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Dawn Primarolo: There is obviously a lesson here for me: do not try to be helpful to the hon. Gentleman. Column Number: 516 I was more than surprised by the comments of the right hon. Member for Fylde. I would not care to go through the debates on previous Finance Bills and see how many times he came down on the side of parliamentary draftsmen. Of course I take responsibility for the matter, so let us try another way. Not only is the amendment not needed, but to make it work would require changes in a large number of other areas. New rules would have to be introduced into schedule 22. I was trying to be kind to the hon. Member for Eddisbury. Not only is the amendment unnecessary; it does not even work and would require more changes to schedule 22, which would make the provision more complicated.Mr. Burnett: Perhaps the Paymaster General would clarify the matter by saying the net price that would be charged to stamp duty. Dawn Primarolo: I am not sure whether the hon. Gentleman was in the Room when I clarified the position on the point made to me. The takeover is the value of the old option disregarded. That proposition was put to me, and I answered it. I shall not repeat my answer; if the hon. Gentleman checks the record, he will find it. Mr. O'Brien: When the hon. Member for Torridge and West Devon (Mr. Burnett) looks at the record, perhaps he might want to consider the tax we are dealing with. We dealt with stamp duty last week; we are now on to corporation tax. [Interruption.] The Paymaster General says from a sedentary position that she was trying to be even more helpful by not observing that fact. I hear what she says. Where an amendment is put forward in an attempt to flush out something that is important, I do not claim pride of authorship. A genuine point has been identified. If the Government then table amendments to address any irregularities and make the measure work, that would be welcome. However, there is enough on the record for us to consider the matter again when there has been time for reflection. I beg to ask leave to withdraw the amendment. Amendment, by leave, withdrawn. Mr. O'Brien: I beg to move amendment No. 232, in
14A. Where under generally accepted accounting practice the employing company recognised an expense in connection with the grant of an option, the amount of relief is equal to the amount of the expense recognised on grant.'.
The Chairman: With this it will be convenient to discuss the following: Amendment No. 236, in
'Cancellation of options 15A (1) Where the holder of an option is paid consideration in money or money's worth for the cancellation of an option then relief is available for an amount equal to the amount of the consideration paid together with any NIC charge on that amount charged on the payer. (2) The payment must be made either by the employing company, or a company which subsequently becomes a qualifying company within the meaning of paragraph 13 following a takeover of the company whose shares are the subject of the option. Column Number: 517 (3) Relief under this paragraph shall be claimed by the company which makes the payment in respect of the accounting period in which the payment is made. (4) In this paragraph— ''NIC charge'' means a liability to pay national insurance contributions under section 6 (Class 1 contributions), section 10 (Class 1A contributions) or section 10A (Class 1B contributions) of the Contributions and Benefits Act; and ''the Contributions and Benefits Act'' means either the Social Security Contributions and Benefits Act 1992 (c.4) or the Social Security Contributions and Benefits (Northern Ireland) Act 1992 (c.7).'.
Amendment No. 235, in
'(1) Relief shall be given for the accounting period or periods in which, applying generally accepted accounting principles, the employing company would recognise an expense or a provision against a future expense (in either case ''the accounting expense'') if— (a) the employing company were to expend a sum as a payment to the recipient at the time that the recipient exercised the option; and (b) the amount of such sum were equal to the total amount of relief available under this Part. (2) The amount of any relief available in any accounting period shall equal the amount of any corresponding accounting expense which would have been recognised for that period. (3) Where relief has been given under this Part in respect of an option which subsequently lapses or is cancelled without being exercised then— (a) where the option lapses without any payment being made in money or money's worth, the employing company shall be deemed to have received profits or gains chargeable to tax under Case VI of Schedule D in the period in which such lapse occurs of an amount equal to the deductions claimed in respect of that option for prior periods; and (b) in any other case, the employing company shall be deemed to have received profits or gains chargeable to tax under Case VI of Schedule D in the period in which such lapse occurs of an amount equal to the deductions claimed in respect of that option for prior periods, less the amount of money or money's worth given in consideration for the lapse of the option.'.
Amendment No. 233, in
'Relief under paragraph 15 (amount of relief on exercise)'.
Amendment No. 234, in
'(1A) Relief under paragraph 14A (amount of relief on grant) is given for the accounting period in which the option is granted.'.
I call Sir Stephen O'Brien—he is not that yet. It is Mr. O'Brien. Mr. O'Brien: I think that I am right in saying that I am 27 years behind you in my parliamentary career, Sir Nicholas, and do not aspire to the dizzy heights that you have reached. The purpose of the amendments is to probe the Government's intention and policy. As my hon. Friend the Member for Arundel and South Downs (Mr. Flight) said during discussion of schedule 22, which allows tax relief for options on exercise only—my hon. Friend the Member for Billericay may hear an echo of some of his arguments on schedule 8—international accounting standards are changing and Column Number: 518 companies will have to represent a PNL charge on grant equal to the Black Scholes value of the option.Mr. George Osborne (Tatton): I do not want to press my hon. Friend, but what is the Black Scholes option?
Mr. O'Brien: That is a challenge that I had anticipated would come from a Government Back Bencher. We could spend the rest of the sitting on the Black Scholes value of an option. Suffice it to say that back in 1969 two young, exceptionally clever Americans, Mr. Black and Mr. Scholes, invented a model to value options. They tried repeatedly to have it published and when they eventually succeeded it became probably the leading mathematical model for valuation of all time. Without giving the definition, which might tax the Committee, the model's equation is simply C=SN(d1-KeŽ(-rt) N(d2) when C is the theoretical call premium, S is the current stock price, N is the cumulative standard normal distribution and d1 is 1n(S/K)+(r+sŽ2/2)t over s
Paul Farrelly (Newcastle-under-Lyme): On a point of order, Sir Nicholas. Do we have to suffer lectures in amateur corporate finance?
The Chairman: I am not responsible for what hon. Members say so long as they are in order, and the hon. Member for Eddisbury is in order, whether we like it or not. I am only worried whether the Hansard writers can get it right.
Mr. O'Brien: I shall make my notes available for the Hansard writers. I hope that the hon. Member for Newcastle-under-Lyme (Paul Farrelly) does not think that corporate finance is boring. I am willing to accept that I am an amateur, but I suspect that every corporate financier, by definition, is an amateur.
Mr. Osborne: I found my hon. Friend's explanation useful. If the hon. Member for Newcastle-under-Lyme thinks that my hon. Friend is an amateur, perhaps he could rise and repeat what my hon. Friend said.
The Chairman: Order. With respect, I want to help the Committee. We have a lot of ground to cover and this discussion is not helpful.
Mr. O'Brien: I am grateful to be able to move on.
I was explaining that, under international accounting standards companies will shortly have to represent a PNL charge on grant equal to the Black Scholes value of the option. It is not clear whether that charge will be deductible for employers under general principles or whether the Inland Revenue will try to argue that schedule 22 overrides the deduction. The matter needs to be clarified. The Chartered Institute of Taxation commented that paragraph 17, as amended by paragraph 67 of schedule 22, states that the time when the deduction is available is the time when the employee
That was exactly the point that the Paymaster General confirmed when she responded to my hon. Friend the Member for Billericay. The amount of the tax deduction is quantified by paragraph 15(1), as amended by paragraph 66 of schedule 22, and is based on the market value of the shares when they are acquired.
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On options over unissued shares, the date on which the employee exercises the option may be different from the date on which they acquire the beneficial interest in the shares. For example, if an option were exercised on Monday, the shares might not be issued until Wednesday. That would mean that the employee could not acquire the beneficial interest in the shares until Wednesday, as they would not have been issued before then. To save companies from having to perform two lots of calculations to work out the market values of the shares—once on exercise for PAYE purposes and once on the beneficial interest being acquired for corporation tax purposes—it would be helpful if the two days could be aligned. Amendments Nos. 232, 233 and 234 address that point.
As the Paymaster General and Committee members will readily have appreciated, we are also considering amendment No. 235. That is an alternative way of approaching the same issue and addressing the problem. It is a variation, so by definition some of the amendments have to be probing. I hope that those alternatives that are not probed to the point of destruction will be accepted by the Paymaster General. Amendment No. 235 leaves out from the end of line 22 and inserts a large paragraph. The Bill permits a tax deduction for employees for their share option gains, but delays that until the exercise of the option, as we have discussed. As that will lead to uneven tax charges and contradicts the trend in modern accountancy to smooth expenses over time, the amendment would simply allow for deductible provisions prior to exercise, which is the norm under the existing common law planning that the schedule replaces. It would also provide a clawback where the option is not exercised. The arguments that I have set out form one package of points on this group of amendments—Nos. 232, 233 and 234, and amendment No. 235 as an alternative.
Amendment No. 236, which is also in the group, is on a separate point. It would introduce much new wording, and I shall address its rationale. Schedule 23 makes no provision for a deduction for a payment to cancel an option. There might be perfectly sound commercial reasons for doing that, such as local regulatory restrictions on share acquisitions or a defect in the rules of an approved plan that prevent exercise prior to a takeover or afterwards. That might include an unlisted company acquiring an unlisted target, a situation in which the company might want to buy out the options, because under the current effect of schedule 23 the options would cease to qualify for corporation tax relief, as we have discussed. Quite simply, why do we not allow cancellation payments to be deductible? After all, they are taxable and NICable—however one wants to coin that phrase—on the employee.
I hope that those explanations have put complex points—not least the Black and Scholes model, on which I hope I have not added to the mud rather than to clarity—as briefly as possible. I look forward to
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