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We have just discussed the increases in the SIP and SAYE scheme limits, which were announced in the autumn statement. In addition, the clause gives effect to several changes to the rules for employee share arrangements that were recommended by the Office of Tax Simplification.
In July 2011, the Minister asked the OTS to review the four schemes to identify when they are complex and place unnecessary administrative burdens on their users, and to suggest ways they could be simplified. The OTS report was published on 6 March 2012 and, in June 2012, the Government launched a consultation containing 16 proposals for changes to the rules of all four types of scheme. In December 2012, the Government confirmed that they intended to proceed with the three OTS proposals that are found in clause 48.
In May 2013, HMRC published details of its proposed arrangement for the self-certification of SIP and SAYE schemes and company share option plans, and digital filing of forms and returns for employment-related securities, or ERS. The main changes include the introduction of self-certification by businesses for three of the tax advantaged employee share schemes—SIP, SAYE and CSOP—to replace the need for approval from HMRC, which was previously required. Secondly, there are changes including online filing for all employee share scheme returns and information, including for enterprise management incentives—EMIs—and non-tax advantaged arrangements providing ERS. Thirdly, there are a number of technical changes to the SIP, SAYE and CSOP rules that are designed to clarify legislation, including the modification of the so-called purpose test that must be met by the schemes.
The changes aim to simplify the employee share scheme rules when they might create undue complexities or unnecessary administrative burdens for scheme users, so we are broadly supportive of the proposals in the Bill. The changes came into effect on 6 April 2014.
There has been helpful commentary on the changes, especially from the Quoted Companies Alliance. It broadly welcomed the changes, although it noted some points of concern, especially the decision not to grandfather previously approved schemes under the new regime. The alliance says that having to revisit schemes to see if they comply will place an unnecessary burden on businesses, so will the Minister tell the Committee what discussions he has had with the QCA and other stakeholders about such matters?
Is the Minister confident that, in the absence of a distinction in legislation between serious default and other breaches, companies that operate schemes without full-time HMRC share scheme managers will not find themselves facing substantial penalties for inadvertent but ultimately minor mistakes? A number of commentators have made that point. While broadly welcoming the changes, they have asked whether the Government have considered how best to assist smaller businesses without an in-house tax team, and unrepresented taxpayers, to understand the changes and their new obligations. Will the Minister outline the Government’s views on those matters?
The QCA and one or two other organisations have been somewhat critical of the new purpose tests saying that they will be no more helpful than the previous tests. What is the Minister’s response? Is he confident that the tests will represent a simplification?
Will the Minister also confirm whether, under the new system, if a company misses the deadline for self-certification, it will not mean that all the grants, for example of SAYE options, in the previous tax year no longer qualify for preferential tax treatment? That might go too far and could lead to uncertainty and hardship for employees potentially through no fault of their own.
Clause 48 introduces schedule 6, which gives effect to recommendations of the Office of Tax Simplification on employee share schemes. The Government asked the OTS in 2011, as we have heard, to review employee share schemes and identify ways in which existing tax provisions and processes might be simplified. Last year, we brought in a substantial package of changes to give effect to many of the OTS’s recommendations on tax-advantaged schemes. We have now produced a second tranche to address further OTS recommendations on which we needed to undertake preparatory work and consultation before we could put detailed proposals before Parliament. This is just one of the Bill’s provisions that implements OTS recommendations, and I pay tribute to that organisation for enabling us to take forward a major programme of tax simplification for employee share schemes in this year’s and last year’s Finance Bills.
Schedule 6 makes several changes that I shall run through fairly quickly. It removes the current requirement that a share incentive plan, save-as-you-earn option scheme or company share option plan must be approved by HMRC to qualify for favourable tax treatment, and replaces that with a process of self-certification of schemes by businesses. It introduces online filing for the information and returns on employment-related securities that companies are required to submit to HMRC and applies that to enterprise management incentives and non-tax-advantaged schemes and arrangements, as well as SIPs, SAYE option schemes and CSOPs.
The changes replace processes that the OTS told us were outdated and time consuming for businesses with up-to-date digital arrangements. Other changes under the measure clarify or simplify various technical rules governing the operation of such schemes. There are new, more specific purpose tests for SIP, SAYE and CSOP, and significant changes in areas such as requirements in relation to the provision of information by companies to scheme participants, variations of share capital, company events that are subject to overseas legislation and the exchange of options. HMRC has consulted extensively with businesses and leading professionals to make the new arrangements simple and user-friendly, and I am grateful to all those who have helped us to develop a system fit for the 21st century.
The hon. Member for Birmingham, Ladywood asked whether the system should have grandfathered existing schemes already approved by HMRC instead of requiring them to self-certify. The Government’s view is that once the new system has come into operation, all schemes should be treated on the same basis, meaning that all schemes—new and existing alike—need to self-certify. Published guidance will make it clear that if a scheme received formal approval prior to 6 April 2014, HMRC accepts that the scheme met the legislative requirements on the date of approval. That will be sufficient evidence that the scheme is suitable for the company to self-certify, assuming that there have been no significant changes to the scheme or how it has operated since approval was granted.
The hon. Lady asked whether HMRC’s ability to impose penalties may result in innocent mistakes by companies being penalised, as well as raising a concern about whether these are the right powers. We believe that the new arrangements strike a reasonable balance. Clearly HMRC must have adequate powers to impose penalties when companies fail to comply with the new rules. It will be publishing guidance on how it expects the new penalties regime to work, which will include examples of the sorts of errors and omissions that might be considered serious and those that might be seen as less serious. HMRC aims to publish detailed guidance on the new rules by the time the Bill receives Royal Assent to provide information for companies and advisers on all aspects of the new arrangements. HMRC will undertake an informal process of consultation on the guidance to help make it as useful and comprehensive as possible.
The aim is to publish detailed guidance on the new rules by the time the Bill receives Royal Assent, which will be in July. HMRC will be undertaking an informal process of consultation on the guidance but, as I said, the aim is to publish it by the time the Bill receives Royal Assent.
On the purpose test and whether it is narrow, the old purpose test broadly required that the scheme should not contain provisions that were not essentially or reasonably incidental to the purpose of providing shares or share options. The OTS told us that the test should be simplified and that the legislation should be more specific about what should not be included in a scheme. The new purpose test precludes schemes from providing benefits other than in accordance with the terms of the legislation and specifically bans the provision of cash in place of shares or share options. The new approach provides a straightforward and workable test that strikes a reasonable balance and should counter the most obvious types of abuse that might arise.
I turn to safeguards for members of existing approved schemes, if their employer fails to self-certify. In the case of SAYE, SIP and CSOP schemes approved by HMRC before 6 April 2014, companies must notify and self-certify them by 6 July 2015 if they wish the schemes to remain tax-advantaged from 2014-15 and in following years. If schemes are not properly registered by that date, they will no longer be tax-advantaged. In such cases, legislation will protect the interests of participants in the all-employee SIP and SAYE schemes in relation to shares awarded or options granted prior to 6 April 2014. However, there is no comparable protection for participants in discretionary CSOP schemes on options granted prior to 6 April 2014 in cases when the 6 July 2015 deadline for self-certification is missed.
With those points of clarification, I hope that the Committee will accept the clause and schedule. I hope that they demonstrate the Government’s support for simplifying the tax system and ensuring that it is sensible and encourages businesses to award shares to employees.