Social Security Contributions (Share Options) Bill

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Mr. Timms: If an option is never exercised, income tax relief for special contributions paid by an employee will be given in the same way as relief for class 1 contributions where a notice is not made. In other words, it will be given against the option gain at the time that the option is exercised, and relief will be given through self-assessment. If they have employees who are affected, employing companies must, in the time allowed by the Bill, use their best judgment to decide whether to give a notice in relation to special contributions.

Even when employees have elected to pay class 1 national insurance contributions on the eventual share option gain, their employer can, under the Bill, decide to give a notice. In such a case, the employer will be responsible for paying the crystallised special contributions. We are giving companies and, where applicable, employees a chance to finalise their liability and obtain certainty. Giving notice is not compulsory under the Bill. In deciding whether to take the opportunity, employers need to weigh all relevant factors, including the likelihood of the option lapsing.

Relief will be obtained when the option is exercised, and the relevant mechanism is the self-assessment arrangements.

Mr. Flight: The position is as I feared, and the Minister must surely accept that it is unfair. If, for whatever reason, the employer is able to lean on the employee so that he stumps up the special NIC payment, and if the employee is subsequently fired and his options lapse, he will have paid NIC that would never have arisen and will have no income tax deductibility. That seems extremely unfair. I do not deny that such a circumstance is rather unlikely, given that it is mainly employers who will operate the provision, but it could arise and the law should provide for it in a fair way.

On the timing of the income tax deduction, the paying employee could be out of the money for some time. I assume that there is no suggestion that he should get an interest credit. Again, the provision forms part of a quid pro quo that is stacked somewhat in the Revenue's favour. As well as being asked to take a gamble, the paying employee will be out of income tax relief until the option is exercised. I understand the mechanics, but I do not feel that it is a fair arrangement.

Mr. Timms: It is, as the hon. Gentleman has said, part of the quid pro quo—the benefit of certainty in exchange for early payment. I do not understand why he thinks that an employer might lean on an employee to avail himself of this opportunity. As far as we can tell, in the small number of cases when the employee has taken on liability, it would be a matter for the employee to determine. In most cases, it would be a matter for the employer, in which case that concern would not arise.

Mr. Flight: I can easily think of situations where, specifically in relation to the Bill, a company might say to an employee, ``Look, you've got these options that were issued before the power existed, as of last May, for us to transfer our liability to you. We will issue you with more options only if you accept liability.'' It is perfectly possible for companies to apply leverage to their employees to transfer the liabilities. In that situation, the employee is treated unfairly if the firm subsequently gets rid of him and he never exercises his options. He will have paid his national insurance contributions, but lost them, and he will have lost his options, but received no income tax offset.

Question put and negatived.

Clause 4 ordered to stand part of the Bill.

Clauses 5 and 6 ordered to stand part of the Bill.

New Clause 3


    `.—Notwithstanding any discrimination between the holders of rights to acquire shares introduced by this Act, no right of action against the Crown shall lie under the Human Rights Act 1998 as a result of the coming into force or operation of this Act.'.—[Mr. Flight.]

Brought up, and read the First time.

Mr. Flight: I beg to move, That the clause be read a Second time.

As the wording suggests, we have noticed that the various references to European legislation that often appear in British legislation have not been included in the Bill. Although there are no obvious human rights issues, is it not standard practice to have a clause such as this in all Bills?

Mr. Timms: No, it is not standard practice to have such a clause, which disapplies the Human Rights Act 1998, in all Bills. It is unclear how this legislation might offend against that Act.

Mr. Burnett: Presumably, such a clause would gainsay the certificate that the Chancellor of the Exchequer gave the Bill in the first instance.

Mr. Timms: The hon. Gentleman has a point.

There is no compulsion in the Bill. We are offering companies a simple and practical solution to a legitimate concern that they raised with us. A company choosing to settle on its share price on 7 November will obtain certainty, which is perceived by many companies to be an important benefit. To suggest that any part of the legislation is ``discriminatory'' would be to stretch the word beyond its natural meaning. If the Bill did contravene anyone's human rights, which I am confident that it does not, it would be wrong to deny that person any remedy that the 1998 Act may provide. With that in mind, I hope that the hon. Member for Arundel and South Downs will withdraw the motion.

Mr. Flight: The question whether the Bill is in contravention of the Human Rights Act 1998 had not been raised, but the Minister has made the position clear on that. Whether the provision is worded as in the amendment or in standard language is another debate. He has said that the Government believe that nothing in the Bill will contravene human rights provisions, so I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

New Clause 4

Procedure when right to acquire ceasesto be exercisable

    `(1) Where a right to acquire shares has been the subject of a notice under section 1 above and the payment of a special contribution under section 2 above, and that right subsequently ceases to be exercisable to any extent then at the appropriate time an appropriate person may make a claim for the repayment of the appropriate amount.

    (2) The procedure for making a claim under this section shall be governed by regulations made by the Inland Revenue pursuant to section 1(5) above.

    (3) In this section

    (a) the ``appropriate amount'' is the amount of the special contribution in question, reduced to take account of any tax relief (if any) given on the original payment of that special contribution, apportioned on a just and equitable basis agreed with the Inland Revenue to the extent that the right has ceased to be exercisable;

    (b) the ``appropriate person'' is the person who paid the special contribution in question;

    (c) the ``appropriate time'' is the period of twelve months commencing with the end of the year of assessment in which the right in question has ceased to be exercisable to any extent.'.—[Mr. Flight.]

Brought up, and read the First time.

12.30 pm

Mr. Flight: I beg to move, That the clause be read a Second time.

I referred to the new clause when we discussed amendments to clause 1. It is a possible alternative to our first suggestion of a special NIC crystallising on exercise and would provide for repayment of NIC, with a facility for partial repayment if only part of the option lapses because the share is under water or someone has left employment. The Minister said that the Government intend the Bill to provide that quid pro quo, but it is unsatisfactory for companies or employees to pay tax that they do not need to pay and it is not proper to ask people to gamble on an outcome. The Government should consider the new clause as a possible option to cover that.

Mr. Timms: The new clause is contrary to the spirit of the Bill. Our aim is to allow companies to obtain some certainty and, inevitably, a judgment must be made. It is a voluntary measure and employers will have to consider whether settling the NIC at the share price on 7 November 2000 is right for them. They will have to make a judgment on whether the benefits of early settlement outweigh the risk that the share price might fall or that options will not be exercised.

The Bill gives companies the chance to arrive at a once-and-for-all decision on what is in their best interests. It provides the certainty that they asked for in relation to their liability on gap options. If refunds were allowed, the certainty that companies have asked for would be undermined, and that would undermine the whole purpose of the Bill. The certainty that is provided by the Bill is valuable for companies and the Exchequer, and I hope that the hon. Gentleman will not press the motion to a vote.

Mr. Flight: The new clause would not undermine certainty. If companies pay the special NIC, that discharges the future employer's NIC liability. All it does is to provide that if no NIC is payable because the option lapses, the NIC will be paid back. It would not undermine the principle of certainty. It boils down to whether the Committee believes that the quid pro quo gamble on NIC liability is a principle that we want in our tax law. Our view remains that that is undesirable, and that it would be fairer, if NIC liability is not to apply on exercise, to provide that it will be refunded if options are not exercised. The Government have made it clear that they are keen on their quid pro gamble, notwithstanding the concerns of many eminent tax lawyers. I shall not carry the argument further, but perhaps the Minister will think about it a little further in his bath ahead of Report stage. I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

New Clause 5

Proceedings under Financial Servicesand Markets Act 2000

    `.—The service of any notice under section 1 above and the payment of any special contribution under section 2 above, or any decision to not serve any such notice or to not make any such payment shall not form all or part of the subject of any proceedings against any person under the Financial Services and Markets Act 2000.'.—[Mr. Flight.]

Brought up, and read the First time.

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