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Mr. Timms: I am grateful to the hon. Gentleman. Will he confirm the last figure that he gave to the House? Did he say that there was an effective rate of taxation of 47 per cent. in the UK on unauthorised options and that in the United States it is 46 per cent?
Mr. Ottaway: I said that in the United States for ISO stock options, which are considered important, the rate is 26 per cent., and that for other stock options, it is 46 per cent.
Mr. Timms: We are, of course, speaking about unauthorised share options, so let us compare like with
like. The comparison is, as the hon. Gentleman rightly said, 47 per cent. in the UK and 46 per cent. in the US. The arrangements for authorised options are different in both countries.
Mr. Ottaway: The Minister is more familiar with the matter than I am. However, ISO stock options are considered important by companies such as the one that I mentioned, and they attract a tax rate of 26 per cent. That must be taken into account.
Mr. Edward Davey (Kingston and Surbiton): I am grateful to the hon. Gentleman for giving way. Although the Financial Secretary is right with respect to the measure under discussion, is the hon. Gentleman aware that the Financial Secretary admitted in the Standing Committee on 29 June:
- There is an alternative regime for approved options in the US, as there is in the UK
- the terms of the approved scheme are more generous in the US than in the UK--[Official Report, Standing Committee H, 29 June 2000; c. 1033.]?
I quoted a business man who finds it far more attractive to build up his company in the United States than in the UK. A message must be sent from the Government to entrepreneurs.
5.15 pm
I shall conclude by referring to a report from the "Global Entrepreneurship Monitor" produced by the London business school, with which I suspect the Minister is familiar. It is sponsored by Apex Partners and Co., which I suspect has given advice to the Government on entrepreneurial activity. The report was produced in 1999, and includes a clear and specific recommendation in terms of assessing Government policies. It states:
- Rules on share option schemes need to be improved to give incentives to people to join young entrepreneurial businesses and go on to build large, world-class enterprises.
Mr. Edward Davey: When, two years ago, the Government introduced measures to apply employers' national insurance contributions to share options and gains on those options, I do not think that they realised the mess into which they were getting themselves. In the Child Support, Pensions and Social Security Bill and in the Finance Bill in clause 56, they have tried to alleviate the problems that they have created. However, they have not
gone far enough. The amendment would help to improve the relief but it would go significantly against the Government's intentions.When we debated these matters in Committee, the Minister admitted that a real problem had been caused by the Government's previous legislation. He admitted that the problems would lead to some high-tech companies having to assess the unpredictable future liability of employees' national insurance contributions.
Mr. Michael Fabricant (Lichfield): Is the hon. Gentleman aware that many high-tech companies--some of the dot.com companies--are offering profit-share schemes that are related to profits rather than dividends? They are not providing shares for some of their employees even though they are offering bona fide profit options. Is the hon. Gentleman aware also that that is excluded in clause 56, which the amendment is designed to amend?
Mr. Davey: I was aware of that, but I am not sure whether it is germane to my argument or to the issues on which we should focus during the debate. I shall develop my argument, which I hope is germane to the issues.
A problem is created for high-tech companies when it comes to predicting liability and having to account for that. The Minister was up front and honest with the Committee in explaining that problem. High-tech companies often have to go to capital markets to secure extra funds to compete in a highly competitive and dynamic industry, and they have to convince investors that their balance sheets are at least moving in the right direction even when profit and loss does not look too good in the near future. Unpredictable liabilities on balance sheets create great problems in winning the confidence of investors. The Government admitted that that was the problem and they are seeking to deal with it in clause 56.
Have the Government dealt with the problem? In the Child Support, Pensions and Social Security Bill, they introduced an unusual technique in British tax law, which was that there could be an election and an agreement between the employer and employee to switch the liability for employers' national insurance contributions to the employee, thus getting round the accounting proposal. However that creates another difficulty, which is that of attracting labour.
The skilled employees in the industry are internationally mobile. If a UK or US company tried to attract them, they would consider the various stock options and salaries on offer and the tax regimes that applied to salaries and stock options.
In Committee, we focused on whether the provision made the tax regime for stock options for employees of high-tech companies in the United Kingdom worse than the regime in the United States. There was a huge debate about that, and it has been reflected in our proceedings today. I do not think that the Government have gone far enough to make sure that the UK remains attractive enough to internationally mobile labour. The provision will deter skilled employees from joining UK companies instead of those in the United States. That will inevitably encourage high-tech companies to set up in the United States and not in the UK
The Financial Secretary might say that the tax differential--between 46 and 47.3 per cent. for approved share option schemes--is rather small. It might seem a
small differential, but the key point is the change. Many companies have set up in the UK or are considering setting up in the UK because they previously viewed the tax regime here as beneficial. They could encourage skilled internationally mobile employees to work for them in the UK, because the tax regime was favourable for share options. However, in a stroke--by applying class 1 national insurance contributions to stock options--the Government have removed that advantage.One could argue that there was a tax loophole that needed closing, but was it necessary to remove it altogether? Was it not necessary to give some competitive tax advantage to the UK's information technology industry to attract companies and internationally mobile labour here? By not recognising that important fact, the Government are doing down that sector and doing this country a disservice.
Mr. Bercow: I agree with the hon. Gentleman's observation that the fact of the change is significant. However, does he agree that the other significant fact is that a substantial proportion of the companies that will be affected are small companies? Given that 99.6 per cent. of Britain's firms employ fewer than 100 people and that they account for about 50 per cent. of the private sector work force and generate 40 per cent. of national output, that point is of the most dramatic significance.
Mr. Davey: As always, the hon. Gentleman comes to the House with a barrage of statistics, the veracity of which I cannot confirm at this time. However, I am more than happy to agree with the thrust of his point. Small firms are active in this sector.
When we debated this issue in Committee, I put some of these points to the Financial Secretary. He said that the Government had chosen to get the marginal rate of the relief in clause 56 down to 47.3 per cent. because they wanted to get it below 50 per cent. He said that it appeared from the negotiations that had been held with the companies affected that the figure of 50 per cent. was "psychologically significant". I am sure that it is "psychologically significant", but is that the test that we should apply? We want to ensure that this country is the most competitive--even vis-a-vis the United States--in the world. One could argue that we are talking about percentage points, but they are important in such decisions.
Mr. Timms: Can the hon. Gentleman confirm that, in addition to the liability for the employee, employers in the United States also have to pay a 1.5 per cent. Medicare charge? That works in exactly the same way as national insurance liability works in this country, but it is not an issue for companies here. In that respect--indeed, in many others--the UK is in a better competitive position than the United States.
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