Select Committee on European Union Minutes of Evidence

Further Supplementary Memorandum from First Tuesday on the budget

  Share options were a huge concern for British entrepreneurs, and the budget did little or nothing to address their issues. First, it did not solve the most threatening problem of the existing regulations: employer's NIC contributions on the profit made on option sales. This creates huge potential liabilities for small companies, for which cash flow is the key to survival. Privately the government is being told that it could easily put a small company out of business. The budget says that the financial secretary will seek "a technical solution". But clearly a promise is not a solution in itself; nor does the term "technical" promise the sort of radical change that entrepreneurs want—which is to tax options as capital gains rather than income.

  It was a tiny step in the right direction for the budget to increase the amounts of options allowed in "approved" schemes, which do tax options as capital gains, to £100,000 each for up to 15 key employees. But this is inadequate on both practical and moral grounds. In practical terms, British companies are competing for key talent on international markets. And £100,000 in options just won't cut it for key people—or even semi-key people. They can get more abroad, particularly in the United States. In the US, all options are taxed at capital gains rates and the amounts granted are much, much higher. Microsoft has made thousands of millionaires. At Yahoo, the average value of options per employee is several million dollars. Even in absolute terms, £100,000 isn't much when adjusted for the risk that the options will be worth nothing and the time required for the options to vest.

  Increasingly, though, I'm less bothered by the uselessness of government policy than by its injustice. Taxing share options as income and share investments as capital gains implicitly privileges money over labour—which is exactly what I thought a Labour government was against. Most new economy companies have no assets apart from the talent and brainpower of their employees. Microsoft, for example, has assets on its books of only about $30 billion ($20 billion of that cash) for a market capitalisation of well over $400 billion. What the stock market values in the company is the talents of its employees. It is precisely by letting employees share in the value that they create that Microsoft and its ilk win their loyalty and dedication. By taxing those options as capital gains, the United States puts talent on level footing with the financiers who provide the cash to fuel their original ambitions. But by taxing share options as income and share investments as capital gains, Britain taxes talent far more heavily than money. That seems just plain wrong.

  On the plus side of the budget, faster approvals for immigration is a good move. And faster write-offs for computer equipment—though they will do little for fast-growing firms, will help traditional small businesses move on to the Net.

28 March 2000

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