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Good morning, Mr Streeter. It is a pleasure to serve under your chairmanship again this morning.
Clause 49 and schedule 7 implement a number of recommendations made by the Office for Tax Simplification to simplify the tax rules in relation to employment-related securities such as employee shares or ERS options awarded to employees. The clause changes the tax treatment of ERS and ERS options awarded to internationally mobile employees, introducing a new relief for certain ERS exchanges. It simplifies the rules around nil-paid and partly-paid ERS and extends the corporation tax relief available to companies in relation to employee share acquisitions. The clause also makes some technical changes to the tax treatment of share awards, providing a new relief for certain share-for-share exchanges on takeovers and extending corporation tax relief in certain situations, principally on takeovers and where international moves are involved.
We support the changes made by the clause and the schedule. Given the attempts to obtain some symmetry in the income tax and corporation tax treatment of option gains for internationally mobile employees, what steps will the Government take to align the new rules in respect of national insurance contributions for IMEs? The new rules for IMEs introduce additional costs for the employers of IMEs, in that they will need to update their reporting systems. They will need to track inbound assignees to a greater extent, as they are more likely to be liable for UK income tax, and reporting to Her Majesty’s Revenue and Customs will increase. What is the Government’s estimate of the additional costs involved? Given our earlier discussions about tax-advantaged schemes of this nature, can the Minister say how many companies operate tax-advantaged schemes, what percentage of the UK work force are covered and what the overall cost to the Exchequer will be of the various reliefs in relation to share schemes? Have any studies been done to quantify the positive effects that these have on the UK economy?
It is a great pleasure to serve under your chairmanship once again, Mr Streeter.
As we have heard, clause 49 introduces schedule 7, which makes various simplifications to the tax rules for employment-related securities, as recommended by the Office of Tax Simplification. Not for the first time, we are making some changes to the law as a consequence of its proposals. In its report on unapproved employee share schemes, the OTS highlighted a number of areas where the rules could be simplified to make life easier for businesses and employees. This is just one of the provisions in the Bill that implements recommendations made by the OTS. It addresses issues indentified as priorities by the OTS and has been welcomed by consultation respondents as a valuable simplification of complex tax rules.
The clause will change the rules for taxing shares and share options awarded to internationally mobile employees. Currently, whether UK tax is chargeable in relation to employee shares or share options might depend upon where an employee resided at the time these were awarded, regardless of where the work to earn that award was carried out and whether it related to UK or overseas duties. The new rules put the position on a simpler, more orderly and principled basis, broadly reflecting OECD guidance and taking into account where duties were performed. Alongside these changes, we will also extend the availability of corporation tax relief. Relief will be available, for example, where individuals are seconded from overseas to work for a UK company.
We have consulted on these changes, and most respondents were agreed on their simplification potential. However, some concerns were raised about implementation. We therefore propose that the new rules will not come into effect until 2015, which will allow affected businesses and employees to prepare. To avoid businesses having to operate different sets of tax rules, we will apply the new rules to all employment-related securities, regardless of when they were awarded. We are introducing a new relief that will allow certain shares awarded to employees to be exchanged for similar shares without an income tax charge arising—for example, in takeover and merger situations.
We are simplifying the rules on notional loans, which apply when an employee is awarded nil-paid or partly-paid shares. The effect of the change is to provide a relief from a potential tax charge in certain cases where an employee disposes of those shares. There will be new corporation tax relief for certain employee share acquisitions that take place after the takeover of a business by an unlisted company.
Let me turn to the questions raised by the hon. Member for Birmingham, Ladywood. On the current cost to the Exchequer, the tax relief granted under the Government’s four tax-advantaged schemes increased by 10% to £610 million in 2011-12, the latest year for which we have figures. The figures show an increase in the number of companies currently operating one of the Government’s four tax-advantaged employee share schemes, up 3% to 9,260 in 2011-12.
The purpose of the change in relation to internationally mobile employees is to simplify the tax rules, not to raise revenue. In some cases more UK tax may be charged than currently; in some cases it may be less. The changes include new corporation tax reliefs for UK companies with regard to overseas employees. However, it is right and fair that securities income relating to UK work and duty should be taxed as employment income in the UK. International double taxation agreements will continue to protect internationally mobile employees and there will be overrides in the legislation to ensure that the tax treatment is just and reasonable.
The OTS has pointed out that the current rules can impose significant burdens on businesses, particularly when they involve amounts being treated as loans to employees and when separate rules apply for different types of securities. Most respondents to the consultation agreed that the changes have the potential to simplify the position for employers in the longer term. Although there were some concerns about short-term implementation and the need to establish new processes and systems, HMRC has responded by allowing a longer lead-in time before the changes take effect, removing the potential for employers to have to apply two sets of rules when the changes come in.
The hon. Lady asked about the percentage of the work force that is covered. HMRC does not have that figure, but she has some indication of the scale. She asked about the application of the provision to national insurance contributions and whether the rules will be changed in line with the new rules set out in schedule 7. The answer is yes, as far as possible that will be done under international social security agreements. The Government will bring regulations before the House in time for implementation from 6 April 2015. I hope those points of clarification are helpful to the Committee, and I am grateful for the cross-party support for the clause.