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Mr. Dale Campbell-Savours (Workington): On a point of order, Mr. Speaker. I am not being silly, but there is a point of principle involved here, and I should be grateful for your clarification. Surely when a declaration is made, it is meant to be more specific than simply a general declaration.
Mr. Speaker: The details of a declaration are for the Member and the Parliamentary Commissioner for Standards.
Mr. Campbell-Savours: Further to that point of order, Mr. Speaker. The details of a registration, as opposed to a declaration, are a matter for the Member and the Commissioner. I am speaking specifically about a declaration on the Floor of the House of Commons which has been the subject of some consideration by the Standards and Privileges Committee. I ask you to clarify the position, Mr. Speaker.
Mr. Speaker: That is also a matter for the hon. Member concerned. I notice that on the Order Paper, the hon. Member for Arundel and South Downs (Mr. Flight) has declared an interest. As far as I can see, the hon. Gentleman has conducted himself properly.
Mr. Flight: Thank you, Mr. Speaker.
The Bill might better be described as the share options (correction of further mistakes) Bill. The whole saga illustrates the hollowness of the Government's alleged support for entrepreneurship. In the beginning, back in April 1999, they saw scope for a major stealth tax. They expected to raise about £1 billion of revenues, as confirmed to me in correspondence from the Treasury. They then forgot that many companies' share prices may perform as a result of future expectations, but that they may not have the cash to meet the liability. Indeed, the national insurance contributions liability could have put such companies into financial difficulties. As outlined, the measures in May 2000--
Mr. Timms: I thank the hon. Gentleman for giving way. I do not recognise the figure of £1 billion that he cites. Will he tell the House what that figure relates to?
Mr. Flight: I wrote to the Treasury last August in order to clarify matters and asked what revenue the Treasury expected from the levy of NICs on the exercise of options.
The reply was that the revenue was expected to be about £1 billion per annum. I will be happy to send the Minister a copy of the letter. However, estimates made by employment accountants do not show anything like that figure, because existing measures are likely substantially to reduce the attractiveness of unapproved option schemes for new businesses.The Government first endeavoured to deal with the problems that they had created by enabling employers to transfer their liabilities to employees, but they forgot that, between April 1999 and May 2000, many companies had granted options which they were not able to transfer. The legislation is thus a response to the howls of many high-tech and young businesses and to the many companies who have advised that they will move their entrepreneurial endeavours overseas. The measure addresses those specific complaints.
The Bill introduces a most unacceptable principle; it invites companies to gamble with their NIC tax liabilities. In essence, it says, "Pay up on the gain to 7 November or run the risk of higher NIC liabilities in the future". However, such liabilities may never arise; staff may leave or be sacked and the options will lapse, or the share price may not perform. Company managements will have to take unreasonable decisions with shareholders' funds.
One of the main intentions of the Financial Services and Markets Act 2000 is to get rid of the scope for market abuse through the sending of misleading signals to the public on share prices and on the potential performance of companies. A company may decide not to elect for the special NIC payment because it may estimate that its business will not perform well, so the value of its shares will not rise. Equally, it may decide not to do so because it wants to initiate staff changes, or--more likely--it may not have enough cash.
A company that decides not to exercise its option within the 60-day period will send a signal that will be interpreted by the markets as negative for that company and its share price and vice versa--the signals may be entirely misleading. That is a classic example of what market abuse is all about. Even if the abuse is unintended, committing it is a criminal offence. The measures that have been introduced will lead to such problems.
The Government could not resist including a further stealth tax angle in this relieving measure. The Bill brings forward NIC payments; it may elicit NIC payments that might not otherwise be made. Worse than that, when individuals are giving the election, they will pay their NICs but may never exercise the options and will be unable to offset the NIC payment made against income tax.
The Bill is deficient in that it does not make clear when those people exercising that special provision will be able to offset against income tax the NICs they have paid. It gives insufficient notice; 60 days is unreasonable. The Minister assures me that the detailed regulations will be available if and when the Bill becomes law, but they have not been published in draft. Many small businesses do not have legal advisers on tap. If companies are foreign subsidiaries--as is so often the case in the UK at present--options are frequently handled outside the UK in the parent company. That company may not be aware of that and may not act in time. Therefore, the provisions could be unfair. The sharp companies will avail themselves of the gamble if it apparently makes sense;
the smaller businesses and foreign ones may not. The Bill is, dare I say, very poorly drafted. No doubt, we shall address that in more detail in Committee.
Mr. Jack: Does my hon. Friend agree that it is rather odd that representations by companies, such as NTL, Micromuse and Cisco, caused the Government to react to a potentially damaging event in this case, yet on the climate change levy, which will vastly affect manufacturing industry to its great detriment, companies have received absolutely no response from the Government?
Mr. Flight: My right hon. Friend makes a good point, but I would add that such companies complain that they were not consulted about the Bill, which came out of the blue. The lack of consultation is one of the reasons why the Bill contains many technical errors.
Clause 3 is a complete drafting mess, and roll-overs are misconstrued and mishandled. The arrangements are over-complex. It would be much more straightforward if the special NIC were payable on the exercise of the options, which would remove the gamble and the need for notice. It would make much more sense to exclude companies whose shares are not readily convertible assets and those whose option prices are any way under water on 7 November. That would save companies and the Inland Revenue a huge amount of unnecessary time and effort.
The individual appointed by the Government as chairman of the small business investment taskforce has said that, in his view, the whole share option-NIC arrangements are punitive and will be highly negative to entrepreneurship in this country. Contrary to the Minister's previous comments on Report on the Finance Act 2000, United Kingdom tax and other arrangements on approved and unapproved option schemes are significantly less generous than those in the United States. Unapproved option schemes in the US involve a 39.6 per cent. charge on exercise, but the tax paid can be offset against the issuing company's corporate tax, producing an overall net tax charge of about 15 per cent. and enabling companies to be much more generous in option issuance. In the case of approved options, US individuals can have $100,000 per annum; they pay tax only on sale, not on exercise; and social charges are capped at incomes of $74,000. Therefore, there is virtually no US equivalent in practice to the UK NIC charge.
Mr. Timms: I am grateful to the hon. Gentleman for giving way again. Will he confirm that, as I said when we have previously debated such matters, the figure of 39.6 per cent. refers only to federal tax, on top of which there are state taxes?
Mr. Flight: The Minister is correct, but nothing like a 47.32 per cent. gross rate is achieved. If the Government were to tell companies that the tax paid by individuals could be offset against corporation tax, they would readily agree that the overall taxation of unapproved options in the United Kingdom was competitive with that in the United States. At present, the overall situation is wildly uncompetitive, which is why so many new, growing companies, such as those to which reference has been made, are increasingly undertaking their entrepreneurial activities outside the United Kingdom.
Sir Nicholas Lyell: My hon. Friend rightly expresses the concerns of small businesses. In November 2000,
the Government issued a code of consultation on such matters, but there is a feeling abroad that they have not fulfilled it. Will he comment on that?
Mr. Flight: There is a feeling that, bluntly, the proposals are all about raising further stealth taxes. There is no argument in principle for applying NICs to option gains; they are different from remuneration. Someone may go to work for a small business, take a lower salary and be awarded options in the hope that he will gain from them. However, there is no certainty that he will; it will depend entirely on whether the company does well and the share price goes up. If he leaves a well-paid job in a mature company such as Unilever, he will forgo his certain salary. There is a complete mismatch between certain and uncertain income, The logic for the argument that options are the same as salary does not exist.
Conservative Members accept that the Government have shown some good faith in trying to tackle this problem. However, to put it candidly, the Bill is a dog's dinner and it has been drafted on the hoof. It is full of errors that we shall consider later and it will introduce a flawed principle that will make companies gamble with shareholders' funds. Consequently, they could even contravene the law by committing the offence of market abuse that was introduced by the Financial Services and Markets Act 2000. We need to start again and recast this relieving measure, which is necessary and fair.
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