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Dawn Primarolo: I thought it important when responding to this first set of amendments this afternoon to attempt to make it crystal clear to the Committee the target of the arrangements under schedule 2. We are discussing employment-related income, of which some £1½ billion to £2 billion are paid to a small number of highly paid people in certain industries per year. I will not take long to explain matters, but I shall cite a few examples with dates. Systematically, over a long time, contrived schemes have been developed to ensure that those individuals do not pay national insurance and income tax on that employment-related income.
I defy any member of the Committee to parade before us higher rate taxpayers who do not understand that their employment-related income is subject to income tax and national insurance. Given the comments of the hon. Gentleman about small business, I shall give the Committee an example of an avoidance scheme. This is what happens. The employer pays the cash bonus into a bank and gets gilt futures in return, which he gives to the employee with a minor forfeitable condition. The employee transfers them to a special-purpose company that he already owns—let us call it Newco—in exchange for partly paid shares at a high premium, on call, equal to the amount of the bonus, plus a loan equal to the amount of the bonus. The employee then sells his shares in Newco to another, unrelated company—let us call it Purchaser—for their market value, which is very little as the gilt futures are matched with debt and the huge outstanding call on partly paid shares.
Newco then calls on Purchaser to pay out the partly paid shares so that it can repay the loan to the employee. Purchaser is now worth the market value of the gilt futures. Newco then becomes unlimited to increase its distributable reserves, which are then distributed in specie so that the gilt futures end back with Purchaser. Purchaser refunds money to the bank by way of the gilt futures, and that completes the circle. In that way, the individual receives his bonus without paying tax or national insurance.
Forgive me for saying this, but that is a highly complex contrivance—[Interruption.] I am glad to hear that Committee members are struggling with it. The purpose of that highly complex contrivance is to get round the payment of tax and national insurance.
This challenge started quite a long time ago. In 1995, the then Conservative Minister announced measures to stop a national insurance dodge that operated by paying employees tradeable assets. One year, a scheme was closed down in which an employee was given an interest in platinum sponge—I had to find out what that was; I am sure I still do not know. If all the platinum sponge had been in the employee's possession, and he had hung on to it, there would have been a commercial problem because it would not have been available. In fact, it seems never to have left either Schiphol airport or Jersey. There were also payments in fine wines—the list goes on.
Let us be clear: successive Governments of both main parties have attempted regularly to make it clear that the payment of employment-related bonuses is subject to income tax and national insurance. That
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seems a perfectly reasonable proposition—everybody else pays tax and national insurance on their income. I want to break the link, once and for all: sometimes, hon. Members seek to advance the idea that small businesses carrying out innocent activities and striving against the odds will be caught by the provisions. The provisions specifically target the disclosed schemes of which the Government have been made aware.
Mr. Philip Hammond: Will the Paymaster General give way?
Dawn Primarolo: I shall answer a couple more points. I shall be happy to give way after I start answering the amendments.
In moving the amendments, the hon. Member for Cities of London and Westminster (Mr. Field) talked about small-scale entrepreneurs. I say to him that the provisions are clearly targeted, as we shall see when we move through the amendments. Their purpose is to counter highly complex and contrived arrangements that aim to avoid tax and national insurance. Merely choosing one structure or form of share reward over another will not have any effect. Similarly, having an exit strategy will not be within the scope of the provisions. We are dealing specifically with the annual payment of bonuses that make us, as taxpayers, suffer from the reluctance of others to pay the tax and national insurance that they should.
I am happy to give the hon. Gentleman the assurance he sought regarding employee share schemes and share option plans: they will not be affected. We continue to believe that they make an important contribution to the Government's productivity agenda. The Bill only targets contrived and highly artificial arrangements.
After the announcement accompanying the pre-Budget report, David Cohen, a partner in Norton Rose company and chairman of the UK Share Plan Lawyers Group, said:
''This measure can only be welcomed by all those who believe in the value of genuine employee share ownership.''
Mr. Philip Hammond: The right hon. Lady makes a persuasive case. No Conservative Member would defend highly contrived arrangements. Our concern is that well meaning legislation that is designed to shut down one problem might inadvertently inflict collateral damage. This is the point my hon. Friend the Member for Cities of London and Westminster was aiming at.
As the Paymaster General was speaking, it occurred to me that she was talking about large bonuses paid to very high earners in contrived circumstances. Has the Treasury considered a de minimis threshold for the provision, so that it would be clear that we were only talking about cases in which substantial amounts of money were involved?
Dawn Primarolo: It would be an interesting tax authority that sanctioned some tax avoidance schemes and not others, or a loss to the Exchequer as long as it was less than a certain amount. No, we had not considered a de minimis threshold. The prevention of avoidance and contrived schemes presents challenges to the tax authorities and to Finance Bill Committees
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considering what are always complex reactions to complex arrangements. Such measures are continually debated in connection with Finance Bills. As we consider schedule 2, the hon. Gentleman will see that the purpose test is extremely tightly targeted. I will come back to the points raised by the amendments, and other points the hon. Gentleman made, but his hon. Friend wants me to give way.
Mr. Brooks Newmark (Braintree) (Con): I feel that I should declare some sort of interest in that I have been involved in the venture capital industry for 12 years—although I hasten to add I have never invested in rhodium sponge or platinum sponge, which are used for catalytic converters. I do understand that.
One point that my hon. Friend the Member for Cities of London and Westminster has been trying to get across, particularly in relation to tax planning, is that when somebody is investing in a business it is important to ensure that the interests of employees—particularly key employees—are aligned with those of the investors or the owners of the business One thing that the Government should consider is the way in which those individuals are compensated through options or warrants: they should be viewed as co-owners of the business. My concern with the wording that I have seen is that such compensation will be captured as a form of earning that would involve PAYE and so on.
The Government have gone a long way with measures such as taper relief, which was an excellent incentive for entrepreneurs to set up businesses. I congratulate Ministers on that—
The Chairman: Order. This intervention is becoming a bit of a speech.
Mr. Newmark: I am sorry, Sir Nicholas. My question to the Paymaster General is simply to ask her, when considering share option schemes, to align the rules with employees' ownership of those businesses, and not to capture that as some form of income. I am sorry for labouring the point.
5 pm
Dawn Primarolo: The hon. Gentleman makes an important point about the protection of sanctioned, good and well used schemes, many of which are tax assisted, offered in the UK to assist companies in involving their employees in the profitability and growth of the company by the allocation of shares. That matter is not dealt with in the schedule, however. Although such schemes are important to the Government's productivity agenda, they are not disturbed by schedule 2. We are aiming specifically at employment-related income bonuses, which by no stretch of the imagination come in any of the categories identified by the hon. Members for Braintree (Mr. Newmark) or for Cities of London and Westminster.
The hon. Member for Runnymede and Weybridge spoke of the importance of not inflicting collateral damage; however, the amendments inflict collateral damage on the proposals in the schedule. I shall explain why. Not only are the amendments unnecessary, but they would lead to a significant loss
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of revenue. Unless he pushes me, I will spare the blushes of the hon. Member for Cities of London and Westminster by not telling him exactly how much we estimate we might not be able to collect.
Amendment No. 1 appears to be an attempt to restrict insurance contracts classed as securities to those used for avoidance. Although I am sure it is not the Opposition's intention, it would, by removing exclusions provided in the Bill, also catch contracts that we are satisfied pose no risk.
Amendment No. 2 is unnecessary. The changes that we propose will ensure that the rules apply only to value passed through insurance contracts by way of employment reward—that is, the payment of an employment reward. When an insurance contract is offered to employees on exactly the same terms as to a member of the public, there should be no passing of employment reward. Employees in those circumstances will not be affected by the changes. Unfortunately, the amendment would create a safe harbour for those who provide insurance contract avoidance schemes as their main business. It would therefore provide a route through the legislation and lead to a loss.
Amendment No. 3 reflects concerns about insurance contracts entered into before the measures were announced. The only arrangements that Her Majesty's Customs and Revenue has seen that involve the use of insurance contracts to deliver employment reward were designed to avoid tax and national insurance. We can find no other examples. That speaks volumes. Only value passed to the employee on contracts made after 2 December 2004 is caught. In my view, it is both fair and proportionate that income tax and national insurance be paid on such value. If the hon. Member for Cities of London and Westminster chooses to press the amendment to a Division, I shall ask my hon. Friends to oppose it.
I have dealt with employers offering share-based incentives, with the date and with value passing through. The one remaining point for me to answer is the hon. Gentleman's argument that tax inspectors would somehow decide on a whim to use the legislation to challenge owner-managers. I have said that the approach to compliance in the area of employment products avoidance is being carefully managed. The schedule will ensure that the finite inspector resources are carefully focused through central direction and control and are supported by clear risk-based guidance on highly contrived and complex arrangements. Owner-managers of small businesses who are not using such contrived, complex arrangements will not be targeted for their efforts.
I have made as clear as I can the target, the reason and the mechanism. I hope that I have allayed the hon. Gentleman's concerns. The amendments are fatally flawed and if he feels unable to withdraw them I will ask my hon. Friends to oppose them.
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