SHARE INCENTIVE SCHEMES (Hansard, 12 July 1972)

§ Mr. Nicholas Edwards (Pembroke)
I beg to move Amendment No. 166, in page 55, line 34, at end insert: 'or (d) the sole or main purpose for which the right or opportunity referred to in subsection (1) of this Section was conferred or offered to the person making the acquisition was either to provide permanent capital required by the body corporate for the purposes of its business or to enable a member of that body corporate to dispose of the shares acquired by the person making the acquisition'. In Committee on 21st June, my hon. Friend the Chief Secretary introduced an Amendment to ensure that the Clause would not strike at ordinary profit sharing schemes and to exclude from the Clause …shares which a person acquires as a director or employee if they are not subject to any special restrictions and are not of a class held mainly by people who have acquired them as directors or employees. It was not the intention of this legislation to hit at either the profit sharing scheme or the case where shares are acquired in a normal way unconnected with any of the features of a share incentive scheme. The Bill went further than this, and the Amendment will correct it. My hon. Friend the Member for Surrey, East (Mr. William Clark), who had raised the matter, said: …the thing that was worrying me was that somebody might join a company as a director. One of the conditions is that he subscribes to shares in that company. Subsequently, if business prospers and he realises his shares he will not be subject to capital gains tax but will be subject to Schedule E."—[Official Report, Standing Committee E, 21st June, 1972; c. 1257–8.] The Amendment went a long way to meet that fear.
However, the language used is still so wide that I am advised that when interpreted by the courts it is possible the Clause could be held to penalise directors or employees of a company who have acquired shares as a genuine straight forward investment rather than as beneficiaries of a share incentive scheme in the normal sense.
If I understand what my hon. Friend said in Committee, surely it was the Government's intention, and it would certainly be mine, to exclude from the operation of Clause 77 two cases. First, persons who happen to be directors or 1793 employees or those who are about to become directors or employees who are asked to provide finance for a company as an investment; and, secondly, a shareholder of a close controlled company who wishes to dispose of his shareholding and sell it to the other working directors or employees.
In both these cases the acquisition of shares by directors or employees could be said to have arisen because of the opportunity which occurred by virtue of their directorship or employment. As there is doubt about this matter and about whether the Clause fulfils the intention stated by my hon. Friend in Committee, I hope he will either accept the Amendment or take some other action to remove that doubt.

§ Mr. Peter Rees (Dover)
I hope it will not be thought churlish if I press my hon. Friend the Chief Secretary on this Amendment at this stage of the night, particularly when he has gone so far to still our doubts on many aspects of share option and share incentive schemes.
It strikes me, as it did my hon. Friend the Member for Pembroke (Mr. Nicholas Edwards), that possibly Clause 77 is still too tightly drawn in that it may, through inadvertence, catch people who are not taking part in any true sense in a share incentive scheme. That must be the rationale underlying Clause 77. Indeed, the side note entitles it "Share incentive schemes".
I understand the Clause is meant to catch schemes which provide some kind of concealed reward for services provided by directors and employees; in other words, a reward which, had it not been conjured up in the form of a share incentive scheme, might have been assessable under Schedule E.
There are certain situations which might be caught by Clause 77, although not providing any incentive in the true sense. My hon. Friend has mentioned small companies where all the shares are held by working directors. There are two situations. First, that company may require fresh capital. In that situation it is obvious that the directors will wish to keep the capital within their hands and they will, therefore, be encouraged to subscribe that fresh capital themselves. In that situation they would have taken up shares as a result of an oppor- 1794 tunity offered to them as directors of that company.
The second situation is where a director retires and, because all the shares are tightly held and intended to be held by working directors, he passes on his shares to the incoming director. Again, that incoming director acquires the shares as a result of an opportunity offered to him as a director, and Schedule 12 describes a director as one who is not only a director, but about to become a director.
My hon. Friend the Chief Secretary may say that these cases are covered by Clause 77(2), particularly paragraph (c) which provides, the acquisition was of shares which were not subject to any restriction other than restrictions attaching to all shares of the same class". In the kind of situation I envisage, the shares would probably be of the same class.
However, a second condition has to be satisfied if such a scheme is to be outside the scope of Clause 77. The second condition is, and the majority of shares of that class were acquired otherwise than as mentioned in subsection (1) above. That is, otherwise than in pursuance of an offer to the public.
In such a tightly held company it may be that the shares are always passing from one outgoing director to an incoming director or have always been subscribed for by directors and employees of that company. In that case, therefore, the let-out provided by subsection (2)(c) would not be available.
It is not only my view but the view of many people better instructed than myself in the City that the Clause will catch these quite innocent schemes. I hope, therefore, that my hon. Friend will look favourably at the Amendment which is carefully drawn and designed to let out those schemes which are not in any true sense of the word share incentive schemes. If my hon. Friend is not able to accept the Amendment, I hope he will assure us that an equivalent Amendment will be introduced at a later stage.

§ Mr. Dalyell
In Committee I raised the question of surveyors, and I should like to take this opportunity to thank Treasury Ministers and their officials for 1795 a number of letters which I have received, over which they have taken a lot of trouble. The Minister said in his letter that if the exception was extended to include all the professional and confidential advisers who could claim a comparable position it could substantially undermine the usefulness of the Inspector's power to require information.

§ Mr. Patrick Jenkin
I appreciate what the hon. Member for West Lothian (Mr. Dalyell) said, and his kind words will be taken note of in official circles.
I should like to respond to the Amendment moved by my hon. Friend the Member for Pembroke (Mr. Nicholas Edwards) and supported by my hon. and learned Friend the Member for Dover (Mr. Peter Rees) in the spirit in which they put forward their case. I cannot accept the Amendment as it appears on the Notice Paper, mainly because it imports a motive test, and it has been the experience of the Inland Revenue that Clauses which involve a motive test are extremely difficult to administer and often fail to achieve their purpose.
The point to which attention has been drawn came to the notice of the Inland Revenue only about a week ago, when a letter was received, and with the general pressure of business—which I am sure hon. Members will understand—it has not been possible to examine all the ramifications and possibilities to which the suggestion gave rise. We were not, therefore, in a position by the end of last week to put down an Amendment, or even to decide whether the Bill required to be amended, or whether there was a problem which ought to be looked at.
As the result of the limited studies which we have made, reinforced by the arguments which have been advanced tonight, I think I can say that we would want to look at the matter further, as it is by no means beyond doubt. We shall consider dealing with the matter next year if it is shown in practice that there will be, or could be, real difficulties in the field.
No substantial problem is likely to arise during this year, as liability under the Clause in respect of the normal shares could arise only on the disposal of the shares acquired after 5th April, 1972. If, however, amending legislation should 1796 be found to be necessary next year we shall, in the light of the statement that I am making now, consider making it retrospective to 6th April of this year. It would be a relieving and not a charging provision.
In the meantime, if the Inland Revenue comes across any case in which liability arises under the Clause in circumstances which appear to be outside the intended scope of the legislation, it will consider most carefully what action should be taken. I am sorry that I cannot be more definite about it, but we have had such a short time in which to consider the matter. Nevertheless, I hope that my response will make my hon. Friend feel that he does not need to press his Amendment.

§ Mr. Nicholas Edwards
I beg to ask leave to withdraw the Amendment.