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Mr. Flight: I thank the Minister for her full response to the matters that I have raised. I make the point upfront that the issues that I raised have been raised with me by Cisco, which is now called the Quoted Company Association, as well as several leading lawyers in the matter. For better or worse, they communicated to me that their key worry on EMI legislation as it stands is the lack of certainty. They will find what the Minister said helpful in addressing that worry.
Without misdescribing the matter as a scheme, however, when an individual gets his EMI qualifying options, there is an issue arising from self-certification. It is possible that the company may have made a minor
mistake, which the Revenue will pick up when it looks at it a year later and say, "Terribly sorry, there is something wrong." Consequently, the individual will not qualify. There is clearly an issue of materiality versus non- materiality. The Minister may be able to give me further comfort, as it is not entirely clear whether a relatively minor issue can be put right retrospectively.
Miss Johnson: I have already covered that point. As with self-assessment returns, there will be a period when the Inland Revenue or those on the other side can correct any matters. It is perfectly possible for genuine minor mistakes to be sorted out in that period.
Mr. Flight: I thank the Minister for her clear and extremely helpful explanation. I agree that, if that is the case, the risk of EMI agreements getting cluttered with all sorts of legalese to protect businesses against the risk of being sued is probably not a major one. Therefore, amendment No. 143, which sought to address that risk in a rather heavy-handed fashion, is not necessary.
As the Minister said, the tight rules about 16 people and a limit of £1.5 million were discussed in Committee. Our amendment certainly is not intended to undermine the scheme's objective. The simple point is that how many key executives one needs in a business varies enormously, depending on the nature of the business. If the business is very much a selling business, there will be more key people, especially in the flat structure of companies, who will be the makers of success in that business. If the business is a concentrated high-tech producer and the selling is subcontracted, there will be infinitely fewer key employees.
The tariff of key people in different areas and different businesses varies considerably. As we said in Committee, we think that it is sensible to permit flexibility. We are glad that the Government have raised the number to 15, but in some areas there may be eight key people and the tariff may be £200,000, and in other areas there may be 20 key people and the tariff will be much less. I understand why the Government want to stick with the simplicity of the rule--that has its logic--but in consultation with companies, as opposed to venture capital professionals, they would find that there is unhappiness about this issue.
6.30 pm
I shall repeat our point about instalment payments to get it on the record. When an individual gets his grant of EMI options and the company qualifies, can he be sure that he will retain EMI tax status as long as he holds those options, even though the company may subsequently cease to qualify because of significant growth or for another reason? If the EMI status can change relatively easily beyond the date of grant, and the individual who has EMI options is not certain of retaining his EMI tax advantages, my basic concerns stand.
Miss Johnson: I repeat my earlier point, which answered the hon. Gentleman's question. There is no disqualification if a company grows above the initial limit of £15 million of gross assets. The tax-exempt status applies only at the date on which the option is granted. Obviously, it has to apply at that point so that the options can be granted under the EMI incentive. Subsequent growth by the company will not invalidate the fact that the options were granted at that point.
Mr. Flight: I thank the Minister for that reply. The key issue is growth and success, but one could think of other factors that could invalidate the status. On the other hand, there is a question of principle: if there is qualification at the time of grant, does that make the EMI status valid for so long as the individual holds the options? If so, we do not take issue with the proposal. I shall give an example: the Minister, later in her career, will get her EMI options, but she cannot know whether anything will happen to her business or the way in which it conducts itself that will render her options non-EMI, and that will affect her perspective of their value when she receives them.
My understanding, and that of the lawyers to whom I have spoken, is that one's EMI tax status is not safe on all counts simply because the status applies at the time of grant. There are factors that could subsequently negate that status. The Minister kindly responded to my question about growth, but what about other issues?
Miss Johnson: I understand that change would not normally alter that status, but I am happy to write to the hon. Gentleman to cover any other eventualities. I cannot, at the moment, foresee any, but there may be some. Under normal circumstances, the individual who receives the tax advantage will continue to receive it through the EMI incentive. In the case of a disqualifying event other than company growth, the employee has 40 days to exercise and keep the relief; otherwise, the answer is yes: the individual will continue to receive the tax advantage through the EMI incentive.
Mr. Flight: We do not intend to press the amendment to a vote. There has been a useful airing of the issues. I look forward to further modest correspondence on the subject. It is clearly in the country's interests that the measures succeed in their objective. I merely say to the Minister that companies have expressed concerns to me and if the scheme is to work, they must be laid to rest. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Amendments made: No. 61, in page 321, line 8, leave out--
'at some time in the qualification period relating to the relevant shares'.
No. 62, in page 332, line 10, leave out "not".
No. 63, in page 332, line 36, at end insert--
'This is subject to sub-paragraph (3).
(3) Paragraphs 44 to 46 and sub-paragraph (2) of this paragraph do not apply if the amount chargeable under section 135 of the Taxes Act 1988 on the exercise of the option would, in the absence of those provisions, be less than the amount so chargeable by virtue of those provisions.'.--[Miss Melanie Johnson.]
Clause 66
Mr. Flight: I beg to move amendment No. 136, in page 47, line 10, at end insert--
'(2A) Following subsection (7) add--
"(7A) Where any individual retires or dies or ceases employment due to ill health, injury or disability, and as a result an asset ceases
(a) there had been a disposal of a non-business asset which had been acquired for a consideration equal to the market value of the asset at the time it ceased to be a business asset, and which had been acquired two years prior to that time; and
(b) there had been a disposal of a business asset for a consideration equal to the market value of the asset on the date it ceased to be a business asset.".'.
Mr. Deputy Speaker (Mr. Michael J. Martin): With this it will be convenient to discuss the following: Government amendment No. 97.
Amendment No. 137, in clause 67, page 49, line 10, leave out "2000" and insert "1998".
Amendment No. 138, in page 49, line 12, leave out--
'at a time before that date'
'in respect of a disposal prior to 6th April 2000'.
Mr. Flight: Government amendment No. 97 concerns the issue to which I referred when we were discussing Government amendment No. 57, but I could not find my notes on Government amendment No. 97. We support the amendment, which addresses what we described as the GKN point. Older, larger companies, in particular, have joint ventures and shareholdings below 51 per cent., which would have disqualified many from the taper relief. The amendment resolves that, and I am sure that the Government will have had discussions with those who raised the issue. We are pleased to support the amendment.
The combination of taper relief, business asset definition and the need to find some method of apportionment will easily result in potential injustice. The unfortunate complications created by those three issues give rise to problems that may be insoluble, and we discussed them at length in Committee. We have considered many formulae, and we may settle on one formula, only to find that we create another injustice.
Amendment No. 136 is designed to deal with one injustice and to produce a slightly fairer result than that produced by the Bill. It tackles the anomaly in the new business taper relief for employees. As soon as they cease to be employees, their assets, which are principally shares, will cease to be business assets and will receive the less favourable taper based on time apportionment. If the employee retires or resigns of his own free will, that is fair enough, but if he is wrongfully dismissed, he should be able to recover damages from the company. That would be fair, although he would have to go through the legal hassle of doing that. I am well aware that the principle on which the Government rest is that in either case the employee has departed and is not contributing to the business.
There is, however, a middle set of no-fault departures, or what in business are now called "good leavers", and it would be unfair to cause those employees to be in a less favourable capital gains tax position because there is no voluntary departure or justifiable ground for divorcing them from the business. For those individuals, our amendment proposes an apportionment of gains on the basis of market value at the relevant time, with an acceleration of the non-business clock post-departure.
If that produces a worse position than time apportionment, we would accept that it is fair because it means that value has increased more significantly after their departure than when they were present, but they were not contributing to that value. We accept that the negative aspect of the amendment is that it adds further complications, but the rough justice of the present arrangements is the worse of the two options.Our amendments Nos. 137 and 138 address the larger problem. As the House is aware, there are new rules relating to assets acquired in the period between April 1998--when the taper started--and April 2000 when, under the present Finance Act, there was a change to business assets. As the new definition of business assets applies only from 6 April 2000, assets acquired prior to that date, and thus held longer than assets held after that date, are eligible for lower taper relief, if they did not qualify as business assets under the old rules.
We discussed that matter at some length in Committee. As the whole period of ownership is considered for the 10 years prior to disposal, and then divided into periods of business and non-business asset holding, each portion is taxed on different tapers. That seems to be contrary to the Chancellor's policy of encouraging long-term asset holding. As we illustrated in Committee, it produces extremely unfair anomalies in tax bills and would favour people who had acquired their business assets later.
We concluded that the only solution was to backdate the new rules to April 1998 when the taper started, but that confining them to disposals after April 2000--the intention of the measure--would achieve a fairer result. The Government's main opposition to that proposal was its cost. However, I am not sure whether the figures that Ministers quoted would have been confined--as we propose--to disposals made after 2000. I cannot help but comment that, given the splurge announced yesterday, the amount referred to by the Government as the cost was not hugely significant. Our proposal would sort out the extremely unfair and anomalous situations that could arise.
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