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Approved Share Plans and Schemes

Question proposed, That the clause stand part of the Bill.

Mr. Flight: There is a broad measure of agreement between hon. Members on both sides about the merits of employee share ownership. The changes introduced by the clause are intended to provide relief and make more flexible the share incentive plan or SIP arrangements, save-as-you-earn option schemes and the company share option plan or CSOP.

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I believe passionately that as many people as possible should own shares in the businesses for which they work. All the evidence shows that companies with widespread employee share ownership perform better and have much better human relations. Such ownership clearly engenders an owner-employer mentality rather than a them-and-us mentality. Businesses such as the John Lewis Partnership, which has succeeded so well on the back of employee share ownership, are legendary.

The arrangements generally give greater flexibility in the administration of share plans. That includes, for example, the removal of the former requirement that, in order to be tax-free, a CSOP option must be exercised more than three years after a previous tax-free exercise. Furthermore, an individual will be able to participate in more than one connected SIP in a tax year—that is, he can participate in one or more approved SIPs established by his company or a connected one. However, three aspects of the arrangements are unsatisfactory, and the industry and associated advisers, including ProShare and many of those concerned with encouraging employee share ownership, have made criticisms and contacted the Treasury to seek changes.

Of particular concern is the change to rules about pay-as-you-earn and the national insurance contribution in relation to CSOPs exercised within three years of grant. The change is clearly unfair and will cause some problems. It should logically apply to options granted on or after 9 April this year, rather than options exercised after that date. The change to options exercised on or after 9 April has two implications for companies that are retrospective in nature.

The employer will now be responsible for withholding PAYE and NICs from employees, although he can under law deduct those payments from an employee's cash pay. There are strict rules in that regard. If the employee has already been paid for the month or his net pay is insufficient for deduction of the new PAYE and NIC liability, the employer will not have sufficient funds to pay the required sums to the Revenue. It is extremely rare for approved plans, unlike unapproved ones, to contain a provision to prevent exercise of the option if satisfactory arrangements to deal with PAYE and NICs cannot be made. The reason for that is that such provision has not been necessary in the past, as there has been no obligation to apply NICs or PAYE.

The new rule will therefore mean that employers will often have to pay PAYE and NICs without having any practical method of recovering the costs from employees. The employer will also have their own NIC liability on the exercise of the options. Typically, it will be set at 12.8 per cent. of the employee's option gain. As the new rules apply to options exercised on or after 9 April this year, the employer will have a new liability for which they could not previously have provided. When the NIC rules were amended to allow employers to transfer to employees the NIC liability on unapproved share schemes, many companies attempted to include such provisions in their approved share option plans as insurance against NICs being charged to them, but the Inland Revenue refused to approve share option plans that contained such provision.

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A point of principle is at stake. The Government's argument for applying NIC on unapproved plans was that gains from such plans were liable to income tax, so the contributions went together. Approved plans remain under the capital gains tax regime, however, so there is an issue of principle about whether it is appropriate to charge NICs at all.

Mr. Djanogly: My hon. Friend makes a good point in saying that, when people try to amend approved schemes, the Inland Revenue throw them out of the door. We are talking not only about a tax implication, but significant cost implications, because many professionals will have to be paid to redo schemes.

3 pm

Mr. Flight: I thank my hon. Friend for that accurate point.

I apologise, Mr. McWilliam, for not having welcomed you to the chairmanship of our proceedings. It has always been a great pleasure to have you as Chairman in Finance Bill Committees.

The proposed arrangements will require trustees to maintain records of those who have participated in one or more approved share incentive plans. That presents a problem in that, to maintain records of such participants, the trustees will need the full requisite information. It should not be a breach of the plan conditions if the trustees fail to maintain such records as a result of not receiving the necessary information from the company or the participants concerned.

The retrospective nature of the application of NIC charges to company share option plans will particularly hit companies that allow employees to take options with them when they leave. Such a company would find itself paying the PAYE tax and employees' NICs, as well as the employer's NICs, and would be lucky to make the payments to the accounts office in time, assuming that it knows that the exercise has taken place. Indeed, despite the statement in the Budget notes that the motivation behind the provisions is to close a loophole, there is a broad belief in the share scheme world that CSOPs have not been promoted as an NIC mitigation tool, especially given the continued low limit of only £30,000 of participation.

Companies sometimes seek to maintain approved status during a takeover as part of their general tax and NIC arrangements. In that context, some small firms may have tried to sell the CSOP to private companies that are looking for an exit on the full understanding that the options would be exercised within three years without the NIC liability being payable. Many of those companies can now benefit from the EMI—executive management incentive—plan arrangements and can exercise them when they wish without paying any tax or NICs, but those that cannot benefit from EMI will now be in a less advantageous position whereby they use the CSOP instead. The chief concern is that the provision applies to all existing options. Although the provisions that allow employers to transfer their NIC charges to the employee can apply to CSOP options, it is extremely difficult to make that happen. This is a fundamental issue. The Government may ultimately decide that the measure will not yield much tax, but if the legislation has to change, it should apply only to future, not existing, option grants.

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Another aspect of the proposals is intended to be helpful, but looks to be unworkable—that is, the changes to ease the complexity of the dividend share provisions. Those are contained in paragraphs 9 to 15 of the schedule, which we will debate Upstairs. I understand that the Government recognise the weakness of the proposals and intend to withdraw them for reconsideration. I should be grateful if the Paymaster General could confirm that.

Another important issue is the threat to employee share ownership in the shape of the proposed requirement by the International Accounting Standards Board that all forms of subsidy towards employee share ownership are charged to the profit and loss account. It is clearly understood that the background to that is abuse in the US, but if it becomes the accounting rule here, it will lead to a major contraction in employee share schemes and do much more to undermine the positive aspects of clause 138 and the accompanying schedule. It is, of course, not for politicians or Governments to tell the professional accounting bodies what to do, but it is important that they realise the extent of the threat to employee share ownership. The theoretical accounting arguments are very much balanced on both sides.

Conservative Members want to ensure maximum employee share ownership for the good of businesses, the good of individuals and the overall good of our economy.

Mr. Burnett: I, too, welcome you to the chairmanship of the Committee, Mr. McWilliam.

The notes to the Bill state that clause 138 deals with

Of course, we support that aim.

An increasing amount of legislation, certainly in Finance Bills, is increasingly complicated, and Opposition Members rely heavily on briefings from outside bodies. The hon. Member for Arundel and South Downs (Mr. Flight) highlighted the problems with the clause, which is designed to simplify procedures. Will the Paymaster General tell us what consultations the Government have had with professional bodies such as the Law Society, the Institute of Chartered Accountants, other accountancy bodies, the Bar Council and the Chartered Institute of Taxation? I hope that the Government will listen not only to the submissions of the hon. Member for Arundel and South Downs, but to those of the professional bodies. It is in all our interests to have a satisfactory, tax-efficient, un-bureaucratic system that encourages employee share ownership and acts as a first-class incentive to employees. It is important that employees feel part of the ownership of an organisation. Organisations that have such schemes are shown time and again to thrive and grow.

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