Previous SectionIndexHome Page



'Where an option does not qualify by reason of an error in the scheme pursuant to which it has been granted, but would otherwise have been capable of being a qualifying option pursuant to paragraphs 9 to 17 inclusive of this Schedule, then that error may be corrected and be deemed to have been always corrected from the date of grant of the option.'.

19 Jul 2000 : Column 419

Mr. Deputy Speaker: With this it will be convenient to discuss the following: Amendment No. 143, in page 314, line 24, at end add--


'(4) In the event of the requirements of this Schedule being found not to be met in relation to an option, whether upon enquiry by the Inland Revenue or following an appeal, there shall be no right of action in tort or contract either in favour of or against the relevant company or any employer company.'.

Amendment No. 142, in page 316, line 2, leave out from beginning to end of line 3 and insert--


'At any one time there may not be qualifying options in respect of shares in the relevant company over shares with a total value of more than £1,500,000. For the purposes of this paragraph shares shall be valued according to their market value at the time that the option granted over them is granted.'.

Government amendment No. 61.

Amendment No. 141, in page 328, line 21, at end insert--


'(4) Where pursuant to any provision of this Schedule an individual becomes liable to income tax then notwithstanding any other provision of the Taxes Act 1988, the tax due shall be paid in five equal instalments as follows--
(a) the first shall be due and payable when, but for the operation of this sub-paragraph and ignoring the operation of Chapter V of Part V of the Taxes Act 1988 (PAYE), that tax would otherwise have been due and payable ("the first payment date");
(b) the second shall be due and payable on the first anniversary of the first payment date;
(c) the third shall be due and payable on the second anniversary of the first payment date;
(d) the fourth shall be due and payable on the third anniversary of the first payment date; and
(e) the fifth shall be due and payable on the fourth anniversary of the first payment date.'.

Government amendments Nos. 62 and 63.

6 pm

Mr. Flight: At first glance, the enterprise management incentives appear to be extremely generous and attractive schemes to encourage entrepreneurs and key leaders of business. Regrettably, however, as we pointed out in Committee, there are several problems, one of which is that a large number of business areas have been excluded, based on views founded in the past. A larger problem has been raised by several accounting and law firms specialising in the matter: that if the business in which people are granted EMI options succeeds--and therefore the options become worth something--it will almost certainly have disqualified itself by that stage; so, although individuals might enjoy EMI tax advantages for a year or two, they will quickly cease to do so.

Our amendments relate to the issues thus raised, which reveal the proposal as being more spin than reality--perhaps I should call it underspin. What is the estimated tax cost of the scheme? That would provide a reasonable measure of the extent to which the Government expect it to be effective. According to Government calculations, are EMI schemes a major means of fiscal incentivisation, or am I right to fear that they are merely a case of nice presentation with limited practical application? Before addressing our amendments, I should say, in passing, that the Opposition support the Government amendments, which, as the House will agree, are practical measures.

19 Jul 2000 : Column 420

Our amendments are further practical measures that relate to the themes that I have identified. The first issue is the self-certification system, to which amendment No. 144 relates. Business wanted self-certification, which is a good idea, but it might engender some unnecessarily wrong outcomes. Currently, both employee and employer have to take a chance that the option scheme might not qualify; they have to wait to see whether the Revenue agrees with the employer's view that it does qualify. Therefore, the amendment embodies a reasonable suggestion whereby the correction of technical errors should be allowed where it is clear that the company and its arrangements should have been capable of qualifying. There is a difference between a scheme that is clearly outside the key parameters and rules, and one that contains, say, a drafting error that has resulted in the Revenue not granting its approval. Past comparable arrangements provide precedents whereby the Revenue is permitted retrospectively to correct what are described as remediable errors, as opposed to major errors of principle.

Amendment No. 143 relates to similar territory. Because it is not known at the time of grant whether a scheme will qualify, there is clear scope for legal action if an employee has been led to believe that it will qualify and then finds that it does not. The employer is asked to bear the risk, so we suggest that it should be permissible to give an indemnity against such actions, to avoid the process being impeded by legalese and caveats, which might discourage genuine cases of schemes that should have qualified.

I am referring to our amendments in reverse numerical order, as they appear on the selection list, which means that amendment No. 142 is next. It represents our attempt to create somewhat greater flexibility within the basic parameters whereby no more than £1.5 million can be awarded under EMI options. The amendment would introduce the principle whereby, instead of there being an inflexible maximum of 15 employees, there should be an aggregate limit constituting the total sum of all qualifying options. As Ministers will note, our amendment is worded so that one person will be prevented from awarding himself the whole lot. The current provisions might produce unnecessary anomalies, given the contrasting nature of different businesses. If a company needed to recruit 16 key people and a perfectly adequate market allocation was £50,000, it could not do so under the present rules; similarly, if the key number of people required was seven, but in the very competitive, new economy area, where £100,000 as an allocation was on the low side, it would not be permitted. Our amendment would provide a little flexibility within a limit of £1.5 million and would cater for the different needs of businesses.

Amendment No. 141 proposes arrangements that have been used quite successfully in this country in the past, which, in essence, stagger the payment of tax. It relates to the situation in which after an individual has enjoyed EMI terms for the first two years, the company grows and the individual ceases to enjoy the terms. When he or she exercises the options, there will be substantial income tax liability. The amendment would introduce the principle of instalment payments for the income tax that would fall due on the exercise of the EMI option, and it follows the provisions on payment of income tax on share options that prevailed before 6 April 1984, updated to reflect the introduction of self-assessment, which was not then in operation.

19 Jul 2000 : Column 421

The amendment also removes the gain from the operation of pay-as-you-earn, providing for payment in five instalments. The first would be on the normal self-assessment date and the others on successive anniversaries of it. It is necessary to take account of the special nature of EMI companies. If the tax were collected via PAYE, the employer would have 30 days to raise it to avoid an additional tax charge under section 144A of the Taxes Act 1988, which states that if an employer receives benefits that are non-cash but PAYE-able, such is the gain made on the exercise of share options that a second tax charge on the amount of the PAYE due would be levied if the employee had not paid to his employer the amount of tax due within 30 days.

In practice, the amendment will force the employee to sell shares to raise the PAYE. PAYE applies where shares are readily convertible assets, which the Revenue defines and interprets widely, and which catches any listed company, and even unlisted companies in which it is considered likely that the employee might be able to realise cash from the shares, such as businesses that are about to be sold or in which flotation is pending.

Our proposal is designed to stop what would effectively be mandatory sales arising in situations in which a company has been successful and the EMI qualification has ceased. The Government will be advised by the professions that several problems arise in what is in principle an attractive scheme. Companies offering membership of a scheme to key staff will suffer uncertainty as to how long qualification will last, as to approval by the Revenue after the company's self- certification and as to the potential tax liability. Our amendments are designed to address those uncertainties and make the scheme more workable as regards its basic intent, which we support.

Miss Melanie Johnson: I do not intend to speak to the Government amendments as they are technical, correcting unintended double negatives and so forth.

The hon. Member for Arundel and South Downs (Mr. Flight) got a number of things quite wrong in his speech, and I hope to reassure him. He mentioned costs. The anticipated cost is given at page 154 of the Red Book--£45 million for a full year--and we anticipate that 2,500 companies will take up the incentive in the first three years, which involves about 18,000 employees. That is the basis on which our figures were constructed.

Amendment No. 144 demonstrates a misunderstanding of how enterprise management incentives work. An EMI option is granted as part of a share option scheme, but it is possible that a company may wish to grant EMI options to key employees under the rules of such a scheme. Nothing in the schedule requires that, however, and the schedule does not refer to a scheme as such. In addition to the reference to a scheme in the amendment, the hon. Gentleman spoke about schemes a few moments ago, but the schedule does not require the establishment of a share option scheme with rules to govern the granting and exercise of options.


Next Section

IndexHome Page