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Employee Securities and Options

Mr. Flight: I beg to move amendment No. 12.

Clause 139, which gives effect to new schedule 22, takes up some 80 pages of the Bill—

The Temporary Chairman (Mr. John McWilliam): Order. I think it would be unfair if I did not let the Committee know my thinking. It strikes me that debate on the amendment encompasses a clause stand part debate. I ask Members who intend to speak to bear that in mind. I have not finally made up my own mind, but I think it is probably the case.

3.45 pm

Mr. Flight : I thank you for that, Mr. McWilliam. Indeed, I was going to crave your indulgence that I might discuss the amendment in a wider, "stand part" context.

As I said, the proposals in clause 139 take up some 80 pages of the Bill. It strikes me that they have been introduced in response to a court judgment that has

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proved a problem to the Revenue and needs to be corrected. There has, however, been no consultation on the provisions. Dare I say that it has been drafted extremely poorly? It contains a raft of potential new charges and burdens, some of which could be retrospective. To be candid, the proposals as they stand have received widespread criticism from the relevant professional bodies.

The amendment calls for new schedule 22 to be suspended pending further consultation. The schedule's drafting constitutes a complete rewriting of the Income Tax (Earnings and Pensions) Act 2003, which came into force on 6 April. Indeed, it is a complete contradiction of that legislation; as the Bill stands, we will revert to an incomprehensible drafting.

The scope and breadth of the proposals were not evident from the Budget speech and press releases—a point that is particularly true of the proposed changes to pay-as-you-earn and national insurance. A statute is being amended that had already been rewritten in plain language; however, the opposite effect is now being achieved. Formulae are used as in the rewritten legislation, but the acronyms used are not explained, save in the explanatory notes. For example, according to the explanatory notes the expression "UMV"—it is used in a particular clause—means "unrestricted market value"; however, it would be a great deal more user-friendly for such expressions to be included in the body of the legislation itself.

Mr. Bercow: Can my hon. Friend advise me, in so far as he can interpret the thinking of the Paymaster General, as to how schedule 22 is consistent with the right hon. Lady's support for the tax law rewrite project, given the implication that that project is intended to simplify taxation?

Mr. Flight: I thank my hon. Friend for making, in his splendid way, the point that I was making in a rather low-key fashion. This provision is a complete contradiction of any commitment to clearly drafted legislation. As I have pointed out before, eminent lawyers have described schedule 22 as

The schedule, in

As it stands, it is difficult even for the lawyer-experts to understand all the proposals.

The Bill expands the definition of a "readily convertible asset". In particular, shares in a company under the control of another are to be treated as readily convertible assets. That gives rise to additional PAYE and national insurance liabilities for the employer when charges arise under the new legislation. Several of the changes apply to securities issued before 16 April this year. Before the Budget, shares could have been issued to employees on the basis of legislation then in place—only for those employees and their advisers to discover that the shares are subject to provisions that they could not have been aware of when the transactions were

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entered into. That, combined with changes to PAYE and national insurance, means that employers are likely to face tax charges for which they have not provided. In respect of national insurance, they will not be able to recover it from employees. The changes should not apply to securities issued before 16 April, where such unforeseen liabilities could arise.

A new chapter 2 of part 7 applies to restricted securities. The provisions stop the avoidance of the income tax charge when securities are acquired by an employee subject to conditions or otherwise reduced in value. It is a tax-avoidance issue, which the Government understandably sought to address. The conditions were subsequently removed. Without the provisions, the growth in value of the securities would have been subject to capital gains tax. The schedule modernises the existing provisions and makes them more sophisticated. I welcome the fact that the powers provide for a number of elections, which will allow employees to pay income tax by reference to the value of the securities acquired at the date of acquisition on the assumption that some of the restrictions are not there.

We are particularly concerned that the new raft of proposed legislation is highly complex and has not had adequate consultation. We appreciate the Government's desire to reverse the impact of the recent court ruling and to deal with the PAYE avoidance schemes to which I referred. However, the current drafting will leave many genuine share schemes in a serious mess and will overlay an already over-complicated regime, which could come to represent a material barrier to wider share ownership for unlisted companies.

The catch-all drafting could result in a raft of unexpected income tax charges arising at various points during the period of ownership of the shares. The new PAYE and national insurance contribution rules will mean that charges arise when shares have not been disposed of. Venture capitalists with investee companies in which restrictions on shares are included in the articles could face particularly serious problems. There is a plethora of purpose tests, valuation tests and requirements to look back for seven years, which will mean that unlisted companies and owner-managed businesses will need to navigate most carefully through extremely difficult legal waters.

We wonder whether the Revenue intends to issue any guidance on such matters as the meaning of market value—for example, when restrictions are in the articles of association of the company as opposed to when they are outside the articles. The effects of new capital gains tax, market value definition, the position regarding management buy-outs and what constitutes commercial purposes are all important issues.

Many of the changes apply with immediate effect, and we are concerned that the new measures impose charges that people did not conceive of when the relevant share schemes were set up, and will leave people having to comply with legislation with which they are unfamiliar. Very little of the principles of the tax law rewrite has been included, as I explained.

Another concern is the harshness of some of the provisions that could be mitigated by an election, which has to be made in a Revenue-approved form within 14 days of a transaction. I am led to understand that the

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Revenue has stated that it will not allow taxpayers to make an election before Royal Assent and will positively prevent them from doing so by declining to issue a prescribed form of election. The Revenue has stated that no provision or concession will be granted to allow elections for events that take place between 16 April and Royal Assent to be made within 14 days after Royal Assent. If that is the case, it strikes me as unethical, unfair and without precedent. It could cause real problems for clients who need to get things done before mid to late July.

I end by echoing the comments of my hon. Friend the Member for Buckingham (Mr. Bercow). So much for the Government's commitment to clarity, transparency and fairness: the provisions in schedule 22 are an absolute nightmare. We have tabled many amendments, and I hope that the Paymaster General will respond by saying that she, too, recognises the need for very considerable clarification and better drafting, and for unintended problems to be addressed.

Mr. Burnett: I endorse entirely what has been said by the hon. Member for Arundel and South Downs (Mr. Flight). All the information that I have received from the professional bodies leads me to conclude that the clause and schedule are exceptionally complex, and that there has been insufficient consultation.

If City experts do not understand the clause, what hope is there for anyone else? Do the Inland Revenue and parliamentary counsel understand the clause and the schedule, and the repercussions and tax consequences that they will have?

It is empty for Ministers to trumpet tax reliefs when they are so complex that they cannot be accessed. It is worthless for them to exclaim that they are seeking to simplify the tax system, when provisions such as the clause and the schedule only make the legislation more complex.

The scope and breadth of the proposals were not evident in the Budget press release. That is especially true in respect of the consequences for PAYE and national insurance. I hope that the Paymaster General will concede that the amendment is entirely reasonable in the circumstances, and that there should be proper consultation. People need to understand the law, which should be readily accessible. It is in the interests not only of tax practitioners but of their clients and of businesses that they should be able readily to understand the law and its consequences. They must be able to access the law without undue risk or expenditure.

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