Clause 23.—(DIRECTORS AND EMPLOYEES OF COMPANIES GRANTED RIGHTS TO ACQUIRE SHARES.)

HC Deb 20 June 1966 vol 730 cc177-238

Mr. Hordern

I beg to move Amendment No. 214, in page 23, line 3, after "right" to insert: granted or acquired after the said date". I understand that it will be convenient to the Committee if together with this Amendment we discuss Amendment No. 215, in line 7, at end insert: which has accrued since the date aforesaid". Amendment No. 217, in page 24, leave out lines 29 to 38.

Amendment No. 218, in Schedule 3, page 69, line 10, leave out subparagraph (2).

The whole of this Clause is nasty, brutish and long. The effect of these Amendments is perfectly simple. It is to take the retrospective element out of the Clause. The Chief Secretary made a great deal of play about the fact that Clause 22 contained no retrospective element. We completely failed to agree with him in that argument. I do not believe that anyone can claim that the effect of this Clause is not retrospective.

The Chancellor said in his Budget Statement that any increase in the value of share options which took place before today will be left out of account."—[OFFICIAL REPORT, 3rd May, 1966; Vol. 727, c. 1435.] I have no doubt that the purpose of that statement was to prove to the House of Commons that there was no retrospective element in this Clause. But there is. It depends on the definition of an option. The option can only exist at the time that the right to it is granted. It is nothing more nor less than a contractual right. It is a conditional reward given by a company to an employee or a director or an executive for past services or for future services rendered, and it is the value of that option granted at that time that is the value that can be taxed, and no other.

Rule 1 of Schedule E taxes a person exercising an office or employment of profit … in respect of all salaries, fees, wages, perquisites or profits whatsoever … for the year of assessment. There can be no doubt that that year of assessment can only apply to the year in which the option is granted. It cannot conceivably apply when the option is exercised because at that time there can be no right of exercise for the executive or employee unless it had been granted at a previous time. It is, therefore, only the grant itself which is capable of bearing taxation at all, and this fact has been borne out by a famous and most excellent judgment in the House of Lords in the case of Abbott v. Philbin. Indeed, to be eligible under Schedule E at all it would surely have to be shown that a profit——

Mr. Barnett

Would the hon. Gentleman not agree that the case of Varty v. British South African Company rather confused the issue?

Mr. Hordern

I do not think it confused the issue at all. I think the case which I cited was a finer example, had a great deal more legal merit, although I am no lawyer, and certainly more up-to-date merit than the case which the hon. Gentleman has specified.

Besides that legal argument, it is surely the case that to be eligible under Schedule E it would have to be shown that a profit when the option rights are exercised was incurred by a person exercising his office and, of course, nothing of the kind can be shown. When an option is granted, all that happens is that an employee or an executive is invited to engage upon the swings and roundabouts of outrageous fortune in the fortunes of the shares of his company. To suggest that the price of the shares increases because of the work of that particular individual and that that is the sole reason for the increase in the prices of the shares is a perfectly ludicrous understanding for anyone who knows anything about the movement of share prices. Indeed, the price of the shares which have been granted to the employee or executive could easily have gone up for a whole variety of reasons—for a cheap money policy advocated by the Government, because of the Corporation Tax which produces a scarcity of shares. All the outside influences with 101 different reasons for the movement of shares could operate.

Nobody could use the argument that shares have appreciated in value entirely because of the office of employment of the employee or executive. But that is what would have to be argued if this liability to Schedule E tax were to be incurred. The value of the option, therefore, can only be the consideration given for the option when it is granted. If the option turns out to be profitable, that is almost entirely conditional and fortuitous, and is very little indeed to do with the work of the particular employee or executive to whom the rights are granted. Yet it is to be treated by Schedule E as if the profit were to be unconditional and uncertain. I suppose that any reasonable person would understand that it should be possible to offset losses against the same tax. That is what we shall attempt to do in a later Amendment.

10.15 p.m.

What is perfectly monstrous about the Clause is that it interferes retrospectively with a contract made between a company and its employees and executives at an earlier date. That is precisely what the Clause does, and that is why we oppose it and why the Amendments are framed in the way that they are.

I do not know what arguments the Financial Secretary may bring to bear when he answers these points. We wish to address ourselves entirely to the retrospective element in the Clause, and we shall listen with great interest to what he has to say. It is extremely unlikely that this will be in the least satisfactory, and it is highly likely that I shall have to advise my right hon. and hon. Friends to divide the Committee.

Mr. MacDermot

The Amendments propose that Clause 23 should apply only to options granted or acquired after Budget Day. As the hon. Member for Horsham (Mr. Hordern), who moved the Amendment clearly and shortly, said, it is based on the principle that if it were to apply to options granted or acquired before Budget day, it would be retrospective legislation. I hope to satisfy the Committee that that is a complete fallacy.

Retrospective legislation is legislation which involves an Amendment ex post facto of the law applicable to particular events which have already taken place. In some cases it is legitimate to do that, and we discussed the principles as to when it is legitimate at considerable length on the War Damage Act, 1965. We are not concerned with that here, because I hope to satisfy the Committee that this is not retrospective legislation.

We are not legislating to set aside, for example, the decision in the case of Abbott v. Philbin to which the hon. Member for Horsham referred, or to set aside the right of people who, before Budget day, relying on the decision of the House of Lords in that case, had exercised options that had been granted. In taxation, retrospective legislation means the imposition of a liability on transactions which have already been completed and which were not taxable at the time when they were completed. All that the Clause does is to impose tax on a specific event, namely the taking up, assignment or release of a share option. It does that only when that event happens after Budget day.

Therefore, on the simple test as to whether the events are complete to which the taxation applies, the answer is, "No", since in no circumstances can those events have been completed before Budget day for the Clause to operate as it is drafted.

Another principle to which the hon. Gentleman referred, and on which, presumably, the supporters of the Amendment rely, is that if a person can be shown to have contracted to do something on the footing that certain tax consequences would follow, and that he would suffer a loss if the tax consequences were altered while he remained bound by his contract, then it may be unfair to alter the law so as to impose that loss upon him.

That is a principle which, for example, we have taken into account in the decision which we made in Clause 27, to which we shall come before very long, that single-premium bonds issued before Budget day should not be subject to that Clause.

I argue that, certainly on this principle, it would not be retrospective legislation to have made it such. But it could be said in those cases, perhaps, that people had entered into contracts on the faith of the tax position as it then was. That does not apply here. Taxpayers with share options for which they pay only a nominal sum, if any, at the time when the option is granted are not under any kind of contractual liability in relation to their share options. They are quite free either to exercise them or not.

What we are proposing in relation to these options is exactly comparable to what the Conservative Government did in the 1960 Finance Act in respect of provisions which are not very dissimilar in their subject matter from these. Section 32 of that Act imposed a tax on certain receipts received after a trade, profession or vocation had been discontinued, even though such receipts had been exempt in previous years, again due to a decision of the House of Lords which had reversed what had previously been thought to be the law. There is a comparable situation here with the case of Abbott v. Philbin. The liability was imposed on those receipts even though the contractual right to receive them had already arisen before Budget day that year.

Another example is the "golden handshake" provision in the same Finance Act. That imposed a liability to tax on "golden handshakes", including the commutation of certain pensions. A director who had a right to commute his pension could exercise it at any time during the year 1959–60 without incurring any tax liability, but if he commuted it after 6th April, 1960 —Budget day—he became liable to tax even though his right to the pension, and to commute it, had been fully established by contract before that Budget day.

I suggest that that is a close analogy to what we are now discussing, and that it clearly establishes the principle for which I am contending. In any event, I suggest that it would be somewhat naive and artificial to say that people have been granted options or have accepted them during the period since the case, of Abbott v. Philbin in the expectation that the law in that case would not be altered. There has been widespread speculation in the Press on the question how long that decision would continue in force. I do not base my argument on that; I based it on the clear principles which I have stated. I say that this is not retrospective legislation.

If it were accepted the Amendment would produce some illogical and strange results. Often options are granted up to a ten-year period and it might therefore still come about in 1975 that a person could exercise an option and still be exempt from tax, because the exemption was granted before Budget day, whereas many people who had been granted options since Budget day and could exercise them much earlier than 1975—and did so—would be subject to tax. I rest my argument on the principles that I have stated. The simple answer to the hon. Member is that the charge that this is retrospective legislation is without foundation.

Mr. John Nott (St. Ives)

I happen to be the beneficiary of an option for 4,000 shares in the company with which I was previously working. I may therefore look at this matter from a somewhat subjective point of view. Nevertheless, I completely disagree with what the Financial Secretary has just said. I believe that a liability in respect of transactions already completed does arise, and that this Clause is retrospective, for reasons which I shall try to explain.

In the case of options already granted to employees of a company, the following has already taken place. In the first place, the beneficiary of the option, the person granted it, has already been assessed for tax by the Inland Revenue on the value of the grant. The Revenue has already assessed the option as something which he has received as an emolument of his employment. In many cases the Income Tax which such an employee has paid has been quite considerable.

In deciding whether or not to accept an option from his company, an employee had to decide whether the tax for which he was assessed outweighed the advantages he would gain from receiving a quite intangible benefit. To my knowledge, employees of many companies offered options have rejected them because they felt that the tax liabilty imposed on them at the time of the grant did not make it worth their while to accept the option.

Worse still—this is the point which the Financial Secretary has not grasped, and, incidentally it applies in my case— many employees have agreed with the Revenue to accept their option at a striking price well above the market price of the shares at the time it was granted in consideration of their not being assessed for tax at the time of the grant. I have here a note which I made following a conversation which I had with the Revenue on this very matter. In 1965, the Revenue told me that, if the option was granted 15 per cent, above the market price on the day of the grant, there would be no tax problem and I— the same applies to others in a similar position—would not be assessed for Income Tax. If, on the other hand, the option price was granted 10 per cent, above the market price, there would have to be restrictions on the time when the option was exercised; in other words, there would be a graduated period over which the option could be exercised.

The point I emphasise is that I have given consideration for that option because I have forgone the right to take an option at the market price I have taken it at 15 per cent, above the market price in consideration that, and after agreeing with the Revenue that, I should not be assessed for tax.

The situation is now being completely changed. There is a clear element of retrospection in what the Financial Secretary proposes. That is the point from the individual's angle. There is retrospection also from the point of view of the shareholders of the company who in general meeting agreed that these options should be granted. They agreed to forgo part of their proprietary rights over their shares, they agreed to have their equity in the company diluted at some future date, on the basis that employees of the company were being given something which now, because of what the Government propose, has become worthless. The shareholders agreed to give part of their proprietary rights away so that employees of the company might be given a benefit which would encourage them to work harder in the future, but now that the options which have been granted are to bear Income Tax, this makes them virtually worthless in the hands of those who have already received them.

This is why I say that there is retrospection in the Clause, first, because many employees have already paid Income Tax at the time of the grant. Others have not paid Income Tax because they agreed with the Revenue not to have a striking price at the market but at 15 per cent, above the market at that date and exercise it in a graduated way over a period of years. That is the consideration which they gave for not being assessed for Income Tax at the time.

Secondly, I consider it retrospective so far as the shareholders are concerned because they agreed to forgo future proprietary rights in the shares which belonged to them in consideration of the fact that the employees of the company were being granted something which had value, whereas now as a result of the Clause it will have no value at all.

10.30 p.m.

Mr. Harold Lever

This is a narrow but rather important point about retrospection. I am speaking only to the question of retrospection because I am anxious that when there is any harsh retrospective legislation the House and the Committee should react appropriately. Our protests in such circumstances would be weakened if by false logic we shouted retrospection on innumerable occasions when there was no retrospection.

I would make clear to the Committee right away that I entirely agree with my hon. and learned Friend that there is no retrospection in this instance, and I hope to satisfy the Committee that that is so by one or two simple tests. I want hon. Members to keep their minds clear that what we are talking about now is retrospection only, not the merits or fairness of the substantive Clause itself.

If I have an option on shares, as I have at the present moment, I have the expectation that if I exercise it no tax will fall upon me. I have paid good money to take the option under the law as it stands and as it will stand next year. If I exercise my option in the following year, no tax will arise for the reason of the exercise of the option. Would anybody say that if the Chancellor decided that when options are exercised tax shall be levied, of whatever kind, that will be retrospection if only applied to the exercise of options after the date of the Finance Bill? Of course not. If there was not a sense of unfairness for other reasons in the mind of the hon. Member for St. Ives (Mr. Nott), I feel sure that if he felt that the tax was fair in itself and was satisfied with its substantive merits, he would not have the feeling that it was retrospection.

What the Chancellor is doing is not retrospeoting but disappointing expectations as to the future tax liabilities that people not unreasonably held. I deal with the two particular cases which the hon. Gentleman mentioned, from the point of view only of retrospection. First, he says that some people have already been taxed upon their option. Clearly, that is in respect of the value of the option itself. In those cases tax on the option has been inflicted upon the taxpayer. Suppose a new tax were made payable not upon the receipt of the option but upon its exercise and the profits thereby gained. I will not discuss it now because I think it would be exceedingly unfair if a second tax were charged on the same profits. That is a good case for saying that the tax on the exercise of options should be mitigated or reduced by the amount of tax that has already been exacted. This has nothing to do with retrospection.

The same thing applies to the other question, that what the hon. Gentleman agreed with the Inland Revenue, or someone else did, was that no tax should be payable in consideration of their accepting particular terms of the option. But the tax which it was agreed then should not be payable was the existing tax; that is, the tax upon the option. It was not the tax which is now to be imposed, which is the tax on profits achieved by acquiring a share below its market value. There are two distinct bodies of profit which are taxed: one under the old law, the' receipt of an option and its value, and the other under the new law, the future activities of the tax payer, namely, the exercise profitably of an option.

Mr. Nott

Would not the hon. Gentleman agree that if the person in question had agreed to be taxed at the time of the grant and accepted the option at 5 per cent, above the market, he would be better off than he will be now as a result of the new Clause? That is my point, and that is the element of retrospection in the Clause.

Mr. Lever

I am seeking to persuade the Committee that there is an element of possible unfairness in the Clause but not an element of retrospection. For example, in my own case, I paid good money for the suggested option because I believed that, if I exercised it, I would achieve the receipt of a capital asset substantially below market value. If the Chancellor decides to tax me upon the exercise of the option, I might think it unfair that he should suddenly reverse tax policy and make me pay tax in circumstances that have hitherto been tax free, but I could not accuse him of retrospection.

The hon. Member has made out a case for saying that this tax might be unfair but not for saying that it might be retrospective. There is little doubt that the Chancellor is within his rights from the retrospection point of view to operate this Clause. It is for the Committee to consider, on other Amendments and on the Clause itself, whether the Clause is desirable and just or whether it initiates cases of hardship which operate unfairly on some people, but we are considering now retrospection and there is no argument that this is a retrospective activity by the Chancellor.

Mr. W. R. van Straubenzee (Wokingham)

I am sure that, as always, the hon. Member for Manchester, Cheetham (Mr. Harold Lever) has convinced himself but he will forgive me when I say that some of his latter argument was of a very close kind and that it was not easy for all of us to see the difference he was drawing.

There is an aspect of this transaction which closely links the grant and the taking up of the option, and it is on the grant as opposed to the taking up of the option that the Financial Secretary is resting so much of his case. Let us take an aspect which has not so far been discussed and in respect of which I have no personal interest. Indeed, I seem to be the only hon. Member present who does not have an option on something or other.

There are perfectly proper, honourable and upright transactions when men who have worked exceedingly hard and have built up a business part with it in the general way of floating it or obtain capital from outside, the business having grown to a certain stage of needing outside help, and when part of the consideration is an option. I have an exact case in mind in respect of which, I repeat, I have no personal interest other than constituency, and I will not bore the Committee with details.

At the time the option was made— it has not yet been taken up—it was a perfectly fair and proper transaction for, in this case, two men. Through their personal exertions, they built up a company and brought great prosperity to many people and to the neighbourhood. Now, however, the basis of the transaction is to be wholly altered. I suggest to the Financial Secretary that there is a strong retrospective element, because the taking up of an option is so closely linked with the situation of the grant of the option.

My two constituents parted with a substantial interest in the company and have a strong personal sense of resentment that the Government are to impose an element of retrospection on a perfectly proper and upright transaction. I cannot see the narrow distinction it is sought to draw. The gloomy forecast of my hon. Friend the Member for Horsham (Mr. Hordern) was justified.

Mr. MacDermot

The hon. Member for St. Ives (Mr. Nott) has already been answered by my hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever). He spoke about liability for tax at the time of the grant. I stress that this is a rare occurrence and that in the vast majority of cases share options are of nominal value at the time they are granted and it is, therefore, virtually impossible to establish any value at that time, but when there is substantial value the question is whether the terms of the tax which we propose to impose are fair, and we can discuss that when we come to debate the terms of the Clause in detail. Under paragraph 1(2) of the Third Schedule, where the pre-Budget day option such as the hon. Gentleman is talking about is exercised after Budget day, the amount, if any, assessed to tax under Schedule E at the time of the grant will be treated as if it were part of the price of the option, so that we have taken this into account in deciding what is fair when taxing the exercise of the option when that time comes.

I cannot accept the argument that retrospective legislation is involved in the position of the shareholders any more than it would have been if they had agreed to a service contract, say, for the managing director of the company to last for several years ahead and the rates of tax on that income were later changed. I remind the hon. Member for Wokingham (Mr. van Straubenzee) of the example which I gave of the golden handshake. Surely the two situations are entirely parallel. A director or employee who had a contract under which he was entitled to a pension which he was entitled to commute in a way which would give him a large tax-free sum prior to 1960 and who entered into a contract with the company on the understanding that he was to have that benefit, when hon. Members opposite passed their Finance Act, 1960, found himself in the position of having to pay tax on it.

The only difference is that the two gentlemen to whom the hon. Gentleman referred had an expectation that they would receive what in effect was remuneration for their services at a future date tax-free, and now the law is being altered so that they will have to pay tax on it. But there is no retrospection in that.

Mr. Hordern

I must advise my hon. Friends that the explanations which we have had from the Financial Secretary and the hon. Member for Manchester, Cheetham (Mr. Harold Lever) have been wholly unsatisfactory, as I forecast that they would be. The hon. Member for Cheetham said that the case put by my hon. Friend the Member for St. Ives (Mr. Nott) might be unfair, but was not retrospective. It was both unfair and retrospective. The Financial Secretary has completely failed to answer the point that the only taxable transaction is the grant of the option in the first place. It must be so. What happens is that a man is willing to part with his labour, in the words of Adam Smith, or part of his labour in return for the grant of an option which may become available to him in future. That is the only certain taxable thing which is given to him.

Mr. Harold Lever

Would the hon. Gentleman deal with the point which I made about my own option? When I parted with money for this option it was in the expectation that I would get a tax-free transaction if I took up the option. Would he say whether the Chancellor would be retrospecting if he

decided that all options taken up should be assessed for tax on the difference between the price paid for the option taken up and the market value of the shares?

Mr. Hordern

In that case, there is no retrospective element, simply because this Clause specifically takes the value of the option to be the difference in value between the Budget date and the date at which it is exercised. That is what is called the value of the option. We deny the whole basis of that and say that the only value of an option is at the time granted.

The second point which I must put again is that one cannot tell with any certainty what the reward will be when the option is exercised. It depends and is wholly conditional on a whole host of factors which certainly could not be in the minds of the company which originally granted the option.

The Financial Secretary has referred to the case of a service contract and the golden handshake. The difference is that in both cases the reward is certain and fair. The difference with an option is that the time when it is exercised is the only time of any possibility of any kind of reward occurring, and we hold firmly to the view that the time at which the option was granted is the only time at which a tax can be levied and that only on the value of the grant itself.

On that point and at this stage, I must ask my hon. Friends to join me in the Lobby against the Government.

Question put, That those words be there inserted:—

The Committee divided: Ayes 119, Noes 214.

Division No. 31.]	AYES	[10.45 p.m.
Alison, Michael (Barkston Ash)	Buchanan-Smith, Alick(Angus,N&M)	Deedes, Rt. Hn. w. F. (Ashford)
Astor, John	Buck, Antony (Colchetter)	Dodds-Parker, Douglas
Awdry, Daniel	Campbell, Gordon	Doughty, Charles
Batsford, Brian	Carlisle, Mark	Eden, Sir John
Bell, Ronald	Carr, Rt. Hn. Robert	Elliot, Capt. Walter (Carshalton)
Bennett, Dr. Reginald (Gos. A Fhm)	Castle, Rt. Hn. Barbara	Elliott, R.W.(N'c'tle-upon-Tyne,N.)
Berry, Hn. Anthony	Chichester-Clark, R.	Errington, Sir Eric
Biffen, John	Clegg, Walter	Eyre, Reginald
Biggs-Davison, John	Cooke, Robert	Farr, John
Birch, Rt. Hn. Nigel	Corfield, F. V.	Fisher, Nigel
Black, Sir Cyril	Crosthwaite-Eyre, Sir Oliver	Fletcher-Cooke, Charles
Blaker, Peter	Crouch, David	Fortescue, Tim
Body, Richard	Crowder, F. P.	Glover, Sir Douglas
Boyd-Carpenter, Rt. Hn. John	Cunningham, Sir Knox	Griffiths, Eldon (Bury St. Ildmunds)
Boyle, Rt. Hn. Sir Edward	Dalkeith, Earl of	Gurden, Harold
Brewit, John	Dance, James	Hall-Davis, A. G. F.
Brinton, Sir Tatton	d'Avigdor-Goldsmid, Sir Henry	Hawkins, Paul
Brown, sir Edward (Bath)	Dean, Paul (Somerset, N.)	Heald, Rt. Hn. Sir Lionel
Heath, Rt. Hn. Edward	Maddan, Martin	Rossi, Hugh (Homsey)
Higgine, Terence L.	Maude, Angus	Scott, Nicholas
Hill, J. E. B.	Maxwell-Hyslop, R. J.	Sinclair, Sir George
Hirst, Geoffrey	Maydon, Lt-Cmdr. S. L. C.	Stainton, Keith
Hobson, Rt. Hn. Sir John	Mills, Peter (Torrington)	Talbot, John E.
Hogg, Rt. Hn. Quintin	Mills, Stratton (Belfast, N.)	Taylor, Sir Charles (Eastbourne)
Holland, Philip	Monro, Hector	Taylor,Edward M.(G'gow,Cathcart)
Hordern, Peter	More, Jasper	Taylor, Frank (Moss Side)
Hornby, Richard	Munro-Lucas-Tooth, Sir Hugh	Teeling, Sir William
Hutchison, Michael Clark	Neave, Airey	Temple, John M.
Jenkin, Patrick (Woodford)	Nicholls, Sir Harmar	Thatcher, Mrs. Margaret
Jopling, Michael	Noble, Rt. Hn. Michael	Turton, Rt. Hn. R. H.
Kaberry, Sir Donald	Nott, John	van Straubenzee, W. R.
Kimball, Marcus	Osborn, John (Hallam)	Ward, Dame Irene
Knight, Mrs. Jill	Page, Graham (Crosby)	Weatherill, Bernard
Langford-Holt, Sir John	Peel, John	Webster, David
Legge-Bourke, Sir Harry	Pounder, Rafton	Wells, John (Maidstone)
Longden, Gilbert	Powell, Rt. Hn. J. Enoch	Whitelaw, William
Loveys, W. H.	Price, David (Eastleigh)	Wilson, Geoffrey (Truro)
MacArthur, Ian	Prior, J. M. L.	Wolrlge-Gordon, Patrick
Maclean, Sir Fitzroy	Pym, Francis
Macleod, Rt. Hn. Iain	Renton, Rt. Hn. Sir David	TELLERS FOR THE AYES:
McMaster Stanley	Roots, William	Mr. George Younger and Mr. Anthony Grant.
NOES
Allaun, Frank (Salford, E.)	Fernyhough, E.	Lawson, George
Alldritt, Walter	Fletcher, Raymond (Ilkeston)	Lee, John (Reading)
Allen, Scholefleld	Fletcher, Ted (Darlington)	Lever, Harold (Cheetham)
Archer, Peter	Floud, Bernard	Lewis, Arthur (W. Ham, N.)
Armstrong, Ernest	Foley, Maurice	Lewis, Ron (Carlisle)
Ashley, Jack	Forrester, John	Lomas, Kenneth
Atkins, Ronald (Preston, N.)	Fowler, Gerry	Luard, Evan
Atkinson Norman (Tottenham)	Fraser, John (Norwood)	Lubbock, Eric
Barnett, Joel	Fraser, Rt. Hn. Tom (Hamilton)	Lyon, Alexander w. (York)
Baxter, William	Freeson, Reginald	Lyons, Edward (Bradford, E.)
Benn, Rt. Hn. Anthony Wedgwood	Galpern, Sir Myer	Mabon, Dr. J. Dickson
Bennett, James (G'gow, Brdgeton)	Gardner, A. J.	McBride, Neil
Bidwell, Sydney	Garrow, Alex	McCann, John
Bishop, E. S.	Ginsburg, David	MacDermot, Niall
Blackburn. F.	Gordon Walker, Rt. Hn. P. C.	Macdonald, A. H.
Boardman, H.	Gourlay, Harry	Mackenzie, Alasdalr(Ross&Crom'ty)
Booth, Albert	Gray, Dr. Hugh	Mackenzie, Gregor (Rutherglen)
Braddock, Mrs. E. M.	Gregory, Arnold	Mackintosh, John P.
Brown, Rt. Hn. George (Belper)	Grlmond, Rt. Hn. J.	Maclennan, Robert
Brown,Bob(N'c'tle-upon-Tyne,W.)	Hamilton, James (Bothwell)	McMillan, Tom (Glasgow, C.)
Brown, R. W. (Shoreditch & F'bury)	Hamilton, William (Fife, W.)	MacPherson, Malcolm
Buchan, Norman	Hamling, William	Mahon, Peter (Preston, S.)
Buchanan, Richard (G'gow, Sp'burn)	Hannan, William	Mahon, Simon (Bootle)
Butler, Mrs. Joyce (Wood Green)	Harper, Joseph	Manuel, Archie
Callaghan, Rt. Hn. James	Hazell, Bert	Mapp, Charles
Cant, R. B.	Henig, Stanley	Marquand, David
Carmichael, Neil	Hilton, W. S.	Marsh, Rt. Hn. Richard
Carter-Jones, Lewis	Hobden, Dennis (Brighton, K'town)	Mason, Roy
Chapman, Donald	Hooley, Frank	Millan, Bruce
Coe, Denis	Hooson, Emlyn	Miller, Dr. M. S.
Coleman, Donald	Horner, John	Mitchell, R. C. (S'th'pton, Test)
Corbet, Mrs. Freda	Howarth, Harry (Wellingborough)	Morgan, Elystan (Cardiganshire)
Craddock, George (Bradford, S.)	Howarth, Robert (Bolton, E.)	Morris, Charles R. (Openshaw)
Cronin, John	Howell, Denis (Small Heath)	Moyle, Roland
Cullen, Mrs. Alice	Howie, W.	Mulley, Rt. Hn. Frederick
Dalyell, Tarn	Hoy, James	Neal, Harold
Davidson,James(Aberdeenshire, W.)	Hughes, Rt. Hn. Cledwyn (Anglesey)	Newens, Stan
Davies, Dr. Ernest (Stretford)	Hughes, Emrys (Ayrshire, S.)	Noel-Baker,Rt.Hn.Philip (Derby,S.)
Davies, Harold (Leek)	Hughes, Roy (Newport)	Ogden, Erie
Davies, Robert (Cambridge)	Hunter, Adam	O'Malley, Brian
Dell, Edmund	Hynd, John	Orme, Stanley
Dempsey, James	Irvine, A. J. (Edge Hill)	Oswald, Thomas
Dewar, Donald	Jackson, Colin (B'h'se & Spenb'gh)	Padley, Walter
Diamond, Rt. Hn. John	Jackson, Peter M. (High Peak)	Page, Derek (King's Lynn)
Dickens, James	Jeger, George (Goole)	Pardoe, J.
Dobson, Ray	Jeger, Mrs. Lena(H'b'n&St.P'cras,S.)	Park,Trevor
Doig, Peter	Johnson, Carol (Lewisham, S.)	Parker, John (Dagenham)
Dunn, James A.	Johnson, James (K'ston-on-Hull, W.)	Parkyn, Brian (Bedford)
Dunnett, Jack	Johnston, Russell (Inverness)	Pavitt, Laurence
Dunwoody, Mrs. Gwyneth (Exeter)	Jones, Dan (Burnley)	Perry, George H. (Nottingham, S.)
Eadie, Alex	Jones,Rt.Hn.SirElwyn(W.Ham,S.)	Prentice, Rt. Hn. R. E.
Edwards, William (Merioneth)	Jones, J. Idwal (Wrexham)	Price, Christopher (Perry Barr)
Ellis, John	Judd, Frank	Price, Thomas (Westnoughton)
English, Michael	Kelley, Richard	Price, William (Rugby)
Ennals, David	Kenyon, Clifford	Randall, Harry
Ensor, David	Kerr, Mrs. Anne (R'ter & Chatham)	Redhead, Edward
Evans, Albert (Islington, S.W.)	Kerr, Dr. David (W'worth, Central)	Rees, Merlyn
Evans, loan L. (Birm'h'm, Yardley)	Kerr, Russell (Feltham)	Rhodes, Geoffrey

Roberts, Albert (Normanton)	Steele, Thomas (Dunbartonshire, W.)	Williams, Alan (Swansea, w.)
Roberts, Goronwy (Caernarvon)	Summerskill, Hn. Dr. Shirley	Williams, Alan Lee (Hornchurch)
Robinson, W. O. J. (Walth'stow, E.)	Symonds, J. B.	Willis, George (Edinburgh, E.)
Ross, Rt. Hn. William	Thorpe, Jeremy	Wilson, William (Coventry, S.)
Rowland, Christopher (Meriden)	Tuck, Raphael	Winnick, David
Rowlands, E. (Cardiff, N.)	Urwin, T. W.	Winstanley, Dr. M. P.
Ryan, John	Varley, Eric G.
Shaw, Arnold (Ilford, S.)	Wainwright, Richard (Colne Valley)	Winterbottom, R. E.
Sheldon, Robert	Walden, Brian (All Saints)	Woodburn, Rt. Hn. A.
Short, Rt. Hn. Edward(N'c' tle-u-Tyne)	Walker, Harold (Doncaster)	Woof, Robert
Short, Mrs.Renée (W'hampton,N.E.)	Wallace, George	Yates, Victor
Silkin, John (Deptford)	Watkins, David (Consett)
Silkin, S. C. (Dulwich)	Wellbeloved, James	TELLERS FOR THE NOES:
Silverman, Julius (Aston)	Wells, William (Walsall, N.)	Mr. William Whitlock and Mr. Alan Fitch.
Steel, David (Roxburgh)	White, Mrs. Eirene

Mr. MacDermot

I beg to move, Amendment No. 233, in page 23, line 4, after "that", to insert "or any other".

The Chairman

I think that it would be for the convenience of the Committee if that Amendment and Amendments Nos. 234 to 238 were taken together.

Mr. MacDermot

I am grateful to you, Sir Eric. I think that that would be convenient, because they are all related to the same matter.

These Amendments are designed to widen the scope of the Clause so as to include in the charge the grant of options in companies other than the company or group of companies by which the director or employee is employed. It will include the case where a director is employed in one of a group of companies. If the Committee decides to accept these Amendments, subsection (10) as drafted will become unnecessary, and indeed the last Amendment proposes to leave it out.

Hon. Members may think that the likelihood of a person being granted an option in a company other than the one in which he is employed, and which does not belong to the same group of companies, is rather remote. Certainly we would not dispute that or disagree with it, but there has been some comment in the financial Press since the publication of the Finance Bill to the effect that we have not covered this eventuality.

The suggestion was made, I think first in the Economist, that an option might be granted in an investment company which held shares in the employing company, and that that could well be given to a director without attracting liability under this Clause, provided that the investment company was not technically controlled by his employing company. I say at once that we have not come across any option scheme of this kind, but we agree that it would not be very difficult for avoidance experts to contrive a device of that kind, and indeed there are other ways in which it could be done.

Now that these possibilities have been referred to in the Press, I think that perhaps the Committee will agree that it is better to legislate to exclude them, and this is the sole object of these Amendments.

Mr. Hordern

It is a little ingenuous of the Financial Secretary to tell the Committee that the Government's attention has been drawn by the Economist to a particular case at this stage. The financial Press has been full of a particular type of company operation for at least a month, and possibly a good deal longer. It is a type of operation which has come to be known as a Garda operation, and I presume that the purpose of these Amendments—and there are many of them—is to plug the loophole which existed under the terms of the original Clause which allowed a company to operate which could be called briefly a Garda-type scheme.

I do not wish to bore hon. Gentlemen opposite with an exposition of what it means—I am sure that many of them know—but I should like to make clear our attitude to this scheme. It is that we have no objection in principle to a company giving an incentive by means of offering shares or options in another body corporate, whether an investment trust, a unit trust or anything else. Our objection to the Garda-type scheme comes solely from the point of view of concealment, that the shareholders of the company were not informed of this device in public meeting.

11 p.m.

There are also, of course, other objections—forcible ones—such as the granting of a debenture at beneath the current market rate in order to allow executives the opportunity of receiving shares at a materially cheaper price than would otherwise be available. But even that case is offensive to us, because it has not been revealed to the shareholders and they were not called upon to approve it. We feel that the more suitable place for this kind of action is in a Companies Bill, which is why we feel so deeply about the absence of any legislation for companies in this Session. It was not even mentioned in the Queen's Speech.

We do not think that this is a particularly good way of handling the Garda option, because it does not meet the main objection, that the shareholders were not informed. Nevertheless, we are not unsympathetic to the objectives of the Financial Secretary. We shall be coming to his points—there may well be many on Report——

Mr. Harold Lever

Surely the hon. Gentleman is making heavy weather of this. The appropriate place to prevent a Garda-type operation, as he rightly said, is a Companies Bill. The appropriate place to deal with the tax consequences of a Garda-type operation is a Finance Bill, which is what we have here. So the Chancellor is in order.

Mr. Hordern

If I could remind the hon. Member, it was not particularly the tax position of these investment trusts to which we are objecting. I want to say why.

The first reason is that it is a sophisticated practice in the United States for an executive or an employee who has been granted options in his company, at the point of exercising the options to be able to convert the shares so exercised into a closed-end unit trust. This is not generally known, but it is the case, and they can do so without incurring a capital gains tax.

I am sure that my hon. Friends would agree that this is a desirable long-term element which we should like to see introduced into the law. A great deal of the suspicion which at present surrounds shareholdings—I am talking about employees—is due to the fact that, having held shares in the company in which they have been for some years, they may find that the value of their shares goes down. This is particularly the case for employees who have long service with their company and feel that they would like a broader spread and wider protection. It is just this movement, which comes from the shop floor, which will be effectively prevented by the Amendments.

Of course, there was a movement from the other direction, that is to say, from the unit trust movement itself which was progressing on a wider share ownership basis not only through banks but on the shop floor, trying to induce workers to buy unit trust shares.

The two forces were working together. It is more than unfortunate—I put it no higher—that the kind of wider share ownership to which all hon. Members pay lip service will be to some degree affected by the Amendments. We shall have more to say on the subject on the Question, "That the Clause, as amended, stand part of the Bill", but at this stage, in the absence of my hon. Friend wanting to say something, on the matter, I am content to remain where we are.

Mr. Harold Lever

I want to demolish in a sentence or two such criticism as has been made of the Government in this instance. The Companies Act does not deal with the tax consequences of a scheme to give directors or employees share options in any company. Nor can it properly do so. As the hon. Member said, the only objectionable feature of that type of scheme is that it is not disclosed to shareholders. But the Chancellor wants to tax those options, whether they are disclosed to shareholders or not, and the only place to do that is in the Finance Bill—and he is right to do it.

Mr. Hordern

The hon. Member has not done me his usual courtesy of listening to my remarks. I entirely agree with him. The objectionable part of the proposals is that they are not disclosed to the shareholders and that this should come out in the companies legislation. But we are not making that argument. We are merely saying that it has unfortunate effects if it is carried through, and I tried to give one or two examples. I do not say that it is altogether desirable but that we ought to bear in mind what the effects will be—and they are not altogether desirable.

Amendment agreed to.

Mr. Hordern

I beg to move Amendment No. 169, in page 23, line 5, to leave out from "to" to the end of line 7 and to insert: capital gains tax on the amount of any chargeable gain (or loss) computed under and in accordance with Part III of the Finance Act 1965 as amended by the provisions of this section. I understand that we may discuss at the same time the following Amendments:

Amendment No. 219, in page 23, line 7, at the end to insert: Such charge shall be spread over the years of assessment covering the period from the date of grant of the right to the date of its realisation, assignment or release: Provided that this clause shall not apply to—

1. (a) the exercise of a right to acquire shares where the right was granted at the time a person was non-resident and the grant was in respect of an employment with a non-resident body corporate; and
2. (b) the exercise of a right to acquire shares in a non-resident body corporate where that right was granted by a nonresident body corporate."

Amendment No. 216, in page 23, line 31, at the end to insert: (3) Where a person is chargeable with income tax (including surtax) upon a gain which arises or accrues to him by virtue of an application of this section that person may require the tax so payable to be reduced so as not to exceed the total amount of income tax (including surtax) which would have been payable by him had that gain arisen in three equal annual amounts the first arising on the date on which it is taken so to arise.

Amendment No. 172, in Schedule 3, page 69, line 5, to leave out sub-paragraph (1).

Amendment No. 171, in Schedule 3, page 69, line 10, to leave out from the beginning to "tax".

Amendment No. 170, in Schedule 3, page 69, line 12, to leave out from "1966" to "shall" in line 13.

The Temporary Chairman (Mr. Grant Ferris)

If that meets the convenience of the Committee.

Mr. Hordern

The purpose of Amendment No. 169 is to make such gain or loss liable to Capital Gains Tax when the options are exercised. Both sides of the Committee give a great deal of lip-service to the ideals of wider share ownership and especially to the spread of employee share holdings, and it will be within the knowledge of the Committee that such schemes have had great popularity and have been increasingly widespread during the last few years. One need not point out that many of our greatest companies now operate such schemes for their employees—such companies as I.C.I., Metal Box and, I believe, Rolls Royce. These schemes will be commended on all sides of the Committee. It is therefore quite ironic that the effect of the Clause is to tax an employee shareholder—one who works on the shop floor—at a far higher rate than an ordinary outside shareholder will be taxed.

Consider, for example, a rights issue. A company can make a rights issue to its shareholders at a price slightly below the market price. It generally makes such shares available to its employee shareholders at the same price. The effect of the Clause is that the gain on the shares by the employee shareholders will be taxable as to Schedule E but a gain of the same amount to outside shareholders will not be taxed to Schedule E but will be taxed to Capital Gains Tax in the ordinary course of events. It is a remarkable state of affairs, and I never thought that I would live to see the day when a Socialist Government could be seen to soak the worker in order that the capitalist would have full use of his rights.

What was intended was different. It was the intention to soak the directors and the executives and not the employees in the company. It is time to weigh up some of the consequences of this action.

The Chancellor has rightly been consistently and constantly critical of management, and my hon. Friends and I believe that there is a good deal in what he has said. We are united in our view that we require more competition and higher rewards in industry; more of the stick and more of the carrot. And although options may not be a tangible rewards when granted, they are, nevertheless, a form of prospective compensation which can make a significant difference to an executive or other employee.

I will illustrate what I have said. In the United States option schemes have flourished for many years. According to a survey conducted by McKinsey & Co., no less than 60 per cent, of all the companies quoted on Wall Street have option schemes for their executives. The survey went on to show that the company with the highest paid top executive group in each industry earned a 50 per cent, greater return on investment than its average competitor and double the rate of return of its lowest paid competitor. I am not disposed to argue that high rewards necessarily go with efficiency, but there is certainly a connection between the two.

It so happens that at present stock option schemes are not particularly popular in the United States, but that is entirely because the top rate of tax has come down in the last two years from 90 per cent, to 70 per cent.—while the top rate of tax in this country is now 91½ per cent. However, it is not necessary to refer to those on the top level of Surtax. The Chancellor made some remarks this afternoon about comparisons of people on various levels of income. I will put forward some examples to show the case in another direction.

The Times had two interesting articles earlier this year, on 17th and 18th February, which compared executives' pay in the United Kingdom with executives' pay in the Netherlands, Belgium, West Germany, Sweden, Italy, France and the United States. A comparison was drawn between an executive earning £5,000 a year, married, with two children aged 11 and 16. Although £5,000 may sound a lot of money, it is not for the kind of executives about whom we are talking; the sort of people hon. Members on both sides of the Committee have said we must encourage. One can see from the figures that while a person earns £5,000 in this country, his counterpart in other countries earns, before tax, at least 20 per cent, more and, after tax— with the sole exception of the United States—very much more. And in the United States he earns 90 per cent. more. The higher the income the more this discrepancy is exaggerated.

I put this to the Committee because the Chancellor tried to show earlier that we should not be too discouraged by any comparisons drawn between our remunerations and those of other countries. I have shown that the class of person about whom we are talking now, the £5,000 a year man, does not come out at all well in this country when making such comparisons.

One must observe the effect of this in our international dealings. There are many international companies operating in this country and they are increasing in number and scope. But the fact is, according to several reports, that it is now practically impossible to persuade men to come here if it means a drop in salary. Some of the largest international companies have reported that to persuade executives to come to work in this country they must be offered as much as three times the pay their counterparts would ordinarily get here. This is a factor which one must take into account when considering what would happen if share options were to be discontinued altogether.

11.15 p.m.

The rapid increase in sales is generally accompanied by a rapid increase in salaries. This is another finding of the McKinsey company. But the managing director's salary, whether for a company of £10 million or £100 million a year, is smaller in this country than in the others I have mentioned. We look with considerable alarm at the proposals which the Government have to wipe out share option schemes altogether. There is very little incentive for those not on the highest rate of income but in the £5,000 a year class. They cannot help but observe conditions in other countries. As travel becomes easier and their knowledge of conditions in other countries widens, there are natural tendencies for them to seek opportunities in other countries.

We have put down in another Amendment what we think the ameliorative effect on options might be if it were spread over three years. We think it wrong in any case to levy the tax in the year of exercising the option. It is not the common experience where share options have existed for many years for those in receipt of them to sell them when they have been exercised. I understand that in America 70 per cent, of those who have share options and are entitled to them retain them. The Government have not made clear in the Bill whether tax can be incurred even if the options are not exercised at all because of some notional figure of the value of the rights at the time.

What the Clause does not do is to allow any time to be taken into account between the time when the shares were originally granted and the time when they were exercised. The effect of the Clause is to tax the whole of the gain from the time of the grant of the option in one year. This cannot be defended on any reasonable basis. There are plenty of precedents for our proposal. I understand that in patent law it is a common practice to spread earnings over a number of years, and I believe the same is true of authors.

Before the Question is put, "That the Clause stand part of the Bill", we shall discuss a number of Amendments. I have mentioned the effect in relation to Amendment No. 169. There is plenty of scope here for criticism. The Clause is an extremely important one to oppose.

Mr. Harold Lever

If the hon. Member for Horsham (Mr. Hordern) seeks to convince me that tax on unearned income is excessively high in this country he has a willing ear. If he seeks to convince me that companies under pre-existing law have sought to mitigate the effect of high tax by the issue of options to directors and employees and are perfectly right to do so, he again has an assenting ear. But, if he seeks to show that the Chancellor has not a case for amending the law, the hon. Member has failed to make his case.

First, I must deal with what I object to in what I regard, however well-intentioned, as an excessive criticism of the Chancellor's motives. I wish that hon. Members opposite would give a little thought before they assert a malign intention and assume spite where none exists.

Mr. Hordern

The only other alternative is to accuse him of ignorance, and I am sure the hon. Gentleman would not want that.

Mr. Lever

That is right. Let us see whether this is so. The Chancellor says that when a person gets a benefit, whether in kind or cash, he shall be treated exactly the same. I am not going through a series of pedantic quibbles. The fact is that an employee or director who receives shares worth £100,000 for £10,000 is receiving a wage of £90,000.

That is the reality of it. He is getting benefit of £90,000 by reason of his working for the company. If he had received that wage in the form of cash, he would be liable to tax and Surtax.

I have already conceded that I regard the tax and Surtax rates as very seriously excessive in this country. But the fact remains that that is the law. If one wants to remedy that injustice, the right way is not to leave open certain loopholes that can be reasonably and honourably taken advantage of as long as those loopholes exist. But nobody can criticise the Chancellor for closing them. A fair criticism would be to say that when loopholes of this kind are closed, one ought to look at the rates of tax on unearned income which are excessive.

Can we make out a case that when directors and employees receive something in money's worth which is of substantial value, they shall not pay Income Tax or Surtax upon it? If an employee or a director gets a suit for half its market price, he pays tax on the difference. If by reason of his employment he gets a share for half its market price, the Chancellor is saying that he shall pay Income Tax and Surtax on the difference. If the result is harsh, it is another way of saying that there is an excessive rate of Income Tax and Surtax and the situation ought to be remedied.

One should not try to document a case against the Chancellor for his perfectly reasonable proposition by an irrelevant and unjustified allegation of bad faith and by adding to these unproved assertions and statements relating to I.C.I, and the Metal Box Co. All that I.C.I, and the Metal Box Co. do— I am speaking without any notice that this matter would be raised—is to issue to their shareholders shares either for nothing or below the market price, and the difference between the price that the employee pays and the value of the shares is an assessable taxable item. So much for the story that the issue of shares, if they are not taxable, is not affected by the Clause. The Clause does not deal with the issue of shares per se. The mere issue of shares by I.C.I, to its employees is not affected by this Clause.

It is wrong to suggest that the Chancellor is tampering with these excellent schemes whereby I.C.I, offers its shareholders shares at low prices, by way of gift or issue. Under the general law, the difference between what an employee gets and the price he pays is an earning of his trade.

The suggestion has been made that in some way or other the Chancellor is treating the employee worse than an existing shareholder, because under this Clause if a shareholder gets a right to subscribe a share below market price and a similar chance is given to an employee, the shareholder will not pay Income Tax under the Clause but the employee will. That is right. There is no unfairness involved.

The difference is this. When the shareholder receives a right to an issue below market price, he is merely conferring a benefit upon himself because every shareholder owns his proportionate share of the company. When the company issues its shares below market price to its own shareholders the shareholder is getting no gift. He is watering the capital of his own company. Therefore, he has not got anything that is taxable in the slightest degree. If the Chancellor were to tax him, I should rise in loud and long protest against the unfairness of it.

Mr. Hordent

Will the hon. Member address himself to the point that the issue of rights is the same issue as divided between the shareholders and the employees, and that the effect on the employees is more onerous than on the outside shareholders?

Mr. Lever

I was coming to this point. A shareholder who gets a share issue is getting no gift but is merely getting his own property in an adjusted form. It has been said over and over again that there is nothing to tax when a shareholder receives rights in his own company because pro tanto and in proportion he is watering the capital of his own company. That is why these issues rightly escape taxation.

When a shareholder gets a bonus issue of a one-for-one share, for nothing, there is often a scream from some of my hon. Friends, and then we hear a patronising explanation from hon. Members opposite that the shareholder has not really had anything from the company. They are quite right, because he has merely received a denomination of his own asset in a different form, and there is no change in his total property rights. When he gets the share below market price, there is nothing to tax, and the Chancellor would be wrong in taxing it.

But the situation is otherwise in the case of an employee who is not a shareholder. To the extent to which he is a shareholder, he will not be affected by the Clause. The employee who gets a share below market price, unlike the shareholder who receives nothing but his own asset in another form, is receiving a "perk", an emolument of his trade. It is that which the Chancellor is seeking to tax.

I am sure that the hon. Member for Horsham did not mean to misrepresent the position, but he got on to a false point in error. However, it is wrong to suggest that the Government are penalising workpeople, as compared with the generous treatment which they give to shareholders in this situation.

This must be wrong, and for the same reason I am not impressed by the argument that what should be charged upon the directors' options is Capital Gains Tax. If it is right to treat what the director receives in the ultimate as an earning of his employment, as I believe that it broadly is, the common sense of our citizens will regard it as reasonable that it must be treated as the amount to be taxed.

If that is reasonable, the appropriate taxes are Income Tax and Surtax. One hon. Member asked me if my views about Capital Gains Tax were the same this year as they were last year. This is not strictly relevant, but I can assure him that I hold the same unfavourable view of Capital Gains Tax as I did last year, and experience has done nothing to diminish my criticisms.

Capital Gains Tax would not be the right tax to apply to a man's earnings, which should be taxed by Income Tax and Surtax. Why should one seek to tax by Capital Gains Tax a particular form that his earnings take? There is no logic, rhyme or reason in attempting to do so. It is, in general, a tax on realised capital gains, and here the whole point is that the tax is imposed on acquisition of the share and not on realisation.

Of course, in some cases Capital Gains Tax would be applicable, and the man would pay this in addition to Income Tax and, perhaps, Surtax. But this would be only in appropriate cases and on appropriate areas of profit. To the extent that he later develops a capital gain and realises it he will pay Capital Gains Tax on that segment.

I can give a simple illustration. Let us imagine that a man gets an option to take up shares for £1 each, and that they are worth £5 when he exercises his option. He pays Income Tax and Surtax on the difference, namely £4. He holds the shares until he realises a capital gain of a further £5. He will then pay Capital Gains Tax on them, because it is a capital gain and not earnings. He will not pay Income Tax or Surtax. The Chancellor is right. He will apply Capital Gains Tax to capital gains profit and Income Tax and Surtax to the earnings of a trade or profession.

11.30 p.m.

Mr. Hirst

The hon. Member for Manchester, Cheetham (Mr. Harold Lever) is a marvellous chap at addressing himself to his own argument and then arguing even more brilliantly why it is a bad argument. It is a great enjoyment to listen to him, and a great intellectual exercise. I admire his skill very much, but it does not convince me in relation to the case which my hon. Friend has put forward. I am convinced that the Government, at heart, do not like option schemes.

I take a very different view. I ask myself, "What is necessary?" I come to the conclusion that we must find some way of rewarding and encouraging people in higher management. I do not belong to the hierarchy of management, but if this is the situation, and our top hierarchy says that it is, the Committee must accept it. We should not be pedantic about it and say, "Option schemes are wrong, and since everybody cannot have one nobody shall"—the usual Socialist argument, which is so tedious—and then decide what we can do to kill them.

Mr. Robert Sheldon (Ashton-under-Lyne)

Does not the hon. Member agree that this provision will not kill any option scheme? Any option scheme will still stand. Only Income Tax and, where applicable, Surtax, will be paid on it.

Mr. Hirst

Certainly. That is what I am objecting to. I say that there should be some loophole—using that word because it seems the most popular—or legitimate method of ensuring that these rewards can be given. I am all out for an advantage being legitimately given.

What I agree 100 per cent, about is that it is utterly wrong to conceal this from the shareholders. I share my hon. Friend's view entirely that there is no reason why shareholders should not be told about schemes of this sort. They will accept them. It is wrong not to disclose such schemes to shareholders. Nobody would dispute that. Shareholders are only too willing to ensure that a specific company official shall be properly rewarded for what he does.

We must get above this junior way of thinking and realise what goes on in the world. We must realise that if we are to go ahead and not lose our top management we must ensure that it is given opportunities for reward—and we must put the matter in the hands of the shareholders. This should be part of company law. I am in favour of a scheme being produced to ensure that companies can reward top management by methods which will produce a financial advantage. I am glad that I have made myself clear. I never like to be anything else, but I cannot always be sure that I have made myself clear.

One difficulty is that we cannot always do what we like in Parliament. I should like to scrap the whole Clause and bring in a totally different provision, but it would not be in order to pursue that point. One is up against the familiar difficulty of having to do the best one can with the bad job the Government have done. All Governments produce bad jobs in Finance Bills, and we have got to do our best to put them right. Governments are far too much in the hands of advisers who, very often, have not the least idea how industry ticks, and the result is that we have nonsensical provisions such as these. We have to do our best with them, and that is what my right hon. Friends and I are trying to do.

My Amendment No. 219 is being discussed at the same time. I am not particularly keen about it. It is not very bright or clever, but it is the best I can do to make clear another aspect of this matter. I should like to rewrite the whole Clause. I regard it as dreadful, as I have already said. But there is a strong feeling that, as the Bill stands, there will be an assessment on the whole profit arising from the grant in the year of realisation. I do not know whether that is the Government's intention. Perhaps they really want to do all they can to damp down initiative. If that is their intention, I can only say again that it is contrary to what the country's economy requires.

The rights we are discussing are a common way of giving incentive to higher executives. Therefore, of course, they should provide the maximum benefit possible. That should be the object, the maximum benefit possible. It should not be our object to try to minimise the benefit to the greatest extent. The spread proposed in my Amendment, rotten as it is, with a rotten Clause in a rotten Bill, would go some way towards achieving that object. Unless right hon. Gentlemen opposite give us something like it, their sincerity in this matter will be in grave doubt.

Mr. Maurice Macmillan (Farnham)

I hope that the hon. Member for Cheet-ham (Mr. Harold Lever) will forgive me if I return to a theme which, in one way or another, has underlain a great many contributions which we have both made from time to time on successive Finance Bills, the theme of the spread of wealth and responsibility, the spread by all manner of means of share ownership, and the creation of what is called a capital-owning democracy.

My hon. Friend the Member for Horsham (Mr. Hordern) pointed out that the arguments in favour of wider share ownership, social, economic and managerial, are as widely accepted in principle as, alas, they are frequently rejected by Governments in practice. I shall not say that this is so because the ideas or even the practices are repugnant to politicians in successive Governments, but they seem somehow to have become intolerable to the Governmental machine. It is no good the Financial Secretary quoting what Tory Governments in the past have done. I have objected with equal force when these ideas and arguments similar to those he puts forward tonight have come from Conservative Chancellors and Financial Secretaries.

We find the same rather melancholy story in this Clause, the determination to prevent what one might call the reward of the industrious apprentice, to penalise the employee of the company who becomes a part owner of that company because of his general value as a worker, by assuming that he alone is causing the increase in the value of his shareholding. There is a discrimination against the employee acquiring ownership in a company by this method as compared with the outside shareholder.

The hon. Member for Cheetham said that he made a gain because of his work. It is more accurate to describe an option as the chance to make a gain from the success of a company for which a person is working and from which he is receiving a salary on which he is paying Income Tax and, possibly, Surtax. It is no more logical to penalise a senior employee, manager or executive of a company who is given a stake in the future success rather than in the past success of the company by this method than it is to penalise an employee in one of the many employee-shareholding schemes which successful companies run and which extend ownership to the factory floor. The workpeople are responsible in their degree for any increase in the value of the company. Yet nobody suggests that because their shares are acquired by reason of their work they should be taxed on the value in the same way. The real reason——

Mr. Harold Lever

It is a fact that employees' shares are taxed in precisely the same way at every point as any directors' shares. No distinction is made by the Bill.

Mr. Macmillan

If the shareholding is acquired in the way employees' shares are normally acquired, there is no discrimination. It applies to all employees, whatever their standing in the company, who acquire shares by this method. I was saying that it would be as foolish to penalise shareholdings as usually acquired under an employee shareholding scheme as to do what the Government are proposing to do.

One of the reasons behind this form of acquiring ownership in a company is not only that it suits the needs of senior executives and top managers but also that it is a method which gives them an incentive to put their best into the company and realise the reward to them of the value which they, among others, contribute to the company. It gives them a stake in the future success of the company. It is presumably because of abuse and the possibility of abuse that the Government are willing to abandon this valuable incentive.

I think that it was the hon. Member for Cheetham who said in the debates on last year's Finance Bill, unhappily unheard by me on that occasion, that whereas Jehovah was willing to spare the cities of the plain for four just men, the Government were prepared to destroy the City of London in order to catch four tax dodgers. It is not the City of London that the Government are damaging in this Clause. They are damaging the capacity of the United Kingdom to compete with the United States and other countries in offering rewards to management. Quite apart from the social and economic aspects of the Clause and the damage that can be caused by it, there is this point, which has already been well covered and which I need not linger on.

However, I should like to say a few words about the wider social aspects of the damage which can be done by the Clause. One of the main points of the wider share ownership movement is that the modern affluent society tends to concentrate its chief benefits on owners of property of one sort or another, and at the same time it limits the capacity of more people to become owners through the tax structure and in other ways. Hence, the campaign to turn earners into owners, not excluding either the more highly paid earners who sometimes find it just as difficult as those who earn less to become the owners or part owners of the companies in which they work. Because their standard of living is so closely attached to their salary and other conditions of work, they lack both freedom of action within the company and freedom of movement, which the ownership of capital can help to give, between then company and other companies where they may be needed more. It is totally illogical to accept the principle and deny this particular application of it.

As the hon. Gentleman said, we are not arguing about a gift of shares, nor are we arguing that the profit made in exercising a stock option should escape tax altogether. We ae simply asking that it should be taxed as any other category is taxed. I am not convinced by the ingenious and elegant arguments of the hon. Member for Cheetham. It is ridiculous to treat this type of capital gain in a different way because the man who benefits has helped in some form or other to cause that gain. The form of option in which it comes is wholly beneficial to the company which exercises it and to the economy.

11.45 p.m.

There is a special benefit in that it enables a United Kingdom company to compete in rewards with companies overseas and it is of immense benefit in helping smaller companies, particularly, to acquire the talent which they need to compete successfully and which they perhaps cannot, in the early stage of development, afford to pay for in the form of large salaries, especially with the heavy incidence of Income Tax and Surtax. It enables them to acquire talent easily and to compete more successfully.

I have argued in general terms for the Amendment and for the value of stock options in general. An aspect which disturbs me very much is the fundamentalist attitude of the Government in considering the dogma of taxation security regardless of the economic consequences or of economic common sense. I fear that, in this as in other matters, the damage that can be done by this sort of Pharisaical insistence on the letter of the law can do great harm to the country and the spirit of the taxpayer, and I beg the Government to consider the Amendment sympathetically.

Mr. Stratton Mills (Belfast, North)

I join my hon. Friend the Member for Farnham (Mr. Maurice Macmillan) in his thesis of the harm that the Clause will do and wish to deal with a particular unfairness pinpointed by the Amendment. As I understand it, the Capital Gains Tax at present applies to an increase in the value of a share option between Budget Day, 1965, and the date on which it is exercised. The Bill will apply the top rates of Income Tax and Surtax for a single year to that gain. The Amendment seeks to put share options back in the position they enjoy at present.

I take as an example two employees of I.C.I. One can buy some I.C.I. shares on the market, being able either to pay cash or borrow from the bank to do so. If those shares increase in value over a period and he sells them, he pays Capital Gains Tax. But the other employee has no capital and is unable or unwilling to borrow the cash from the bank. He is, however, given a share option which he exercises. He is then caught by the top rate of Income Tax and Surtax. This is discrimination against that sort of person.

We should be endeavouring to help extend the range of capital ownership. The Clause hits in particular those junior employees managements wish to encourage to remain with their firms—and this particularly applies to smaller firms—and creates many anomalies. I fear that the Clause will, in effect, stop stock options in future and that will be a direct hindrance to the spread of wealth. As such, it is to be condemned.

Mr. Nott

I was astonished when I first heard of this Clause, because it seemed to go completely contrary to what all members of the Government had been saying, both privately and publicly, for many years. I recall hundreds of occasions when the Prime Minister and the Chancellor of the Exchequer have spoken of the encouragement of ability in this country and of trying to bring fresh blood into British industry. In effect, what is happening by this Clause is that every advantage will be given to the person who has capital to build up his business and taken away from the person who has only his ability. That is what is so offensive about the Clause.

If the Government are not protagonists of old-fashioned capitalism, and I do not think that any of my hon. Friends would charge them with that crime against humanity, it is inconceivable that they should take away or e of the most efficient means still existing vhereby the capitalist can transfer some of his assets to the manager. It seems inconceivable that they should remove one of the most efficient methods whereby the shareholders of a company can willingly, in general meeting, agree to dilute their equity in order that the managers of the business can build it up on their behalf.

In an effort to understand the reasoning behind the Clause, I have been able to find only one answer. It is that the Revenue must still be smarting from the defeat which it met in Abbott v. Philbin. Throughout, the hon. Member for Cheet-ham has referred to options as remuneration which an employee receives, but the House of Lords and the Court of Appeal considered that an option was something different.

Mr. Harold Lever

The hon. Gentleman has got me quite wrong and I suspect that he has got the Chancellor quite wrong. What the Chancellor is saying is that it is not the option, but the receipt of money's worth on the exercise of the option which is the reward, namely, the difference between the price paid for the share and the actual market value.

Mr. Nott

I take that point, but this was considered in Abbott and Philbin and the Court of Appeal and the House of Lords both decided that this transaction was in the nature of a transfer of proprietary rights from the shareholders to the employees. That is what they decided and the hon. Gentleman has only Lord Denning and his dissenting judgment on his side.

Mr. Lever

They decided that that was what it was in law, and it is precisely that law which is being corrected.

Mr. Nott

I will pass from that to one or two other comments on the Clause. As my hon. Friend the Member for Farnham (Mr. Maurice Macmillan) has said, in this country we must be concerned with the present international competition for executive talent. The market for executive talent becomes more and more international and more and more competitive every day. Every person of quality who comes to seek a job in this country probably already has two or three offers in his pocket from an American company.

Under our taxation system, in many respects we have far fewer advantages to offer than have American companies. American companies have a system of executive options and I consider that many British executives will take the opportunity of transferring their loyalties and allegiance to American companies which can provide them with this benefit.

Young men enter business to make money. Young men may enter the Treasury for the pleasure of discussing classical iambics over a plate of cottage pie at the Reform, but they enter business to make money. This possibility is also being taken away from them by the Clause, because these options will become worthless as a result of what is being proposed.

Young people have a loyalty to the country, but they have an even greater loyalty to provide security for their families and to build up their savings as much as they can. Therefore, I do not hesitate to say that many of these people will now go abroad and work for our competitors overseas, who can provide them with precisely the benefit which is now being taken away from them. When the economic survival of the country depends upon management —a phrase which, since I have been a Member of the House, I have heard often from the benches opposite—how is it possible that an advantage of this nature, which management requires and can get elsewhere, is now being taken away so that young executives will be encouraged to go abroad and sell American exports to this country?

Over the last few months, I have seen options granted by a number of industrial companies to their executives. Of the 30 or 40 employees involved, in no case can I remember this right being abused. In practically every case those executives had no capital. This situation was not abused by granting options to those who already had capital.

I therefore summarise and follow what my hon. Friend the Member for Farn-ham has said by making these three points. First, there is no evidence that the system of executive options has been abused.

Mr. Harold Lever

Nobody said that.

Mr. Nott

I know. I am saying it for the first time. It is an important point, and one is trying to understand why the Chancellor has included the Clause.

Secondly, the Clause diminishes the ability of British business to recruit the talent which it so badly needs. The market for executive talent is becoming more and more international, and we now have less reason to hold British people in this country. We have less reason to attract German and American executives to come here. It should be a two-way business. Thirdly, the Clause will not gain anything for the Revenue, because, in effect, it is abolishing the system of executive options and it will merely lose the revenue which it would otherwise have received from Capital Gains Tax.

Mr. MacDermot

The hon. Member for St. Ives (Mr. Nott) said that as a result of the Clause, we would find it more difficult to recruit German executives. I take it that he was referring to West Germany. That country's scheme for taxing share options is almost identical with what we propose in the Clause.

We are discussing three sets of Amendments. Amendments Nos. 169 to 172 propose that the Schedule E charge should remain on the granting of options but that the gain on the exercise of the option should be chargeable to Capital Gains Tax. I will not comment further about Schedule E on the granting of options, because I commented on it in the last debate. It is largely ineffective, because usually options are granted for a nominal sum and it is rarely possible to establish more than a nominal value at that stage. The real issue is whether, assuming that we are to tax share options at the time the options are exercised, they should be subject to Income Tax or to Capital Gains Tax.

The arguments used in the debate have been riddled with error. To start with, it is suggested that we are trying to destroy option schemes. We have nothing against option schemes. All that we are asking is that they should be fairly and properly taxed.

12 p.m.

Listening to the arguments, one would think that the present system of taxing option schemes was something introduced by hon. Members opposite when they were in office in order to provide a special tax benefit and incentive to dynamic young executives in industry. It is nothing of the sort. What we are seeking to do is to restore the law to what it was always thought to be and the way in which it was practised up to the decision of the House of Lords in the case which has been referred to of Abbott v. Philbin. For nine of the 13 years that hon. Members opposite were in office, they operated and continued to operate the taxation of share options exactly in the way in which we are proposing in the Clause.

Mr. Maurice Macmillan

I should like it on record that some hon. Gentlemen opposite put down an Amendment seeking to remove it.

Mr. MacDermot

And the hon. Member for Farnham (Mr. Maurice Macmillan) was himself one of my predecessors as a Treasury Minister and was a member of a Government which did not make the change.

Secondly, we have heard a lot of arguments directed to the position of the man on the shop floor, as though in the Clause we were in some way penalising the worker on the shop floor. Last year, I had occasion to say, being a suspicious man, that when I heard hon. Members opposite arguing the special case of the poor widow, I was sometimes inclined to look for the Surtax payer who was hiding behind the widow's skirts.

The arguments which we are concerned with, as the hon. Member for Shipley (Mr. Hirst) faced fairly and squarely, are directed to whether there should be some special tax advantage in favour of one narrow and particular class of taxpayers whom we are all agreed play a very important and vital part in the prosperity of the country; namely, the executives in our industries. Is it right that they should get the special treatment which is being argued for? That is the general issue on the Clause as a whole.

The particular issue on these Amendments is whether, if we tax them, that tax should be in the form of a capital gains tax, which would still leave them a special advantage, or whether they should be taxed in the ordinary way in which people are taxed when they get a benefit which forms part of the remuneration of their employment.

The real issue which we have to decide is, is the share option a device—and I use that term in no derogatory sense and with no particular overtones—or a mechanism to reward a director or employee for his service, in which case it is properly chargeable as income; or is it the granting of a capital asset which later appreciates?

We think that it is a mechanism to reward a director or employee for his service. That, surely, is the attitude of those who argue so strongly in favour of share options. It is argued that, to the young executive of ability whom a company wishes to recruit into management in industry, it is an incentive to take such employment. It is certainly regarded by the company as being a reward for his services.

No one on this side of the Committee is arguing that, when the holder of an option exercises it, it is suggested that the benefit which he gets is in some way directly the result of his services. It is not. But that does not stop it being what it is and is regarded by him as being, namely, a reward for the services which he has rendered in his employment or in his capacity as a director of the company.

The true parallel at which we should look is the case where shares or other assets are allotted to a director or employee at less than their market value. When this happens the difference between the market price and the price paid, if any, has always been taxable as part of the income from that employment or from that office as a director, and this is the usual case of a distibution or an issue of shares to employees in companies which believe in shareholding by their employees. That has always been taxed.

The share option scheme is an attempt to get away from that and to escape that perfectly proper liability to tax by making the grant in the form of an option which is then exercised at a later date, and exactly the same benefit is conferred when the option is exercised. The hon. Member for Farnham says that this is not the actual grant of that gain; that it is only the grant of the chance of making a gain. So be it.

Supposing an employer were to say to his employees, "We are going to give £100 bonus this Christmas to one person in the shop. You can draw numbers if you choose, and whoever draws the lucky number will get the £100 which we are presenting as a Christmas bonus". That would be a chance of making a gain, but it certainly would be a remuneration which the person was getting in the course of his employment, and would be liable to tax. This is a different element of chance, but I am dealing with the element of chance argument.

The point is that if the shares do not appreciate the option will not be exercised. If there is no gain, then cadit quaestio, and there is nothing to tax. But if there is an increase in value and the option is exercised and the benefit is gained, it is the same benefit as a person gets when he is allotted shares in the first place, and it would be illogical to make special exceptions in the case where the benefit is conferred by this device of the share option.

Equally, surely, it would be illogical, unless one accepts the argument of the hon. Member for Shipley, to single out this particular class of highly paid person, the executives in industry, and say that in our tax laws we are going to confer a special advantage to them, when there are many people who are making an equally valuable contribution to the prosperity and life of this country, and who are earning similar incomes but who cannot obtain any similar tax advantage.

The professors who train these admirable, highly skilled, and highly intelligent management executives cannot get the benefit of this, and hon. Gentlemen will know, and certainly hon. Gentlemen who have been in Government will know, that for many years one of the cardinal principles of our tax system has been that all forms of income, whatever their source, should be taxed according to the same principles, unless one accepts the argument of the hon. Member for Shipley who said—and the hon. Gentleman is nothing if not honest—that he was arguing for special treatment for this class of people.

Sir Harmar Nicholls (Peterborough)

Would the hon. and learned Gentleman include the chap who taught the professor?

Mr. MacDermot

Certainly I would. Let us go back as far as we like.

Finally let me deal with the suggestion that this gain really is a capital gain which ought to be taxed in accordance with the Capital Gains Tax. There is no comparison with the type of gain at which the Capital Gains Tax is directed. Until the person who holds the option acquires the shares, he has not put any funds of his own—apart from any nominal amount at the time of the grant of the option— into the transaction, and indeed he has not committed himself to acquire the shares at all.

This is the difference between the position of the two I.C.I. employees to which the hon. Member for Belfast, North (Mr. Stratton Mills) referred, so the suggestion that it should be charged to Capital Gains Tax is misconceived, and this, I suggest, is also the answer to the hon. Member for Shipley, who I thought was unduly modest about his proposal. I think that if one wanted to single out and make a special concession to this class, there is a lot of attraction in the form that he proposed. I am urging the Committee that it would be wrong in principle to do so. The director or employee has no real interest in the shares until he exercises the option.

Mr. Harold Lever

I follow with great sympathy the principle of my hon. and learned Friend's argument. He has said that we want to tax these share profits before realisation, because they are benefit in kind in the nature of an earning. But would he consider, if these earnings have been made over a period of years, that they could appropriately be spread over the period of years in which they have been earned? I should like to hear him deal in some detail with this point. If we tax them on the principle that they may represent, when this option is exercised, an earning over a period of years, I should like him to deal with the point that they should be taxed over the same period.

Mr. MacDermot

My simple answer to that would be to repeat the case which my hon. Friend himself raised so often—that of the person granted an allotment of shares at less than their market value. This may well be a remuneration in consideration of, and to reward a person for, many long years of service, but it is taxable in the year in which the benefit is received—

Mr. Lever

I am sorry to press my hon. and learned Friend on this point, but it is worth following up. When shares are issued below value to a shareholder, they are normally a reward for that year's services and the amount involved is properly taxed in that year.

For example, when I.C.I. gives out its shares, it gives them from year to year to the shareholders in the employ of the company in that year, but if the principle is—I think that it is right— that when a man exercises this option he may not be a member of the company or an employee by this time, clearly the principle for taxing him was that he earned it when an employee, although in the year when he exercised it he was working there no longer.

Mr. MacDermot

My hon. Friend's argument reminds me of the argument between Ruskin and Whistler about the value of a picture painted in an hour and the value of the skill which went into the painting. I have two answers to my hon. Friend. One is that the person granted this option may have given ten or twelve years' valuable service to the company before he is given the option, but one does not spread it over that period. The second and more practical answer is that most options are granted in a form in which it is not necessary for the holder to take them up in the same year. Many take them up in parcels and in that way are able to spread their tax liability in the way which my hon. Friend is anxious to achieve and which is also proposed in Amendment 216.

That is that argument. Instead of its being spread back in the way preferred by the hon. Member for Shipley, it should be spread forward for a three-year period. I have given the general arguments why the options should be taxed in the year in which they are exercised. I must emphasise that it usually lies within the power of the option holder himself to spread it if he wants to and no doubt this is a practice which may increase.

We have heard the arguments about the comparison with America. I would remind the Committee that the American system, which has similarities with that proposed in the main Amendment, though not quite the same, is a compromise between the more favourable treatment which used to be given before 1964 to share options and the attempt by the United States administration to tax them at full income tax rates, which is in effect our proposal in this Clause.

I would quote two passages from President Kennedy's tax message to Congress in 1963, because they summarise our arguments very well. He said: Stock options represent compensation for services. Taxpayers are generally required to pay ordinary income tax on their compensation. To the extent that the stock option provisions allow highly-paid executives to pay tax at capital gains rates or to escape all tax, on part of their compensation, they are not consonant with accepted principles of tax fairness. He went on to say that the advantages claimed for them … do not appear to substantiated by experience. Option benefits are haphazardly distributed. The rewards they confer on highly paid executives have been related not so much to their efforts in improving company profits as to changes in investor outlook and stock prices…. The use of stock options frequently tends to impede rather than to improve executive mobility. The available evidence suggests that options are used almost entirely to reward present management rather than to attract new executives. The conditions of their exercise are usually calculated to tie executives to their present jobs … For these reasons and others which I have put before the Committee, I ask hon. Members to reject the Amendments.

12.15 a.m.

Mr. Hordern

The hon. and learned Member appreciates from the arguments which he has heard from my hon. Friends that we do not agree with him in any respect. On our side, too, we have the powerful legal arguments adduced in Abbott v. Philbin—what we regard as a most excellent judgment. If hon. Members opposite feel that they have a case in law I urge them to remind themselves of that case once again.

We shall certainly never agree with them on what constitutes a taxable part of an option. In our view, the taxable part of an option is when it is granted; it cannot be "at any time" because of the uncertainty. The only part of an option which can be liable to tax is that at the time it is granted, for the fact that the shares have risen is entirely due to the accident of the market and not at all to do with the efforts of the employees involved.

The hon. and learned Member completely failed to meet my hon. Friend's arguments about the three years' spread. He turned his face against that reasonable proposal although it is common knowledge that this kind of spread exists in patent legislation and other types of legislation and could be applied in this case.

It is remarkable that he cited the United States as a country acting against share options. In the United States taxation has been reduced in two years from the highest rate of 91 per cent, to 70 per cent, whereas, following increases in taxation by the Labour Government, the rate in this country stands at 91¼ per cent. It is against that background that we must view the proposals in the Clause.

One of the main reasons for the existence of options is the present high general rate of taxation. But options also serve the purpose of assisting the development of very small companies. I have one such company in mind. Four years ago the profits of the company after tax were £5,000. They ran at £350,000 in the financial year just ended. They are made from a simple process—I do not want to go into it now—and 80 per cent, of the production is exported. Four years ago, when the company was earning £5,000, shares were introduced to assist the executives in what was then a very small company.

Those executives are naturally thrilled with the company, and it is fair to suppose that those executives could not have been persuaded to stay with the company had they not been convinced not only of the merit of the production in which they were engaged but also of the future expectation of some possible gain by the grant of the option. That is what the Clause will disturb—the ability of a small company to engage the attention of highly qualified executives.

If the Government are serious in their determination to enter the Common Market they must have a serious look at the comparative scales of remuneration among executives in Common Market countries. If options are to be abolished, as I think they will be, one or two things will happen. Either some other way of rewarding executives will have to be

found or otherwise these executives will go somewhere where they will earn higher rewards. It is often said that the reason why so many professional people leave these shores today, why the brain drain exists, has nothing to do with monetary rewards but with conditions of work. What really induces them to leave is that it is considered anti-social in Britain at present to earn a high salary, no matter how expert or unique one's contribution. The reason why people are leaving in such numbers may not be because of the high material rewards offered elsewhere, although that is bound to be partly the reason, but because their skills are at least recognised in other countries. The Government must recognise that, whatever they may wish to happen in Britain— however many self-denying ordinances they may issue—the fact is that the rewards for those who possess skill and enterprise are increasing all the time, not least in the Communist countries.

All that Her Majesty's Government Government have succeeded in creating in Britain so far is a little Lilliput cast away from the main stream of events. They do not seem to realise that this situation can only rapidly get worse with the advance of science, electronics and automation. It is the same state of mind which turns its face away from the idea of higher rewards for executives, which refuses to acknowledge that there is overmanning in industry, which refuses to introduce competition in industry, which refused to recognise that there is anything wrong with the trade unions and which combines to take a posture in international affairs worthy of the United States or the Soviet Union and a posture on internal affairs worthy of Iceland.

For these reasons, and in view of the cogent arguments adduced by my hon. Friends in support of the Amendment, I urge my hon. Friends to divide the Committee.

Question put, That the words proposed to be left out stand part of the Clause: —

The Committee divided: Ayes 188, Noes 106.

Division No. 32.]	AYES	[12.22 a.m
Allaun, Frank (Salford, E.)	Atkins, Ronald (Preston, N.)	Boardman H.
Alldritt, Walter	Atkinson, Norman (Tottenham)	Booth, Albert
Allen, Scholefield	Baxter, William	Braddock, Mrs. E. M.
Archer, Peter	Bennett, James (G'gow, Bridgeton)	Brown, Rt. Hn. George (Belper)
Armstrong, Ernest	Bishop, E. S.	Brown, Bob(N'c'tle-upon-Tyne,W)
Ashley, Jack	Blackburn, F.	Brown, R. W. (Shoreditch & F'bury)
Buchan, Norman	Hilton, W. S.	Newens, Stan
Buchanan, Richard (G'gow, Sp'burn)	Hobden, Dennis (Brighton, K'town)	Noel-Baker, Rt. Hn.Philip(Derby,S.)
Butler, Mrs. Joyce (Wood Green)	Hooley, Frank	Ogden, Eric
Callaghan, Rt. Hn. James	Hooson, Emlyn	O'Malley, Brian
Carmichael, Nell	Horner, John	Orme, Stanley
Carter-Jones, Lewie	Howarth, Harry (Wellingborough)	Oswald, Thomas
Coleman, Donald	Howarth, Robert (Bolton, E.)	Page, Derek (King's Lynn)
Craddock, George (Bradford, S.)	Howell, Denis (Small Heath)	Pardoe, J.
Cronin, John	Howie, W.	Parker, John (Dagenham)
Cullen, Mrs. Alice	Hoy, James	Parkyn, Brian (Bedford)
Dalyell, Tarn	Hughes, Rt. Hn. Cledwyn (Anglesey)	Pavitt, Laurence
Davidson, James(Aberdeenshire, W.)	Hughes, Emrys (Ayrshire, S.)	Perry, George H. (Nottingham, S.)
Davies, Harold (Leek)	Hughes, Roy (Newport)	Prentice, Rt. Hn. R. E.
Davies, Robert (Cambridge)	Hunter, Adam	Price, Christopher (Perry Barr)
Dell, Edmund	Hynd, John	Price, Thomas (Westhoughton)
Dernpsey, James	Jackson, Colin (B'h'se & Spenb'gh)	Price, William (Rugby)
Dewar, Donald	Jackson, Peter M. (High Peak)	Redhead, Edward
Diamond, Rt. Hn. John	Jeger, George (Goole)	Rees, Merlyn
Dickens, James	Jeger,Mrs.Lena(H'b,n&St.P'cras,S.)	Rhodes, Geoffrey
Dobson, Ray	Johnson, Carol (Lewisham, S.)	Roberts, Albert (Normanton)
Doig, Peter	Johnson, James (K'ston-on-Hull,W.)	Roberts, Coronwy (Caernarvon)
Dunn, James A.	Johnston, Russell (Inverness)	Robinson, W. O. J. (Walth'stow, E.)
Dunnett, Jack	Judd, Frank	Ross, Rt. Hn. William
Dunwoody, Mrs. Gwyneth (Exeter)	Kelley, Richard	Rowland, Christopher (Meriden)
Eadie, Alex	Kenyon, Clifford	Rowlands, E. (Cardiff, N.)
Edwards, William (Merioneth)	Kerr, Mrs. Anne (R'ter & Chatham)	Ryan, John
Ellis, John	Kerr, Dr. David (W'worth, Central)	Shaw, Arnold (Ilford, S.)
English, Michael	Kerr, Russell (Feltham)	Short,Rt.Hn.Edward(N'c'tle-u-Tyne)
Ennals, David	Lawson, George	Silkin, John (Deptford)
Ensor, David	Lever, Harold (Cheetham)	Silkin, S. C. (Dulwich)
Evans, Albert (Islington, S. W.)	Lewis, Arthur (W. Ham, N.)	Silverman, Julius (Aston)
Evans, loan L. (Birm'h'm, Yardley)	Lewis, Ron (Carlisle)	Steel, David (Roxburgh)
Fernyhough, E.	Lomas, Kenneth	Steele, Thomas (Dunbartonshire, W.)
Fitch, Alan (Wigan)	Luard, Evan	Summerskill, Hn. Dr. Shirley
Fletcher, Raymond (Ilkeston)	Lubbock, Eric	Thorpe, Jeremy
Fletcher, Ted (Darlington)	Lyon, Alexander W. (York)	Urwin, T. W.
Floud, Bernard	Lyons, Edward (Bradford, E.)	Varley, Eric G.
Foley, Maurice	Mabon, Dr. J. Dickson	Wainwright, Richard (Colne Valley)
Forrester, John	McCann, John	Walden, Brian (All Saints)
Fowler, Gerry	MacDermot, Niall	Walker, Harold (Doncaster)
Fraser, John (Norwood)	Macdonald, A. H.	Wallace, George
Fraser, Rt. Hn. Tom (Hamilton)	Mackenzie, Alasdair(Ross&Cromarty)	Watkins, David (Consett)
Freeson, Reginald	Mackenzie, Gregor (Rutherglen)	Wellbeloved, James
Galpern, Sir Myer	Mackintosh, John P.	Wells, William (Walsall, N.)
Gardner, A. J.	Maclennan, Robert	White, Mrs. Eirene
Garrow, Alex	McMillan, Tom (Glasgow, C.)	Whitlock, William
Ginsburg, David	MacPherson, Malcolm	Williams, Alan (Swansea, W.)
Gordon Walker, Rt. Hn. P. C.	Mahon, Peter (Preston, S.)	Williams, Alan Lee (Hornchurch)
Gourlay, Harry	Mahon, Simon (Bootle)	Willis, George (Edinburgh, E.)
Gray, Dr. Hugh	Manuel, Archie	Winstanley, Dr. M. P.
Gregory, Arnold	Marquand, David	Winterbottom, R. E.
Grimond, Rt. Hn. J.	Millan, Bruce	Woodburn, Rt. Hn. A.
Hamilton, James (Bothwell)	Miller, Mr. M. S.	Woof, Robert
Hamilton, William (Fife, W.)	Mitchell, R. C (S'th'pton, Test)	Yates, Victor
Hamling, William	Morgan, Elystan (Cardiganshire)
Hannan, William	Morris, Charles R. (Openshaw)	TELLERS FOR THE AYES:
Hazell, Bert	Moyle, Roland	Mr. Joseph Harper and Mr. Neil McBride.
Henig, Stanley	Neal, Harold
NOES
Alison, Michael (Barkston Ash)	Corfield, F. V.	Hall-Davis, A. G. F.
Astor, John	Crosthwaite-Eyre, Sir Oliver	Hawkins, Paul
Awdry, Daniel.	Crouch, David	Higgins, Terence L.
Batsford, Brian	Crowder, F. P.	Hill, J. E. B.
Bennett, Dr. Reginald (Gos. & Fhm)	Cunningham, Sir Knox	Hirst, Geoffrey
Berry, Hn. Anthony	Dalkeith, Earl of	Hobson, Rt. Hn. Sir John
Biffen, John	Dance, James	Hogg, Rt. Hn. Quintin
Biggs-Davison, John	d'Avigdor-Goldsmid, Sir Henry	Holland, Philip
Blank, Sir Cyril	Dean, Paul (Somerset, N.)	Hordern, Peter
Body, Richard	Dodds-Parker, Douglas	Hornby, Richard
Boyd-Carpenter, Rt. Hn. John	Doughty, Charles	Hutchison, Michael Clark
Boyle, Rt. Hn. Sir Edward	Eden, Sir John	Jenkin, Patrick (Woodford)
Brewis, John	Elliot, Capt. Walter (Carshalton)	Kaberry, Sir Donald
Brinton, Sir Tatton	Elliott,R.W.(N'c'tle-uponTyne,N.)	Kimball, Marcus
Brown, Sir Edward (Bath)	Eyre, Reginald	Knight, Mrs. Jill
Buchanan-Smith, Alick(Angus,N&M)	Farr, John	Langford-Holt, Sir John
Buck, Antony (Colchester)	Fisher, Nigel	Legge-Bourke, Sir Harry
Campbell, Cordon	Fletcher-Cooke, Charles	Longden, Gilbert
Carlisle, Mark	Fortescue, Tim	Loveys, W. H.
Carr, Rt. Hn. Robert	Glover, Sir Douglas	MacArthur, Ian
Chichester-Clark, R.	Grant, Anthony	Maclean, Sir Fitzroy
Clegg, Walter	Griffiths, Eldon (Bury St. Edmunds)	Macleod, Rt. Hn. Iain
Cooke, Robert	Gurden, Harold	Maddan, Martin

Maude, Angus	Peel, John	Temple, John M.
Maxwell-Hyslop, R. J.	Powell, Rt. Hn. J. Enoch	Thatcher, Mrs. Margaret
Maydon, Lt.-Cmdr. S. L. C.	Price, David (Eastleigh)	Van Straubenzee, W. R.
Mills, Peter (Torrington)	Prior, J. M. L,	Ward, Dame Irene
Mills, Stratton (Belfast, N.)	Pym, Francis	Webster, David
Monro, Hector	Renton, Rt. Hn. Sir David	Wells, John (Maidstone)
More, Jasper	Roots, William	Whitelaw, William
Munro-Lucas-Tooth, Sir Hugh	Rossi, Hugh (Hornsey)	Wilson, Geoffrey (Truro)
Neave, Airey	Scott, Nicholas	Wolrige-Gordon, Patrick
Nicholls, Sir Harmar	Sinclair, Sir George
Noble, Rt. Hn. Michael	Stainton, Keith	TELLERS FOR THE NOES:
Nott, John	Taylor, Sir Charles (Eastbourne)	Mr. George Younger and Mr. Peter Blaker.
Osborn, John (Hallam)	Taylor,Edward M.(G'gow,Cathcart)
Page, Graham (Crosby)	Taylor, Frank (Moss Side)

Amendments made: No. 234, in page 24, line 6, after first "that", insert "or any other".

No. 235, in line 18, after "that", insert "or any other".

No. 236, in line 39, leave out "in a body corporate".

No. 237, in line 41, leave out "that" and insert "a".

No. 238, in page 25, line 5, leave out subsection (10).—[Mr. MacDermot.]

Mr. David Steel (Roxburgh, Selkirk and Peebles)

I beg to move Amendment No. 3, in page 25, line 31, at the end to add: (13) This section shall not have effect as respects any right to acquire shares conferred pursuant to any scheme approved by a company in general meeting and having as its object the giving to all employees on completion of three years' continuous service with that company opportunity to acquire voting shares in that company pro rata to each employee's remuneration. At this late hour I am sure that neither the Chair nor the Committee wish to hear long speeches, but the Treasury Bench should note that the debate on this Amendment will be shorter in proportion to their acceptance of the proposal contained therein. They will have noted that we on the Liberal Bench have just supported them in a Division for the good reason that we accept that they are right to plug the general loophole in the law and we do not accept the argument adduced, for example, by the hon. Member for Shipley (Mr. Hirst) in support of the general case. But in speaking to the Amendment which we have just been discussing, one or two Conservative Members raised the case which we seek to have exempted in this Amendment.

We are concerned that companies which introduce co-ownership schemes on the lines which we have defined should be allowed to take advantage of a minor loophole in the law to encourage such schemes. If this is not done we shall have another disincentive to the spread of partnership schemes in industry.

As part of the Liberal Party's general programme for sharing wealth and power it is a long-held principle that co-ownership schemes should be encouraged throughout industry. These involve the sharing of wealth—a financial stake in a company—and a share in representation, in decision making and company policy. In the Amendment we are concerned with the profit-sharing or share-owning aspect.

As industry becomes larger and more impersonal, and as relations between employer and employed, by the very nature of modern complex industry, become more remote and jobs become more monotonous in modern assembly plants, it is most important that we should introduce into our industrial life a new ingredient of responsibility and of interest in the life of a company on the part of every person participating in it.

Yet Governments, of whatever party, have for some years been content to conduct industrial relations in the language of the battlefield. We use the phrase "both sides of industry" when there should be only one. In the last few weeks we have heard of concessions, defeats or victories for one side or the other, and we even talk about peace negotiations. So long as we are prepared to conduct our industrial relations as we would conduct a war, we shall continue to have a permanent state of cold war which is liable to break out at any time and at any point in industry.

It has been said by those who do not subscribe to the Liberal Party's viewpoint that this is a well-meaning policy which has been part of the Liberal platform for a number of years but that the Liberals are not putting forward constructive ideas that can be of real use in discussing the nation's economic plight. This can no longer be held to be true.

We should be prepared to take examples from some of our competitors who have shown that by Governments' encouraging the concept of partnership in industry they have been able to make a significant contribution to the economic growth of their country.

An outstanding example is West Germany. Under its Works Constitution of 1952 every employer of more than five people is required to take employees into consultation in the running of the firm. Possibly the most striking example of the success of the concept of partnership is to be found in the Volkswagen motor car works, which provides a strong contrast to our own recent history of car production.

In the Volkswagen firm two out of every three employees own shares in the company, and last year, in addition to paying a record dividend to all the shareholders, including those employees who are shareholders, 8 per cent, of the profits were distributed to employees. The top authority in the firm is a supervisory board, one-third of which is elected by the employees. West Germany has a strike record ten times better than ours, with a working population very much the same as ours. When we consider such aims as ending demarcation disputes and restrictive practices, and bringing about productivity agreements, we see that they are best dealt with in an atmosphere of partnership and industrial harmony.

The Chairman

Order. I hope that the hon. Gentleman will relate his observations to the rather narrow terms of the Amendment, which relates to schemes approved in general meeting.

Mr. Steel

I was about to do that, Sir Eric, when you correctly called me to order. I say that it is the duty of a Government to make sure that some positive step is taken to encourage schemes of this kind. The Amendment offers one such positive suggestion.

In the last year we have had a small breakthrough in Government thinking, in the reconstruction of Fairfield's, with a coming together of the trade unions involved and the owners, and with new capital being put in and representation on a new board of directors. We submit that the only thing wrong with that scheme is that it had to wait until the firm went bankrupt and jobs were at stake before the principles of the Liberal Party were put into practice. I hope that the Government will consider the Amendment sympathetically. If they accept it, it will be a major step forward in our industrial relations.

Mr. MacDermot

The hon. Member for Roxburgh, Selkirk and Peebles (Mr. David Steel) has made it clear—as has already been demonstrated during the voting on the last Amendment—that in general the Liberal Party supports our approach on the question of the taxation of share options. But his Party is urging that we should make an exception to the general principle in the case of schemes which have been approved by the shareholders in general meeting and whose object is to give all employees with an average of three years' service a right to acquire voting shares in their companies, the right being in proportion to their remuneration.

The Revenue has no knowledge of any such scheme being operated by any company. The general practice is that share options are granted to a fairly small number of people—usually directors and senior employees. The question to which we are asked to direct our minds is whether we should lend encouragement to a certain type of copartnership by granting a special tax concession for a scheme of this kind.

I do not want to be drawn into arguing the merits or otherwise of copartnership schemes. All I urge is that it is not right to try to devise a scheme and grant a special tax benefit for it in advance of anyone's working such a scheme in practice. In any event, this would be open to the same objection, in principle, as that which we raised in connection with the Amendment which we have just been discussing. Our belief is that where shares are granted to employees or directors connected with a company, as part of their remuneration, they should be taxed as such, whether they be granted in the form of an option or in the form of the allotment of shares. If that principle be right, it would be right also in the case of a co-partnership scheme of the type which has been outlined.

We do not believe it would be fair to discriminate in favour of employees of companies in this way when there are countless other taxpayers earning similar incomes who would not be able to benefit from such a scheme who would justifiably complain that we were departing from the basic principle of taxation that all forms of income should be liable to the same incidence of tax, whatever their source. For these reasons, I advise the Committee to reject the Amendment.

12.45 a.m.

Mr. Emlyn Hooson (Montgomery)

The Financial Secretary's reaction to the Amendment is extremely discouraging and is in no way justified. The aim of the Amendment is to remove the discouragement which otherwise the Clause will have against co-ownership or copartnership schemes. The hon. and learned Gentleman ignores the whole American experience in this matter. Since 1954, the American Federal tax laws have made special provision for employee restricted stock options. No Income Tax is paid on them either when the option is given or when the shares are transferred; it applies only when they are disposed of. In this way, the Americans seek to encourage the spread of wealth and power within their industry. Many young British executives go to the United States because they are attracted by the idea that they can acquire capital.

One of the most discouraging features of life in Britain is that, whatever our fiscal reforms, we tend to entrench wealth where it is found. It is a continuing process. The Financial Secretary knows that members of our profession earn lucrative livings by advising on tax avoidance. The more complicated the law becomes, those who are already entrenched in their wealth go to the top people to get advice in these matters. The truth is that no Government have yet succeeded in bringing forward a scheme which encourages the better distribution of wealth in the form of capital.

This country needs to follow the example of countries which have done so well economically and by their production have put us to shame over the last 20 or 30 years. My hon. Friend the Member for Roxburgh, Selkirk and Peebles (Mr. David Steel) mentioned West Germany, but there is also the example of the United States. Unless we can encourage the distribution of power and capital within our private enterprise system, we shall end by choosing between State ownership and nationalised industry, on the one hand, and the very large corporation owned or controlled mainly by large shareholders, on the other, with the ordinary worker or young executive having little chance to have a share in the ownership of the industry in which he works.

I have here an extract from a report to the House of Representatives in the United States by one of its Committees. Discussing this matter in 1964, the House Committee said, under the heading "General Explanation": Under the present law, no income tax is imposed in the case of employee restricted stock options, either when the option is granted or at the time it is exercised. Instead, tax generally is imposed at the time the stock involved is sold by the employee. In the case of those stock options where the option price is at least 95 per cent, of the market price of the stock at the time the option is granted"—

Mr. Keith Stainton (Sudbury and Woodbridge) rose——

Mr. Hooson

May I continue? I am in the middle of a quotation.

Mr. Stainton

It is an important point. The schemes are different.

Mr. Hooson

The House Committee goes on: … where the option price is at least 95 per cent, of the market price of the stock at the time the option is granted, the entire amount of any gain realised by the employee at the time he sells the stock is treated as capital gain. Later, the Committee says: Your committee, however, decided to continue the stock option provision because it believes that it is good for the economy for management of various businesses to have a stake in their successful operation. I understand the point that the hon. Member for Sudbury and Woodbridge (Mr. Stainton) is trying to make, that the stock option scheme is somewhat different from the scheme proposed in our Amendment. But the principle is exactly the same, that it is in the interests of the country to enable more and more people to have a stake in the industry in which they work. That is what the Amendment is designed to achieve. I hope and believe that my colleagues will oppose the whole Clause unless the Amendment or something similar to it is accepted.

Mr. Hordern

The Financial Secretary will not expect me to deal with his arguments, which we have already done exhaustively on the last Amendment.

I am surprised that the Liberals were not able to join us in the Lobby on our Amendment on the last occasion. They

are producing precisely the same arguments as we did on the last Amendment, though less well put than my hon. Friends were able to put them. But we bear no grudge that they are putting forward their own Amendment. We agree with the sense of it and have the greatest possible pleasure in supporting them.

Question put, That those words be there added:—

The Committee divided: Ayes 112, Noes 171.

Division No. 33.]	AYES	[12.51 a.m.
Alison, Michael (Barkston Ash)	Eyre, Reginald	Mills, Peter (Torrington)
Astor, John	Farr, John	Mills, Stratton (Belfast, N.)
Batsford, Brian	Fisher, Nigel	Monro, Hector
Bennett, Dr. Reginald (Gos & Fhm)	Fletcher-Cooke, Charles	More, Jasper
Berry, Hn. Anthony	Fortescue, Tim	Munro-Lucas-Tooth, Sir Hugh
Biffen, John	Glover, Sir Douglas	Neave, Airey
Biggs-Davison, John	Grant, Anthony	Nicholls, Sir Harmar
Black, Sir Cyril	Griffiths, Eldon (Bury St. Edmunds)	Noble, Rt. Hn. Michael
Blaker, Peter	Grimond, Rt. Hn. J.	Nott, John
Body, Richard	Gurden, Harold	Osborn, John (Hallam)
Boyd-Carpenter, Rt. Hn. John	Hall-Davis, A. G. F.	Page, Graham (Crosby)
Boyle, Rt. Hn. Sir Edward	Hawkins, Paul	Pardoe, J.
Brewis, John	Higgins, Terence L.	Peel, John
Brinton, Sir Tatton	Hill, J. E. B.	Powell, Rt. Hn. J. Enoch
Brown, Sir Edward (Bath)	Hirst, Geoffrey	Price, David (Eastleigh)
Buchanan-Smith, Alick(Angus, N&M)	Hobson, Rt. Hn. Sir John	Prior, J. M. L.
Buck, Antony (Colchester)	Hogg, Rt. Hn. Quintin	Pym, Francis
Campbell, Gordon	Holland, Philip	Roots, William
Carlisle, Mark	Hooson, Emlyn	Rossi, Hugh (Hornsey)
Carr, Rt. Hn. Robert	Hornby, Richard	Scott, Nicholas
Chichester-Clark, R.	Hutchison, Michael Clark	Sinclair, Sir George
Clegg, Walter	Jenkin, Patrick (Woodford)	Taylor, Sir Charles (Eastbourne)
Cooke, Robert	Johnston, Russell (Inverness)	Taylor,Edward M.(G'gow,Cathcart)
Corfield, F. V.	Kaberry, Sir Donald	Thatcher, Mrs. Margaret
Crosthwaite-Eyre, Sir Oliver	Kimball, Marcus	Thorpe, Jeremy
Crouch, David	Knight, Mrs. Jill	Van Straubenzee, W. R.
Crowder, F. P.	Langford-Holt, Sir John	Wainwright, Richard (Colne Valley)
Cunningham, Sir Knox	Legge-Bourke, Sir Harry	Ward, Dame Irene
Dalkeith, Earl of	Longden, Gilbert	Webster, David
Dance, James	Loveys, W. H.	Wells, John (Maidstone)
Davidson, James(Aberdeenshire, W.)	MacArthur, Ian	Whitelaw, William
d'Avigdor-Coldsmid, Sir Henry	Mackenzie, Alaedair(Ross&Crom'ty)	Wilson, Geoffrey (Truro)
Dean, Paul (Somerset, N.)	Maclean, Sir Fitzroy	Winstanley, Dr. M. P.
Dodds-Parker, Douglas	Macleod, Rt. Hn. Iain	Wolrige-Gordon, Patrick
Doughty, Charles	Maddan, Martin	Younger, Hn. George
Eden, Sir John	Maude, Angus
Elliot, Capt. Walter (Carshalton)	Maxwell-Hyslop, R. J.	TELLERS FOR THE AYES:
Elliott, R.W.(N'c'tle-upon-Tyne,N.)	Maydon, Lt.-Cmdr. S. L. C.	Mr. Eric Lubbock and Mr. David Steel.
NOES
Allaun, Frank (Salford, E.)	Butler, Mrs. Joyce (Wood Green)	Dunwoody, Mrs. Gwyneth (Exeter)
Alldritt, Walter	Callaghan, Rt. Hn. James	Eadie, Alex
Allen, Scholefield	Carmichael, Neil	Edwards, William (Merioneth)
Archer, Pater	Carter-Jones, Lewis	Ellis, John
Armstrong, Ernest	Coleman, Donald	English, Michael
Ashley, Jack	Craddock, George (Bradford, S.)	Ennals, David
Atkins, Ronald (Preston, N.)	Cullen, Mrs. Alice	Ensor, David
Atkinson, Norman (Tottenham)	Dalyell, Tarn	Evans, Albert (Islington, S.W.)
Baxter, William	Davies, Harold (Leek)	Evans, loan L. (Birm'h'm, Yardley)
Bennett, James (G'gow, Bridgeton)	Davies, Robert (Cambridge)	Fernyhough, E.
Bishop, E. S.	Dell, Edmund	Fitch, Alan (Wigan)
Blackburn, F.	Dempsey, James	Fletcher, Raymond (Ilkeston)
Boardman, H.	Dewar, Donald	Fletcher, Ted (Darlington)
Booth, Albert	Diamond, Rt. Hon. John	Floud, Bernard
Braddock, Mrs. E. M.	Dickens, James	Foley, Maurice
Brown, Bob (N'c'tle-upon-Tyne.W.)	Dobson, Ray	Forrester, John
Brown, R. W. (Shoreditch & F'bury)	Doig, Peter	Fowler, Gerry
Buchan, Norman	Dunn, James A.	Fraser, John (Norwood)
Buchanan, Richard (G'gow, Sp'burn)	Dunnett, Jack	Fraser, Rt. Hn. Tom (Hamilton)
Freeson, Reginald	Kerr, Dr. David (W'worth, Central)	Perry, George H. (Nottingham, S.)
Galpern, Sir Myer	Kerr, Russell (Feltham)	Prentice, Rt. Hn. R. E
Gardner, A. J.	Lawson, George	Price, Christopher (Perry Barr)
Garrow, Alex	Lever, Harold (Cheetham)	Price, Thomas (Westhoughton)
Ginsburg, David	Lewis, Arthur (W. Ham, N.)	Price, William (Rugby)
Gordon Walker, Rt. Hn. P. C.	Lewis, Ron (Carlisle)	Rees, Merlyn
Gourlay, Harry	Lomas, Kenneth	Rhodes, Geoffrey
Cray, Or. Hugh	Luard, Evan	Roberts, Albert (Normanton)
Gregory, Arnold	Lyon, Alexander W. (York)	Roberts, Goronwy (Caernarvon)
Hamilton, James (Bothwell)	Lyons, Edward (Bradford, E.)	Robinson, W. O. J. (Walth'stow, E.)
Hamilton, William (Fife, W.)	Mabon, Dr. J. Dickson	Ross, Rt. Hn. William
Hamling, William	McBride, Neil	Rowland, Christopher (Meriden)
Hannan, William	McCann, John	Rowlands, E. (Cardiff, N.)
Hazell, Bert	MacDermot, Niall	Ryan, John
Henig, Stanley	Macdonald, A. H.	Shaw, Arnold (Ilford, S.)
Hilton, W. S.	Mackenzie, Gregor (Rutherglen)	Short,Rt.Hn.Edward(N'c'tle-u-Tyne)
Hobden, Dennis (Brighton, K'town)	Mackintosh, John p.	Silkin, John (Deptford)
Hooley, Frank	Maclennan, Robert	Silkin, S. C. (Dulwich)
Horner, John	McMillan, Tom (Glasgow, C.)	Silverman, Julius (Aston)
Howarth, Harry (Wellingborough)	MacPherson, Malcolm	Steele, Thomas (Dunbartonshire, W.)
Howarth, Robert (Bolton, E.)	Mahon, Peter (Preston, S.)	Summerskill, Hn. Dr. Shirley
Howell, Denis (Small Heath)	Mahon, Simon (Bootle)	Urwin, T. W.
Howle, W.	Manuel, Archie	Varley, Eric G.
Hoy, James	Marquartd, David	Walden, Brian (All Saints)
Hughes, Rt. Hn. Cledwyn (Anglesey)	Millan, Bruce	Walker, Harold (Doncaster)
Hughes, Emrys (Ayrshire, S.)	Miller, Dr. M. S.	Wallace, George
Hughes, Roy (Newport)	Mitchell, R. C. (S'th'pton, Test)	Watkins, David (Consett)
Hunter, Adam	Morgan, Elystan (Cardiganshire)	Wellbeloved, James
Hynd, John	Moyle, Roland	White, Mrs. Eirene
Jackson, Colin (B'h'se & Spenb'gh)	Neal, Harold	Whitlock, William
Jackson, Peter M. (High Peak)	Newens, Stan	Williams, Alan Lee (Hornchurch)
Jeger, George (Goole)	Noel-Baker, Rt. Hn. Philip (Derby.S.)	Willis, George (Edinburgh, E.)
Jeger,Mrs.Lena(H'b'n&St.P'cras,S.)	Ogden, Eric	Winterbottom, R. E.
Johnson, Carol (Lewisham, S.)	O'Malley, Brian	Woodburn, Rt. Hn. A.
Johnson, James (K'ston-on-Hull, W.)	Orme, Stanley	Woof, Robert
Judd, Frank	Oswald, Thomas	Yates, Victor
Kelley, Richard	Page, Derek (King's Lynn)	TELLERS FOR THE NOES:
Kenyon, Clifford	Parkyn, Brian (Bedford)	Mr. Charles R. Morris and Mr. Joseph Harper.
Kerr, Mrs. Anne (R'ter & Chatham)	Pavitt, Laurence

Question put, That the Clause, as amended, stand part of the Bill:—

The Committee divided: Ayes 171, Noes 113.

Division No. 34.]	AYES	[1.00 a.m.
Allaun, Frank (Salford, E.)	Dunwoody, Mrs. Gwyneth (Exeter)	Howarth, Harry (Wellingborough)
Alldritt, Walter	Eadie, Alex	Howarth, Robert (Bolton, E.)
Allen, Scholefield	Edwards, William (Merioneth)	Howell, Denis (Small Heath)
Archer, Peter	Ellis, John	Howie, W.
Armstrong, Ernest	English, Michael	Hoy, James
Ashley, Jack	Ennals, David	Hughes, Rt. Hn. Cledwyn (Anglesey)
Atkins, Ronald (Preston, N.)	Ensor, David	Hughes, Emrys (Ayrshire, S.)
Atkinson, Norman (Tottenham)	Evans, Albert (Islington, S.W.)	Hughes, Roy (Newport)
Baxter, William	Evans, loan L. (Birm'ham, Yardley)	Hunter, Adam
Bennett, James (G'gow, Bridgeton)	Fernyhough, E.	Hynd, John
Bishop, E. S.	Fletcher, Raymond (Ilkeston)	Jackson, Colin (B'h'se & Spenb'gh)
Blackburn, F.	Fletcher, Ted (Darlington)	Jackson, Peter M. (High Peak)
Boardman, H.	Floud, Bernard	Jeger, George (Goole)
Booth, Albert	Foley, Maurice	Jeger,Mrs.Lena(H'b'n&St.P'cras,S.)
Braddock, Mrs. E. M.	Forrester, John	Johnson, Carol (Lewisham, S.)
Brown, Bob(N'ctle-upon-Tyne,W.)	Fowler, Gerry	Johnson, James (K'ston-on-Hull, W.)
Brown, W. R. (Shoreditch & F'bury)	Fraser, John (Norwood)	Judd, Frank
Buchan, Norman	Fraser, Rt. Hn. Tom (Hamilton)	Kenyon, Clifford
Buchanan, Richard (G'gow, Sp'burn)	Freeson, Reginald	Kerr, Mrs. Anne (R'ter & Chatham)
Butler, Mrs. Joyce (Wood Green)	Galpern, Sir Myer	Kerr, Dr. David (W'worth, Central)
Callaghan, Rt. Hn. James	Gardner, A. J.	Kerr, Russell (Feltham)
Carmichael, Neil	Garrow, Alex	Lawson, George
Carter-Jones, Lewis	Ginsburg, David	Lever, Harold (Cheetham)
Coleman, Donald	Gordon Walker, Rt. Hn. P. C.	Lewis, Arthur (W. Ham, N.)
Craddock, George (Bradford, S.)	Gourlay, Harry	Lewis, Ron (Carlisle)
Cullen, Mrs. Alice	Gray, Dr. Hugh	Lomas, Kenneth
Dalyell, Tam	Gregory, Arnold	Luard, Evan
Davies, Harold (Leek)	Hamilton, James (Bothwell)	Lyon, Alexander W. (York)
Davies, Robert (Cambridge)	Hamilton, William (Fife, W.)	Lyons, Edward (Bradford, E.)
Dell, Edmund	Hamling, William	Mabon, Dr. J. Dickson
Dempsey, James	Hannan, William	McBride, Neil
Dewar, Donald	Harper, Joseph	McCann, John
Diamond, Rt. Hn. John	Hazell, Bert	MacDermot, Niall
Dickens, James	Henig, Stanley	Macdonald, A. H.
Dobson, Ray	Hilton, W. S.	Mackenzie, Gregor (Rutherglen)
Doig, Peter	Hobden, Dennis (Brighton, K'town)	Mackintosh, John P.
Dunn, James A.	Hooley, Frank	Maclennan, Robert
Dunnett, Jack	Horner, John	McMillan, Tom (Clasgow, C.)
MacPherson, Malcolm	Pavitt, Laurence	Summerskill, Hn. Dr. Shirley
Mahon, Peter (Preston, S.)	Perry, George H. (Nottingham, S.)	Urwin, T. W.
Mahon, Simon (Bootle)	Prentice, Rt. Hn. R. E.	Varley, Eric G.
Manuel, Archie	Price, Christopher (Perry Barr)	Walden, Brian (All Saints)
Marquand, David	Price, Thomas (Westhoughton)	Walker, Harold (Doncaster)
Millan, Bruce	Price, William (Rugby)	Wallace, George
Miller, Dr. M. S.	Rees, Merlyn	Watkins, David (Consett)
Mitchell, R. C. (S'th'pton, Test)	Rhodes, Geoffrey	Wellbeloved, James
Morgan, Elystan (Cardiganshire)	Roberts, Albert (Normanton)	Wells, William (Walsall, N.)
Morris, Charles R. (Openshaw)	Roberts, Goronwy (Caernarvon)	White, Mrs. Eirene
Moyle, Roland	Robinson, W. O. J. (Walth'stow, E.)	Whitlock, William
Neal, Harold	Ross, Rt. Hn. William	Williams, Alan Lee (Hornchurch)
Newens, Stan	Rowland, Christopher (Meriden)	Willis, Ceorge (Edinburgh, E.)
Noel-Baker, Rt. Hn.Philip(Derby,S.)	Rowlands, E. (Cardiff, N.)	Winterbottom, R. E.
Ogden, Eric	Ryan, John	Woodburn, Rt. Hn. A.
O'Malley, Brian	Shaw, Arnold (Ilford, S.)	Woof, Robert
Orme, Stanley	Short,Rt.Hn.Edward(N'c'tle-u-Tyne)	Yates, Victor
Oswald, Thomas	Silkin, S. C. (Dulwich)
Page, Derek (King's Lynn)	Silverman, Julius (Aston)	TELLERS FOR THE AYES:
Parkyn, Brian (Bedford)	Steele, Thomas (Dunbartonshire, W.)	Mr. John Silkin and Mr. Alan Fitch
NOES
Alison, Michael (Barkston Ash)	Fisher, Nigel	Mills, Stratton (Belfast, N.)
Aster, John	Fletcher-Cooke, Charles	Monro, Hector
Batsford, Brian	Fortescue, Tim	Munro-Lucas-Tooth, Sir Hugh
Bennett, Dr. Reginald (Gos. & Fhm)	Glover, Sir Douglas	Neave, Airey
Berry, Hn. Anthony	Grant, Anthony	Nicholls, Sir Harmar
Biffen, John	Griffiths, Eldon (Bury St. Edmunds)	Noble, Rt. Hn. Michael
Biggs-Davisor, John	Grimond, Rt. Hn. J.	Nott, John
Black, Sir Cyril	Gurden, Harold	Osborn, John (Hallam)
Blaker, Peter	Hall-Davis, A. G. F.	Page, Graham (Crosby)
Boyd-Carpenter, Rt. Hn. John	Hawkins, Paul	Pardoe, J.
Boyle, Rt. Hn. Sir Edward	Higgins, Terence L.	Peel, John
Brewis, John	Hill, J. E. B.	Powell, Rt. Hn. J. Enoch
Brinton, Sir Tatton	Hirst, Geoffrey	Price, David (Eastleigh)
Brown, Sir Edward (Bath)	Hobson, Rt. Hn. Sir John	Prior, J. M. L.
Buchanan-Smith, Alick(Angus, N&M)	Hogg, Rt. Hn. Quintin	Roots, William
Buck, Antony (Colchester)	Holland, Philip	Rossi, Hugh (Hornsey)
Campbell, Gordon	Hooson, Emlyn	Scott, Nicholas
Carlisle, Mark	Hordem, Peter	Sinclair, Sir George
Carr, Rt. Hn. Robert	Hornby, Richard	Stainton, Keith
Chichester-Clark, R.	Hutchison, Michael Clark	Steel, David (Roxburgh)
Clegg, Walter	Jenkin, Patrick (Woodford)	Taylor, Sir Charles (Eastbourne)
Cooke, Robert	Johnston, Russell (Inverness)	Taylor, Edward M. (G'gow,Cathcart)
Corfield, F. V.	Kaberry, Sir Donald	Taylor, Frank (Moss Side)
Crosthwaite-Eyre, Sir Oliver	Kimball, Marcus	Thatcher, Mrs. Margaret
Crouch, David	Knight, Mrs. Jill	Thorpe, Jeremy
Crowder, F. P.	Langford-Holt, Sir John	van Straubenzee, W. R.
Cunningham, Sir Knox	Legge-Bourke, Sir Harry	Wainwright, Richard (Colne valley)
Dalkeith, Earl of	Longden, Gilbert	Ward, Dame Irene
Dance, James	Loveye, W. H.	Webster, David
Davidson, James(Aberdeenshire, W.)	Lubbock, Eric	Wells, John (Maidstone)
d'Avigclor-Coldsmid, Sir Henry	MacArthur, Ian	Whitelaw, William
Dean, Paul (Somerset, N.)	Mackenzie, Alasdair(Ross & Crom'ty)	Wilson, Geoffrey (Truro)
Dodds-Parker, Douglas	Maclean, Sir Fitzroy	Winstanley, Dr. M. P.
Doughty, Charles	Macleod, Rt. Hn. Iain	Wolrige-Gordon, Patrick
Eden, Sir John	Maddan, Martin	Younger, Hn, George
Elliot, Capt. Walter (Carshalton)	Maude, Angus
Elliott, R.W.(N'c'tle-upon-Tyne,N.)	Maxwell-Hyslop, R. J.	TELLERS FOR THE NOES:
Eyre, Reginald	Maydon, Lt.-Cmdr. S. L. C.	Mr. Francis Pym and Mr. Jasper More.
Farr, John	Mills, Peter (Torrington)

Schedule 3 agreed to.

To report Progress and ask leave to sit again.—[Mr. Callaghan.]

Committee report Progress; to sit again this day.