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Mr. Matthew Taylor (Truro and St. Austell): I shall be brief, because the Bill primarily attempts to make amends for the errors that the Government made in their original proposals. It is the second time that they have had to correct such errors and it remains to be seen whether it is the final time that they have to do so. The hon. Member for Arundel and South Downs (Mr. Flight) suggested that it will not, but I am not sure whether I agree with all his criticisms. It will be interesting to hear the Minister's reply.
The Bill appears to fill the most obvious gap in the Government's previous proposals. It left some companies facing the potential for serious liabilities without their having an exit route, and that partly answers the point made by the hon. Member for Arundel and South Downs. The Bill is intended to give companies an opportunity to resolve the problem of potential liabilities without forcing them down a route that might not be in their interests. The Conservatives describe that as gambling; I would describe it as offering choice to businesses that know their own position and can assess what is in their best interests. Although we have criticised the Government's approach, we shall support the Bill because it provides an answer to the most fundamental flaw that currently exists.
Secondly, the reason for the complication, for all the difficulties that the hon. Member for Arundel and South Downs outlined and for the Government's difficulty in making sense of the changes is the fundamentals of a tax system in which the income tax and national insurance systems are not in line. If the Government wanted to bring the treatment of national insurance and income tax in line to create a single, more sensible structure, they would release a great many costs that fall on businesses and individuals who have to deal with a two-tier system that bears no relation to the realities of the way in which the national insurance fund is used.
There is a fundamental deceit. National insurance is not a fund that people pay into to cover their future liabilities, but a vehicle that is treated simply as current taxation. Yet we have to go through all the complications that imply a system that is otherwise. That structure cannot be reformed rapidly without creating some unfairness. A long-term process of reform, which has a clear structure that is followed by the Government, would benefit everyone and remove the need for intensely technical debates. Such debates attract few hon. Members and hold even less interest for people outside the House, but go a long way to making a complicated tax system even worse.
Mr. Timms: With the leave of the House, Mr. Speaker, may I say that I followed both speeches with interest? The hon. Member for Arundel and South Downs (Mr. Flight) concluded his remarks by saying that the measure was necessary and fair. Although I did not agree with many of his remarks, I could at least agree with that.
The hon. Gentleman characterised the Bill as a measure for correcting further mistakes. He is wrong about that. It completes the process that began with the announcement of the transfer on 19 May last year, and provides a necessary and fair resolution of the position with regard to the options that were issued in the gap period.
Mr. John Burnett (Torridge and West Devon): As a result of this measure and earlier changes, a company will want to shift the national insurance contributions liability to employees, but they will not want to assume it for nothing. How will indemnity payments that companies make to employees for assuming that liability be treated in terms of tax and national insurance contributions?
Mr. Timms: I am not sure what the hon. Gentleman means by indemnity payments. We have arranged an offset against income tax when the additional liability is taken on. An employee will pay an effective rate that is rather more than 7 per cent., instead of the full 12.2 per cent., which is the effective rate that the employer pays. If income tax is paid at 40 per cent., the rate will fall to 7 per cent. That is a helpful step.
I was asked about the overall cost of the measure to the Treasury over the five-year period. I said that it would be about £150 million. In fact, we estimate the cost to be £160 million, which is roughly in line with what I said.
The hon. Member for Arundel and South Downs said that the measure would require companies to gamble. Like the hon. Member for Truro and St. Austell (Mr. Taylor), I do not accept that characterisation. The Bill gives companies the opportunity to make a judgment and to decide which way forward is in their best interest. It gives them additional flexibility and freedom, which is helpful. I do not believe that companies will share the view of the hon. Member for Arundel and South Downs.
The hon. Gentleman suggested that if a company's shares were not readily convertible assets, or if they were options that were under water--that is, the share price was less than when the option was granted--it might be helpful if it were possible to deem that those options had been settled in accordance with the provisions of the Bill, rather than requiring companies to make an application and to follow the full procedure. That is an interesting point, on which I will reflect. No doubt we will return to the matter in Committee.
I welcome the support of the hon. Member for Truro and St. Austell for the measure. He made a case for further integration of the taxation and national insurance systems--an argument that we have heard in other forums. We have made good progress in aligning arrangements for the two. The measure that started the process that we are debating is an example of that alignment. We have brought together the organisations administering the two systems--the National Insurance Contributions Office is now part of the Inland Revenue. I expect the trend to continue.
Mr. Campbell-Savours: The hon. Member for Arundel and South Downs (Mr. Flight) asked an interesting question--whether there was a danger that in certain conditions, the wrong signals would be sent to the market, dependent upon whether a company was prepared to adopt within a 60-day period the right to the course of action outlined in the Bill. Is there not a danger that that might happen? Can my hon. Friend elaborate on the possibility?
Mr. Timms: I am grateful to my hon. Friend. As he says, the hon. Member for Arundel and South Downs raised an interesting point, but I do not believe that there are grounds for concern. The great benefit to a company of taking the proposed route is the certainty that it brings to its future liabilities. The company is not making a public statement about what it believes will happen to its share price in future.
The uncertainty that the measure removes relates not just to the future share price pattern, but to the future occasions on which the option will be exercised. That is under the control of the employee, not the company.
Mr. Campbell-Savours: Would not the information to which the hon. Member for Arundel and South Downs referred be gleaned from the accounts? Has not the Accountancy Standards Board laid down rules as to how that information is defined in the accounts? Is not that body in a position to redefine the rules so that share options could appear elsewhere in the accounts, where they would not be immediately identified with the failure to exercise the rights set out in the Bill?
Mr. Timms: My hon. Friend is right: the continuing debate in the accountancy profession about how options should be accounted has not yet been resolved. However, I do not think that the outcome of that debate will affect how we proceed with the Bill, which gives a helpful new certainty to companies that have issued options in the period.