Finance Bill

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The Chairman: Order. I am listening carefully to the hon. Gentleman's argument and looking carefully at the amendment. I suggest that if any Member has any comments to make on clause stand part, it would be useful to do so during this debate, because the amendments cover the whole principle of the clause.

Mr. O'Brien: I am certainly content with your advice, and I dare say that all the other members of the Committee are too, Mr. McWilliam. We can treat this as a combined discussion.

The Chartered Institute of Taxation has also picked up on the matter and has suggested that an amendment should be made. It states:

    ''It will make it easier for companies to stop using QUESTs if the definition of 'original funds' in''—

section 69(3AD) of the Finance Act 1989—

    ''is expanded to include cash received from option-holders on the exercise of SAYE options granted before 27 November 2002 (but not options granted or company contributions made after that date). For example, if a company wants to stop using a QUEST on 1 February 2003, it will have to deal separately with any cash that may arise on the exercise of options between November 2002 and 1 February 2003.''

Amendment No. 243 is being taken at the same time for the convenience of the Committee. The background arguments are exactly the same and, as you have rightly indicated, Mr. McWilliam, they effectively contribute to a stand-part debate. Given that QUESTs have now gone, the amendment removes one of the draconian aspects by allowing trustees simply to clear out whatever is in the trust, transfer it to a less restrictive common-law trust and start again.

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Those are common-sense proposals and I hope that the Paymaster General will consider them a useful contribution.

Dawn Primarolo: I urge the Committee to resist the amendments. They seek, as the hon. Gentleman says, to change the qualifying employee share ownership trust rules in the Finance Act 1989. QUEST works by providing generous, up-front corporation tax relief for payments into the trust. There are detailed rules, including allowing up to 20 years to distribute shares to the beneficiaries, that determine whether relief is already claimed and will be lost.

Relief for future payments into QUEST is being ended by clause 141 to coincide with the start of the new corporation tax deduction, while leaving the other rules unchanged. Companies that have already claimed QUEST relief will not lose it if they continue to satisfy the QUEST rules. Ending future QUEST relief when the new corporation tax deduction is introduced is another step in simplifying the corporation tax treatment of employee share schemes. It avoids the potential for excessive relief and the associated need for complex anti-avoidance rules, and reduces the administrative burden on employers operating share option schemes.

Amendment No. 242 is intended to change the rate at which tax is charged if a chargeable event occurs because the QUEST rules are breached. An inevitable consequence of the amendment would be lost tax to the Exchequer, because the rate resulting from the proposed new wording could be as low as zero. That would be an open invitation to those who abuse the generous relief for avoidance purposes to extract funds from their QUEST without risk of losing the generous relief already enjoyed. Clearly, the Government are not attracted to that and I urge the Committee not to be attracted to it or allow it. I urge my hon. Friends to vote against the amendment.

Amendment No. 243 is intended to change the rules that determine whether relief already claimed should be clawed back. It would allow any asset held by the QUEST to be transferred to another trust without any risk of relief being lost. The amendment would make the current clawback rules ineffective.

I urge my hon. Friends to reject both amendments and to leave the rules as they apply intact.

Mr. O'Brien: I have listened to the Paymaster General. It would not necessarily be appropriate to press for a vote. That said, there will be continuing concern and representations about tidying up the residual consequences of the cessation of QUESTs. In withdrawing the amendment, I urge the Paymaster General to ensure that the Revenue gives as much guidance as possible.

4.30 pm

Dawn Primarolo: I really do not think that guidance is needed. The rules on QUESTs have always been in place. All clause 141 does is end future relief, but there is no reason to go back and change the rules, which the hon. Gentleman is trying to do, on how QUESTs operate. Everybody knows how QUESTs operate, but his amendment would change the rules. If we reject his

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amendment the rules will remain the same and no guidance will be necessary.

Mr. O'Brien: I have listened carefully to the Paymaster General. I am conscious that my hon. Friend the Member for Arundel and South Downs wishes to intervene, so I should let him have a chance.

Mr. Flight: I may not understand the situation clearly, but given that QUEST is ending, people with money in QUEST funds may wish to move to the new arrangements. However, the old tax rules mean that the money will be blocked in the old fund because if they took it out they would suffer a net tax loss. Is that a correct understanding of the issue? Is that why the issue comes up in the context of moving to the new arrangements?

Mr. O'Brien: My hon. Friend understands the position. The word ''blocked''—I am sure that the Paymaster General will intervene if I have got this wrong—indicates a serious disadvantage and disincentive given the incentive to move on to new arrangements following the cessation of QUEST. It is therefore an in-built penalty. If I understand the Paymaster General's response correctly, her answer is ''That is where the current law stands and that is where it will therefore be left.'' The clarification is on the record, although many people will not want to hear it. My intention to withdraw the amendment has not altered, but I daresay that representations will continue to be made. If nothing changes and QUESTs that have ceased have a lot of cash in them, the subject may have to be revisited.

Dawn Primarolo: QUESTs have not ceased. People can still use their QUEST trust, but no corporation tax deduction for payments into QUESTs will be available from now on. That is the position.

Mr. O'Brien: I understand the situation, but it depends on whether we are leaving things in aspic or whether there is an incentive for people to move towards the new arrangements. The clause preserves the situation in aspic without giving people an incentive and an obvious opportunity to move to the new arrangements. The Paymaster General has clearly stated the position, and those who need to consider their dispositions will have paid heed to what has been said in Committee. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 141 ordered to stand part of the Bill.

Clause 142

Restriction of deductions for employee benefit contributions

Question proposed, That the clause stand part of the Bill.

Mr. O'Brien: I do not want to have a stand part debate because we will inevitably consider its broad context along with the amendments.

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The Chairman: Order. We are in this difficulty because the meat of the clause is in the schedule. I will call the amendments under the schedule.

Question put and agreed to.

Clause 142 ordered to stand part of the Bill.

Schedule 24

Restriction of deductions for employee benefit contributions

Mr. O'Brien: I beg to move amendment No. 244, in

    schedule 24, page 336, line 40, after 'asset', insert 'on trust'.

The Chairman: With this it will be convenient to discuss the following:

Amendment No. 291, in

    schedule 24, page 337, line 16, at end insert—

    '(5) For the purposes of subparagraphs (3) and (4) above, the making of a contribution to a third party includes the holding of funds to the order of that third party notwithstanding that the funds are never transferred into a bank account in the name of that third party.

    Amount of subsequently allowable deduction

    1A (1) This paragraph applies where a deduction for an amount of employee benefit contributions is disallowed under paragraph 1 but a deduction becomes available for a subsequent period because of the later provision of qualifying benefits.

    (2) The amount of deduction available in the subsequent period shall be the sum of—

    (a) the higher of—

    (i) the just and reasonable proportion of the original employee benefit contribution as is attributable to the provision of the qualifying benefits in question, and

    (ii) the amount on which the recipient is subject to income tax (or would be if the conditions specified in paragraph 2(3) below were met); and

    (b) the amount of any NIC charge (if any) arising on the provision of the qualifying benefit in question.

    (3) A deduction shall be allowed only once in respect of any amount or part amount of any employee benefit contributions and any associated NIC charges (if any).

    (4) Where more than one person could claim a deduction under this paragraph in respect of any NIC charge it shall, unless the parties agree otherwise, be claimed by the person who employs the recipient at the time that the charge arises.

    (5) ''NIC charge'' has the meaning given it in paragraph 2.'.

Amendment No. 292, in

    schedule 24, page 337, line 20, leave out 'loan' and insert

    'a loan which does not give rise to an employment income tax charge'.

Amendment No. 293, in

    schedule 24, page 337, line 26, leave out 'subparagraph (1)(a)' and insert 'this Schedule'.

Amendment No. 294, in

    schedule 24, page 339, line 20, at end insert—

    '(aa) in respect of the provision of any benefit which does not give rise to an employment income tax charge or to an NIC charge (as those terms are defined in paragraph 2),'.

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