|Social Security Contributions (Share Options) Bill
Mr. Timms: It might be helpful if I set out some of the background to the Bill. On 6 April 1999, changes to the taxation of share options were introduced. Before then, although income tax was always payable on the exercise of share options, national insurance was payable at the earlier point, when the options were grantedand then only on the amount of any discount on the grant of the options. On 6 April 1999, the national insurance charge on unapproved share options was aligned with the income tax charge.
There were two good reasons for that change: first, to continue the Government's policy of aligning more closely the arrangements for income tax and national insurance and, secondly, there was increasing evidence of straightforward tax avoidance initiatives that created artificial share option arrangements to exploit the fact that national insurance was not payable on option gains, whereas it was payable on income. That is the problem with the suggestion by the hon. Member for Guildford (Mr. St. Aubyn) about different treatment for option gains.
After the change was introduced, many companies expressed concern about the unpredictability of the employer's national insurance charge, which was leading to accounting difficulties and creating serious uncertainties. The employer's national insurance liability is uncapped and, in that respect, dependent on the company's share price, and there has been a great deal of share price unpredictability in the past few years.
Last year, following a period of consultation, measures were introduced to allow employers to ask the employee to bear the employer's national insurance charge on the share option gain. I announced that change to the Committee that considered last year's Finance Bill.
Mr. Burnett: The Minister is a fine mathematician, and I hope that he agrees that the thrust of the change is that it is a tax-raising measure to garner more revenue. If the employer pays the national insurance charge, he will get a deduction on his corporation tax bill. If the employee pays, he will not.
Mr. Timms: That is not the case, because the employee can offset the charge against his or her income tax bill. If anything, there is a slight loss of revenue to the Treasury. However, as the hon. Member for Guildford has already paid tribute to the Inland Revenue's generosity, that will come as no surprise to the Committee. The legislation allows companies to escape the accounting difficulties and uncertainty presented by the national insurance charge while retaining the advantages of the April 1999 change.
The Committee will be aware that the Government attach a high priority to establishing an environment in which entrepreneurship can flourish and enterprise is open to all. We are working towards the goal of making the United Kingdom the best environment in the world for electronic commerce. I have been heartened by the recognition, revealed also in a couple of independent surveys published last week, that last May's changes have been helpful in securing those objectives. However, they left one point outstanding: the legislation was drafted to cover all options already granted. In practice, employers have rarely been able to negotiate with employees terms that change options that they already hold, so for many companies that granted options before 19 May 2000 the uncertainty has remained. That is the problem addressed by the Bill.
We have accepted the strength of the concerns on this point, and the Bill meets them in a simple and practical way. We are giving companies the chance to settle their national insurance liabilities on the gap options--options issued in the gap period between 6 April 1999 and 19 May 2000in advance of the date when the option is exercised and the gain made by the employee. Companies can calculate the amount of national insurance due by reference to the accrued gain up to 7 November 2000, the day before the pre-Budget report in which the proposals were announced. That caps the national insurance liability at the company's share price on 7 November 2000, so the company no longer needs to make further provision against profits: it will be able to remove the liability from its balance sheet and avoid any national insurance charge from further upwards movement of its share price. The change has been widely welcomed.
The Bill will provide the certainty that employers have been calling for, which is an important step forward. I do not accept the point made by the hon. Member for Arundel and South Downs that the Bill encourages market abuse, but no doubt we shall discuss that in a few moments. That certainty will allow employers to quantify the unpredictable national insurance liability that they have faced up to now, and to pay the special contribution during the fixed period, so that they can, once and for all, allay their concerns about the amount of national insurance that must be set aside for share option gains for share options granted between 6 April 1999 and 19 May 2000.
We are conscious of the impact of any legislation on business. That is why we have introduced the Bill. Our initial view was that 60 days was adequate, as the announcement was made last November, but I have listened to the concerns expressed by members of the Committee and also to what companies have been saying, and it is clear that an increase in the time limit would be helpful. I accept that an extension to 92 days would be widely welcomed, particularly by foreign companies operating in the UK, as it would give them adequate time to review their national insurance contribution position in relation to the gap options.As my hon. Friend the Member for Putney said, the extension to 92 days would also mirror the time limit now applied to returns for unapproved share option schemes, which was increased in last year's Finance Act from 30 to 92 days to ease the reporting time limits for employers. The hon. Member for Arundel and South Downs made the same point.
The change would give employers additional time to make the necessary inquiries. In some cases, they may need to establish whether shares are readily convertible assets, or obtain a valuation from the shares valuation division.
In light of those considerations, I am willing to accept amendments Nos. 6 to 9. In addition to extending the deadline to 92 days, the Inland Revenue will advise all companies that have an unapproved share option plan of the measure. Every company affected will know about the measure, if they are in a position to use it. I hope that that will address the concern expressed by the hon. Member for Torridge and West Devon.
Amendments Nos. 32 and 33 go so far that they undermine the principle of the Bill, which is that early payment in the 92-day period following Royal Assent is a fair quid pro quo for certainty. Indeed, it is companies that have been asking for certainty: the initial proposal that there should be early payment in return for certainty came from the companies affected. I am aware that one or two companies, having secured their initial request, have asked for more along the lines of amendments Nos. 32 and 33. In other words, they have asked for an end to uncertainty, but without early payment. In my view, that is not a fair and balanced settlement of the difficulty. The Government made a concession concerning the mechanism on 7 November, so it is understandable that some people came back and asked for more.
Mr. Peter Kilfoyle (Liverpool, Walton): Why is my hon. Friend persuaded that 92 days, which was suggested by the Opposition, is the appropriate amount of time? Why not 75 or 115 days? Is it cynical to assume that there will be wide boys in the City and elsewhere who will use whatever time is available to find ever more inventive ways to avoid paying their fair share to the Exchequer?
Mr. Timms: I can reassure my hon. Friend that the extension from 60 to 92 days will not give wide boys, or anyone else, an opportunity to avoid paying what is due to the Exchequer. The 92-day period mirrors the time limit that we introduced on the returns for unapproved share option schemes. It is a period that is used elsewhere in the tax system, and it strikes a balance between the need for a rapid settlement of liabilities, the helpful certainty that we are providing, and the need for adequate planning and preparation by the companies affected.
Amendments Nos. 32 and 33 would also increase the administrative costs that businesses face in applying the special contributions proposed in the Bill. Employers would need to keep track of the gains made by options granted between 6 April 1999 and 19 May 2000. Furthermore, employers would need to establish suitable arrangements to ensure that they could pay the special contributions, perhaps over a period of years, that could have been paid within the fixed period, rather than the full national insurance contributions liability that would have been due without the Bill. The measure offers the opportunity for a company to obtain certainty by settling early. That is the balance that we have offered, and it is the right balance.
On the basis that I am willing to accept amendments Nos. 6 to 9, I hope that the hon. Member for Arundel and South Downs will not press amendments Nos. 32 and 33, but if he does, I urge the Committee to resist them.
Mr. Flight: I thank the Minister for accepting amendments Nos. 6 to 9, because they will make the Bill workable where it would have been chaotic. Although I understand the quid pro quo argument, it is a new and undesirable principle to introduce into the tax system. It amounts to holding a gun to companies' heads and asking them to take a gamble with you're their tax liabilities and pay on everything now, because that will probably cost less than waiting until later.
Many companies will not know what the future is likely to hold in terms, for example, of how many staff may leave. Furthermore, given what has happened over the past year, the price of high-tech options may be under water for ever. Finally, the members of pension funds that own shares in those companies would not welcome their pension moneys being gambled with, which is what the measure amounts to. However, we shall obviously not win amendments Nos. 32 and 33
|©Parliamentary copyright 2001||Prepared 30 January 2001|