Clause 40 (Hansard, 6 July 1999)

§ Dr. Cable
I beg to move amendment No. 30, in page 21, line 4, leave out subsection (7) and insert— '(7) The amendments made by this section shall be deemed always to have had effect'. This technical matter was pursued at length in Committee, but I should like to take it a little further. It arises from a measure against tax avoidance that was designed to stop people converting remuneration into shares, thereby exempting themselves from higher rates of income tax. That measure fell on a particular class of companies—unquoted companies that frequently pay employees or directors in shares that must be transferred when the employee or director leaves the company.
That presented a problem for those people, who would have to pay taxes at higher rates on valid and welcome forms of employee share ownership because of the attempt to clamp down on tax avoidance. The Finance Act 1998 attempted to address the problem by exempting people when the arrangement was built into the company's articles of association. However, it is clear from discussions with the Inland Revenue that the exemption was too narrowly drawn. Many people were caught out who had acquired shares as a result of employee contracts, or because they worked for a subsidiary—unlike the fat cats who work for main companies.
Clause 40 is designed to narrow further the range of the anti-avoidance measure, and is generally welcome as it allows exemptions to be extended to people who work for subsidiary companies. However, the exemption is limited to people who bought shares after Royal Assent was granted to last year's Finance Act. It still catches a substantial number of people innocently involved in employee share ownership schemes who purchased their shares long ago.
The amendment would therefore apply the anti-avoidance measure retrospectively. Little revenue is involved, though if the sum is more substantial, the Treasury should give us some figures. The amendment cannot conceivably be construed as doing anything to encourage tax avoidance as it applies to decisions already taken. It is a reasonable technical suggestion to widen the scope of the exemption already accepted in principle by 865 the Government in a way that will meet the concerns of those who are trying to promote employee share ownership in a specific category of companies.

§ Mr. Howard Flight (Arundel and South Downs)
Clause 40 and the Liberal Democrat amendment are the fruits of excessive zeal in anti-avoidance measures, the complication of which has resulted in mistakes by the Government. The amendment is broadly correct, as the administration of clause 40 would be a nightmare for the Inland Revenue during the year in which an unfair tax rule existed, but it sets a precedent with which we are uncomfortable by making tax matters retrospective, even though it favours individuals. However, we cannot see how clause 40 will operate smoothly without it, unless the Revenue acts as if it had been included in the Bill.
Where companies pay individuals in shares subject to later forfeiture—which creates a difficulty in valuing the benefit and the income tax that arises—special rules apply. When the original provisions were drafted in 1988, cases in which an employee dismissed for misconduct had to sell the shares at a discount were not included, but those cases were included in the special rules last year. Those people are in a tax situation different from the deliberately advantageous situation in which shares become forfeit in order to avoid charges to income tax. The tidying up of parts of last year's Act made the mistake of including a charge to income tax that no reasonable person would have considered.
We are glad that the Government are correcting that error in clause 40. However, do they intend the Revenue to be lumbered with the unintended law for a year, or will the Revenue operate as if the mistake had not happened, even if the amendment is not accepted?

§ Mr. Fabricant
I, too, support the amendment and welcome clause 40. The clause is a small demonstration of the Government's so-called commitment to a stakeholding society, although they are also attacking fat cats and claiming that anyone who enjoys the fruits of the company for which he or she works is a fat cat. There is a fundamental inconsistency there.
It is wholly wrong that clause 40 should become operational from a particular future date. It should be backdated. It should, indeed, have gone further. When in Opposition, Government Members criticised our Finance Acts, claiming that share and profit participation schemes were not lawful, and that profit schemes were being abused. There were instances of that, for example, one at Nottingham university, which was quoted by my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke). A shell company was set up and people were paid through dividends rather than wages.
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Assurances were given before the last general election to companies such as the John Lewis Partnership, which I do not think any hon. Member would accuse of operating a scheme to make use of a tax loophole and which has suffered as a consequence. Everyone who works for the John Lewis Partnership is designated as a partner. At the end of the year, instead of a dividend being declared, a proportion of salary is declared as a bonus, 866 which is distributed among all the workers. If that is not a good example of a stakeholding society, I do not know what is.
I clearly remember during debates on the Finance Bill before the last general election Labour Members pledging that if a Labour Government were elected they would restore tax-exempt status to profit-sharing schemes such as that operated by the John Lewis Partnership, which is a bona fide scheme. Now, two years into a Labour Government, what do we see? The stakeholding society is merely another spin. There has been no deed and the Government have not attempted to reinstate that profit-sharing scheme. That is another empty promise—another promise unfulfilled and another group of people who feel betrayed as a consequence.
Will the Minister, who was not in the House prior to the general election, look through the Hansard of our debates on that Finance Bill, see the promises that were made and undertake on her word of honour that bona fide profit-sharing schemes will be reinstated as tax exempt? There is no logic in introducing clause 40 into the Bill without introducing the sort of scheme that I just mentioned.
The Labour Government claim that they are no longer against fat cats. They hope that fat cats will vote for them. They claim that they want a stakeholding society. Yet when companies generate the very conditions that provide such a society, the Government, either through their inaction or action, work against them. That is hypocrisy, betrayal and spin of the worst kind.

§ Ms Hewitt
I draw the hon. Gentleman's attention to the commitment made in the Budget by my right hon. Friend the Chancellor, both to introduce new tax regulations for employee share ownership schemes, which will make it the most generously tax relieved form of employee share ownership in this country and to introduce a new enterprise management incentive, which is directed particularly towards new and start-up companies. We are more than fulfilling our pledge to promote stakeholding by employees.

§ Mr. Fabricant
Will the hon. Lady give way?

§ Ms Hewitt
No. If the hon. Gentleman will forgive me, I would rather deal with the amendments to clause 40. It is fair to say that he strayed somewhat wide of those.
As the hon. Member for Twickenham (Dr. Cable) said, clause 40 adds two new cases to the categories of shares that are specifically excluded from the special tax rules that were introduced in the Finance Act 1998. Those excluded cases are, instead, taxed in line with general tax rules. The amendment would make the change retrospective to last year.
A similar amendment was tabled in Committee and was spoken to by the hon. Member for Bognor Regis and Littlehampton (Mr. Gibb). I asked him to withdraw it on the ground that it would be wrong to present an unexpected tax bill to some employees. He agreed to do so on the basis of my statement to the Committee, which he described as "full, frank and helpful". I always seek to be full, frank and helpful.
My concern at that time was that making the changes retrospective, while it would be beneficial for the majority, might result in some employees receiving a 867 larger tax bill. That is because the value of shares can go down as well as up. If an employee had been awarded shares since 17 March 1998 that were subject to a risk of forfeiture that could not last for more than 5 years and the shares had fallen in value, the tax charge would, in the absence of retrospective exemption, be on a lower value than would be the case under general tax rules.
In most cases, however, the opposite would apply: the shares would have increased in value and the employee would be better off with retrospection. Because of the possible risk that a few people might be worse off, it seemed better on balance not to make the clause retrospective.
The debate in Committee was helpful and since then several advisers have shown us examples of cases where ordinary employees will be disadvantaged unfairly by the absence of retrospection. In one case, the directors of a company were offered shares subject to the risk of forfeiture in February 1998, before the special rules in section 140A apply. Any subsequent increase in the value of those shares will therefore be taxed as a capital gain.
However, similar shares were awarded to all the employees of the company in April 1998. Those fall within the special rules of section 140A with the result that when they sell their shares the employees will have to pay income tax on any subsequent increase in their value. For most employees that will mean a real cost as the annual capital gains tax exemption would normally cover their gain.
Therefore, the employees end up being treated far more harshly than the directors of the company who acquired their shares a month earlier. If the employees were awarded the same shares after Royal Assent, they would be covered by the exemption provided by clause 40 and would be treated the same as the directors. Therefore, employees who were awarded shares between 17 March 1998 and when this Bill is enacted would be treated more harshly than any employees receiving exactly the same shares both before and after those dates. We have also reached the conclusion that many of those affected will simply not be aware that they are in that unfortunate position.
Therefore, like the hon. Member for Arundel and South Downs (Mr. Flight), I think that on this occasion there is a convincing argument that we should set aside our normal concerns about retrospective legislation and the problems to which it can give rise. I am therefore happy that we should adopt the common-sense solution which is clearly fairer to most employees. I am grateful to hon. Members and those advisers who have brought those cases to our attention and I am happy to accept the amendment.