§ Mr. Howard Flight (Arundel and South Downs)
I beg to move amendment No. 10, in page 3, line 3, at end insert—'(7) For the purposes of this Act only, a right to acquire relevant shares will be deemed to give rise to a liability of nil under section 2 below.(8) In subsection (7) above relevant shares are shares which on 7th November 2000 were neither listed on a recognised stock exchange nor traded on a recognised investment exchange.'.
I should like first to declare that I am a director of companies with outstanding option schemes, none of which are covered by the Bill's provisions. More importantly, in the past 15 months, I have been participating in a major study among leading members of the industry to determine how the United Kingdom can achieve higher levels of venture capital investment in new businesses. Although the study has focused on a very wide range of issues, I think that it has concluded that the issue of options and the UK options tax regimes are absolutely central to understanding the performance differential between the United Kingdom and the United States. As I shall explain later, the Bill is an important part of addressing that issue.
Although Opposition Members are happy that the Government accepted most of the key points that we made in Committee, we are particularly unhappy that, even in the Government's second attempt, their proposals to deal with takeover and roll-over situations are not the correct ones to fulfil what we perceive to be Ministers' intentions.
In Committee, we welcomed the Government's deeming amendment, which dealt with our point that a lot of time and money would have been wasted if a determination—or deeming—that companies are not subject to the special national insurance contribution liability is not made automatically on the due date. The amendment would also help greatly to avoid potential unfairness to smaller and foreign companies that were perhaps not even aware of the new special NIC charge on options issued between April 1999 and May 2000. However, although the Government's change is welcome, we believe that there is still a grey area and the potential for problems which could very easily be avoided.
The issue is whether options relate to shares deemed to be readily convertible assets—which is the key phrase. In the Government's arrangements, if the option is under water or the shares in question are not readily convertible assets, there would be no special NIC liability. The situation applying last November, however, is old history. For the purposes of the deeming provision, therefore, our amendment proposes not defining shares as readily convertible assets if they were not listed or traded on a recognised stock exchange or market on 7 November 2000.
1105 If amendment No. 10 is not accepted, a potential problem is that private companies will assume that they are covered by the deeming provision. Consequently, they could fail to provide due notice. Those companies could become involved in a subsequent, never-ending debate with the Revenue on whether the assets were readily convertible assets on 7 November. If the Revenue found that the companies' shares were readily convertible assets, they would have forgone the opportunity of availing themselves of the Government's relieving provision.
§ Mr. Michael Jack (Fylde)
My hon. Friend said in his opening remarks that he had spent time in consultation with companies that use share option. Was amendment No. 10 therefore also born of practical considerations and his discussions with those companies?
§ Mr. Flight
Yes, it was. I have endeavoured to consult very fully on all the Bill's clauses both with members of the venture capital industry and with lawyers specialising in share options, with the simple and pragmatic purpose of trying to create a regime that is good and not damaging for the United Kingdom economy.
The amendment's proposed arrangements would affect only this legislation and are not intended to address the wider issue of how to define a readily convertible asset. They are not intended to have knock-on effects on other legislative provisions.
There is a grey area when a private company is approaching flotation and its flotation date and market price have not been established. However, I am sure that the House will agree that, for the particular purposes of this Bill, setting 7 November as the target cut-off date is just as realistic a quid pro quo as that enshrined in the Bill—which tells employees to take a gamble and pay the special NIC charge so that companies do not subsequently have excessive NIC liabilities that could not be met.
The amendment is a very practical proposal. It would have minimal revenue implications and help to prevent the possibility of unfairness and wasted time.
§ Mr. John Burnett (Torridge and West Devon)
Liberal Democrat Members support the amendment, which is a move towards simplicity. If an asset is not listed on the specified date, it would not be deemed a readily convertible asset, and therefore not be subject to the special charge to national insurance contributions. I look forward to hearing the Minister's comments on the amendment. Surely the thrust of the legislation is that the special NIC charge should not affect unapproved share option schemes in private companies. By definition, a private company is one that restricts the transfer or sale of its shares.
I am a solicitor, and I specialised in taxation matters. However, I do not practise as such now. I also did not do an awful lot of work on approved or unapproved share option schemes. I spent some time in the shares valuation division, and as I said in Committee, share valuation is very much an art, not a science. A lot of deeming takes place and there is enormous scope for disagreement and negotiation.
The Government are content for shares that are not readily convertible to escape the special national insurance contribution liability. I hope that the Minister 1106 will confirm that and elaborate in detail on the Government's objections to the amendment. Do they fear that it may, in some obscure way, lead to tax avoidance? I do not believe that it will, but I will wait to hear from the Minister before offering any rebuttal. Is their point that it will discourage listing, and therefore investment?
If the Minister rejects the amendment, I hope that he will give compelling reasons, because I consider it to be worth while, simple and straightforward.
§ Mr. Jack
I declare an interest as a non-executive director of a company that has both approved and non-approved share option schemes, although it does not fall under the scope of the amendment.
I share the view of my hon. Friend the Member for Arundel and South Downs (Mr. Flight) that the amendment would bring clarity, but if I were in the Minister's shoes, following what the hon. Member for Torridge and West Devon (Mr. Burnett) said, I would want, if I intended to reject the amendment, to cover areas such as anti-avoidance and what would happen if people with share options in a non-quoted company knew that a takeover was coming and that convertibility would come into play.
§ Mr. Flight
The amendment relates to history, so it has nothing to do with tax avoidance measures that people might get up to in the future. It relates purely to the position on 7 November 2000.
§ Mr. Jack
I posed hypothetical questions in the hope of getting the Minister to explain his position. He may offer us emotive arguments. My hon. Friend's central point of clarity of purpose makes the amendment attractive. People need to know where they stand in this complex area, and the amendment is very helpful.
The amendment refers to "a recognised stock exchange", and most people would understand that, but "a recognised investment exchange", to which it also refers, is a little more obscure. It is sometimes hard to keep up with all the newly emerging markets. Will the Minister give us his views in careful and meticulous order? I hope that he will simply say that the Government accept the amendment, but we certainly want to know his reasons either way.
§ The Financial Secretary to the Treasury (Mr. Stephen Timms)
I am happy to provide the House with that explanation. I do not believe that the amendment represents a simplification, as Opposition Members have suggested. Indeed, it would introduce a new and unhelpful complication.
The national insurance and PAYE rules on share options were aligned in 1999, so that from that date the PAYE rules effectively determine the national insurance liability. PAYE applies only to shares and options that are readily convertible assets. Shares not falling within that description are not taxed under the PAYE rules, nor are they liable to national insurance charges.
The amendment would narrow the definition of readily convertible assets, but only for the purposes of the Bill, and the hon. Member for Arundel and South Downs 1107 (Mr. Flight) confirmed that he did not intend to change the definition in other parts of the system. That is an unnecessary complication.
§ Mr. Timms
What I can best do is to refer the right hon. Gentleman to the Inland Revenue website, which I have no doubt he visits frequently, and in particular to tax bulletin issue 36, which explains the matter in great detail. Of course, a readily convertible asset is one that can be converted to cash and—
§ Mr. Deputy Speaker (Sir Alan Haselhurst)
The right hon. Gentleman has long experience of the House and is a former Minister, and he should know that it is not a matter for the Chair how a Minister chooses to answer a question. It is a matter for debate.
§ Mr. Timms
Thank you, Mr. Deputy Speaker. I am a little hurt by the right hon. Gentleman's point of order, as I was trying to be helpful to him in explaining that a readily convertible asset is one that can be readily converted to cash and is therefore appropriate to be taxed. That is well understood. The amendment would narrow that so that a share in any unlisted company would be deemed not to be a readily convertible asset. To have two definitions floating around in different parts of the tax system would be an unwelcome and unhelpful complication.
§ Mr. Burnett
Would the Minister be minded to accept an amendment that did not exclude this amendment, allowing the definition to include shares that areneither listed on a recognised stock exchange nor traded on a recognised investment exchange"?
§ Mr. Timms
No, certainly not, because that would substantially broaden the concept of assets that cannot be readily converted, which would substantially reduce the tax take in a wide range of circumstances.
In practice, the amendment would allow all those companies that on 7 November 2000 were in the process of floating to avoid liability under the Bill, as well as those that had trading arrangements in place.
The hon. Member for Arundel and South Downs said when he moved the amendment that he did not think that it would cost very much. My estimate is that it would cost some millions of pounds, as a significant number of companies required to make a special payment under the Bill would not need to do so if the amendment were passed. I can understand why some people might lobby for that change, but I do not think that it would be right to introduce it.
§ Mr. Flight
The latter part of 2000 was a period when stock markets were weak and there were very few 1108 flotations. Given that the amendment deals with history, the argument that significant revenue is at risk does not stand up.
§ Mr. Timms
I think the hon. Gentleman is mistaken. It is true that the shares of a number of companies were lower in the period to which he refers than they had been previously, but the liability faced by those companies under the Bill is therefore less than it would otherwise have been. For that reason, Opposition Members might wish to draw attention to the Government's generosity in setting the relevant date at 7 November. If the amendment were agreed, a substantial number of companies would avoid liability.
In allowing companies whose shares were not readily convertible assets on 7 November last year to pay no national insurance on the options granted between 6 April 1999 and 19 May 2000, the Government are already offering considerable relief. Under the existing class 1 rules, many companies would go on the list before the options were exercised and would be liable to class 1 national insurance. The Bill allows all companies whose shares were not readily convertible assets on 7 November last year to be exempt from both class 1 and the special contribution.
I hope that that answers the point raised by the hon. Member for Torridge and West Devon (Mr. Burnett), about avoidance. As I have said, a number of companies that will have to pay under the Bill as it stands would find, if the amendment were passed, that they did not have to pay anything.
The hon. Member for Torridge and West Devon also said that valuations for unlisted companies are difficult to finalise. I can tell him that the shares valuation division of the Inland Revenue can now help companies with their valuations. However, we made it clear in Committee—and I emphasise the point again to the House—that if valuations are produced by the company on a reasonable basis, and if the valuation eventually agreed with the employer is higher, the company will be able to pay the difference without falling back into the class 1 rules.
§ Mr. Burnett
The Financial Secretary said that he was concerned about the amendment because it would exempt companies in the process of flotation, and those with trading arrangements in place. Will the hon. Gentleman elaborate on the latter point? That would be of considerable assistance to practitioners and people with unapproved share option schemes, as well as to the House.
§ Mr. Timms
I am not sure what the hon. Gentleman means. If a company's shares are not regarded as readily convertible assets there is no liability, irrespective of the reasons for that judgment. However, I should be happy to respond to the hon. Gentleman in writing if he would care to drop me a line.
From 7 November 2000, companies will have 92 days after the Bill receives Royal Assent to make a judgment as to whether their shares are readily convertible. As was explained in Committee, the Bill contains appeal provisions that would allow a company that had made a wrong call about whether its shares were readily convertible to pay the special contribution after the 92-day period, as long as that decision had been made on a reasonable basis. That provides an important safeguard for companies.
§ Mr. Jack
I hope that the Financial Secretary will help me on a technical point. In the case of a company that had flotation plans in train and was therefore deemed to have readily convertible assets, what would happen if the flotation was pulled the day before or the day after the valuation date? What would be the position of that company?
§ Mr. Timms
If the right hon. Gentleman comes across a company in that position, he should advise it to contact the Inland Revenue for advice. I am confident that such a company would be given clear guidance about how to proceed.
I see no reason, simply for the purposes of this Bill, to impose an arbitrary limit to rules on the definition of readily convertible assets that are well understood and established. I think that that would be an unnecessary, unwelcome and costly complication to the tax system. In the interests of simplicity, as well as for the other reasons that I have advanced, I ask the House not to support the amendment.
§ Mr. Flight
In view of the guillotine motion, I do not consider the amendment a sufficiently important issue of principle on which to detain the House. However, the Government have introduced a special national insurance contribution charge, and they do not mind the fact that they are addressing a problem of their own making by means of a special form of tax charge. The amendment proposes a special, one-off clarification of readily convertible assets, purely for the purposes of the Bill. It is incorrect for the Minister to object to the fact that we are applying the same principle as the Government are applying.
The Minister made a point about trading arrangements that I do not consider correct. The amendment specifically refers to trading on a recognised exchange. In the absence of the amendment, many companies and Inland Revenue staff will spend a lot of time discussing whether the shares of a limited number were readily convertible assets on 7 November 2000. In most cases, it will be found that they were not. The Government's tax take will be very small as a result, but the costs in terms of time imposed on the companies involved and the Inland Revenue will be considerably greater.
In arriving at that judgment, I have taken heed of the practicalities. It is a pity that the Government do not see fit to accept the amendment, especially as the Bill is designed to be a pragmatic measure, relieving a problem of the Government's making. However, for the sake of time, I shall not press the matter to a vote.
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.