§ 1.4 p.m.
§ Lord McIntosh of Haringey
My Lords, I beg to move that the House do now resolve itself into Committee on this Bill.
§ Moved, That the House do now resolve itself into Committee.—(Lord McIntosh of Haringey.)
§ On Question, Motion agreed to.
§ House in Committee accordingly.
§ [The DEPUTY CHAIRMAN OF COMMITTEES (Lord Brougham and Vaux) in the Chair.]
§ Clauses 1 and 2 agreed to.
§ Clause 3 [Special provision for roll-overs]:
Lord McIntosh of Haringey moved Amendment No. 1:
Page 5, line 5, leave out "(assuming it to be exercisable at that time)
§ The noble Lord said: In rising to move Amendment No. 1, I shall speak also to Amendment No. 3. Comments received from practitioners experienced in employee share arrangements have led us to propose an amendment to guard against a mischievous interpretation.
§ At issue is whether an option is to be taken as being exercisable on the key date of 7th November 2000. The situation could arise, for example, whereby an option had not yet vested on that date. It could be argued that, because the option was not capable of exercise on 7th November 2000, a nil charge should arise under Clause 2. However. that is clearly not the intention of the legislation. We are providing a way for companies to settle their secondary national insurance contribution liabilities on all options granted between the dates set out in Clause 1.1094
§ The simplest way in which to amend the legislation is to omit the specific reference at Clause 3(4)(b)(ii), which is the intention behind Amendment No. 1, and to add an overall provision in the interpretation clause (Clause 5), as sought in Amendment No. 3, to apply to the Bill as a whole. I beg to move.
§ Lord Higgins
As always, I am lost in admiration for the versatility of the noble Lord. Only a moment or two ago he was dealing with problems of tourism (I only regret his failure to refer to my former constituency of Worthing in that context); now he is dealing with the highly complex matter of social security and share options. As I understood him to say, the purpose of the amendment is to prevent mischievous interpretation—no doubt a term of art in your Lordships' House, although I must confess that I have not come across it previously in my earlier experience.
This is the third attempt to get this legislation right. I recounted at Second Reading the history of the way in which it had been dealt with both in the child support, pensions and social security debates and in the Finance Act 2000 debates. I am sure that it is important to get these provisions right. We are seeking to get the technical aspects of the Bill in order; that we are in favour of doing so was apparent earlier.
To put the matter into context, overall it arises from the imposition of yet another stealth tax. In the mail this morning I received a rather interesting analysis based purely on the Government's Red Books, and so on, which showed that there had been some 45 stealth taxes and that, over the life of the Parliament, in the region of £360 billion has been collected in such taxes. However, we certainly welcome this provision because it is designed to ameliorate the effect of the fundamental approach so far as concerns national insurance contributions and share options.
We still have doubts about the legislation because we believe that it penalises employers who wish to use share options as incentives. In addition, we believe that on the part of those involved there is still an element of gambling as to whether they should accept the Government's option of taking a tax hit straight away or whether they should wait to see what happens to their share prices.
None the less, our overall attitude towards the Bill is favourable. Subject to what we may say in a little while with regard to other amendments, I believe that it is right that we accept this amendment. Given the unbelievable complexity of the measure, it is important that we have no doubts as to how something may be interpreted by the Government on the one hand and by taxpayers on the other. Therefore, we are certainly very happy to accept the amendment.
§ Lord Goodhart
I also support the amendment. This is an extraordinarily complex Bill that takes up eight full pages and deals with a point where the concept is quite simple. I agree entirely that a problem was created by the rapid rise of the dot.com shares and their subsequent, more or less equally rapid, fall. That problem is dealt with appropriately by this Bill.
1095 I am not sure whether to describe the Bill as a masterpiece of parliamentary drafting or as a tribute to the ability of the legal profession to make matters so confusing that an extremely lengthy Bill is needed in order to deal with all the possible arguments that may be raised by learned counsel. However, it seems to be right. On Second Reading I raised certain questions about the timing at which companies had to elect, but I did not think it fit in the circumstances 'to press the matter further by tabling an amendment.
§ Lord McIntosh of Haringey
I am grateful for even the modified rapture of the noble Lord, Lord Higgins. The answer to the noble Lord, Lord Goodhart, is, yes to both of his questions—the provision is both a masterpiece of drafting and a tribute to the cunning and complexity of the minds of the legal profession.
§ On Question, amendment agreed to.
Lord Higgins moved Amendment No. 2:
Leave out Clause 3, and insert the following new clause—
§ "SPECIAL PROVISIONS FOR ROLL-OVERS
§ (1) In this section—
- (a) an "original right" is a right to acquire shares in a body corporate granted after 5th April 1999 and before 20th May 2000;
- (b) a "replacement right" is a right to acquire shares in that or any other body corporate granted or acquired in consideration of the assignment or release of an original right (whether comprising all or part of the consideration for that assignment or release);
- (c) a "parity exchange" occurs on the grant or acquisition of a replacement right where the gain which could reasonably be expected to be made on the exercise of that right immediately after the grant or acquisition of that right (on the assumption, if necessary, that that right was capable of being exercised at that time), together with the value of any other consideration given for the assignment or release of the original right, is not manifestly greater than the gain which could reasonably be expected to have been made on the exercise of the original right immediately prior to the assignment or release of that right (on the assumption, if necessary, that the original right had been capable of being exercised at that time);
- (d) an "enhanced exchange" occurs on the grant or acquisition of a replacement right where a parity exchange does not occur; and
- (e) the gain which might be reasonably expected to be made on the exercise of a right to acquire shares shall be determined in accordance with section 135(3)(a) of the Income and Corporation Taxes Act 1988 (c. 1).
§ (2) On a parity exchange—
- (a) any notices made, or deemed to have been made, under this Act in respect of the original right shall be deemed to have been made in respect of, and shall have the same effect in relation to, the replacement right and any other consideration given for the assignment or release of the original right; and
- (b) any special contribution paid, or deemed to have been paid, under this Act in respect of the original right shall be deemed to have been paid in respect of, and shall have the same effect in relation to, the replacement right and any other consideration given for the assignment or release of the original right.
- (3) On an enhanced exchange the consideration given for the assignment or release of the original right shall be apportioned on a just and equitable basis into two parts, the first of which representing all of those terms of the replacement right and of the other consideration. if any, given for the assignment or release of the original right which could have been granted, required or given so as to give rise to a parity exchange (to which part subsection (2) above shall apply) and the second of which representing the remaining terms of the replacement right, and of the other consideration, if any, given for the assignment or release of the original right (to which part the provisions of this Act shall not apply).
- (4) For the purposes of subsection (3) above, on any partial exercise, assignment or release of the replacement right any gain arising shall be treated as comprised in the second part in priority to the first part.
- (5) Where a replacement right to which the foregoing provisions of this section apply is assigned or released for a consideration which comprises or includes a subsequent replacement right, the first mentioned replacement right shall he treated as if it were an original right, and the subsequent replacement right shall be treated if it were a replacement right within the meaning of subsection (1)(b) above, and subsections (2) and (3) above shall apply accordingly on the assignment or release in question.
- (6) In subsection (4) above, references to a subsequent replacement right are references to any right to acquire shares in a body corporate which are or have been obtained by any person as, or as part of, the consideration for the assignment or release by him of a replacement right or of a subsequent replacement right.
- (7) Where prior to the coming into force of this Act payments have been made in respect of Class 1 contributions due on the exercise of any replacement right, then on a claim being made by the person who paid them all such repayments of those contributions shall be made, less any amount representing the special contributions which would be due under section 2 above."
§ The noble Lord said: This amendment is also a masterpiece of drafting, for which I can take very little credit. It contains special provisions for roll-overs of share options. As I pointed out on Second Reading, the debates in another place were very heavily programmed and the discussion on this issue was rather limited.
§ There is a particular disadvantage in this context, in view of the extent to which the courts can, as a result of Pepper v Hart, take into account the travaux préparatoires of any Bill. I doubt whether there is any case in which it would have been more helpful to have had an extended view of the Government's approach than in relation to this Bill.
§ The Bill completed its Report stage and Third Reading in another place on 8th February. My honourable friend Mr Howard Flight rightly raised this issue and was doubtful about whether the clause's drafting was as simple or clear as it might be. In reply, the Minister assured him that that was so.
§ Following that exchange, further correspondence has ensued between the Government and the Chartered Institute of Taxation, which was kind enough to send me a copy of the correspondence. It expressed severe doubts about the Bill's current provisions, which are helpfully described in the Explanatory Notes, which were updated between the Bill's consideration in another place and its arrival in this House. The institute said that it was very doubtful about whether people generally would be able to apply the provisions—they will have to rely to a large extent 1097 on the interpretation by the Revenue of the way in which the Bill will be applied. It felt that the drafting was so complicated that even professional tax operators would have difficulty understanding the Bill's provisions. It suggested—I hope that the Minister will respond to this point—that while it was not in favour of legislation by tax bulletin, it is important for the Government to set out clearly and with examples how they believe the provisions and the Bill in general will operate.
§ Considerable concerns remain in this context. Amendment No. 2 was an attempt, with outside bodies, to try to produce provisions that might be a little simpler than the current drafting of Clause 3. I sincerely thank the Minister for arranging for me to have a meeting with him and his officials, who were extremely helpful in explaining the various points at issue.
§ One might regard the amendment as a probing amendment—if so, it probably holds the world record for being the most complicated probing amendment ever thought up! I know that the Minister has some doubts about it but I hope that he will view it in the context of the Bill. He might also give us some idea of how many people he thinks may need to know what the legislation means and how it should operate. In some respects there do not appear to be many problems with options that are rolled over at parity, although the Bill's wording is still pretty complicated. However, there are additional problems and even greater complexities when the options that are rolled over are not at parity. I tabled the amendment in the spirit of hoping to improve the Bill, which, despite the overall context, we certainly welcome. I look forward to the Minister's response. I beg to move.
§ Lord McIntosh of Haringey
Let me be the first to acknowledge that Clause 3 is extremely complex and that the noble Lord's proposed replacement is somewhat simpler. However, I am afraid there is no way round the Bill's complexity because it has to cover a wide range of situations in which one option is replaced by another, or "rolled over", as the jargon has it.
I am grateful to the noble Lord for his reference to the meeting that we had last week—it was a helpful meeting at which we discussed his concerns about the clause. I explained to him that the Government are anxious to see whether anything could be done to simplify the provisions while retaining the policy aims of having consistency and fairness in the national insurance charge. Before and after that meeting, the Inland Revenue looked very carefully at the effects of the amendment and tested it against a variety of scenarios. The results are set out in a table in the letter that was sent to the noble Lord and to Mr Benson, who was acting on this occasion on behalf of the Chartered Institute of Taxation. That analysis showed that although the amendment is worthy in its aim of seeking to simplify the clause, it unfortunately fails to achieve the desired result. It would also allow fewer options to be settled than the Bill's current drafting.
1098 Let me give an example to show why the amendment would not work. Clause 3 will ensure that a national insurance charge will not arise provided that the option is rolled over at parity—that is, the consideration given for the option at each roll-over is not greater than the inherent gain in the old option at the time of the roll-over. Any excess over parity should be subject to Class 1 national insurance contributions. That parity rule must apply at the stage of each roll-over. The Inland Revenue found that the amendment fails effectively to achieve that in multiple roll-over situations. The result would be that the amount of national insurance contributions paid in multiple roll-over cases would be higher than was intended when the share price was falling and higher when it was rising. Rather than relieving all of the circumstances in which the clause is intended to apply, it would result in an unfair approximation for the purposes of the Bill.
The clause as it stands achieves its aim and we cannot guarantee that re-working the amendment—we also considered that as an alternative—would give us anything less complex in the end.
I was asked whether we would set out guidance to help those who would be affected by this part of the Bill. We shall make available detailed guidance on the provisions for the few companies that will require it. I shall come to the number in a minute. We are grateful to the Chartered Institute of Taxation for its offer of assistance in drawing up the guidance. We shall take advantage of that offer.
The noble Lord, Lord Higgins, also asked how many people might be affected by Clause 3. The number is very small. The total number of options that come under the ambit of the Bill is not more than 2,000, affecting perhaps 50,000 people. We estimate that the number of options on which the provisions of the Bill might be taken up will be no more than 1.300, affecting 30,000 people. A much smaller proportion of those will be rolled over—I should be astonished if it were more than 10 per cent. The proportion affected by multiple roll-over will be even smaller. The number of people who will take advantage of the roll-over provisions in Clause 3 will probably be smaller still. We are talking about tens, or, at the most, hundreds of schemes affecting hundreds, or, at the most, single-figure thousands of people.
We have gone to great lengths to ensure that the provisions in the Bill are fair. I am sorry that the gallant attempt of the noble Lord, Lord Higgins, to make them simple as well is not acceptable.
§ Lord Higgins
I am sure that the Committee is grateful to the noble Lord for that explanation. It is depressing for practitioners in the field that they will have a smaller market than one might have supposed. I am grateful to Minister for his suggestion that there will be adequate briefing for those who are affected by the measure.
The Minister's most convincing line of argument was, if I understood him correctly, that my amendment would involve more tax being raised from 1099 those involved. It may have occurred to some people recently that the Conservatives are not in favour of increasing taxation.
§ Lord McIntosh of Haringey
I should be the last person to accuse the noble Lord of trying to introduce a stealth tax. It is not a phrase that I care for.
§ Lord Higgins
I shall leave that on one side. It would be inappropriate for me to press an amendment that would increase taxation and it would make me rather unpopular in my party. On that basis, I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ Clause 3, as amended, agreed to.
§ Clause 4 agreed to.
§ Clause 5 [Interpretation]:
Lord McIntosh of Haringey moved Amendment No. 3:
Page 8, line 23, at end insert—
() Where any assumption that a right has been exercised at any time is made for the purposes of any provision of this Act, that assumption shall be taken to include the assumption that that right was capable of being exercised at that time.
§ On Question, amendment agreed to.
Lord McIntosh of Haringey moved Amendment No. 4:
Page 8, line 34, leave out "this section" and insert "the provisions of this Act
§ The noble Lord said: I am afraid that I must burden the Committee with a minor amendment that relates to the way in which the legislation will operate.
§ When we were looking at the regulations that will be needed to bring the notification procedures into force, we noticed that, as presently drafted, only Clause 5 would be treated as if it were contained within Part I of the Social Security Contributions and Benefits Act 1992. That was an oversight. We need a change of words so that the whole Bill can be brought within the ambit of Part I of that Act. Without the amendment, we could not use the existing administrative procedures contained in that Act to introduce the regulations to be made under the Bill. The amendment will correct that. I beg to move.
§ Lord Higgins
As Parliament has been struggling since May 1999 to get the legislation right, we must hope that this final amendment succeeds in that objective. We shall not oppose it.
§ On Question, amendment agreed to.
§ Clause 5, as amended, agreed to.
§ Clause 6 agreed to.
§ Title agreed to.
§ House resumed: Bill reported with amendments; Report received.1100
§ Then, Standing Order 46 having been suspended (pursuant to Resolution of 9th May), Bill read a third time, and passed, and returned to the Commons with amendments.