FURTHER PROVISIONS ABOUT SHARE OPTIONS

HC Deb 19 July 2000 vol 354 cc401-16

Mr. Richard Ottaway (Croydon, South)

I beg to move amendment No. 131, in page 40, line 19, after "be", insert "multiplied by 2.5 and".

I make no apology for the fact that the amendment would largely negate the impact of imposing national insurance contributions on share option schemes.

I want to talk about entrepreneurial activity. We are well aware of what this Government measure will do. The problem has been rightly identified by all involved. A start-up company that has little capital or that makes little profit, and whose shares may be quoted or are at least tradable, may employ many staff on a contractual basis that includes large share options. On the exercise of those options, the national insurance contributions are levied not only on the employee, but on the employer. That imposes a large capital liability on the employer, which he may not have the funds to meet. The Government recognise the problem and have made a gesture, but in our eyes the proposal merely takes things from very bad to bad.

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I want to talk about entrepreneurial activity largely because that is what the measure will hit. After the election, the Government produced a competition White Paper that built on the efforts of my right hon. Friend the Member for Henley (Mr. Heseltine) when he was Deputy Prime Minister, and a document on the knowledge-driven economy, of which my right hon. Friend was the driving force until 1997. The Institute for Public Policy and Research produced a report entitled "The Entrepreneurial Society", the launch of which the Prime Minister attended. He supported the teaching of entrepreneurship in schools, which was one of the report's main themes, and I shall return to that point. The Government may talk the talk, but do they walk the walk? [Interruption.] Well, that is important and we want to know.

At first blush, the Government do not do too badly for entrepreneurs. There have been changes to capital gains tax, capital allowances for small and medium-sized enterprises are now 40 per cent. and, for the next three years, allowances for certain information technology equipment will be 100 per cent. for small companies, which will go a long way to help the sort of company that the measure will hit. However, medium-sized companies seem to have dropped out of that relief. Research and development reliefs were discussed upstairs in Committee, and a couple of weeks ago the Government announced a 55 per cent. increase in public expenditure on science.

Although I am prepared to give the Government the credit for that, I do not want to go too far or be too kind and generous. The point is that these measures are finely tuned and focused. They address a particular sector, but what of the colossal burden of corporate taxation and regulation that has been dumped on business overall? It will completely swamp everything that these measures will introduce.

Since 1997, business has had to absorb the cost of union recognition and the additional costs of maternity leave and paternity leave, which have been much publicised. It has also had to absorb the cost of rights to time off, rights for part-time workers, the national minimum wage and the working time directive, so it comes as no surprise that the Institute of Directors has said that the additional regulatory burden is costing business £5 billion a year. However, the Labour party election manifesto said: We will provide stable economic growth with low inflation— so far, so good— and promote dynamic and competitive business and industry at home and abroad.

The Economic Secretary to the Treasury (Miss Melanie Johnson)

And we have.

Mr. Ottaway

I disagree. for the reasons that I am setting out, the effort to promote dynamic and competitive business is being stifled by measures such as those we are debating. If the hon. Lady talks to industry and business, she will find that they agree.

There is extra taxation on business—the pension fund liabilities, for example. It is dawning on millions of people around the country that there has been a raid on their pensions that will cost them and their employers substantial sums. The Government have introduced the windfall tax on the utilities, corporation tax changes and the climate change levy, which we have discussed. The infamous IR35, which is having a colossal impact on the IT sector and the way it behaves, is not stimulating business in the way that the Government claimed in their manifesto. Stamp duty, which was debated in the House yesterday and upstairs in Committee, hits business particularly hard. It took heavy pressure from the Opposition for the Government to amend their double taxation relief proposals. The proposals that they originally came up with were outrageous. Thanks to the Conservative party, which is business's friend, the Government have largely climbed down on the measure, but why they should dream of introducing it in the first place is beyond me.

We have had the additional fuel duty, which is having a big impact on industry that relies heavily on transport. We have the aggregates tax and also the national insurance contributions on share options. It comes as no surprise that Sir Clive Thompson, chairman of the Confederation of British Industry, drew attention to Labour's stealth taxes just before the March 2000 Budget. He said: The Government has introduced a series of well-camouflaged taxes which has put the tax burden firmly onto business. Changes by the Chancellor since 1997 will push up business taxation by almost £5 billion a year for the first five years of the Labour Government. Given that sort of reaction, and if that volume of taxation is going on business, why on earth do the Government bring in such a measure, which will stifle entrepreneurial actively, not help it?

Ministers must get out there and talk to the people who are at the coal face, who have a wage bill to meet every week and who are up against the heavy burden of corporate taxation and regulation, and listen to them. They would then think twice about putting such a burden on Britain's entrepreneurs.

What sort of message does the proposal send to entrepreneurs in this country? There is no doubt that entrepreneurial activity has an impact on the economy. If we have more entrepreneurs, it tends to generate more economic activity and the economy grows. Whatever side of the political debate we are on, we all want the economy to grow.

In the United Kingdom, we are not doing badly with entrepreneurial activity—at least until we compare ourselves with other countries. Just 3.3 per cent. of the people of this country are trying to start a business, but in the United States it is twice that number—more than 6.5 per cent. of people are engaged in entrepreneurial activity. Only 16 per cent. of entrepreneurs in this country think that there are good opportunities that are worth having, whereas in the United States it is 57 per cent., so why do we have those big gaps? What is going on? What lessons can be learned about entrepreneurial activity?

Mr. John Bercow (Buckingham)

Before we accept clause 56, which my hon. Friend wisely seeks to amend, would it not have been helpful if members of the Treasury Bench had spoken to the director general of the British Chambers of Commerce, Mr. Chris Humphries, who said as recently as 20 January this year that, despite their rhetoric, the reality is that the Government have dramatically increased the regulatory burdens that threaten small business competitiveness?

Mr. Ottaway

My hon. Friend makes his point very well. That is the thrust of the argument. That theme was taken up by the Institute of Directors, whose assessment was that regulatory burdens on business amounted to about £5 billion per annum.

I was talking about entrepreneurial activity in this country. When the Prime Minister attended the launch of the report published last year by the IPPR, he said that entrepreneurship should be taught in schools—no doubt the message went out to the relevant Ministers. It is worth looking at a written answer from the Secretary of State for Education and Employment. It spoke about the introduction of consumer and education entrepreneurial skills in the national curriculum and went on:

• At Key Stage I, children will be taught that money comes from different sources and can be used for different purposes.
• At Key Stage 2, they will be taught to look after their money and realise that future wants and needs may be met through saving.
• At Key Stage 3, they will be taught what influences how we spend or save money, and how to become competent at managing personal money.—[Official Report, 24 January 2000; Vol. 343, c. 25W.]

At key stage 4, there will be more lessons in managing personal money.

That shows that the Government's vision of entrepreneurial lessons and teaching entrepreneurial activity in schools involves telling children how to handle their own money. That is off-beat, and it is not the answer. It will not promote entrepreneurial activity or change the culture. The Prime Minister and the Ministers concerned should revisit the report entitled "The Entrepreneurial Society" and address far more seriously the points that are raised.

To return to national insurance contributions on the exercise of share options, I am grateful for a memo from Mr. Stephen Allott of Micromuse, a software and hardware company in this country, with considerable experience in the United States. In his briefing paper this month he states: The vast majority of technology start-ups are done in the US rather than Europe for many reasons including customer proximity, supplier and labour base, the tax regime and culture. He goes on: New Economy businesses are built on good people not assets. Building a new business from the UK or persuading a multinational to locate a major business unit in the UK means that top talent will have to be happy to locate in the UK. Mr. Allott continues: For the UK to be an attractive base for a global technology business (such as Micromuse or the next Cisco) it has to offer something substantial to redress the balance over the United States. The go forward effective personal tax rate of 47 per cent. in the UK compares unfavourably with 26 per cent. in the US for ISO stock options and 46 per cent. for other stock options. There we have an experienced business man contrasting the United States with the United Kingdom, and demonstrating how unattractive such a comparison is.

Mr. Timms

I am grateful to the hon. Gentleman. Will he confirm the last figure that he gave to the House? Did he say that there was an effective rate of taxation of 47 per cent. in the UK on unauthorised options and that in the United States it is 46 per cent?

Mr. Ottaway

I said that in the United States for ISO stock options, which are considered important, the rate is 26 per cent., and that for other stock options, it is 46 per cent.

Mr. Timms

We are, of course, speaking about unauthorised share options, so let us compare like with

like. The comparison is, as the hon. Gentleman rightly said, 47 per cent. in the UK and 46 per cent. in the US. The arrangements for authorised options are different in both countries.

Mr. Ottaway

The Minister is more familiar with the matter than I am. However, ISO stock options are considered important by companies such as the one that I mentioned, and they attract a tax rate of 26 per cent. That must be taken into account.

Mr. Edward Davey (Kingston and Surbiton)

I am grateful to the hon. Gentleman for giving way. Although the Financial Secretary is right with respect to the measure under discussion, is the hon. Gentleman aware that the Financial Secretary admitted in the Standing Committee on 29 June: There is an alternative regime for approved options in the US, as there is in the UK and that the terms of the approved scheme are more generous in the US than in the UK—[Official Report, Standing Committee H, 29 June 2000; c. 1033.]?

Mr. Ottaway

The hon. Gentleman makes a good point, and the Minister must take account of the weight of opinion. He may receive advice about ISOs before the debate is wound up, just as I may pin down the specific facts.

I quoted a business man who finds it far more attractive to build up his company in the United States than in the UK. A message must be sent from the Government to entrepreneurs.

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I shall conclude by referring to a report from the "Global Entrepreneurship Monitor" produced by the London business school, with which I suspect the Minister is familiar. It is sponsored by Apex Partners and Co., which I suspect has given advice to the Government on entrepreneurial activity. The report was produced in 1999, and includes a clear and specific recommendation in terms of assessing Government policies. It states: Rules on share option schemes need to be improved to give incentives to people to join young entrepreneurial businesses and go on to build large, world-class enterprises. If someone is prepared to take a risk with his career and a risk in establishing a business, what message are the Government sending out? It is one that is hostile to entrepreneurs. The Prime Minister has made it clear that entrepreneurship should be encouraged. The Government's advisers have recommended change yet I suspect that the Government will persist in pressing on with activity that is hostile to entrepreneurship instead of encouragement.

Mr. Edward Davey

When, two years ago, the Government introduced measures to apply employers' national insurance contributions to share options and gains on those options, I do not think that they realised the mess into which they were getting themselves. In the Child Support, Pensions and Social Security Bill and in the Finance Bill in clause 56, they have tried to alleviate the problems that they have created. However, they have not gone far enough. The amendment would help to improve the relief but it would go significantly against the Government's intentions.

When we debated these matters in Committee, the Minister admitted that a real problem had been caused by the Government's previous legislation. He admitted that the problems would lead to some high-tech companies having to assess the unpredictable future liability of employees' national insurance contributions.

Mr. Michael Fabricant (Lichfield)

Is the hon. Gentleman aware that many high-tech companies—some of the dot.com companies—are offering profit-share schemes that are related to profits rather than dividends? They are not providing shares for some of their employees even though they are offering bona fide profit options. Is the hon. Gentleman aware also that that is excluded in clause 56, which the amendment is designed to amend?

Mr. Davey

I was aware of that, but I am not sure whether it is germane to my argument or to the issues on which we should focus during the debate. I shall develop my argument, which I hope is germane to the issues.

A problem is created for high-tech companies when it comes to predicting liability and having to account for that. The Minister was up front and honest with the Committee in explaining that problem. High-tech companies often have to go to capital markets to secure extra funds to compete in a highly competitive and dynamic industry, and they have to convince investors that their balance sheets are at least moving in the right direction even when profit and loss does not look too good in the near future. Unpredictable liabilities on balance sheets create great problems in winning the confidence of investors. The Government admitted that that was the problem and they are seeking to deal with it in clause 56.

Have the Government dealt with the problem? In the Child Support, Pensions and Social Security Bill, they introduced an unusual technique in British tax law, which was that there could be an election and an agreement between the employer and employee to switch the liability for employers' national insurance contributions to the employee, thus getting round the accounting proposal. However that creates another difficulty, which is that of attracting labour.

The skilled employees in the industry are internationally mobile. If a UK or US company tried to attract them, they would consider the various stock options and salaries on offer and the tax regimes that applied to salaries and stock options.

In Committee, we focused on whether the provision made the tax regime for stock options for employees of high-tech companies in the United Kingdom worse than the regime in the United States. There was a huge debate about that, and it has been reflected in our proceedings today. I do not think that the Government have gone far enough to make sure that the UK remains attractive enough to internationally mobile labour. The provision will deter skilled employees from joining UK companies instead of those in the United States. That will inevitably encourage high-tech companies to set up in the United States and not in the UK

The Financial Secretary might say that the tax differential—between 46 and 47.3 per cent. for approved share option schemes—is rather small. It might seem a small differential, but the key point is the change. Many companies have set up in the UK or are considering setting up in the UK because they previously viewed the tax regime here as beneficial. They could encourage skilled internationally mobile employees to work for them in the UK, because the tax regime was favourable for share options. However, in a stroke—by applying class 1 national insurance contributions to stock options—the Government have removed that advantage.

One could argue that there was a tax loophole that needed closing, but was it necessary to remove it altogether? Was it not necessary to give some competitive tax advantage to the UK's information technology industry to attract companies and internationally mobile labour here? By not recognising that important fact, the Government are doing down that sector and doing this country a disservice.

Mr. Bercow

I agree with the hon. Gentleman's observation that the fact of the change is significant. However, does he agree that the other significant fact is that a substantial proportion of the companies that will be affected are small companies? Given that 99.6 per cent. of Britain's firms employ fewer than 100 people and that they account for about 50 per cent. of the private sector work force and generate 40 per cent. of national output, that point is of the most dramatic significance.

Mr. Davey

As always, the hon. Gentleman comes to the House with a barrage of statistics, the veracity of which I cannot confirm at this time. However, I am more than happy to agree with the thrust of his point. Small firms are active in this sector.

When we debated this issue in Committee, I put some of these points to the Financial Secretary. He said that the Government had chosen to get the marginal rate of the relief in clause 56 down to 47.3 per cent. because they wanted to get it below 50 per cent. He said that it appeared from the negotiations that had been held with the companies affected that the figure of 50 per cent. was "psychologically significant". I am sure that it is "psychologically significant", but is that the test that we should apply? We want to ensure that this country is the most competitive—even vis-a-vis the United States—in the world. One could argue that we are talking about percentage points, but they are important in such decisions.

Mr. Timms

Can the hon. Gentleman confirm that, in addition to the liability for the employee, employers in the United States also have to pay a 1.5 per cent. Medicare charge? That works in exactly the same way as national insurance liability works in this country, but it is not an issue for companies here. In that respect—indeed, in many others—the UK is in a better competitive position than the United States.

Mr. Davey

I happily admit that. The Financial Secretary made that clear in Committee. However, he should consider the change. The United Kingdom was in a tax-competitive position, which may have approached becoming a loophole and a matter of concern to the Treasury. I accept that it needed to ensure that its finances were not undermined; I imagine that hon. Members from all parties would accept that. However, admitting that a tax loophole requires tackling is different from deciding to throw away all tax competitiveness and to pick a rate that happens to be the equivalent of a United States rate plus Medicare and so on.

We must ensure that this country is internationally competitive, especially in the IT sector, and that it can attract mobile capital and labour. We are debating a Bill that contains many provisions that will hit the UK economy through mobile labour and capital, for example, IR35, which the hon. Member for Croydon, South (Mr. Ottaway) mentioned in his speech. One or two other provisions have the same effect. The Minister must address the change. Why did not the Government keep some advantage in tax competition for the UK?

The Financial Secretary developed his thinking in Committee when he compared the US and the UK from the point of view of a French company, the director of which he had met at a recent conference. The Financial Secretary said that the French director had considered and rejected the rest of Europe because the UK was the best place in Europe to set up an IT company. The French entrepreneur then compared the UK with the US. According to the Financial Secretary, the overriding factor for the French director was that the US skilled labour market in IT was rather tight and that he believed that there was a greater supply of such people in the UK. The Financial Secretary was trying to say that there were other considerations about location.

That was an interesting argument, which I do not believe that anyone would dispute. However, people locate in one place rather than another for many reasons. We want to make sure that Britain is best for all those reasons, yet the Government have chosen to throw away our tax competition advantage. Perhaps the relief needs to be only slightly greater than that for which clause 56 provides, and perhaps amendment No. 131 would be too generous. However, if the Financial Secretary had granted only a slightly higher level of relief, he would have received plaudits from the industry and been able to defend his proposal more effectively today.

I hold the Financial Secretary in high regard, and I hope that he will take account of the points that I have made. Many people have been pleased with the way in which he has taken seriously the issue that we are considering, listened to the industry and tried to devise an elegant solution. I am not sure whether it is that elegant, and I hope that he will, in all humility, reconsider that solution to ascertain whether it could be rather more generous next year to ensure that this country remains the world centre for doing business.

Mr. Fabricant

The hon. Member for Kingston and Surbiton (Mr. Davey) rightly points out that businesses need to be competitive in the world market and that there should also be some certainty about investment for future expansion. My hon. Friend the Member for Croydon, South (Mr. Ottaway) has already pointed out that the Government have not helped the position of new companies—or, indeed, mature companies—that operate in the UK market. The Institute of Directors has acknowledged that union recognition, maternity and paternity leave and the working time directive have added an extra £5 billion in regulatory burdens on such companies. Furthermore, fuel duty has not helped.

I should like briefly to explore another area, which the Government have neglected, despite promises made before the last general election by the Secretary of State for Health when he was in the shadow Treasury team.

5.30 pm

Amendment No.131 has been designated by Madam Speaker, as is shown on the selection list, as dealing with "Employee share options: tax relief to employees". Employees benefit not just from share options but from profit-related pay to which the Government have not sought to restore tax relief. Dividend is not the only way by which the employee—

Mr. Deputy Speaker

Order. The matter that we are discussing relates to share options only; nothing else.

Mr. Fabricant

I am aware of that, and I know that the Clerk is aware of it, too. Clause 56 deals with tax relief to employees, as designated by Madam Speaker.

Both main Opposition parties have referred to new sunrise businesses; such as dot.com, high-tech companies. For all sorts of reasons, many of those companies are unable to offer share options at an early stage of their existence. Instead, they offer profit-related pay. Similarly, such companies as the John Lewis partnership—which employs 45,000 people—have a bona fide profit-related pay scheme. Before the election, the Prime Minister, having visited the John Lewis store in Oxford street, described John Lewis as an example of a stakeholding company. I simply want to ask the Minister this—

Mr. Deputy Speaker

Order. I am sure that the hon. Gentleman will accept some guidance. It is not a question of the selection of amendments; we are talking about clause 56, to which the amendment relates. The clause clearly deals with provisions for share options.

Mr. Fabricant

Thank you, Mr. Deputy Speaker.

I conclude by saying that I hope that, in future Finance Bills, the Government will decide to honour their promise, made before the election, to extend the provisions of clause 56 not only to share options, but to bona fide profit-related schemes, such as that operated by the John Lewis partnership and many sunrise companies.

Mr. Edward Davey

Is the hon. Gentleman aware that the previous Conservative Government did not propose tax advantages for share options that might apply to people working for John Lewis and, indeed, took away tax relief on profit-related pay?

Mr. Fabricant

I am aware of that. I am aware also that the present Secretary of State for Health said that this would be restored within the first year of a Labour Government. That was yet another Labour lie made before the last general election.

Mr. Timms

The hon. Member for Croydon, South (Mr. Ottaway) was misinformed about a number of his points. He asked whether we had fixed the technical problem. The answer is yes; we have entirely resolved the technical difficulty.

The hon. Gentleman was mistaken about other matters as well. There is a new spirit of enterprise abroad across the UK, fostered precisely by the measures that the Government are taking. Helpfully, he listed a number of them, to which I would add a number of other changes that we have made, such as the cut in capital gains tax. The hon. Member for Kingston and Surbiton (Mr. Davey), who is well informed on this matter, will know that the 10 per cent. rate of capital gains tax after four years is significantly less than the comparable rate in the US. On that front, we have made good progress—which the hon. Gentleman will welcome—in terms of competition in attracting investment relative to the United States.

Mr. John Burnett (Torridge and West Devon)

Does the Minister regret that the Finance Act 1998 took away the complete exemption for the first £250,000 chargeable gains on retirement?

Mr. Timms

On retirement! We are now on rather different territory. The answer is no.

Let me draw attention to our reductions in corporation tax rates. We have cut both the main and the small business rates, and have introduced a 10p rate. We now have the lowest-ever small business corporation tax rates, and the lowest in the industrialised world. Since 1997, small companies have received an average corporation tax cut of nearly 25 per cent. That is why there are now 100,000 more small companies than there were at the time of the general election.

Those developments were created by the new spirit of enterprise fostered by all the Government's measures. That is why we are making such excellent progress, and that is why there are 1 million more new jobs than there were at the time of the election.

Mr. Fabricant

The Minister has told us how many new companies had been founded since the election, and the figure was impressive. Will he now tell us how many small companies have gone into receivership since the election?

Mr. Timms

There has been a net increase of 100,000 in the number of small enterprises. That is my point: there are significantly more, in total, than there were at the time of the election.

As we have heard, clause 56 gives relief to the employee in respect of the cost of bearing the secondary national insurance liability, either through an agreement allowing the employer to recover the contributions or by means of an election whereby the liability is transferred. The clause allows a deduction from the amount of the share-option gain that will be chargeable to income tax. In effect, it moves to the employee the corporation tax relief that would have been due to the company if it had borne the cost.

As the hon. Member for Kingston and Surbiton pointed out, that means that the total tax and national insurance charge will be, at the most, 47.32 per cent. As the hon. Member for Croydon, South said, 47.32 per cent. is very similar to the rate that would be paid by a United States employee exercising an option when the uncapped US Medicare contributions and state income taxes are included. It is also a lower top rate of tax than that applying in many other European countries. France, Germany, the Netherlands, Spain and Sweden all have higher top income tax rates.

Mr. Ottaway

I can clarify what was said by the chief executive of Micromuse. He said that companies in the United States with ISO stock options attracted a 26 per cent. tax rate.

The Minister must recognise that there is a difference between the ways of approving schemes here and in the United States. Here, the Government decide whether a scheme can be approved; in the United States, the company decides. The schemes that we are discussing would attract a 20 per cent. rate in the United States.

Mr. Timms

Schemes approved in the United Kingdom will benefit from the lower rate of capital gains tax—10 per cent. after four years. That is significantly lower than the rate in the US.

The rules for approval of schemes in the US are well defined. They specify a limit of $100,000 worth of options that can be provided for under an approved scheme. The ISOs that the hon. Gentleman mentioned are not popular with many US companies, because they do not carry a company tax deduction. The figure in the UK is £30,000 over three years. As I said in Committee—the hon. Member for Kingston and Surbiton mentioned this—that is indeed less generous than the US limit, but it was the previous Government who reduced the UK limit from £100,000 to £30,000 in order to solve some of their "fat cat" problems. I do not think that we should take lessons from the Conservative party on that.

Mr. Flight

I think that the Minister is unintentionally slightly misleading the House in comparing United States and United Kingdom schemes and applying the word "unapproved" to both types of scheme, because the two are not entirely similar. As he rightly said, the United Kingdom-approved scheme has a £30,000 limit and, therefore, can be used only modestly. Many United States businesses use the ISO scheme. The meaning of "approved" and "unapproved" in United States schemes is different from that in United Kingdom schemes.

As the Minister will discover, the bottom line is that the great majority of options issued to management in the United States end up being taxed at 26 per cent., not 46 per cent. In the United Kingdom, the great majority of options will now be taxed at 47.3 per cent., which is 20 per cent. higher than the rate applicable on most options in the United States.

Mr. Timms

The principles are not that dissimilar between the United States and the United Kingdom. Approved schemes in the United States have to comply with USA tax law and USA regulations, just as United Kingdom schemes have to comply with our tax law and regulations. Many of the most successful dot.com start-up companies in the USA use not ISOs, but unapproved arrangements that have various advantages. That is how—depending on the state tax rate—the overall rate of 46 per cent. is arrived at. If the hon. Gentleman is suggesting that the arrangements being provided for in the Bill are significantly less competitive than those applying to many fast-growing United States firms, he is wrong.

We are proposing a package that is already helping to attract business and jobs to the United Kingdom and to help United Kingdom firms compete in the global market. It recognises the importance of share options for employers and employees, particularly in the new economy. It removes barriers to their use in recruiting and retaining employees, and it meets our aims of a fairer tax and national insurance system by ensuring that tax relief is given for the national insurance contributions on share options to whoever bears that cost.

Although I do not want to make too much of it, amendment No. 131 is deficient in various ways. Even if the defects could be resolved, the changes suggested in the amendment would considerably distort the use of share options compared with other forms of remuneration—such as cash bonuses—which would remain fully subject to national insurance, and they would provide an unwelcome opportunity for the re-emergence of widespread national insurance avoidance. It is estimated that, all together, the proposed provision could cost at least £1 billion annually in lost revenue. Therefore, bearing in mind that substantial cost, I urge Opposition Members to think long and hard before pressing the amendment to a vote.

Abolition of the upper earnings cap on employers' national insurance contributions was another step taken by the previous Government. That action led to companies seeking inventive ways of avoiding national insurance on big cash bonuses, particularly in the City. Share options were being used in that way. As I said in Committee, that is one of the reasons why the rules were changed for share options granted after 5 April 1999, to make national insurance payable on the gain made on the option when it was exercised. The change brought the tax and national insurance treatment into alignment and removed scope for such avoidance, which was an important and worthwhile step forward.

The net effect of the proposed change would be to leave the employee paying combined income tax and secondary national insurance at the employee's marginal tax rate on the share option gain. However, although it would do that for higher-rate taxpayers, as it results in a total tax and national insurance contribution charge of 40 per cent, it would not have the same effect on basic-rate taxpayers—who would be left paying income tax at 27.49 per cent, not the 22 per cent. that would apply to their ordinary salary. Therefore, the amendment also discriminates against the low paid.

5.45 pm

The clause is simple and fair. Employing companies will get a corporation tax deduction from their profits if they pay the secondary national insurance contributions as part of the cost of employment and, if the liability is transferred to the employee or if the money is recovered from the employee, there will be no corporation tax deduction. Instead, the employee who bears the cost will get the benefit of an income tax relief for that cost on the same basis as a deduction for the amount paid in calculating the profit chargeable to tax. I urge the House to reject this costly amendment.

Mr. Ottaway

If amendment No. 131 is extremely costly, and I do not believe that it is, the burden of taxation that the Government are taking out of Britain's entrepreneurs' pockets is a darn sight more than we thought that it was. We will divide the House on the issue and the reasons for that are clear. The Government have to send a message to Britain's entrepreneurs. It is no good whacking on the taxes and just expecting those entrepreneurs to pay up, but at the same time hoping that more people will engage in entrepreneurial activity. All the research that the Government have shows that an entrepreneurial culture is lacking in this country. That comes as no surprise if the Government are intent on penalising Britain's entrepreneurs.

The Financial Secretary says that he has resolved the technical problems, but that means—as I said—that the solution has gone from very bad to bad. That is not a resolution of the problems. He says that he has cut taxes on business. Why then does the CBI talk of an extra £5 billion stealth tax on business? Why does the Institute of Directors say that there is an extra £5 billion a year in regulatory burden? Those are real issues that are hitting Britain's industry today.

The Financial Secretary said that he has now fostered a new spirit of entrepreneurial activity. If he has, it is despite these measures and not because of them. For those reasons, I urge the House to support our amendment.

Question put, That the amendment be made:—

The House divided: Ayes 164, Noes 315.

Division No. 278]	[5.47 pm
AYES
Ainsworth, Peter (E Surrey)	Donaldson, Jeffrey
Allan, Richard	Dorrell, Rt on Stephen
Ancram, Rt Hon Michael	Duncan Smith, Iain
Arbuthnot, Rt Hon James	Evans, Nigel
Baker, Norman	Ewing, Mrs Margaret
Baldry, Tony	Faber, David
Ballard, Jackie	Fabricant, Michael
Beggs, Roy	Fearn, Ronnie
Beith, Rt Hon A J	Flight, Howard
Bell, Martin (Tatton)	Forth Rt Hon Eric
Bercow, John	Foster, Don (Bath)
Body, Sir Richard	Fowler, Rt Hon Sir Norman
Bottomley, Peter (Worthing W)	Fox, Dr Liam
Bottomley, Rt Hon Mrs Virginia	Garnier, Edward
Brand, Dr Peter	George, Andrew (St Ives)
Brazier, Julian	Gibb, Nick
Breed, Colin	Gidley, Sandra
Brooke, Rt Hon Peter	Gill, Christopher
Browning, Mrs Angela	Gillan, Mrs Cheryl
Bruce, Malcolm (Gordon)	Gorman, Mrs Teresa
Burnett, John	Gorrie, Donald
Burns, Simon	Green, Damian
Butterfill, John	Greenway, John
Cable, Dr Vincent	Grieve, Dominic
Campbell, Rt Hon Menzies (NE Fife)	Hague, Rt Hon William
	Hamilton, Rt Hon Sir Archie
Cash, William	Hammond, Philip
Chapman, Sir Sydney (Chipping Barnet)	Hancock, Mike
	Harris, Dr Evan
Chope, Christopher	Harvey, Nick
Clappison, James	Hawkins, Nick
Clarke, Rt Hon Kenneth (Rushcliffe)	Heathcoat-Amory, Rt Hon David
	Hogg, Rt Hon Douglas
Clifton-Brown, Geoffrey	Horam, John
Collins, Tim	Howarth, Gerald (Aldershot)
Cotter, Brian	Hughes, Simon (Southwark N)
Cran, James	Jackson, Robert (Wantage)
Davey, Edward (Kingston)	Jenkin, Bernard
Davies, Quentin (Grantham)	Johnson Smith,
Davis, Rt Hon David (Haltemprice)	Rt Hon Sir Geoffrey
Day, Stephen	Keetch, Paul

Kennedy, Rt Hon Charles (Ross Skye & Inverness W)	Ross, William (E Lond'y)
	Rowe, Andrew (Faversham)
Key, Robert	Russell, Bob (Colchester)
King, Rt Hon Tom (Bridgwater)	St Aubyn, Nick
Kirkwood, Archy	Salmond, Alex
Lait, Mrs Jacqui	Sanders, Adrian
Lansley, Andrew	Sayeed, Jonathan
Leigh, Edward	Shepherd, Richard
Letwin, Oliver	Simpson, Keith (Mid-Norfolk)
Lewis, Dr Julian (New Forest E)	Smith, Sir Robert (W Ab'd'ns)
Lidington, David	Spring, Richard
Lilley, Rt Hon Peter	Stanley, Rt Hon Sir John
Livsey, Richard	Steen, Anthony
LIoyd, Rt Hon Sir Peter (Fareham)	Streeter, Gary
Loughton, Tim	Swayne, Desmond
Luff, Peter	Syms, Robert
MacGregor, Rt Hon John	Tapsell, Sir Peter
McIntosh, Miss Anne	Taylor, Ian (Esher & Walton)
MacKay, Rt Hon Andrew	Taylor, John M (Solihull)
Maclean, Rt Hon David	Taylor, Matthew (Truro)
Maclennan, Rt Hon Robert	Taylor, Sir Teddy
McLoughlin, Patrick	Thomas, Simon (Ceredigion)
Madel, Sir David	Tonge, Dr Jenny
Malins, Humfrey	Townend, John
Maples, John	Trend, Michael
Maude, Rt Hon Francis	Trimble, Rt Hon David
Mawhinney, Rt Hon Sir Brian	Tyler, Paul
May Mrs Theresa	Tyrie, Andrew
Michie, Mrs Ray (Argyll & Bute)	Viggers, Peter
Moore, Michael	Waterson, Nigel
Morgan, Alasdair (Galloway)	Webb, Steve
Moss, Malcolm	Welsh, Andrew
Norman, Archie	Whitney, Sir Raymond
Oaten, Mark	Whittingdale, John
O'Brien, Stephen (Eddisbury)	Wilkinson, John
Öpik, Lembit	Willetts, David
Ottaway, Richard	Wilshire, David
Paice, James	Winterton, Mrs Ann (Congleton)
Portillo, Rt Hon Michael	Winterton, Nicholas (Macclesfield)
Prior, David	Yeo, Tim
Randall, John	Young, Rt Hon Sir George
Rendel, David
Robathan, Andrew	Tellers for the Ayes:
Robertson, Laurence	Mr. Peter Atkinson and
Roe, Mrs Marion (Broxbourne)	Mrs. Eleanor Laing.
NOES
Abbott, Ms Diane	Brown, Russell (Dumfries)
Adams, Mrs Irene (Paisley N)	Browne, Desmond
Ainger, Nick	Buck, Ms Karen
Ainsworth, Robert (Cov'try NE)	Burgon, Colin
Alexander, Douglas	Butler, Mrs Christine
Allen, Graham	Byers, Rt Hon Stephen
Anderson, Donald (Swansea E)	Campbell, Mrs Anne (C'bridge)
Anderson, Janet (Rossendale)	Campbell, Ronnie (Blyth V)
Armstrong, Rt Hon Ms Hilary	Campbell-Savours, Dale
Atkins, Charlotte	Cann, Jamie
Austin, John	Caplin, Ivor
Banks, Tony	Casale, Roger
Barnes, Harry	Caton, Martin
Barron, Kevin	Cawsey, Ian
Bayley, Hugh	Chapman, Ben (Wirral S)
Beckett, Rt Hon Mrs Margaret	Chaytor, David
Begg, Miss Anne	Chisholm, Malcolm
Bell, Stuart (Middlesbrough)	Clapham, Michael
Benn, Hilary (Leeds C)	Clark, Rt Hon Dr David (S Shields)
Benn, Rt Hon Tony (Chesterfield)	Clark, Paul (Gillingham)
Benton, Joe	Clarke, Charles (Norwich S)
Berry, Roger	Clarke, Eric (Midlothian)
Best, Harold	Clarke, Rt Hon Tom (Coatbridge)
Blears, Ms Hazel	Clelland, David
Blizzard, Bob	Clwyd, Ann
Bradley, Keith (Withington)	Coaker, Vernon
Bradshaw, Ben	Coffey, Ms Ann
Brinton, Mrs Helen	Cohen, Harry

Coleman, Iain	Howarth, Alan (Newport E)
Colman, Tony	Howarth, George (Knowsley N)
Connarty, Michael	Howells, Dr Kim
Cooper, Yvette	Hoyle, Lindsay
Corston, Jean	Hughes, Ms Beverley (Stretford)
Cox, Tom	Hughes, Kevin (Doncaster N)
Cranston, Ross	Humble, Mrs Joan
Crausby, David	Hurst, Alan
Cryer, Mrs Ann (Keighley)	Hutton, John
Cryer, John (Hornchurch)	Iddon, Dr Brian
Cummings, John	Illsley, Eric
Cunningham, Rt Hon Dr Jack (Copeland)	Jackson, Ms Glenda (Hampstead)
	Jackson, Helen (Hillsborough)
Cunningham, Jim (Cov'try S)	Jamieson, David
Curtis-Thomas, Mrs Claire	Jenkins, Brian
Darling, Rt Hon Alistair	Johnson, Miss Melanie (Welwyn Hatfield)
Darvill, Keith
Davey, Valerie (Bristol W)	Jones, Rt Hon Barry (Alyn)
Davies, Rt Hon Denzil (Llanelli)	Jones, Helen (Warrington N)
Davies, Geraint (Croydon C)	Jones, Ms Jenny (Wolverh'ton SW)
Davis, Rt Hon Terry (B'ham Hodge H)	Jones, Jon Owen (Cardiff C)
Dawson, Hilton	Jones, Dr Lynne (Selly Oak)
Dean, Mrs Janet	Jones, Martyn (Clwyd S)
Denham, John	Jowell, Rt Hon Ms Tessa
Dismore, Andrew	Keeble, Ms Sally
Dobbin, Jim	Keen, Alan (Feltham & Heston)
Dobson, Rt Hon Frank	Keen, Ann (Brentford & Isleworth)
Doran, Frank	Kemp, Fraser
Dowd, Jim	Kennedy, Jane (Wavertree)
Dunwoody, Mrs Gwyneth	Khabra, Piara S
Eagle, Angela (Wallasey)	Kilfoyle, Peter
Eagle, Maria (L'pool Garston)	King, Andy (Rugby & Kenilworth)
Edwards, Huw	Ladyman, Dr Stephen
Efford, Clive	Lammy, David
Ellman, Mrs Louise	Lawrence, Mrs Jackie
Ennis, Jeff	Laxton, Bob
Field, Rt Hon Frank	Lepper, David
Fisher, Mark	Leslie, Christopher
Fitzsimons, Mrs Lorna	Levitt, Tom
Flint, Caroline	Lewis, Ivan (Bury S)
Flynn, Paul	Lewis, Terry (Worsley)
Follett, Barbara	Liddell, Rt Hon Mrs Helen
Foster, Michael Jabez (Hastings)	Linton, Martin
Foster, Michael J (Worcester)	Lloyd, Tony (Manchester C)
Fyfe, Maria	Love, Andrew
Galloway, George	McAllion, John
Gardiner, Barry	McAvoy, Thomas
George, Bruce (Walsall S)	McCabe, Steve
Gerrard, Neil	McCartney, Rt Hon Ian (Makerfield)
Gibson, Dr Ian
Gilroy, Mrs Linda	McDonagh, Siobhain
Godsiff, Roger	Macdonald, Calum
Goggins, Paul	McDonnell, John
Golding, Mrs Llin	McFall, John
Griffiths, Jane (Reading E)	McGuire, Mrs Anne
Griffiths, Nigel (Edinburgh S)	McIsaac, Shona
Griffiths, Win (Bridgend)	McKenna, Mrs Rosemary
Grocott, Bruce	Mackinlay, Andrew
Grogan, John	McNamara, Kevin
Gunnell, John	McNulty, Tony
Hamilton, Fabian (Leeds NE)	MacShane, Denis
Hanson, David	Mactaggart, Fiona
Healey, John	McWalter, Tony
Henderson, Doug (Newcastle N)	McWilliam, John
Henderson, Ivan (Harwich)	Mahon, Mrs Alice
Hepburn, Stephen	Marsden, Gordon (Blackpool S)
Heppell, John	Marshall, David (Shettleston)
Hesford, Stephen	Marshall, Jim (Leicester S)
Hewitt, Ms Patricia	Marshall-Andrews, Robert
Hinchliffe, David	Martlew, Eric
Hodge, Ms Margaret	Meale, Alan
Home Robertson, John	Merron, Gillian
Hood, Jimmy	Michael, Rt Hon Alun
Hope, Phil	Michie, Bill (Shef'ld Heeley)
Hopkins, Kelvin	Miller, Andrew

Mitchell, Austin	Smith, Llew (Blaenau Gwent)
Moffatt, Laura	Snape, Peter
Morgan, Ms Julie (Cardiff N)	Soley, Clive
Morley, Elliot	Southworth, Ms Helen
Morris, Rt Hon Ms Estelle (B'ham Yardley)	Spellar, John
	Squire, Ms Rachel
Morris, Rt Hon Sir John (Aberavon)	Starkey, Dr Phyllis
	Steinberg, Gerry
Mountford, Kali	Stevenson, George
Mudie, George	Stewart, David (Inverness E)
Mullin, Chris	Stewart, Ian (Eccles)
Murphy, Jim (Eastwood)	Stinchcombe, Paul
Naysmith, Dr Doug	Stoate, Dr Howard
Norris, Dan	Strang, Rt Hon Dr Gavin
O'Brien, Bill (Normanton)	Straw, Rt Hon Jack
O'Hara, Eddie	Stringer, Graham
Olner, Bill	Stuart, Ms Gisela
Organ, Mrs Diana	Sutcliffe, Gerry
Osborne, Ms Sandra	Taylor, Rt Hon Mrs Ann (Dewsbury)
Pearson, Ian
Pendry, Tom	Taylor, Ms Dari (Stockton S)
Pickthall, Colin	Taylor, David (NW Leics)
Pollard, Kerry	Temple-Morris, Peter
Pond, Chris	Thomas, Gareth R (Harrow W)
Pope, Greg	Timms, Stephen
Pound, Stephen	Tipping, Paddy
Powell, Sir Raymond	Todd, Mark
Prentice, Ms Bridget (Lewisham E)	Touhig, Don.
Prentice, Gordon (Pendle)	Trickett, Jon
Prescott, Rt Hon John	Truswell, Paul
Primarolo, Dawn	Turner, Dennis (Wolverh'ton SE)
Prosser, Gwyn	Turner, Dr George (NW Norfolk)
Purchase, Ken	Turner, Neil (Wigan)
Quin, Rt Hon Ms Joyce	Twigg, Derek (Halton)
Quinn, Lawrie	Tynan, Bill
Radice, Rt Hon Giles	Vis, Dr Rudi
Rammell, Bill	Walley, Ms Joan
	Ward, Ms Claire
Rapson, Syd Reed, Andrew (Loughborough)	Wareing, Robert N Watts, David
Rogers, Allan	White, Brian
Rooker, Rt Hon Jeff	Whitehead, Dr Alan
Rooney, Terry	Wicks, Malcolm
Ross, Ernie (Dundee W)	Williams, Rt Hon Alan (Swansea W)
Ruane, Chris
Ruddock, Joan	Williams, Alan W (E Carmarthen)
Russell, Ms Christine (Chester)	Williams, Mrs Betty (Conwy)
Ryan, Ms Joan	Wilson, Brian
Salter, Martin	Winnick, David
Sarwar, Mohammad	Winterton, Ms Rosie (Doncaster C)
Savidge, Malcolm	Woodward, Shaun
Sedgemore, Brian	Woolas, Phil
Sheerman, Barry	Worthington, Tony
Shipley, Ms Debra	Wray, James
Simpson, Alan (Nottingham S)	Wright, Anthony D (Gt Yarmouth)
Skinner, Dennis	Wright, Tony (Cannock)
Smith, Angela (Basildon)	Wyatt, Derek
Smith, Miss Geraldine (Morecambe & Lunesdale)
	Tellers for the Noes:
Smith, Jacqui (Redditch)	Mr. Mike Hall and
Smith, John (Glamorgan)	Mr. Clive Betts.

Question accordingly negatives.