Clause 39 - Corporation tax relief for employee share acquisitions etc

Finance Bill – in a Public Bill Committee at 3:00 pm on 4 June 2013.

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

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I am grateful for the opportunity to say a few words about the clause, which relates to the rules on the availability of corporation tax deductions where firms award shares or share options to their staff. Apparently, the clause is not designed substantially to change the rules; it merely clarifies. If an award does not fit within the specified circumstances, no relief would be available. I understand that there might have been some grey areas around the provisions, which is why the Government are seeking to clarify that no deduction would be available for other expenses relating to the provision of shares or for any connected matter beyond that set out in the Corporation Tax Act 2009, and that no deduction is possible for the grant of a share option unless the employee requires the shares under that particular option.

It is not a particularly unexpected clause. It provides some clarification, although I have a couple of points that I want to raise with the Minister on the general provisions relating to tax relief for employee share acquisitions. First, can the Minister clarify the extent of the claims that HMRC may have queried or may feel were illegitimate, which were behind the need to introduce this clause? I assume there must have been various attempts to claim relief that were frowned upon or were not permitted under the provision. Have the Government estimated the cost to the taxpayer as a result of the avoidance arrangements or practices that were being examined?

I want to ask about the changing nature of employee share payments and share options, especially in the banking sector. The Minister will know that, for various reasons, inspired predominantly by the European Union, there has been a shift in the composition of remuneration arrangements for many in the banking sector; it is becoming less about salary or cash bonus payments and much more about rewards in the form of share payments and share options. Clearly such payments present a changing environment for taxation.

The Minister will have to forgive me for asking some naive questions about the practice. I assume that bankers who are remunerated in shares have to pay income tax at some level on the value of those payments, even if they are essentially payments in kind rather than in cash. Or is it the case that taxation is taken at the point at which the shares are disposed of? A big shift is taking place in the banking sector, particularly following some of the European Union decisions regarding payment of employees by share options or transactions. Has there been a change in the tax yield for the Exchequer as a result of that shift in behaviour? If banker A is given a £1 million payment, the calculation of the income tax deduction will be quite clear, but I am not sure—and it would be helpful for the Committee to know—if individuals are paid in shares, at what point they mature and at what point there are options on them. Inspiration will probably strike at any moment, but I would be grateful to the Minister if he elaborated on that.

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree 3:15, 4 June 2013

Again, I am listening carefully to the political thrust of the hon. Gentleman’s question. Surely he knows as well as all of us—at least on the Government Benches—that the main beneficiaries of such options are employees in smaller businesses. The clause does not deal with bankers trying to circumvent the system. I am sure he will agree that the beneficiaries of most options are ordinary employees in small businesses with fewer than 10 people.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Indeed, I hope that that is the case. I support employee share ownership in small business arrangements; I agree with the hon. Gentleman totally on that matter. However, I do not agree with the rather curious, byzantine policy of asking employees to waive their employment rights in exchange for share options— something that we will debate later.

I am not sure about the ceiling on share acquisitions by employees and whether the policy is open as a practice for remuneration at higher levels. To what extent can such provisions be used as the main way in which bankers are remunerated? The practice will become increasingly common, not just with shares, but with contingent convertible instruments and other financial instruments with ongoing liability for the individual who has been paid, but may have sums clawed back if the company’s performance turns down in the long term.

Remuneration in that sector is becoming more complicated. That is my general point. I hope that it is not unreasonable to ask what the tax arrangements are, given that extra complexity.

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree

I have just been reading the explanatory note. If I am wrong, the hon. Gentleman will correct me, but my understanding is that if they are receiving options of this kind, they are taxed as income rather than as capital gain.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Which is indeed the point I am trying to ascertain from the Minister. I want that clarified a little more in the public domain.

Photo of David Gauke David Gauke The Exchequer Secretary

Clause 39 clarifies the legislation on the corporation tax deductions available where companies grant share options or award shares to their employees.  It is one of several provisions in the Bill to ensure that corporations pay their fair share of tax and cannot exploit legislation to gain unintended tax advantages. The normal rule for employee share options and awards is that the availability of corporation tax relief for companies is linked to employees being charged to income tax on acquiring the shares. However, some companies have recently been claiming deductions for accounting expenses for share options and awards in cases that run clearly counter to this principle.

We are introducing the clause to put the tax position beyond doubt. It confirms that, other than in specified circumstances, no deduction is available for share options where an employee does not acquire the shares in question. It also confirms that where statutory relief for a share option or award is available, no additional deduction should be made. In the Government’s view, that is already the case under current corporation tax legislation. That brings me directly to the first question asked by the hon. Member for Nottingham East, which concerned the cost if we did not go ahead with clause.

Our view is that the measure confirms the law as it has been applied by HMRC since the current rules were introduced in 2003. It is entirely consistent with the principles set down by Parliament in 2003 that there should be symmetry between the availability of corporation tax relief for a company and the employee being chargeable to income tax on acquiring the shares in question. We are confident that our current application of the rules is correct. HMRC will continue to pursue any outstanding current cases under the normal procedures if need be before tribunals or the courts. This is a clarification of what the law currently is and we have not made any assessment as to revenue protected because we think that revenue was already protected under existing legislation, but it is always helpful to remove any uncertainty in these areas.

The wider question raised by the hon. Gentleman was about the taxation of shares in these circumstances. Income tax is chargeable on shares provided by reason of employment in the same way as other employment income. Usually income tax is due when the shares are acquired by the employee but there are some exceptions. Where there are share options, income tax is due when the options are exercised. The purpose of the rules is to tax rewards delivered through shares in the same way as other remuneration. The new provision aims to remove any possible uncertainty and to make it quite clear to companies that these claims are not valid. It is consistent with the intentions of Parliament when the current legislation was passed in 2003 and with the way HMRC has applied the rules since they were first introduced.

Question put and agreed to.

Clause 39 accordingly ordered to stand part of the Bill.