Standing Committee G
Tuesday 30 January 2001
[Mr. Joe Benton in the Chair]
(Share Options) Bill
The Chairman: I remind the Committee that the debate on the programme motion may last up to half an hour.
The Financial Secretary to the Treasury (Mr. Stephen Timms): I beg to move,
(1) three sittings shall be allotted to the consideration by the Standing Committee of the Social Security Contributions (Share Options) Bill;
(2) the second sitting shall be held on Tuesday 30th January at half-past Four o'clock and the third sitting shall be held on Thursday 1st February at Nine o'clock;
(3) proceedings on the Bill shall be concluded at the third sitting (unless concluded earlier).
I welcome you to the Chair, Mr. Benton. I do not expect our proceedings to last long, given the modest size and character of the Bill, but I am sure that the Committee will agree that the prospect of expeditious completion is enhanced by your chairmanship.
I welcome all members of the Committee, which has the feel of a reunion, because some of us have previously debated related topics in Committee and on the Floor of the House. I am particularly pleased to see my hon. Friend the Member for Putney (Mr. Colman), as well as the hon. Members for Arundel and South Downs (Mr. Flight) and for Torridge and West Devon (Mr. Burnett), with their long-standing interest in the taxation of share options.
Question put and agreed to.
Notices relating to share optionsacquired before 19th May 2000
Mr. Howard Flight (Arundel and South Downs): I beg to move amendment No. 6, in page 1, line 12, leave out `sixty' and insert `ninety-two'.
The Chairman: With this it will be convenient to take the following amendments: No. 7, in clause 2, page 3, line 26, leave out `sixty' and insert `ninety-two'.
No. 8, in clause 2, page 3, line 34, leave out `sixty' and insert `ninety-two'.
No. 9, in clause 2, page 3, line 45, leave out `sixty' and insert `ninety-two'.
No. 32, in clause 2, page 3, line 3, at end insert
`on the subsequent exercise, assignment or release of that right, or entitled to a repayment as directed by subsection (7) below'.
No. 33, in clause 2, page 3, line 27, leave out
`on which this Act is passed'
`of the exercise, assignment or release of that right'.
Mr. Flight: I, too, welcome you, Mr. Benton. I am sure that your chairmanship will be businesslike. I also welcome all Committee members.
I am a director of companies that hold share options, but none to which the Bill explicitly relates. However, I have some knowledge of the territory from personal business involvement, as well as political involvement.
This is a relieving Bill, which improves the existing position. It also corrects the fact that many companies have issued options since April 1999 and will not be able to avail themselves of the measures introduced in May 2000 under which corporate liabilities can be transferred to employees. The problem is that many companies issued options during that 13-month period and would have the same cash flow problems in meeting national insurance contribution charges on employees who exercise those options. The purpose of the Bill is to relieve that by making a special NIC charge payable on gains to November 2000.
The Bill is overcomplicated for relatively simply issues. It contains drafting errors and invites companies to gamble, because it requires payment now on options that may never be exercised. It could also put companies in the position of committing the offence of market abuse.
Amendments Nos. 6 to 9 are straightforward and would move the deadline period for the once-and-for-all election from 60 days to 92 days. The Government recently changed the reporting deadline for unapproved options from 30 days to 92 days to take account of changes in NIC rules for such options, and we are suggesting the same deadline. When an election is made under the Bill, the Inland Revenue must accept it and confirm the sum due. Then there may be some dispute in the case of companies that are not listed but are close to a listing in agreeing a valuation. Finally, the contribution must be paid. A 60-day period is unrealistic.
Although the Bill provides extension powers, it would be more sensible to have a manageable period in the first place. In amendments Nos. 32 and 33, we propose a simpler, fairer alternative that would remove the element of forcing companies to gamble on their tax liabilities. The amendments would remove the 60-day deadline and place the liability on the exercise of the options, which is the normal point of all tax liabilities. The arrangements in the Bill not only have a gamble element but could have unfortunate accounting implications. Latent liabilities could be created that might crystallise later. It would be simpler and safer for the special liability to crystallise on the exercise of the options.
New clause 4 offers another choice, if we are forced to have liability up front. It would allow the NIC to be repaid in the event of the relevant options lapsing.
Mr. John Burnett (Torridge and West Devon): It is with great pleasure that I welcome you as Chairman of the Committee, Mr. Benton. I want to speak to the amendments referring to time limits, and draw the Minister's attention to the problem of over-bureaucratisation for small companies. Although the measure is welcome, it is using a sledgehammer to crack a nut.
I declare an interest, as I am a lawyer, specialising in taxation matters. However, I do not practise now, and have not done so since a year or so after being elected to Parliament. Share options are a complex matter, and small and medium-sized companies will need to take advice from lawyers and accountants. Sometimes
businesses are not aware of changes, although the Inland Revenue will say that its internet site has all the information. Sixty days is not long enough for small and medium-sized companies to decide which way to opt, as negotiations and discussions will have to take place. We support amendment No. 6.
I shall come to the bureaucracy involved later and I shall ask why an employer cannot elect either to freeze an unexercised option on 7 November 2000, or wait for the exercise, and use entirely normal procedures? I am merely flagging the points that we shall raise later in the debate.
Mr. Tony Colman (Putney): I, too, welcome you to the Chair, Mr. Benton. I support amendments Nos. 6 to 9. My hon. Friend the Minister has met a range of advisers and specialists in share option schemes in the past three years, and I hope that he will take my advice in the way in which it is meant when I say that there should be an extension from 60 to 92 days. He has been very supportive of widening share ownership as part of the socialising of capitalism, with which I agree.
There are good practical reasons for extending the period from 60 days to 92 days. There is also a precedent: the raising of the time limit for approved share scheme returns from 30 days to 92 days. However, there are problems in terms of the time it would take for unlisted companies to have their shares valued, and the need for them to decide whether the shares are readily convertible assets. If the shares were not, there would of course be no basis on which to proceed in national insurance terms.
There is a further practical note. I have always admired the pragmatism of my hon. Friend the Minister in respect of these matters. The Bill was published on 20 Decemberjust before the Christmas recess, when many companies are winding down. According to various advisers, most companies are not back in running order until mid-January, so only now are they being alerted to the nature of the Bill. For that reason, one might be critical of this three-week gap.
Mr. Allan Rogers (Rhondda): The assumption that companies do not get back in the flow until the middle of the month may be correct in respect of those who run them, but it certainly is not the case for the workers in my constituency.
Mr. Colman: I accept that that is the reality on the shop floor. I was making the point that the opinion of the City and of business in generalwhich we as a Government have listened to, as demonstrated in a Bill that they urged us to introduceis that mid-January is an inconvenient time to alert companies to these changes. Some three weeks have been lost. On that pragmatic basis, and for other cogent reasons that I have given, I urge my hon. Friend the Minister to accept amendments Nos. 6 to 9.
Mr. Nick St. Aubyn (Guildford): I expect that I am not the only member of this Committee who is still struggling with his tax return. It was supposed to be submitted by tomorrow, and I want to put on the record my gratitude to the Inland Revenue for extending the deadline until Friday morning. We all know that the annual deadline is coming up, but many still find it difficult to meet. How much harder will it be for small business men, in particular, to meet a deadline on a one-off opportunity, about which, as the hon. Member for Putney said, they learned about only this week, on returning to their boardrooms from the ski slopes? That said, I wish that businesses in Guildford had as leisurely an existence as those in Putney.
Mr. Colman: I was certainly not suggesting that business people in Putney have only just returned to work from the ski slopes. I was simply apprising the Committee of the City's view that it is not appropriate to inform business of the nature of the Bill as late as mid-January. I am not suggesting that I approve of that viewI am merely pointing out that, in this instance, a request for an extension from 60 days to 92 days has been made.
Mr. St. Aubyn: I am sure that the hon. Gentleman's defence of business people's reputation for hard work, for which I can vouch from first-hand experience, will be toasted in wine bars up and down the City.
In addition to distractions such as Christmas, businesses have had to consider filing company returns. Indeed, the end of January is a very busy period for companies that come up against their 10-month deadline, and in the light of all such pressing matters, many with unapproved share option schemes will have yet to focus on the Bill. In the context of a one-off election, extending the deadline by a mere 32 days would seem a modest proposal.
In relation to amendments Nos. 32 and 33, I should point out that the imposition of national insurance contributions on the exercise of such share options creates a hybrid taxin effect, a supertax on capital gains. The tax should be approached from a capital gains tax angle, not an income tax or income accruing angle.
The way in which capital gains are taxed recognises the fact that it is fair to tax them only when they are crystallised. There is no year-end assessment of people's capital gain in paper terms on the value of their shareholdings, followed by a tax demand. That is because the value of shares may go up or down before they bank the money. Similarly, it makes no sense to crystallise a notional gain on share options, because by the time that they are exercised the gain may be significantly less.
The concession has been introduced with a view to the impact on the new economy of the previous rules. New economy shares have been especially volatile over the past year. It is appropriate that the matter should be determined at the point of exercise, not at some arbitrary pointeven if that is after 92 days rather than 60.