Mr. Baron: May I briefly seek clarification from the Paymaster General on one other point? I shall take your guidance on this issue, Sir Nicholas, as I am not sure under which group of amendments one should raise it. It is a very general point on schedule 23.
The Chairman: I advise the hon. Gentleman that although I may not be in the Chair when we reach the schedule stand part debate, I will advise Mr. McWilliam when he takes over from me that it was my intention—I hope that it will be his—to allow a short stand part debate.
Mr. Baron: With your permission, Sir Nicholas, I will leave my comments for the stand part debate.
Dawn Primarolo: The group of amendments are rather expensive.
Mr. O'Brien: They are alternatives.
Dawn Primarolo: None the less, they provide in their various guises for either double or triple relief. I shall explain to the Committee how that would occur, although I am sure that that was not the hon. Gentleman's intention. If he presses the amendments to a vote, I shall urge the Committee to oppose them.
The amendments seek to change the timing and amount of deduction under schedule 23 and, in some circumstances, would provide relief more than once, which is clearly not a good idea—I presume that it was not intentional.
Schedule 23 provides relief to the employing company for the cost of providing shares to employees to give them a real stake in the company for which they work. It achieves this by matching the deduction for the company in terms of timing and amount with the taxation of the employee as a result of acquiring those shares. The amendments appear to be an attempt to move away from that policy objective despite the fact that the informal consultation carried out over the summer of 2002 showed almost universal support for that approach.
Amendment No. 232 inserts a new paragraph that would provide relief at the time an option is granted. That would be in addition to relief under the existing rules, which provide relief at the time that the option is exercised. Although I am sure that it was not the intention of the hon. Member for Eddisbury, the inevitable consequence of amendment No. 232 would be double relief.
Amendments Nos. 233 and 234 introduce alterations as a result of the changes made by amendment No. 232 to the rules in paragraph 17, which determine the time at which the relief is due. They are irrelevant if amendment No. 232 falls.
The intention behind amendment No. 235 is unclear. The hon. Gentleman suggested that it is an alternative. On one reading, it appears to allow relief at the time a share option is granted; on the other hand, it appears to provide relief instead at the time of exercise.
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The proposed changes also appear to ignore the new paragraph that amendment No. 232 seeks to introduce, and they would again provide a duplicate relief. Whichever way the hon. Gentleman takes his combination of amendments—all of them or some of them—they produce double relief.
Amendment No. 232—amendment No. 235 is an alternative to it—inserts a number of deeming provisions that would add significant complication to the interpretation of the new relief. The amount of relief would no longer be based on the amount on which the employee is taxed. Instead it would be deemed to be the amount that the employee would be paid when the option was exercised if the employee received cash rather than shares. If an option lapsed or was cancelled, the employing company would be deemed to receive taxable income equal to the amounts already deducted. Any compensation paid as a result of the option being cancelled would be ignored in arriving at the deemed income, which would provide a double deduction and further opportunities for tax avoidance.
Amendment No. 236 would also provide greater opportunities for avoidance, as there could be a triple deduction for the same amount. It seeks to insert another half page of rules to provide relief for compensation paid to employees when options are cancelled. That not only runs contrary to the policy of providing corporation tax relief for employee share acquisitions but also leads to double deductions for the same amounts, not only for the amount of compensation payable but also for the employer's national insurance contributions. The rationale for the latter relief is completely unclear, because an employer will always obtain relief for employer's national insurance contributions.
If an employee is paid cash compensation for the cancellation of a share option, relief may be available under normal accounting and tax principles, in which case the amendment would again lead to excessive and multiple deductions. I am sure that the hon. Gentleman had no intention of doing that—in fact, he has confirmed that.
The hon. Gentleman also referred specifically to the date of exercise differing from the date of acquisition. The point is not necessary. The employee is taxed on acquisition, not on exercise; therefore, there is no mismatch.
I understand the hon. Gentleman's point about the complexities of the share ownership arrangements in the schedules. However, the legislation deals with the best way to deliver the reliefs, about which for several years there have been discussions and consultation. I understand the hon. Gentleman's reluctance to support the Government on the matter, but I say in all honesty that, should he press the amendments to a vote, they will not be carried, because I will encourage my hon. Friends to oppose them. He would find himself defending a policy position that is, frankly, indefensible.
Mr. O'Brien: I listened carefully to the Paymaster General, who will have noted that I introduced the amendments as probing amendments. She also
Column Number: 522knows—I believe that she sought to ensure that this was placed on the record—that I am happy to confirm that there is no intent on my part or that of Conservative Members to seek in any way to assist avoidance that is not considered to be proper in the due relationship between the taxpayer and the Government.
The amendment was intended to clarify the matter. I recognise her latter point that consultations have taken place over a period of time, but it is our role as parliamentarians not only to scrutinise the Bill to seek to make it as clear as possible but also, given the enormous amount of work that is done by a host of professional and other bodies, as well as interested parties, which have to read a Finance Bill very rapidly after it is published, to reflect representations made to us that we believe deserve exposure through the course of our deliberations.
On that basis, I have ensured that not only these but alternative amendments were on the amendment paper, in case one approach had more merit than another. Therefore, I hope that no point is made of the inconsistencies between amendments, given that I have sought at times to discuss in the usual ways the fact that one cannot flag alternatives on the amendment paper. That might be a helpful thing for the Procedure Committee to think about on a future occasion.
Amendments Nos. 232, 233 and 234, with the alternative to those, amendment No. 235, were probing, and we have listened to what the Paymaster General had to say. The record of these proceedings will assist those who have to contend with the provisions in the future and they may be able to tease out more guidance and clarification from the Revenue. However, amendment No. 236 raises a more substantive point. I shall not press it, as I had not flagged in my earlier remarks that I might want to separate it out, but as I have before, I should like to reflect on what has been discussed today and reserve my position over coming back to this issue either on Report or in a future Bill.
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Mr. O'Brien: I beg to move amendment No. 224, in
'and, in a case where the shares are acquired under an employee share scheme, corporation tax shall not be chargeable on any amount paid or payable by the employing company in respect of the participation of the employee in that scheme.'.
Paragraph 25 of schedule 23 provides that where relief is available under the schedule, no other deduction is allowed in respect of the cost of providing the shares. That includes a deduction for any amount paid or payable by the employing company for an employee's participation in an employee share scheme. I have given this some thought—the Law Society has made representations on it—and consistent with the disallowance of any amount paid or payable by the employing company for its employee's participation in an employee share scheme, we consider that any amount received by a parent company from that company for its participation in such a scheme should be exempted
Column Number: 523from tax if it would otherwise give rise to taxable income or a capital gain in the parent company.
If that is not done, the legislation will discriminate against cases in which payments are made by subsidiaries for their employees' participation in an employee share scheme. Let us suppose that a UK parent company has a wholly owned UK subsidiary whose employees participate in a scheme enabling them to acquire shares from the parent company—a very common situation. If the subsidiary makes no payment to the parent company, the subsidiary will obtain a statutory deduction for the market value of the shares acquired by its employees, less any payments made by the employees. The parent will obtain no tax deduction but, equally, will have no taxable receipt in respect of the subsidiary's employees' participation in the share scheme. If, by contrast, the subsidiary does make a payment to the parent company, the subsidiary still obtains a statutory deduction of the same amount in respect of the award of shares to its employees. Paragraph 25 prevents the subsidiary from obtaining a tax deduction for its payment to the parent company. Nevertheless, unless the payment is structured as a capital receipt for the issue of the shares, it may be taxable in the hands of the parent company, resulting in a greater overall tax liability than if no payment had been made. I believe that the legislation should achieve neutrality between those two situations.
Although that may have sounded a little convoluted, I have tried to encapsulate the situation as briefly as possible. The Law Society has been extremely helpful in its representations. Amendment No. 224 would prevent discrimination where payments are made by subsidiaries for their employees' participation in an employee share scheme.
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