Mr. Flight: My legal advice is that, as the drafting stands, even if a reasonable estimate is made, if the Revenue disagrees with it the original national insurance contributions charge applies. Although the Revenue has the discretion to lengthen the 92-day period, the incentive is the wrong way round. The Bill does not protect companies on the issue of valuation.
Mr. Timms: I can reassure the hon. Gentleman on that matter, but allow me do so in a moment.
The Bill allows employers first to decide whether and to what extent they wish to take advantage of the opportunity to settle the liability, and secondly to calculate and pay the special contribution in the specified period. If an employer notifies and pays the special contribution believing it to be his correct liability, or notifies a nil liability, or fails to do either of those things, the Inland Revenue can extend the specified period. That will be considered in cases where there are reasonable grounds for making an incorrect payment or for notifying a nil payment. The Revenue may also consider extending the period if there is a reasonable excuse for failing to make the payment following notification in the specified period. Those provisions also help to cover the hon. Gentleman's point.
In our view, it is not necessary or desirable to make special treatment for cases where the controlling company is resident overseas. Employers should ensure that they have the communications in place to enable them to meet promptly their income tax and national insurance liabilities. It is unjustifiable to give overseas-controlled companies a special regime that would allow them an extended period to meet their liabilities that would not be available to UK-controlled companies. That would be an unfair imposition on UK companies.
If, in all the circumstances, there is a reasonable excuse for the failure, including reasons founded on the difficulties of communicating with the parent company, the Revenue can extend the period under the clause as drafted. That is a fair provision applying equally to all companies, and it is of long-standing application in other legislation.
The intention behind the amendments is already covered in the Bill. With the benefit of the additional explanation that I have been able to provide and the assurances that I have given, I hope that the hon. Gentleman will withdraw the amendment, and will not press amendments Nos. 20 and 31 to a vote.
Mr. Flight: I seem to have failed to communicate the point that I am getting at, especially in relation to amendments Nos. 19 and 20. As the situation stands, if an unlisted business happens to get caught, and it believes that the appropriate valuation should be £1 per share, the Revenue can hold a gun to its head and say that it should be £1.30 per share. Although the Revenue has the powers to lengthen the period, it is has no incentive to do so because its job is to extract tax. It is therefore placed in a position of unjustified and unreasonable power. If one does not follow the Revenue's instructions on the share price, the punishment is that one misses the option and is exposed to the full NIC charges for ever after.
It would be fairer if the Bill were to provide that if one has made a reasonable estimate, completed the form, got it in on time and paid one's money, that ticks the box in terms of having taken that option, while empowering the Revenue to demand a further contribution in due course if it can substantiate a view that the estimated price of the valuation was too low. At present, the leverage is entirely the other way round.
Mr. Burnett: Presumably, if additional NIC or tax is payable it will attract interest.
Mr. Flight: That would normally be the case. The Revenue will not be out of pocket. However, in respect of difficult categories of company it is almost unfair on the Revenue to assume that it will not use the powers that the Bill would otherwise give it to extract as much tax revenue as it can.
Mr. Timms: A company does not have to have an agreed share valuation before it makes its payment. It is required to pay an amount on a reasonable basis within the 92-day period. It does not have to wait for the valuation to be completed before it does so: it can take a reasonable view and pay the money. If the valuation that is subsequently agreed is higher, it is possible for the extra money to be paid outside the 92 days.
Mr. Flight: If the Minister is correct, that is exactly what we seek to achieve. My legal advice suggests that if the Revenue does not agree the amount that has been paid in and the value, it invalidates the option and the original NIC charge will apply. Perhaps that is wrong. The Minister's comment appears to clarify the intention of the Bill, and on that basis I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Amendments made: No. 7, in page 3, line 26, leave out `sixty' and insert `ninety-two'.
No. 8, in page 3, line 34, leave out `sixty' and insert `ninety-two'.
No. 9, in page 3, line 45, leave out `sixty' and insert `ninety-two',.[Mr. Flight.]
Clause 2, as amended, ordered to stand part of the Bill.
Special provision for roll-overs
Mr. Flight: I beg to move amendment No. 14, in page 4, line 15, leave out from beginning to end of line 15 on page 6 and insert
(a) an ``original right'' is a right to acquire shares in a body corporate granted after 5th April 1999 and before 20th May 2000 (and which includes a new right which is subsequently exchanged for a further new right);
(b) a ``new right'' is a right to acquire shares granted or acquired in consideration for the assignment or release of an original right (whether comprising all or part of the consideration for that assignment or release);
(c) a ``parity exchange'' occurs on the grant of a new right where the gain which could reasonably be expected to be made on the exercise of the relevant new right immediately after the grant or acquisition of that right, together with the value of any other consideration given for the assignment or release of the original right, is not manifestly less than the gain which could reasonably be expected to be made from the exercise of the original right immediately prior to the assignment or release of that right;
(d) an ``enhanced exchange'' occurs on the grant or acquisition of a new right where a parity exchange does not occur; and
(e) the gains which might be reasonably expected to be made on the exercise of a right to acquire shares shall be determined by section 135(3)(a) of the Income and Corporation Taxes Act 1988.
(a) any notices made, or deemed to have been made, under this Act in respect of the original right shall be deemed to have been made in respect of the equivalent new right;
(b) any special contribution paid, or deemed to have been paid, under this Act in respect of the original right shall be deemed to have been paid in respect of the equivalent new right; and
(c) the Income and Corporation Taxes Act 1988 shall apply to the new right as they applied to the original right.
(3) On an enhanced exchange the new right shall be apportioned on a just and equitable basis agreed with the Inland Revenue into two rights, the first of which representing the new right which would have been granted or acquired as the result of a parity exchange (which shall be treated according to subsection (2) above) and the second of which representing the balance of the actual new right (which shall be treated under this Act and the Income and Corporation Taxes Act 1988 as if no notice had been made and no special contributions paid in respect of that right). On any subsequent partial exercise of the new right the second apportioned right shall be treated as having been exercised in priority to the first apportioned right.
(4) Where a new right is granted or acquired as a result of the change of control of a body corporate then a parity exchange shall be deemed to have occurred if the relative terms of the new right and equivalent original right correspond to the terms offered to the holders of shares in that body corporate (``control'' being construed in accordance with section 840 of the Income and Corporation Taxes Act 1988).
(5) Where prior to the coming into force of this Act payments have been made in respect of Class 1 contributions due on the exercise of any new right, then on a claim being made by the person who paid them all such repayments of those contributions shall be made, less any amount representing the special contributions which would be due under section 2 above.'.
The Chairman: With this it will be convenient to discuss amendment No. 15, in page 5, leave out lines 21 to 38 and insert
`(7) For the purposes of this section shares in relation to any right (``the new right'') constituting or comprised in the consideration for the assignment or release of another right (``the old right'') are additional shares in the same proportion that any enhanced gain in that right bears to the entire gain in that gain immediately after the grant or acquisition of the new right.
(8) For the purposes of subsection (7) above
(a) the gain in the new right is the gain that would be chargeable to income tax under section 135 of the Income and Corporation Taxes Act 1988 on an immediate exercise of that right; and
(b) an enhanced gain is the amount by which the gain in the new right exceeds the gain that would have been chargeable to income tax under section 135 of the Income and Corporation Taxes Act 1988 on an exercise of the old right immediately prior to its assignment or release.'.
Clause 3 stand part.
Mr. Flight: Without wishing to offend anyone, the drafting of the clause is rather a mess, and it does not make the correct provision for roll-overs. It seems to assume that section 136(1) of the Income and Corporation Taxes Act 1988 is a taxing section, whereas it is an explicitly non-taxing section, and says that an option exchange is not treated as a payment to buy out the original option. The Government apparently want to allow for the advanced NIC payment to be carried over on an exchange of options of equal value but to retain an NIC charge where the new right is more valuablein other words, where there has been an injection of value.
That could be done simply, with our amendments addressing a technical issue on post-takeover exchanges, where the roll-over generally occurs on the same terms as the takeover but after control has passed, so that, strictly, all post-takeover exchanges have an enhancement element. As matters stand, that is ignored for approved option exchanges, an approach that should surely be followed here.
Amendment No. 15 follows the previous arrangement. If there has already been an NIC payment on new options, surely there cannot be a claim for repayment of any excess.
This is a highly technical area. I assume that the Government do not intend that, in roll-overs, special NIC arrangements and wider arrangements should follow a different path from the accepted approach. Those in such a case should not be subject to additional NIC taxation.