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Mr. Gummer: Does the hon. Gentleman agree that not only businesses or tax advisers need to understand the measure, but that it should be readily accessible to the people whom it affects? Is not one of the problems with the tax system that, if it is not accessible or comprehensible, people will feel that it is not fair? The Government must understand that this complication does not merely make matters difficult for the professionalsit makes them difficult for many people who are pretty ordinary as far as tax is concerned but who will be affected by the schedule.
The Temporary Chairman: Before the hon. Gentleman replies, I must inform the Committee that I have now made up my mind that there is no scope for a stand part debate. Whatever the conditions of the schedule, the clause itself is perfectly comprehensible. Hon. Members are going quite wide of that, but that is fine.
Mr. Burnett: I am grateful to the right hon. Member for Suffolk, Coastal (Mr. Gummer) for making an excellent point. For taxation to achieve public acquiescence, it must be fair and intelligible. I draw the right hon. Gentleman's attention to the excellent memorandum, dated May 2003, issued by the revenue law committee of the Law Society, which gives pages of suggested amendments. I hope that we shall have an opportunity to probe those amendments so that we can try to make some sense of a complete mess.
Mr. Bercow: Notwithstanding the pertinent point made by my right hon. Friend the Member for Suffolk, Coastal (Mr. Gummer), does the hon. Gentleman not think it a pity that the Chancellor cannot be with us in Committee this afternoon, in order to explain how he squares schedule 22 with his foreword to Labour's business manifesto, entitled "Equipping Britain for the Future", published in April 1997, in which the right hon. Gentleman saidho, ho!
We shall be going into these matters in detail in the Standing Committee. Will the Paymaster General assure us that, having heard the arguments, she will acquiesce in this amendment, which is, in the circumstances, entirely reasonable?
Mr. Djanogly: To date, my policy on the Bill has been to go for brevity, but I am not able to do so on this clause, not least because we are considering about 90 pages of extremely complex new measures. The provisions are problematic in many respects and we are
The new rules are generally thought to be a sledgehammer to crack a nut and a compliance nightmare. One specialist noted that generalist advisers, let alone their taxpayer clients, will not know when to make their elections under paragraph 431. They will not know how to operate the regime or how to comply with it on every possible occasion that a chargeable event arises. How they were to do that was, he said, beyond him. Even if they managed to comply with the regime, the shares valuation division would be inundated with applications to agree hypothetical values of securities, with and without their restrictions, in order to calculate the amount of schedule E tax charged on each chargeable event.
The new regime imposes income tax on the acquisition of securities and/or on their value at the time of defined chargeable events, where such securities are made available by reason of any person's employment. That applies irrespective of who acquires and provides the securities.
I have a few basic points to make about the regime. First, income tax charges can arise for an employee at various stages in the life cycle of a security, on what is, of course, purely a paper value. Secondly, there will not always be a corresponding corporation tax deduction for the employer company because there are many mismatches with the corporation tax regime under schedule 23. I am sure that we shall look into that point in greater detail in the Standing Committee. I understand from representatives of the venture capital industry that the measure will be extremely hard on private equity investee companies, as they are often under the control of their investing limited partnership funds and thus cannot enjoy the tax advantages of things such as EMIexecutive management incentiveoptions, nor will they be able to receive corporation tax deductions.
Thirdly, the regime will render the employer company liable to account for the income tax under PAYE, which was originally done under a withholding system. Finally, it will require the employer to account for employer national insurance. All those cases apply even where a person other than an employer provides securities to a person other than the employee. All that makes this proposal extremely draconian.
Proposed new section 421B(3) says that anything provided by a person's employer or by a person connected with the employer will be deemed to be made available by reason of employment, unless the provider of the security is an individualfor example, another shareholder. It also says that the right or opportunity arises
The new regime will catch gifts of securitiesthose securities provided at a price less than their market value; those provided with future payment obligations attached; those provided whether or not at market value or acquisition price; those that attach restrictions on transfer or retention; those that are subject to forfeiture or are convertible; those with artificially depressed or enhanced value; or those that are disposable for more than market value. It will also catch securities options acquired by reason of employment. Some options seem to be caught twice, because the definition of security includes subscription warrants, so a subscription option is both a security and a securities option. Is the regime therefore trying to draw a distinction between subscription and purchase options? That is not clear, and it is absolutely vital that we have an idea from the Minister about that before we go into the details later in Committee.
Most importantly, can the employer and employee elect under the main part of the new regimechapter 2, which relates to the restriction of forfeitable sharesto be taxed on the initial acquisition of the securities, valued for tax purposes on a basis that ignores the restrictions on those securities? If so, the subsequent chargeable events tax charges will not arise. However, if people do not elect, income tax charges will be made at various stages in the life cycle of the security, depending on what happens to it. Why not instead say that the profits on the ultimate disposal of the security will be taxed as income under schedule E, unless people elect for upfront income tax treatment to be the cost of entry to the capital gains tax regime, instead of trying to tax the security at lots of different stages in its life cycle? Of course there is no corresponding relief for a fall in value following a chargeable event.
As my hon. Friend the Member for Arundel and South Downs said earlier, 14 days is much too short a period in which to have to elect for the reasons that he gave, which I will not repeat. Significantly for the private equity industry, which seems to be extremely concerned by these proposals, it would appear that the receipt of a carried interest in a venture capital or limited partnership would fall within the new rules. However, that needs clarification, as it is not clear whether the security interest that the employer acquires is the limited partnership interest itself, as with a unit in a collective scheme, because there is no definition of unit in the legislation, or whether the shares and securities that the partnership acquires in its investee companies count as the employee's securities, and whether, if the latter is the case, they acquire that interest qua partner or qua employee, deriving from their initial acquisition of a carried interest qua employee.
By making an election, it may be possible to opt for income tax treatment at the outset, so that capital gains treatment for the future is secured, but if the electing needs to be done every time the fund makes an investment, that will be an administrative nightmare, and it will be impossible because, with a fund of funds, carry holders in the top fund will not even know what acquisition funds the lower funds are making. It is illogical that the employer and employee can agree that the employee will bear the employer's national insurance costs in the case of securities options, but not in that of other security interests.
Those regimes, when enacted, will generally apply to securities acquired on and after 16 April 2003. Again, in the context of partnerships, it is not clear what is the date of acquisition of the security interest, as that depends on whether it is the partnership interest or the underlying shares or securities in investee companies that count. The definition of collective investment scheme is much too nebulous and unclear. The extension to the definition of readily convertible asset in paragraph 15, which in turn triggers national insurance and PAYE liabilities, is also of concern to the private equity industry, because the widened definition catches shares in a company that is under the control of another company, and limited partnership funds, investee companies, are often caught by that control test. That, of course, gives the employer company a national insurance liability. It also denies it a corporation tax deduction under the schedule 23 regime, and denies it the ability to adopt an enterprise management incentive option scheme, as I mentioned previously. That, of course, is a triple whammy to an industry sector that the Government have said previously they are keen to support, although they may not have intended it to have that effect, in which case I would be interested to hear the Paymaster General's views.
All the people to whom I have spoken about this clause have said that more time is needed for consultation to get it right and to strike the right balance between anti-avoidance measureswhich, of course, the Government wish to implementand the serious impact that those measures will have on the mid-market private sector and the private equity industry too.