§ Mr. Timms
I beg to move amendment No. 1, in page 3, line 34, leave out from "amount" to end of line 36 and insert—'which (in accordance with the provisions of section 135(3)(a) of the Income and Corporation Taxes Act 1988) would have been taken to be the amount of the gain realised by an exercise in full of that right immediately before the time of its assignment or release.'
§ Mr. Timms
These amendments would amend the provisions in clauses 2 and 3 that deal with the assignment or release of an option that has been settled under the Bill. As I said in Committee, I am grateful to the hon. Member for Arundel and South Downs (Mr. Flight) for identifying a loophole in the Bill as previously drafted.
Clauses 2 and 3 deal with the somewhat complex issue of exchanges of options. Our clear intention was to protect the national insurance liability if a settled option were to be subsequently rolled over—or exchanged for another option—or assigned or released, and the new option were to be of a higher value at the time of the roll-over.
We have looked again at clause 3, as I said in Committee we would, and amended it to ensure that it is effective to deal with the range of situations that may arise. It remains complex. I do not seek to persuade the House that this is a straightforward matter. It is not. It deals with multiple roll-overs and a situation in which options are assigned or released for a mixture of benefits such as options plus cash. Most companies will not need to use the provisions in clause 3, which deal only with roll-overs. For those that do, special guidance will be available so that they can be confident about how the legislation will operate.
The amendment leaves undisturbed the class 1 liability on the excess value given for the settled option to prevent the kind of manipulation to which the earlier drafting could have been open and to which the hon. Member for Arundel and South Downs drew our attention.
I commend this technical, but valuable, group of amendments to the House
§ Mr. Flight
Amendment No. 1 indeed addresses the point that we raised in Committee—that the wording of the Bill as drafted opened up scope for avoidance. By the substitution of the term "gain" for the "gross proceeds" to which the original drafting referred, the mistake is corrected.
Our main objections are to amendments Nos. 2, 3 and 4. As we pointed out in Committee, clause 3 deals with the complex territory of takeovers, in which people have options in a company that is taken over and receive alternative options. We attempted to draw the Government's attention to what we felt was misdrafting and a misunderstanding of the implications of certain parts of the Income and Corporation Taxes Act 1988.
It is our perception that those problems have not been grappled with. What is the Government's intention in relation to takeovers and switches of options? We have assumed that common sense will prevail and that the intention is that if people receive a like-for-like option and the value is the same, the position is essentially neutral and no national insurance contribution liability is activated. Obviously, if more valuable options are granted in lieu of the existing options, there is a changed situation, and an NIC liability should apply on the value enhancement, preferably when the options are exercised; or if in place of the existing options people receive a mixture of new options and cash, there will be NIC liability on the cash that has been paid.
1111 It seems that the basic flaw that we pointed out in Committee has been carried over in amendments Nos. 2 and 3. The Bill should provide that if there is an enhancement element in any option exchange, it should be subject to NIC on exercise, as we proposed in Committee. Otherwise, the new option has the benefit of any exemption on the old option.
The technical background is that NIC charges on options are explicitly linked to income tax charges under section 135 of the 1988 Act. Section 4(4) of the Social Security Contributions and Benefits Act 1992 charges NIC on any gain on which the earner is chargeable to tax by virtue of section 135. This charges tax on the exercise, assignment or release of an option and provides that if people exchange one option for another they are not charged tax on the value on the new option, but are charged tax if any other consideration—cash, for example—is given at the same time. The new option should be treated as if it were the original option and the employee had paid the due amount to acquire the new option equal to what he paid for the original one, less any consideration taxed on that exchange and paid at the time of the exchange. So it is a little misleading in amendment No. 3 to describe section 136 of the 1988 Act ascharge to tax on roll-over".The relevant section moderates a tax charge which would otherwise have applied under section 135.
Amendments Nos. 2 and 3 expressly require section 136 to be disregarded in certain circumstances which, prima facie, appear to require a class 1 charge under section 4 of the 1992 Act under which there would not be an income tax charge. We are of the view that, technically, the provision is not correct as it stands.
Amendment No. 2 deals with the assignment or release of an option on which NIC can still be charged on the excess of any buy-out consideration which exceeds the inherent gain in the option. That is reasonably sensible in the light of amendment No. 1. However, amendment No. 2 also seems to provide that in the circumstances of an assignment or a release, we can ignore section 136 for these purposes and apply clause 2(3) to charge national insurance on the excess of the buy-out consideration over the lower of either the inherent gain in the old option or the inherent gain in the new option. That would only ever catch an extra cash consideration on the roll-over: if the new option was an enhancement, proposed new section 3A(a) would treat the non-cash consideration as equal to the gain in the old option as the lower of the two gains plus any cash, and the clause 2(3) charge would be only on that amount less the gain in the old option.
The net effect of the wording of the Government's amendment is that if no extra cash is offered on a roll-over but there is still an enhancement element, there will be a nil charge under clause 2(3). I question whether that is what the Government wanted. It is not a bad result, but the drafting that arrives at this, I suspect unintended, result is incomprehensible.
We think that there is an error in the drafting of amendment No. 3. Clause 3(4) preserves the right to charge national insurance on replacement options in specific circumstances, but amendment No. 3 provides that, on a roll-over, section 136 will apply to the new option only to the extent that it is over additional shares—that is, that the exchange is an enhancement. The intention appears to be that any enhancement element would be 1112 referred back to clause 3(4) and charged national insurance on eventual exercise. Is that the Government's intention? If it is, fair enough.
The problem is that if there is no enhancement in the exchange, the wording also implies that section 136 will not apply to the roll-over, where only so much of section 136 applies as relates to additional shares and the new option, prima facie, gives rise to an NIC charge under the 1992 Act because, with section 136 ignored, there would have been a charge for income tax purposes under section 135.
I was upset that it was not possible to re-table on Report the amendments that we tabled in Committee on these complex issues. As we see it, our amendments address what the Government are seeking to achieve and what should be achieved, whereas the Government's amendments, sadly, do not.
On amendment No. 3, specifically, if the old option was covered by a notice under clause 1, there would be a nil class 1 liability and if not, there would be an accelerated employers' and employees' class 1 liability on the option exchange. So there is a mismatch between the national insurance charge and income tax; the Government are penalising "correct" parity non-enhanced option exchanges for companies which do not gamble on their share price. We assume that that is not the Government's intention; if it is, it is not very prudent. We shall be interested to hear whether that is the case. New subsection (4A) in clause 3 is expressed to be subject to new subsection (5), but that does not help the situation either.
We want to hear the Government's counter-arguments. If they think that we have not technically understood this nightmare labyrinth and the fact that, in essence, there is no 1992 Act charge because such a charge is moderated by statutory regulations; and if they are thinking of relying on such regulations, we would advise them against. Not even the Revenue pretends to apply the regulations in that territory, because they were wrongly drafted. The Government should correct or withdraw their amendments and reconsider the arrangements that we proposed in Committee.
Amendment No. 3 should readleave out from 'or' in line 7 to the end of line of line 31 and add, '(4A) Subject to subsection (5) below, a determination under subsection (4) above may be made in respect of a replacement right or a subsequent replacement right in either case buying a right to which a notice under section 1 applies only—(a) at a time when, but for this Act, a liability to pay class 1 contributions would otherwise have arisen in respect of that right; and(b) to the extent that it is a right to acquire additional shares'.The matter will clearly have to be dealt with in the Lords, but, in short, I ask the Minister to reconsider in depth the drafting of the amendments—especially that of amendments Nos. 2 and 3, which do not achieve what we believe to be the Government's aims.
Amendment No. 4 is not particularly necessary. It seeks to achieve the existing law of the land in a round-about fashion. It seems to be saying only that when there is a roll-over of a new option into another option, with cash paid out as well, the charge is on the cash element under clause 2(3)—on the assumption that one ignores any enhancement element in the new option. As discussed under amendment No. 2, that would be the position in any 1113 case, as I have just commented. We have no particular quibbles as to technical drafting problems with the amendment, but we are not sure that it is needed.
Amendment No. 5 is broadly speaking okay. It addresses a mistake in the Bill which we pointed out in Committee. Amendment No. 6 also corrects a mistake that we pointed out in Committee. Amendment No. 7 is somewhat unclearly drafted, although if it were more precise, it could achieve an end with which everyone is in agreement—along the lines of our alternative amendment proposed in Committee.
Is the Minister sure that the wording of amendment No. 8 is right? We think that the brackets should be deleted from subsection (10)—the current wording does not seem to make grammatical sense. However, I am open to correction. How is the amount of special contribution for one of the options to be assessed, if not according to the principles set out in clause 3? Are we to pretend that the option is an original right?
I apologise for using such technical language, but it is important that law passed by this place is accurate and that it is so drafted as to achieve its objectives. I thought that the Government had accepted the underlying points in the amendments that we tabled to clause 3 in Committee. As I had sight of the Government's amendments only yesterday and had only yesterday afternoon and evening to take legal advice on them, I am disappointed that, for the third time, a significant part of the measure is wrong.
§ Mr. Burnett
I was extremely interested in the matters raised by the hon. Member for Arundel and South Downs (Mr. Flight). He stressed the importance of consultation and of ensuring that the provisions are correct. They are designed to address loopholes in the Bill; we held lengthy discussions on those matters in Committee. In particular, they cover roll-overs and multiple roll-overs—an extremely complex issue. The fact that the amendments were available only yesterday means that neither individuals in the professions nor taxpayers have had an adequate opportunity to give their views on the drafting.
I do not expect the Minister to offer us this afternoon a redrafting or suggested redrafting of amendments that the Government tabled only yesterday. I hope, however, that before the Bill goes to the House of Lords, he will authorise his officials to submit it to the professions, to taxpayers and interested individuals so that they can consider it and offer their comments. I am sure that the Minister will then be minded to listen carefully to their views.
In Committee, I asked the Minister what the Government's aim was in respect of these provisions. I asked him to confirm that, if there was a bona fide exchange of shares—for example, on a takeover—at approximate parity, and provided it that was not part of a measure designed for the avoidance of taxation, a charge should not arise for the taxpayer. There should be no charge to a taxpayer on a takeover or subsequent takeover; to use capital gains tax jargon as roll-over jargon, it should be treated as "no gain, no loss". There should be no charge for the special national insurance contribution.
When the Minister responded to my point, he agreed as to the Government's aim. He said that if the roll-over is at parity, there should be no additional charge. In the light 1114 of our previous debates and our discussions on private companies, will the Minister confirm that there should be no charge? That is important. If there is parity or approximate parity—in respect of private companies, the valuation of shares is an art, not a science—there should be tolerance in valuation either way. It is in the commercial best interests of this country that takeovers happen and that, when they do, taxpayers can be reasonably sure of their liability, provided that they have a bona fide stab at valuation.
Since the Minister was not prepared to accept the amendments that we tabled previously, I can only ask him to elucidate—to tell the House exactly what the charge will be. When will there be an exemption on a roll-over or a multiple roll-over? Will the Minister confirm that he will instruct his officials to circulate these draft provisions to the professions and to interested parties? And when they make their comments and submissions, will he listen to them and then submit a properly drafted Bill to the House of Lords?
§ Mr. Jack
I do not profess to understand the technicalities of this provision beyond its general purpose, but I rise to express my discontent at Government amendment No. 3 and the tortuous drafting therein. Except for the sake of giving the Financial Secretary adequate time to respond to the excellent speech made by my hon. Friend the Member for Arundel and South Downs (Mr. Flight), I shall not detain the House for long.
First, I should like to know what Government amendment No. 3 means and how it will be applied. It starts:Subject to subsection (5), so much of section 136(1) of the Income and Corporation Taxes Act 1988 (charge to tax in roll-over cases) as provides for"—and on it goes in the most labyrinthine and impenetrable language. I want to know what it means.
§ Mr. Jack
It is a great pity that the Whip on duty will not grace the House with his own clairvoyance on the matter. The fact that we are subjected to such language is a condemnation of parliamentary drafting, especially as a tax law rewrite exercise is taking place.
Secondly, I should like the Financial Secretary to tell us why such a technical matter was not subject to further consultation. The Government have had long enough to develop the Bill. Part of the clarity of the tax system has been achieved by virtue of subjecting to outside opinion the proposals in the rewrite exercise. As both Front-Bench spokesmen have said, this group of amendments clearly has not been subject to the white heat of public scrutiny.
I ask the Financial Secretary for a proper, fully detailed explanation of Government amendment No. 3. Why has it been so poorly drafted? How does he propose to ensure that practitioners have an opportunity to comment on the legislation before it is finally cast in concrete?
§ Mr. Timms
I am grateful to the hon. Member for Arundel and South Downs (Mr. Flight) for the care with which he has studied these amendments and taken advice on their contents. He and the hon. Member for Torridge 1115 and West Devon (Mr. Burnett) have asked me what precisely is the Government's intention in clause 3, so I shall explain it again.
Under clause 3, settled options will not incur any further class 1 liability where the option is subsequently rolled over, provided that roll-over is conducted at parity. That aspiration was expressed by both hon. Gentlemen, and that is our intention. Where the roll-over is not at parity, class 1 national insurance contributions will apply, but only on the proportion of the gain on the new option that relates to the amount in excess of parity. So the amount of the gain on the new option that relates to the original remains capped.
§ Mr. Timms
Let me finish the point. I confident that, when these amendments are agreed to, that is what the clause will achieve. The relief from class 1 contributions will be provided by a new basis of the class 1 charge. Therefore, only the proportion of the new option in excess of parity will be subject to charge. That is the intention.
Of course, I shall consider with great care what hon. Members have said about the details of the wording. The right hon. Member for Fylde (Mr. Jack) asks what Government amendment No. 3 will achieve. The best that I can do is to refer him to the published notes, which set out precisely what Government amendments Nos. 3 and 4 will achieve. I shall carefully consider the points that hon. Members have made. I am happy to discuss technical matters, as we have done throughout the process, with the share scheme lawyers group. The Inland Revenue has discussed the roll-over provisions with that group. I believe that these amendments will achieve the Government's intention, which is supported on both sides of the House, and on that basis, I commend them to the House.
§ Amendment agreed to.