SPECIAL PROVISION FOR ROLL OVERS (Hansard, 11 May 2001)

§ The Financial Secretary to the Treasury (Mr. Stephen Timms)
I beg to move, That this House agrees with the Lords in the said amendment.

§ Mr. Deputy Speaker (Sir Alan Haselhurst)
With this we may discuss Lords amendment No. 2.

§ Mr. Timms
As hon. Members know, the Bill forms part of the Government's response to companies' legitimate anxieties about the effects of aligning income tax and national insurance treatment of employee share options. We debated the matter with great care during earlier stages of the Bill's passage.
In Committee in the House of Lords, the Government tabled a small number of amendments Lords amendment No. 1 would clear up a possible misreading of the rules. We were worried about the rules for an option that had not vested by 7 November 2000 or was in a holding period that prevented its exercise. It might have been possible to argue that, because the option could not be exercised on that date, a nil charge should arise under the Bill. That was clearly not the Bi11's intention, and the simplest way of clarifying the matter was to omit some words from clause 3 and add an overall provision to clause 5, which is the interpretation clause. That provision would apply to the whole measure.
I am grateful to the specialists outside the House who drew our attention to the possible difficulty. I am pleased that it was possible to agree the helpful amendment in another place.

§ Mr. Howard Flight (Arundel and South Downs)
We support the amendment and the Bill, which are both remedial measures. I remind hon. Members that the Bill is a consequence of a Labour stealth tax on options and constitutes the third attempt to solve the resultant problems.
In April 1999, the Government introduced the employers' national insurance charge at 12.2 per cent. on the gains realised on the exercise of unapproved options. They were taken aback because many small businesses, especially new businesses, could have been landed with unknown, potentially damaging cash liabilities. The Government wisely responded to that and, in May 2000, introduced measures to enable companies to transfer their employers' NIC liability to the employee. However, there was a problem, because that created a 47.3 per cent. tax charge on exercising unapproved options. Again, the Government forgot the options that were issued between April 1999 and May 2000. The Bill therefore introduced a provision that limited the gain on which NIC was payable to the increase in value between exercise and 7 November last year.
384 As the Financial Secretary said, outside specialists have pored over the Bill usefully and in depth. It is not unfair to say that, initially, the Bill was not technically well drafted. I give the Government credit for accepting most of the key amendments that we tabled to increase the notice period to 92 days and remove the unnecessary provision to give notice when no NIC arose.
Clause 3 remained the controversial provision, which tackled the technically difficult territory of the roll-over of options in takeovers. In Committee, the Opposition stressed that the clauses were not satisfactorily drafted. On Report, we were not happy with the redrafts that the Government proposed. As the Financial Secretary said, the amendments are the result of substantial consultation with the relevant officials during the Bill's progress in another place, especially Lords amendment No. 1, which was designed to clarify a specific point. We support the amendments and the Bill, which has made the best of a bad job on which the Government should not have embarked.
The result is that we now have an extremely unattractive share option regime, particularly for small companies. The enterprise management incentive scheme is fine for small businesses worth up to £15 million, but for the important group of businesses valued up to £100 million unapproved option schemes have to be used. A scheme that charges 43.6 per cent. tax on gains realised is, as the Government's own small business expert said, punitive. It places companies in this country in a highly uncompetitive position, given the arrangements in the United States.
For that group of companies, the most appropriate share option scheme is the approved share option scheme, which is a capital gains tax regime. That is why the Conservative party is committed to increasing the limit per person from £30,000 to £100,000 for companies valued up to £100 million participating in the approved share option scheme. That is designed to solve the whole problem created by the imposition of NICs on approved options.
We are relieved that the Bill is to reach the statute book in the dying embers of this Parliament. It is remedial and helpful to British commerce.

§ Mr. Timms
I should like to respond to some of the points made by the hon. Member for Arundel and South Downs (Mr. Flight), although I must say that I found his tone disappointingly churlish.
I remind the House that we are giving companies the chance to settle their national insurance liabilities on options granted in advance of the date when a gain is made by the employee. Companies that choose to take advantage of that will calculate the amount of national insurance due by reference to the accrued gain up to 7 November 2000—the date before the proposals were announced.
This measure effectively caps the national insurance contribution liability by reference to a company's share price on 7 November. The benefits to the company are that it will be able to remove the on-going provision for the liability on its balance sheet, thus achieving certainty, and save national insurance contribution costs in relation to any further upward movement of the share price.
I do not accept the criticism made by the hon. Member for Arundel and South Downs about the drafting of the Bill. The Bill has benefited from substantial consultation 385 with a wide range of people who follow these matters closely and I am pleased that we have been able to take on board their suggestions and proposals. We are a listening Government, as the Bill demonstrates clearly.
The question has been raised as to whether we have chosen an appropriate date—7 November 2000 was the day before the proposals were announced in the pre-Budget report. A date had to be chosen for crystallising the gains, and 7 November may turn out to be a favourable date for many of the companies using the measure.
It is not obvious how an optimal date could be found because it is impossible to predict how long the fall in high-technology share prices—a precipitative fall—will continue. Setting a later date could conceivably disadvantage many companies that have planned to use the measure based on the previously announced date of 7 November. Some 550 companies have already expressed an interest in taking advantage of this legislation and any change in the date would risk upsetting their business plans. Companies whose share price has risen since November 2000—there are some such companies—could lose out if the date were changed.
Another problem with moving the date forward is that it could disadvantage unquoted companies that have commenced plans to float subsequent to the 7 November date. Companies whose shares were not readily convertible assets on 7 November 2000 would have their liability on the gap options extinguished as a result of the Bill. They would have to reassess whether their shares were readily convertible assets on the new date and might find themselves having to pay special or class 1 contributions as a result.
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Using the prospective date—that suggestion has certainly been made in our debates on this matter—would unfortunately give rise to national insurance avoidance opportunities. It would also leave companies little time to consider the effect of this measure on their national insurance liability.
Another possibility that has been considered is giving companies a choice of two dates. That would present serious problems, especially given the roll-over provisions in the Bill. The hon. Member for Arundel and South Downs has played a helpful role in this process and I am happy to put on the record my appreciation of the good deal of helpful comment that he has made on a number of the provisions. A moment ago. he drew attention to the complex character of the roll-over provisions. If we were to proceed with a choice of two dates, he could imagine, probably better than anyone else in the House. how complicated that would become. It is not an attractive proposal.

§ Mr. John Bercow (Buckingham)
I do not want this to become an exchange purely between what might be described as roll-over anoraks. I am in the somewhat unfortunate position of not having the extensive knowledge of these matters with which the Minister and my hon. Friend the Member for Arundel and South Downs (Mr. Flight) are blessed. I therefore wonder whether it would be in order, as well as being helpful to 386 the House, if the Minister were either to dilate upon, or at any rate animadvert to, those roll-over provisions in some modest detail.

§ Mr. Timms
I am grateful to the hon. Gentleman for that generous invitation. What I can best do is refer him to clause 3, the character of which has already been referred to by the hon. Member for Arundel and South Downs. The hon. Member for Buckingham (Mr. Bercow) will see that the clause is called "Special provision for roll-overs" and there are three pages on the subject. If his perusal of the clause gives rise to any questions in his mind, I should be nappy to address those. We looked at the clause in some detail in Committee and I am confident that it is now in good order and has benefited from the critical examination that it received.
Let me explain briefly to the hon. Gentleman what happens when an option that has been settled is subsequently rolled over. Where options were granted during the relevant period and rolled over after that, the settlement will relate only to the part of the gain on the new option that relates to the original. Provided that the options are rolled over at parity, the national insurance contribution will remain settled. Where a roll-over is not at parity, the amount of the gain on the new option relating to the amount in excess of parity at the time of the roll-over will be subject to class 1 national insurance contributions under the existing rules.
If the new option comprises additional shares that are in excess of the market value of the shares subject to the original option at the time of the roll-over, they will be liable to class 1 national insurance contributions on any gain arising on exercise of the additional shares.

§ Mr. Bercow
The Minister is doing his best to respond to the request that 1 put to him. As he knows, I do not lightly pay tribute to him, but I am bound to say that his explanation thus far has been comprehensive, racy and—dare I say it?—even intoxicating. I am concerned, as I know he is, about fiscal and fiduciary responsibility. I know that we are coming to an election, but he should bear it in mind that, when I am in Buckingham town centre on Saturday, my constituents will not be able to cope with a detailed explanation. However, they will ask about what he said on the exercise of fiduciary responsibility in relation to the amendment.

§ Mr. Timms
It is a shame that I shall be unable to listen in on those conversations on Saturday morning, but the hon. Gentleman should tell his constituents that all the actions of the Government have been marked by prudence. That is certainly the case in this connection. It will not assist the House if I proceed much further with our discussion, but I am pleased and grateful to the hon. Gentleman that we have been able to cover the matter in the way that we have.
The hon. Member for Arundel and South Downs referred to the proposals in the Conservative manifesto. I say to him that the problem is that the sums simply do not add up, and that will become apparent in the days ahead.