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One requirement is that a company is carrying on a qualifying trade, but if it was not, it would not be possible to go back in time to suggest that it had been carrying on a qualifying trade at the date when the option was granted.

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That being so, we would not want to deem the option as having been a qualifying option from the outset, if the company decided that not carrying on a qualifying trade was an error and changed its trade to correct it. That would set an extreme and unwelcome precedent, and I cannot think that Conservative Members would think that sensible or desirable.

If, however, amendment No. 144 indicates concern that the company will be unfairly penalised if it has accidentally provided incorrect information when notifying the option to the Inland Revenue, I can allay that concern. The schedule already makes provision, at paragraph 3, for errors to be corrected in the notice to the Revenue. The provisions are equivalent to those provided under self-assessment for companies or individuals to correct any mistakes in their return.

The schedule also makes provision for the grant of an option over shares with a market value exceeding the individual limit of £100,000. Paragraph 10 allows any excess to fall outside the EMI provisions without disqualifying the whole of the option. Any error in the option agreement itself would be a matter between the grantor of the option and the employee. If they agreed to change the terms of the option, and the change related to something not required by the schedule, that would not in itself be a reason to disqualify the option, unless the effect were to increase the value of the shares under option. Amendment No. 144, with its reference to correcting errors in a scheme, in fact addresses an issue not relevant to the schedule. For those reasons, it is unwelcome and unnecessary.

Amendment No. 143 would have far-reaching consequences that the hon. Gentleman may not appreciate. It seeks to prohibit claims in tort or contract from being brought by or against any relevant company in the event that an option fails to meet the requirements of schedule 14. It is not clear why anyone would wish to protect companies against civil actions taken against them, or prevent them from bringing such actions, simply because the action was in connection with an option that failed to meet the criteria for EMI. I can see no reason why the employee--or employer--should lose his or her rights under civil law because he or she has become involved in the grant of an option intended to qualify under EMI.

If, for example, a company had deliberately misrepresented an option to an employee as qualifying for EMI, that employee might well feel that he or she had a legitimate right to challenge the actions of the company in court. That could lead to an anomalous situation. An employer may grant two identical options to two employees--one notified to the Revenue under EMI and the other not. It might be that neither would meet the EMI conditions, but once it was discovered that the first option did not meet the EMI criteria, the employee would have no redress against his employer for any failure to meet his contractual obligations, or any negligence or deceit involved in granting the option. The other employee--with exactly the same right to acquire shares--would retain his rights under civil law. The amendment would give too many powers away as well as raising questions under the European convention on human rights.

Amendment No. 142--it was dealt with as amendment No. 194 in Committee--would allow a company to grant options under the EMI provisions to as many employees as it wished, up to a limit of £1.5 million. The amendment goes against the whole aim of EMI, and against all the

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recommendations made to us by business experts. As I have already explained in Committee, EMIs are a targeted measure for key employees--those who really make a difference to smaller, high-risk companies.

In Committee, I provided details of the reports backing EMI which appear at column 515 of Committee proceedings on 6 June. I could list them again, but I did list them all then. A report by the Bank of England on financing technology-based firms, a report by the Confederation of British Industry on technology stars, and the Government's own study group, chaired by Sir Peter Williams, chairman of Oxford Instruments plc, all found that the main barrier to growth experienced by smaller high-risk start-up businesses was a lack of highly qualified and motivated key employees. Those studies recommended targeted tax relief to help solve that specific problem, not general relief for employees to pay less tax.

EMI is the response to that and provides targeted tax relief. If companies want to, they can grant options to all their employees under not one, but two tax-advantaged share schemes: the company share option plan and the save-as-you-earn savings-related share scheme. A third such scheme is not necessary, as the matter is not about companies being to able to grant those options to all employees.

Amendment No. 142 would produce another unsatisfactory result. EMIs are simple and quick to operate, and do not require an approvals process. They have been designed that way because smaller companies have told us they want an incentive that is simple to operate and flexible, so that it can be designed to suit the individual needs of a particular business situation. If EMIs could be extended to all employees, having a company limit of £1.5 million rather than a limit of £100,000 per individual would require much more administration or red tape. I am sorry that the hon. Member for Buckingham (Mr. Bercow) is no longer in his place, as he was complaining earlier about red tape. The amendment would increase the amount of red tape and would involve keeping track of all option grants and exercises to ensure that the limit was not breached and all the employees' tax relief lost as a result.

The hon. Member for Arundel and South Downs asked about disqualification. He claimed that the options will almost certainly have disqualified themselves by the time that the company is successful. There is no disqualification if the company grows above the initial limit of £1.5 million of gross assets. The test applies only at the time that the options are being granted, so the issue foreseen by the hon. Gentleman does not arise. During our extensive consultation, everybody, including an advisory group of experts that helped the Inland Revenue to draw up the legislation, commented that smaller companies have only a limited number of key employees and welcomed the increases that we made to the number, initially from six to 10, and then from 10 to 15. There has also been a welcome for the great flexibility of this incentive.

Amendment No. 141 addresses issues which, again, are based on a misunderstanding. For the most part, no one will pay any tax as the result of being granted EMI options. Under normal circumstances, people will not pay tax when they exercise the option, if they were granted the option at market value. EMI is a very flexible

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instrument and allows companies to structure option agreements that could provide a gain to employees for reasons other than the intrinsic growth of the company. For example, companies can offer employees an option at a discount or at no cost at all, or can offer them an option that is immediately exercisable. Normally, there is no charge to tax under EMI on the exercise of a market value option. But when the option is granted at a discount, the normal taxing provisions apply to the part of the gain that relates to the discount. Only the discounted element will then be taxed. The charge arises under the normal charging provisions on share option gains, including section 135 of the Taxes Act 1988. EMI option holders are treated in exactly the same way as any other taxpayer in relation to the chargeable amount.

EMI has been deliberately designed to target the relief on gains arising from genuine growth in the value of the company. That rewards the employee's contribution to making the company grow, rather than any gains that he may make because he has been granted options at a discount on the market price. If a discountable amount is taxed, we would defend that as being not part of the incentivisation, as it has been granted as part of the arrangement, as opposed to growth. In all other regards, under normal conditions, people are unlikely to pay tax. Therefore the proposal envisaged in the amendment is not necessary.

I cannot see a case for providing for EMI option holders a special rule for paying tax over five years on taxable gains which do not fall within the schedule's targeted tax reliefs. In fact, we agree that the revived rules seem to fall in with the rules that the previous Conservative Administration looked at and which they acted against in the Finance Act 1984, when they restricted any payment in instalments to options granted before 6 April of that year. We agree with the previous Government's conclusions that the advantages available to companies under the approved schemes mean that there is no need for special rules for paying tax on other gains. Any taxable gains arising from EMI options are in exactly the same position as gains from other unapproved options, and should be taxed after allowing for EMI relief under the same rules.

The problems envisaged by the hon. Member for Arundel and South Downs will not normally arise and, when they do, that does not present a difficulty, but an arrangement that fits in with other arrangements that we would defend. I hope that I have reassured the hon. Gentleman on a number of counts. On those counts on which I am not reassuring, but arguing that his proposals are unnecessary, unhelpful or complex, I ask him not to press his amendments.


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