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The Financial Secretary to the Treasury (Mr. Stephen Timms): I am happy to provide the House with that explanation. I do not believe that the amendment represents a simplification, as Opposition Members have suggested. Indeed, it would introduce a new and unhelpful complication.
The national insurance and PAYE rules on share options were aligned in 1999, so that from that date the PAYE rules effectively determine the national insurance liability. PAYE applies only to shares and options that are readily convertible assets. Shares not falling within that description are not taxed under the PAYE rules, nor are they liable to national insurance charges.
Mr. Timms: What I can best do is to refer the right hon. Gentleman to the Inland Revenue website, which I have no doubt he visits frequently, and in particular to tax bulletin issue 36, which explains the matter in great detail. Of course, a readily convertible asset is one that can be converted to cash and--
Mr. Jack: On a point of order, Mr. Deputy Speaker. Is it in order for a Minister, when a Member of the House asks a straightforward question, to refer him to a technical asset that is not immediately available to Members to find the information that is required?
Mr. Deputy Speaker (Sir Alan Haselhurst): The right hon. Gentleman has long experience of the House and is a former Minister, and he should know that it is not a matter for the Chair how a Minister chooses to answer a question. It is a matter for debate.
Mr. Timms: Thank you, Mr. Deputy Speaker. I am a little hurt by the right hon. Gentleman's point of order, as I was trying to be helpful to him in explaining that a readily convertible asset is one that can be readily converted to cash and is therefore appropriate to be taxed. That is well understood. The amendment would narrow that so that a share in any unlisted company would be deemed not to be a readily convertible asset. To have two definitions floating around in different parts of the tax system would be an unwelcome and unhelpful complication.
In practice, the amendment would allow all those companies that on 7 November 2000 were in the process of floating to avoid liability under the Bill, as well as those that had trading arrangements in place.
The hon. Member for Arundel and South Downs said when he moved the amendment that he did not think that it would cost very much. My estimate is that it would cost some millions of pounds, as a significant number of companies required to make a special payment under the Bill would not need to do so if the amendment were passed. I can understand why some people might lobby for that change, but I do not think that it would be right to introduce it.
Mr. Timms: I think the hon. Gentleman is mistaken. It is true that the shares of a number of companies were lower in the period to which he refers than they had been previously, but the liability faced by those companies under the Bill is therefore less than it would otherwise have been. For that reason, Opposition Members might wish to draw attention to the Government's generosity in setting the relevant date at 7 November. If the amendment were agreed, a substantial number of companies would avoid liability.
In allowing companies whose shares were not readily convertible assets on 7 November last year to pay no national insurance on the options granted between 6 April 1999 and 19 May 2000, the Government are already offering considerable relief. Under the existing class 1 rules, many companies would go on the list before the options were exercised and would be liable to class 1 national insurance. The Bill allows all companies whose shares were not readily convertible assets on 7 November last year to be exempt from both class 1 and the special contribution.
I hope that that answers the point raised by the hon. Member for Torridge and West Devon (Mr. Burnett), about avoidance. As I have said, a number of companies that will have to pay under the Bill as it stands would find, if the amendment were passed, that they did not have to pay anything.
The hon. Member for Torridge and West Devon also said that valuations for unlisted companies are difficult to finalise. I can tell him that the shares valuation division of the Inland Revenue can now help companies with their valuations. However, we made it clear in Committee--and I emphasise the point again to the House--that if valuations are produced by the company on a reasonable basis, and if the valuation eventually agreed with the employer is higher, the company will be able to pay the difference without falling back into the class 1 rules.
Mr. Burnett: The Financial Secretary said that he was concerned about the amendment because it would exempt companies in the process of flotation, and those with trading arrangements in place. Will the hon. Gentleman elaborate on the latter point? That would be of considerable assistance to practitioners and people with unapproved share option schemes, as well as to the House.
Mr. Timms: I am not sure what the hon. Gentleman means. If a company's shares are not regarded as readily convertible assets there is no liability, irrespective of the reasons for that judgment. However, I should be happy to respond to the hon. Gentleman in writing if he would care to drop me a line.
From 7 November 2000, companies will have 92 days after the Bill receives Royal Assent to make a judgment as to whether their shares are readily convertible. As was explained in Committee, the Bill contains appeal provisions that would allow a company that had made a wrong call about whether its shares were readily convertible to pay the special contribution after the 92-day period, as long as that decision had been made on a reasonable basis. That provides an important safeguard for companies.
Mr. Jack: I hope that the Financial Secretary will help me on a technical point. In the case of a company that had flotation plans in train and was therefore deemed to have readily convertible assets, what would happen if the flotation was pulled the day before or the day after the valuation date? What would be the position of that company?
Mr. Timms: If the right hon. Gentleman comes across a company in that position, he should advise it to contact the Inland Revenue for advice. I am confident that such a company would be given clear guidance about how to proceed.
I see no reason, simply for the purposes of this Bill, to impose an arbitrary limit to rules on the definition of readily convertible assets that are well understood and established. I think that that would be an unnecessary, unwelcome and costly complication to the tax system. In the interests of simplicity, as well as for the other reasons that I have advanced, I ask the House not to support the amendment.
Mr. Flight: In view of the guillotine motion, I do not consider the amendment a sufficiently important issue of principle on which to detain the House. However, the Government have introduced a special national insurance contribution charge, and they do not mind the fact that they are addressing a problem of their own making by means of a special form of tax charge. The amendment proposes a special, one-off clarification of readily convertible assets, purely for the purposes of the Bill. It is incorrect for the Minister to object to the fact that we are applying the same principle as the Government are applying.
The Minister made a point about trading arrangements that I do not consider correct. The amendment specifically refers to trading on a recognised exchange. In the absence of the amendment, many companies and Inland Revenue staff will spend a lot of time discussing whether the shares of a limited number were readily convertible assets on 7 November 2000. In most cases, it will be found that they were not. The Government's tax take will be very small as a result, but the costs in terms of time imposed on the companies involved and the Inland Revenue will be considerably greater.
In arriving at that judgment, I have taken heed of the practicalities. It is a pity that the Government do not see fit to accept the amendment, especially as the Bill is designed to be a pragmatic measure, relieving a problem of the Government's making. However, for the sake of time, I shall not press the matter to a vote.