Column Number: 505
Standing Committee B
Thursday 12 June 2003
[Sir Nicholas Winterton in the Chair]
(Except clauses 1, 4, 5, 9, 14, 22, 42, 56, 57, 124, 130 to 135, 138, 139, 148 and 184 and schedules 5, 6, 19 and 25, and any new clauses and schedules tabled by Friday 9th May 2003 relating to excise duty on spirits or R&D tax credits for oil exploration.)
Mr. Gerry Sutcliffe (Bradford, South): I beg to move,
That the Order of the Committee of 15th May 2003, as amended by the Orders of 5th June 2003 and 10th June 2003, shall be further amended by leaving out in the second column of the Table the words ''5 pm on Tuesday 17th June'' and inserting the words ''6 pm on Tuesday 17th June''.
Mr. David Wilshire (Spelthorne): I do not know whether to congratulate my opposite number on still having his job or to commiserate that he has not been moved to something more important. We shall soon find out his fate.
I am more than happy to support the proposal, because it honours a specific agreement to make up the hour we lost this morning. If I repeated what I said at column 403 of the report of our proceedings, Sir Nicholas, you would tell me that I was repeating myself. Suffice it to say that our objections in principle still stand, but I shall not bore the Committee by repeating them. My view is that we do not have enough time in general to deal with the Bill, but I shall not rehearse the arguments.
Question put and agreed to.
Corporation tax relief for employee share acquisition
Mr. Stephen O'Brien (Eddisbury): I beg to move amendment No. 225, in
schedule 23, page 324, leave out line 30.
The Chairman: With this it will be convenient to discuss the following:
Amendment No. 226, in
schedule 23, page 324, leave out lines 31 to 38.
Mr. O'Brien: Sir Nicholas, I welcome you back to the Chair until you are temporarily replaced because of having to leave for very eminent matters.
The amendments target the same point and probe the thinking behind the provision. I hope that the Minister's response will not require me to press the matter further, but we must wait and see.
The origin of the ordinary share requirement comes from approved share plans when the state's intention was to ensure that employees received only proper shares. That now sounds a touch patronising, but in the days when share options and share plans were in their infancy it was understandable in order to
Column Number: 506
encourage that form of added incentive in the remuneration of key employees. The scheme has now spread, so that even the phrase ''key employees'' is redundant, because all parties in the House now want employees to have the widest possible share involvement in the enterprises with which they work.
There is no such limitation on tax changes in schedule 22, and PAYE is extended to any company that does not qualify for schedule 23 relief. The purpose of the amendments is to remove an unnecessary restriction. Paragraph 4(3) is causing problems in the private equity arena in which, as I am sure the Paymaster General is aware, flexibility, fluidity and liquidity are the key points of the approach to supporting enterprise fairly and competitively.
When more than half a company is owned by a private equity fund constituted as a limited partnership, relief will not normally be available because the shares, and thus the voting rights, will be held by the general partner—typically a limited company—on behalf of the partners. That seems unduly restrictive, particularly given the changes to PAYE and national insurance rules under paragraph 15 of schedule 22.
The Chartered Institute of Taxation puts it rather well. It comments that the ''kind of shares acquired'' condition in paragraph 4 must be met when an option is exercised for relief to be available. If an option is exercised over shares in an independent company—a company that is not under the control of another company—the conditions in paragraph 4(3)(b) will be met. However, an issue will arise if an option is exercised immediately following the takeover of a company. As we all know, that is not a rare event, particularly in this country. Thankfully, although there can be extreme pressure in relation to competitiveness and the independence of companies, that demonstrates that competitiveness exists and, above all, that there is liquidity, by sharp contrast with, for instance, the Mittelstand in Germany.
Many share option plans contain a rule that will allow an option to be exercised on a change of control or for a short period thereafter. However, if a company is taken over by another company, the requirement in paragraph 4(3)(b) cannot be satisfied on the date of exercise as, by definition, the company will be under the control of the company that has taken it over. Unless, for example, the acquiring company is listed, no corporation tax relief will be available in respect of the exercise of those options if relief is available under paragraph 4(3)(c). That appears to be an unintended result of the new legislation and seems to distort the takeover of companies in favour of listed acquirers. I dare say that the Paymaster General is not looking to favour listed acquirers over those that are not listed, not least because of the need to maintain a totally transparent and open opportunity.
According to the Chartered Institute of Taxation, a similar issue arises in the context of approved share options. The issue arises if the option is exercised following a change of control or if an option is exchanged for another option immediately following a
Column Number: 507
change of control. Again, that is not uncommon. In my experience, it can be quite common when a foreign company takes over a UK company, replacement share options are considered to be a benefit for those who continue as employees—very often that provides an incentive—and the share options are in a new company that is a UK subsidiary of the controlling foreign company.
The Chartered Institute of Taxation states:
''We understand that, in these circumstances, the Inland Revenue do not take the point that the shares would fail the test in, for example, paragraph 17 Schedule 4 ITEPA.''
It would be helpful if the Paymaster General confirmed that relief under schedule 23 will continue to be available in those circumstances.
I hope that I have made the main thrust of the two amendments clear. I look forward to the Paymaster General's response. If it is favourable, I certainly will not press the amendments further.
The Paymaster General (Dawn Primarolo): The amendments seek to remove all restrictions on the types of shares that qualify for relief under the schedule. That defeats the policy aim of providing relief only for shares that give employees a real stake in the company for which they work. It would allow relief in respect of shares used in tax avoidance schemes, which is precisely what we are trying to deal with. The amendments would also leave the heading for paragraph 4 intact, and sub-paragraph (1) would read:
''The shares acquired must meet the following requirements.''
That sub-paragraph would be left in splendid isolation. I shall urge the Committee to resist the amendments if the hon. Gentleman decides to press them to a vote.
The schedule provides corporation tax relief to the employing company for the cost of providing shares to employees that give them a real stake in the business for which they work. Such shares must meet the criteria that they are part of the ordinary share capital, are fully paid up and non-redeemable and are shares in the parent company of a group, or in a subsidiary company, provided that the parent is a quoted company. Shares in independent companies also qualify. We discussed much of that earlier.
Shares in subsidiaries of unquoted companies, and other types of shares excluded by paragraph 4 of the schedule are, unfortunately, frequently used in tax avoidance schemes. The rules in the schedule exclude such shares from the definition of qualifying shares to ensure that those intent on manipulating the value of shares to avoid paying their fair share of tax and national insurance do not gain an unfair advantage in terms of the employing company's corporation tax.
We accept that in a limited number of circumstances relief under the schedule may not be available. That appears most likely to occur as a result of the way in which certain venture capital investments are structured. We touched on that issue in earlier debates. However, relief for the acquisition of shares
Column Number: 508
by employees is given when the employees are taxed as a result of acquiring the shares, which is often after the venture capital investors have relinquished control of their investment target. In such cases, the employing company or group would not be under the control of another company, and relief would be available.
Alternatively, relief for the cost of providing the shares may be available under rules in schedule 24, if contributions are made to an intermediary to provide shares to employees who do not meet the requirements of schedule 23. The amendments would remove the targeting of the relief to shares that provide employees with a real stake in the company for which they work, and would provide potential for those seeking unfairly to reduce their corporation tax, which I am sure is not the hon. Gentleman's intention.
Although it would be premature to relax the anti-avoidance rules, which are designed to protect the schedule, before the new rules in schedule 22 settle down, we shall closely monitor developments. As I confirmed to the Committee in earlier debates, Inland Revenue officials have already met the British Venture Capital Association and dialogue is taking place to ensure that, while the schedules interact to address the issue raised by the hon. Gentleman, the anti-avoidance rules remain intact. We must also see how the rules operate and how venture capital trusts continue to structure themselves.
I hope that, with that explanation, the hon. Gentleman will not press his amendment. Should he do so, I shall ask my hon. Friends to vote against it.