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Consideration and Third Reading

1. Proceedings on Consideration and Third Reading shall be completed at today's sitting.

2. Proceedings on Consideration shall (so far as not previously concluded) be brought to a conclusion at half past Three o'clock.
3. Proceedings on Third Reading shall (so far as not previously concluded) be brought to a conclusion at a quarter past Four o'clock.
4. Sessional Order B (Programming Committees) made by the House on 7th November 2000 shall not apply to proceedings on Consideration and Third Reading.

Consideration of Lords Amendments and further messages from the Lords

5. Paragraphs (6) and (7) of Sessional Order A (varying and supplementing programme motions) made by the House on 7th November 2000 shall not apply to proceedings on any programme motion to supplement or vary this order in relation to--

(a) proceedings on Consideration of Lords Amendments; or
(b) proceedings on any further messages from the Lords,
and the question on any such motion shall be put forthwith.

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Orders of the Day

Social Security Contributions (Share Options) Bill

As amended in the Standing Committee, considered.

Clause 1

Notices relating to share options acquired before 19th May 2000

2.31 pm

Mr. Howard Flight (Arundel and South Downs): I beg to move amendment No. 10, in page 3, line 3, at end insert--

'(7) For the purposes of this Act only, a right to acquire relevant shares will be deemed to give rise to a liability of nil under section 2 below.
(8) In subsection (7) above relevant shares are shares which on 7th November 2000 were neither listed on a recognised stock exchange nor traded on a recognised investment exchange.'.

I should like first to declare that I am a director of companies with outstanding option schemes, none of which are covered by the Bill's provisions. More importantly, in the past 15 months, I have been participating in a major study among leading members of the industry to determine how the United Kingdom can achieve higher levels of venture capital investment in new businesses. Although the study has focused on a very wide range of issues, I think that it has concluded that the issue of options and the UK options tax regimes are absolutely central to understanding the performance differential between the United Kingdom and the United States. As I shall explain later, the Bill is an important part of addressing that issue.

Although Opposition Members are happy that the Government accepted most of the key points that we made in Committee, we are particularly unhappy that, even in the Government's second attempt, their proposals to deal with takeover and roll-over situations are not the correct ones to fulfil what we perceive to be Ministers' intentions.

In Committee, we welcomed the Government's deeming amendment, which dealt with our point that a lot of time and money would have been wasted if a determination--or deeming--that companies are not subject to the special national insurance contribution liability is not made automatically on the due date. The amendment would also help greatly to avoid potential unfairness to smaller and foreign companies that were perhaps not even aware of the new special NIC charge on options issued between April 1999 and May 2000. However, although the Government's change is welcome, we believe that there is still a grey area and the potential for problems which could very easily be avoided.

The issue is whether options relate to shares deemed to be readily convertible assets--which is the key phrase. In the Government's arrangements, if the option is under water or the shares in question are not readily convertible assets, there would be no special NIC liability. The situation applying last November, however, is old history. For the purposes of the deeming provision, therefore, our amendment proposes not defining shares as readily convertible assets if they were not listed or traded on a recognised stock exchange or market on 7 November 2000.

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If amendment No. 10 is not accepted, a potential problem is that private companies will assume that they are covered by the deeming provision. Consequently, they could fail to provide due notice. Those companies could become involved in a subsequent, never-ending debate with the Revenue on whether the assets were readily convertible assets on 7 November. If the Revenue found that the companies' shares were readily convertible assets, they would have forgone the opportunity of availing themselves of the Government's relieving provision.

Mr. Michael Jack (Fylde): My hon. Friend said in his opening remarks that he had spent time in consultation with companies that use share option. Was amendment No. 10 therefore also born of practical considerations and his discussions with those companies?

Mr. Flight: Yes, it was. I have endeavoured to consult very fully on all the Bill's clauses both with members of the venture capital industry and with lawyers specialising in share options, with the simple and pragmatic purpose of trying to create a regime that is good and not damaging for the United Kingdom economy.

The amendment's proposed arrangements would affect only this legislation and are not intended to address the wider issue of how to define a readily convertible asset. They are not intended to have knock-on effects on other legislative provisions.

There is a grey area when a private company is approaching flotation and its flotation date and market price have not been established. However, I am sure that the House will agree that, for the particular purposes of this Bill, setting 7 November as the target cut-off date is just as realistic a quid pro quo as that enshrined in the Bill--which tells employees to take a gamble and pay the special NIC charge so that companies do not subsequently have excessive NIC liabilities that could not be met.

The amendment is a very practical proposal. It would have minimal revenue implications and help to prevent the possibility of unfairness and wasted time.

Mr. John Burnett (Torridge and West Devon): Liberal Democrat Members support the amendment, which is a move towards simplicity. If an asset is not listed on the specified date, it would not be deemed a readily convertible asset, and therefore not be subject to the special charge to national insurance contributions. I look forward to hearing the Minister's comments on the amendment. Surely the thrust of the legislation is that the special NIC charge should not affect unapproved share option schemes in private companies. By definition, a private company is one that restricts the transfer or sale of its shares.

I am a solicitor, and I specialised in taxation matters. However, I do not practise as such now. I also did not do an awful lot of work on approved or unapproved share option schemes. I spent some time in the shares valuation division, and as I said in Committee, share valuation is very much an art, not a science. A lot of deeming takes place and there is enormous scope for disagreement and negotiation.

The Government are content for shares that are not readily convertible to escape the special national insurance contribution liability. I hope that the Minister

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will confirm that and elaborate in detail on the Government's objections to the amendment. Do they fear that it may, in some obscure way, lead to tax avoidance? I do not believe that it will, but I will wait to hear from the Minister before offering any rebuttal. Is their point that it will discourage listing, and therefore investment?

If the Minister rejects the amendment, I hope that he will give compelling reasons, because I consider it to be worth while, simple and straightforward.

Mr. Jack: I declare an interest as a non-executive director of a company that has both approved and non-approved share option schemes, although it does not fall under the scope of the amendment.

I share the view of my hon. Friend the Member for Arundel and South Downs (Mr. Flight) that the amendment would bring clarity, but if I were in the Minister's shoes, following what the hon. Member for Torridge and West Devon (Mr. Burnett) said, I would want, if I intended to reject the amendment, to cover areas such as anti-avoidance and what would happen if people with share options in a non-quoted company knew that a takeover was coming and that convertibility would come into play.

Mr. Flight: The amendment relates to history, so it has nothing to do with tax avoidance measures that people might get up to in the future. It relates purely to the position on 7 November 2000.

Mr. Jack: I posed hypothetical questions in the hope of getting the Minister to explain his position. He may offer us emotive arguments. My hon. Friend's central point of clarity of purpose makes the amendment attractive. People need to know where they stand in this complex area, and the amendment is very helpful.

The amendment refers to "a recognised stock exchange", and most people would understand that, but "a recognised investment exchange", to which it also refers, is a little more obscure. It is sometimes hard to keep up with all the newly emerging markets. Will the Minister give us his views in careful and meticulous order? I hope that he will simply say that the Government accept the amendment, but we certainly want to know his reasons either way.

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