreign employees might benefit from generous tax reliefs on their share options in that way? That might well be the intention of the Treasury and the Minister, but I would welcome clarification.

Photo of David Gauke David Gauke The Exchequer Secretary

As the hon. Gentleman points out, this is another clause that we have brought in to prevent EU infraction proceedings. It is perhaps worth informing the Committee that one reason why we needed to bring in this second Finance Bill was to deal with a number of detailed technical points that we could not leave for next year’s Finance Bill. That is why we have brought forward this clause and, indeed, it is the justification for a number of clauses in the Bill.

Enterprise management incentives is a share option scheme that allows certain types of company to grant tax advantaged options over their shares to key employees. The scheme was introduced 10 years ago with the aim of helping smaller, higher-risk companies to recruit and retain high-calibre staff. The rewards that the scheme offers provide key employees with a powerful incentive to promote the success of their company. EMI is part of the Government’s strategy to help and encourage such smaller companies, which are so important to the UK’s economy.

As the hon. Gentleman pointed out, the clause removes the present requirement for EMI qualifying options that companies must broadly be carrying on a trade “wholly or mainly” in the UK. In the future, a single company wishing to grant EMI options must have a “permanent establishment” in the UK. Alternatively, in the case of a parent company, at least one company in the group that is carrying on a “qualifying trade” within the meaning of the legislation must have a “permanent establishment” in the UK.

Photo of Alison McGovern Alison McGovern Labour, Wirral South

In response to some of my earlier comments, the Minister was very kind and helpful by giving a good steer on the scale of what we are dealing  with in relation to another scheme. It is important for us to have a sense of that with this scheme as well. I wonder whether he or his officials have figures to hand to show the cost to the Treasury arising from this scheme. If he does, I would be grateful if he could make some remarks about them.

Photo of David Gauke David Gauke The Exchequer Secretary 5:15 pm, 19th October 2010

I hope that I can help the hon. Lady. In 2008-09, 2,550 companies granted EMI options to their employees. That was a 10% decrease on the previous years. The number of employees granted these options in 2008-09 decreased by 17% to 22,000, and the number of employees exercising their options fell by 45% to 4,900. I suspect that there is a cyclical element, as one would expect in these matters. The annual estimated cost of income tax and national insurance contributions released have both declined by 23% to £100 million and £40 million respectively. As I say, those downward trends reflect the difficult economic climate during the relevant year.

If I may provide a bit of detail on the clause, as I said a moment ago, a single company wishing to grant EMI options must have a permanent establishment in the UK. In the case of a parent company, at least one company in the group must be carrying on a qualifying trade within the meaning of the legislation, with a permanent establishment in the UK. This worthwhile change will increase the number of companies that can qualify for EMI.

The hon. Member for Nottingham East raised an interesting concern about employees and the sale of shares in these circumstances. As far as I am aware, that matter has not previously come up in consultation. Obviously, we published the clause in July but, before that, the matter dates back to the previous Government. If I may, I will look into the particular concerns he raised and write to him accordingly. However, he makes an interesting point. We will look into the issue and I hope to be able to inform him on it in due course.

Photo of Chris Evans Chris Evans Labour, Islwyn

As one south Wales MP to another, I would like to say that it is a pleasure to serve under your chairmanship, Mr Caton. On the 2,550 companies that the Minister has mentioned, I would like to ask what type of companies are benefiting from the scheme and which sector is benefiting the most. Also, what assessment, if any, is being made of the impact of the scheme on the high-risk companies and what benefits has it given them over the past 10 years?

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

While inspiration strikes the Minister on those important matters, I would like to say that I am more than happy for him to come back to the Committee on the point about the lack of a requirement for an employee to be resident in the UK and the fact that a visitor coming from abroad to carry on business here on behalf of that company appears to trigger the qualification for some of the tax relief. My point is simply that there could be a risk of tax relief tourism, and that people will put a foot in the country and therefore potentially open up the door to significant sums of UK taxpayers’ money. That is why we should reconsider that important issue at some point.

I accept that the European Union arrangements often come down from on high and that Departments tend to cut and paste them and insert them into legislation. However, we should have our own particular British approach to these things and employ a bit of flexibility and latitude to suit our country’s interests. As long as we are within the spirit of the treaty obligations, I think we would all want to adopt such an approach. I am certainly concerned about the risk of tax relief tourism, and am happy for the Minister to respond to that at another date.

Photo of David Gauke David Gauke The Exchequer Secretary

I am grateful for the spirit in which those comments were made. Let me summarise how the hon. Gentleman’s position could be described: British tax relief for British jobs. He makes an entirely reasonable point. On the sectoral availability of EMI, it is not specifically designed to help one sector over another; it applies to overall sectors. I do not have to hand a breakdown of where EMI has applied, but if we have that information, I will certainly write to the hon. Member for Islwyn.

Question put and agreed to.

Clause 6 accordingly ordered to stand part of the Bill.