Mr. O'Brien: That was helpful, particularly as the relief will be monitored as a matter of practice. I understand that a balance must be kept between the anti-avoidance intent and the need to retain competitive flexibility, not least through the British Venture Capital Association and others, which will no doubt continue to be consulted and to make representations. From what the Paymaster General said, we can expect guidance from the Inland Revenue, which will be a sensible way to proceed. If the legislation needs to be ameliorated or changed there may well be such measures in the next Finance Bill. The amendments were probing amendments, and the discussion has been helpful. Therefore, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Mr. O'Brien: I beg to move amendment No. 227, in
The Chairman: With this it will be convenient to discuss the following:
Amendment No. 228, in
Amendment No. 229, in
'the amount on which the recipient is liable for income tax, or would be if the conditions specified in paragraph 7(2) were met.'.
Amendment No. 230, in
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'is liable for income tax in respect of the shares, or would be if the conditions specified in paragraph 7(2) were met.'.
Amendment No. 231, in
Mr. O'Brien: Schedule 23 permits tax deductions for employers where employees receive share rewards, restricted shares or options, but it leaves out a lot of the new provisions introduced by schedule 22. We accept that we are seeking a balance, but because the provisions are anti-avoidance it is harsh to deny a tax deduction for the income. Shares subject to forfeiture are included in schedule 22 as an anti-avoidance provision, which the amendments are designed to address.
The likely answer from the advice that I have received, and my own speculation, is that schedule 23 may have gone out in draft form last Christmas and may have been prepared by people who were not necessarily involved in planning the surprises in schedule 22. I am sure that the Paymaster General will accept that that is not sufficient reason not to align the two schedules to allow employers' tax deductions for any share awards. If the legislation taxes an employee on the grounds that they have received an employment benefit, employers should be allowed a deduction. Amendments Nos. 227 and 228 are admittedly probing amendments, which are mirrored by amendments Nos. 229 and 230.
Amendment No. 231 proposes that part 4 should be left out—apologies are due to the draftsman who worked on it. I shall pray in aid of the amendment a couple of comments. The accountancy firm Grant Thornton says:
We have specifically sought to address that problem. I hope that the Paymaster General recognises that our approach is helpful rather oppositional.
Ernst and Young says:
The Paymaster General used the word ''targeting'' in her previous answer. Ernst and Young goes on:
The Paymaster General will accept that a broad theme in the debate is our attempt to find, by proper scrutiny of the Bill, where the balance lies and what the Government truly intend by their judgments in putting forward the legislation. The probing amendments are important, not least because there is great concern about the lack of consistency and intelligibility in the interaction between schedules 22 and 23. I reserve judgment on whether we will press the amendments, but at this stage they are probing amendments.
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Mr. John Baron (Billericay): I seek clarification from the Paymaster General on paragraph 8(1) of schedule 23, which is somewhat ambiguously worded. One could attach at least two or three different meanings to it and the consequences of following through the equations set out in it. I do not wish to go over old ground but, as we know, schedules 23 and 24 can give deductions in corporation tax for companies only if they provide benefits to employees. We know that schedule 24 restricts deductions, whereas schedule 23 gives deductions if benefits are provided to employees, which includes provisions to employees, to third parties and to employee benefit trusts. That is where paragraph (8) does not help, and I seek clarification from the Paymaster General.
I am thankful to the Law Society of Scotland for making me aware of what may be an anomaly. If I may just test the Paymaster General's patience for a second, I shall take her through an example that, I think, illustrates why paragraph (8) is badly worded. Let us say that a company made a contribution—gave money, or whatever—to an employee benefit trust of £50,000 to allow that EBT to purchase shares from employees at the then market value of £50,000. If the EBT then granted options to other employees to acquire shares from it at their then market value of £1 per share, and the options were exercised at a time when the shares were worth £500,000, it could appear from paragraph 8(1) that the company could claim a corporation tax deduction of £400,000. That is on account of two words in paragraph 8(1)(b), which I think need clarification: ''or another''. Paragraph 8(1)(b) reads altogether,
I should like the Paymaster General's clarification, because the meaning of that could be misconstrued.
I should also like to ask the Paymaster General to look at paragraph 8(1)(a). When defining the word ''award'', are we talking about the grant of an option or the exercise of a benefit? Which of the two meanings that one ascribes to the word ''award'' has a direct effect on the calculation. I would appreciate clarification because the meaning of the paragraph has caused some concern in certain circles. For example, it is felt that companies may be able, quite unfairly, to deduct far larger amounts by way of relief from corporation tax than they otherwise should.
Dawn Primarolo: I need to start by posing a question to the Committee, having listened to the hon. Member for Billericay (Mr. Baron), who advanced the point that the Law Society of Scotland wanted to be raised in Committee, and who asked for clarification. Why should the Government provide for an alignment, which would cater for restricted and convertible shares to be used, when they are being used specifically for avoidance? During the six years in which I have held various posts in the Treasury and examined taxation, one of the challenges that I have found most difficult concerns trust. I have been chastised by the hon. Member for Yeovil (Mr. Laws) for that. I trust that the Government write legislation in a particular way and answer questions about the operations. People whom I never see cleverly make
Column Number: 511sure that people get relief, even though that was not the intention. In considering the issue, and not wishing to take the hon. Gentleman's name in vain, I think that he questioned whether it was wise for a Government, or a Minister to demonstrate that type of trust, particularly when relief was being put into the system. We are talking about reliefs in the system, and ensuring that they are used for the purpose for which they were provided.
I urge the Committee to resist the amendments because they would remove part 4 of schedule 23. That part provides relief when the shares acquired are restricted shares. The effect of the amendments would be to remove completely part 4 of schedule 23 while appearing to preserve relief for restricted shares by making changes to the wording in part 2 of the schedule. However, they only partially remove references to part 4 where they occur throughout the schedule. That will produce an anomalous result and will not achieve the intended effect. For instance, references to part 4 would remain in parts 1, 3 and 5 of schedule 23, but part 4 itself would no longer exist. That is not what the hon. Member for Eddisbury (Mr. O'Brien) was trying to achieve, and I am sure that he would agree that that would be extremely unhelpful, to put it mildly, for those who would apply the rules in practice.
The amendments do not reflect the impact of the changes being made to schedule 23 by schedule 22. Schedule 22 changes the way restricted shares are taxed on employees and has allowed us to expand the relief in schedule 23. We are trying to curtail what we do not want in the tax system while trying to assist corporation tax relief, which we think is rightly and justifiably in the tax system.
After an appointed day, companies will get relief in relation to all types of restricted shares at the same time and equal to the amount on which the employee is taxed in respect of those shares. Previously, relief was available only in respect of forfeitable shares at the time when the conditions of forfeiture were lifted. Although the amendments would remove part 4 from schedule 23, they would not hinder the introduction of the new and extended part 4 from the same appointed day from which the changes introduced by schedule 22 take effect. The consequence would be legislation with incorrect and ineffective references and signposts, which would be impossible to operate.
Schedule 23 provides relief on the correct basis in respect of restricted shares acquired by employees, and that is why the Government have included the schedule. A number of questions were encapsulated in what the hon. Member for Eddisbury said: first, why is schedule 23 amended by schedule 22? The reason is clarity, and that relates to the fact that schedule 23 is effective from 1 January 2003, with changes being made to it from an appointed day to coincide with the rules introduced in schedule 22. By making the changes to schedule 23 in schedule 22, employers have certainty that the rules in schedule 23 will apply from 1 January until they are changed and extended by schedule 22 on the appointed day. That
Column Number: 512avoids the need for the complex transitional rules that would have been required to make all the changes in schedule 23.
Furthermore, because of the changes to the way in which restricted and convertible shares are taxed, it has been possible to extend the scope of the relief provided by schedule 23 to include shares that carry restrictions other than the condition for forfeiture and shares acquired on conversion of convertible securities. Employers who offer employees such shares should welcome the exemption.
The hon. Gentleman asked about alignment. The rules in schedule 22 have been designed to ensure that restricted and convertible shares that are used properly in normal commercial circumstances are subject to a fair taxation system. In such cases, it is right to give the employer the corporation tax deduction. However, if such shares are misused for avoidance purposes through artificial value manipulation, schedule 23 is designed to ensure that no corporation tax relief is given. Surely, that point had to be addressed.
Finally, the hon. Member for Billericay gave an example of the interaction of paragraphs 8(1)(a) and (b) in respect of the grant of options and the exercise of benefit. I wonder whether he will bear with me and allow me to write to all members of the Committee on the matter. My answer will be placed in the Library and, as such, would become part of the record. To be perfectly honest, I cannot just at this moment manage the intellectual acrobatics that are necessary to ensure that I get the answer right.
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