Finance Bill

Public Bill Committee, 22 May 2003.

Standing Committee B

(Except Clauses 1, 4, 5, 9, 14, 22, 42, 56, 57, 124, 130 to 135, 138, 139, 148 and 184 and Schedules 5, 6, 19 and 25, and any new Clauses and Schedules tabled by Friday 9th May 2003 relating to excise duty on spirits or R&D tax credits for oil exploration.)

Nicholas Winterton (Conservative, Macclesfield)

May I welcome all members of the Committee to the penultimate sitting before we have a short break? I regret that I will not be in the Chair this afternoon, so I wish everyone, particularly those who have been working extremely hard during the sittings we have had so far, a restful and enjoyable spring recess. We sat late on Tuesday, but I am sure that we will make further progress today.Clause 170 Policies of life insurance etc: miscellaneous amendments

Clause 170 - Policies of life insurance etc: miscellaneous amendments

John Healey (Labour, Wentworth)

The clause introduces the four measures in schedule 34 and provides that they take effect from Budget day. They all relate to the way in which gains from life policies are taxed in the hands of the policyholder. The clause and schedule contain a number of beneficial measures affecting the taxation of gains from life assurance. They provide new exemptions, while correcting some anomalies and closing some loopholes.

Part 1 of schedule 34 deals with group policies: policies that insure the life of more than one person and pay benefits on the death of the persons whose lives are insured under the policy. Part 2 deals with charitable and non-charitable trusts. Part 3 contains a minor amendment applying only to annuities issued to friendly societies. Part 4 repeals, subject to transitional provisions, the rule that enables the owner of a life insurance policy to defer tax by allowing a policy to mature and reinvesting the proceeds in a new policy instead of extending the term of the old policy.

The changes in the clause and schedule represent some tidying up of the special regime for taxing gains from life policies. When it has been possible to consult the industry, we have done so to ensure that the changes meet the industry's concerns. Consequently, many of the changes proposed in the clause and schedule are welcomed by the industry. That is particularly true of the new exemptions for group policies, which the industry has sought for some time. The new exemption is the main change provided for by the clause and schedule.

Howard Flight (Conservative, Arundel and South Downs)

Sir Nicholas, may I welcome you to chairing our sitting this morning and wish you a restful break?

As the Economic Secretary commented, in principle the industry welcomes the exclusion of group life policies from chargeable events, which is the main issue in the clause. The Law Society and others have raised some aspects for clarification and discussion relating to the pertaining conditions. Our coming amendments relate to those aspects. First, we want to clarify whether sums paid to a partnership for its benefit should be regarded as belonging to the individual's beneficiary. Secondly, we want to find out why, in principle, a charity that has a life policy gain should pay tax on it when it would be exempt from capital gains tax if it had arisen in the individual's hands. Thirdly, we want to focus on the disparity of treatment between charities according to their constitution and whether they are trusts, companies or associations—using ''charities'' in its loosest sense.

The new exemption for gains on some closely defined group life policies in section 539A of the 1988 Act appears to exclude policies in which the beneficiaries are any person other than individuals or charities, and policies in which one is insured for life benefit on the death of another by virtue of any right that is related to his being one of the insured lives. There are frequently policies in pension schemes—I recollect that the arrangements are thus for Members of Parliament—where individuals are invited to nominate whether they want their spouses or partners or children to benefit on their death. Would that be affected in any way by the provisions?

No reason is given for the restrictions that could significantly inhibit the value for exemption. For example, how is the insurer or anyone else to know whether a real trust created by an insured life will meet the conditions for exemption, and why should the exemption not apply to a group policy on the lives of members of the partnership with the firm as a beneficiary? Again, there is a practical point to be made, which is that partnerships, as with companies, will often want key man insurance that may be structured in that way, it being crucial that the partnership should benefit from the key man insurance.

John Healey (Labour, Wentworth)

We will deal with the question whether the provisions should apply to partnerships of firms when we come to debate the relevant amendments to the schedule. On the other question that the hon. Member for Arundel and South Downs (Mr. Flight) posed about whether the clause will have an impact on nominated beneficiaries—he cited the parliamentary scheme—the answer to that is no.

Question put and agreed to.

Clause 170 ordered to stand part of the Bill.

Schedule 34 - Policies of life insurance etc: miscellaneous amendments

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 140, in

schedule 34, page 398, line 17, leave out from beginning to end of line 21 and insert—

'(a) one or more individuals and/or charities beneficially entitled to them, or

{**?h=1.5pt**}(b) a trustee or other person who does not have power to secure that the sums or other benefits are paid to or for, or conferred on, or applied in favour of, any person other than one or more individuals and/or charities beneficially.'.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following:

Amendment No. 141, in

schedule 34, page 398, line 23, at end insert—

'; and sums paid or belonging to a partnership of individuals for the benefit of the partnership shall be regarded as paid or belonging to the individuals themselves beneficially.'.

Amendment No. 155, in

schedule 34, page 398, line 36, leave out from 'referable' to 'policy' in line 37 and insert

'solely to that individual's being one of the individuals whose lives are insured by the policy, but does not include any such right that is referable to that individual being a member of a partnership of individuals all or most of whose lives are insured by the'.

Howard Flight (Conservative, Arundel and South Downs)

These and forthcoming amendments essentially pick up on the points of principle that I have raised. Amendments Nos. 140 and 141 would avoid making the conditions unnecessarily rigid and unsuited to typical circumstances, and would make the conditions reflect the intention in the explanatory notes and new subsection (7). Benefits under a group life policy will typically be held under flexible trusts allowing the ultimate beneficiaries to be selected after the death of a given life assured. The present wording fails to cover the position in which someone might desire part of the sum in question to be paid to a charity and the remainder to an individual. The amendment would clarify, without needing to rely on the Interpretation Act 1978, that the condition is satisfied when more than one individual or charity is involved.

Amendment No. 155 would better reflect the intention evident in the explanatory notes, and would protect partnership life group policies from being left within the charge that the provisions otherwise exclude.

John Healey (Labour, Wentworth)

The measures in part 1 of the schedule ensure that, provided certain conditions are met, the group life policy will be entirely outside the scope of the special regime for taxing policyholders on the gains that they make on their life insurance policies. The aim of amendments Nos. 141 and 155 is to extend the scope of the exclusion to group policies providing for payment to partnerships on the death of the individual partners. The hon. Member for Arundel and South Downs has explained that the Law Society advocates the amendment. That is understandable, because the big professional partnerships—particularly lawyers and accountancy partnerships—would take advantage of the exclusion were it implemented.

Amendment No. 140 would replicate the Interpretation Act 1978. It is intended to help individuals who are covered under group life policies, which provide death benefits to their families, dependants and others. Group life cover is broadly in line with the cover provided within approved pension schemes. It is not intended or designed to cover payments, particularly commercial

arrangements, of the kind that the hon. Gentleman discussed. Policies in which the beneficiary on death is the partnership to which the deceased belonged are not within the category of group policies, and it is therefore inappropriate to widen the scope of the measure to include them.

I hope that the hon. Gentleman will withdraw the amendment; if not, I must ask my hon. Friends to reject it.

Howard Flight (Conservative, Arundel and South Downs)

The Economic Secretary's argument is unclear. It is one thing to say that such a policy would not be used by a partnership. It is entirely different to say that the clause is specifically designed to exclude partnerships benefiting from the key man insurance of one of their partners, which is unreasonable. The Government have encouraged the use of limited partnerships as an alternative to a corporate structure. Like a company, a limited partnership faces severe risks if a key person working within it dies and their earnings cease. I cannot see any reason why a limited partnership should not have key man insurance in a fair and tax-efficient fashion. Will the Economic Secretary clarify his comments?

John Healey (Labour, Wentworth)

The provisions in the clause and the schedule are not designed to include such partnerships, because the policy purpose behind the provision is to provide the exemption, which will assist group life policies that provide death benefits to families, dependants and others. It is not designed to incorporate the commercial partnerships in which the hon. Gentleman is interested.

Howard Flight (Conservative, Arundel and South Downs)

I cannot see a good reason why such partnerships should be excluded. Having clarified the Government's position, we want to put the amendment to the vote.

Question put, That the amendment be made:—

The Committee divided: Ayes 7; Noes 16.

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 157, in

schedule 34, page 400, line 35, at end insert

'; and at the end of that paragraph (b) insert ''but subject to subsection (1AA)'','.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss amendment No. 156, in

schedule 34, page 401, line 10, at end insert—

'(7A) After that subsection insert—

''(1AA) Where the rights referred to in subsection (1) above were, immediately before the happening of the chargeable event in

question, in the beneficial ownership of a charitable company, or were held as security for a debt owed by a charitable company, the same tax credit shall be available to that charitable company (with the same related consequences) as though the charitable company had been the trustees of a charitable trust; and for this purpose ''charitable company'' means a company (within the meaning of section 832) which is a charity (within the meaning of section 506).''.'.

Howard Flight (Conservative, Arundel and South Downs)

Again, this issue has been raised by the Law Society. The amendments seek to avoid differences between the tax treatment of different charities, which arise as a result of the manner in which they are constituted. The provisions in part 2 of the schedule, on charitable trusts, seem to throw up an unjustifiable disparity in treatment, depending on the structure of a charity. How a charity is constituted should not affect its tax treatment. The amendment would put charities constituted other than as trusts into the same position as charitable trusts.

John Healey (Labour, Wentworth)

As the hon. Gentleman has said, the amendments would put a charity constituted other than as a trust into the same position as a charitable trust when it makes a gain from a life insurance policy. They would do that by giving corporate charities some tax credit in relation to such a gain. The main effect of the change that we have made for charities that are trusts in this part of the schedule is to treat gains from life policies in the same way as their other non-exempt income; in other words we are bringing those into line. The provision taxes the trustees not the donors, and reduces the rate to that generally applying to charities' other non-exempt income.

Gains made by a charitable company are already taxed on the company and are liable to tax at the same rate as the charity's other non-exempt income. Therefore, the reasons for changing the taxation of charitable trusts do not apply to charities that are companies. A charity constituted as a company is liable to corporation tax not income tax on its non-exempt income and chargeable gains. It is therefore subject to different rules and different rates of tax from those that would apply were it constituted as a trust. Those different rules apply to the income and chargeable gains that charities have from all sources. It is by no means clear that it is right to single out life insurance gains for treatment different from that for all other types of non-exempt investment income.

The 1998 changes to the chargeable events regime applied to trusts put the few charitable trusts that held life insurance products into a difficult position. The change that the Government propose this year will remove a significant administrative burden for charities, donors, the Revenue and everyone involved in insuring that self-assessment returns are correct. The 1998 changes did not affect the way that companies, whether charities or not, were taxed. The tax treatment of insurance gains made by corporate charities has been unchanged since 1989.

The piecemeal approach of the amendment, singling out life insurance gains, as one type of income, for special treatment looks wrong in principle. On that basis, I encourage the hon. Gentleman to withdraw the amendment.

Howard Flight (Conservative, Arundel and South Downs)

I take the Economic Secretary's point that the provision is designed to address a specific

situation in relation to charities that are trusts. Will the net result of that be that, although a corporate charity has a different tax regime, the charity that is a trust is likely to be better off in terms of insurance gains? I note—although I am not saying that I welcome it—that many charities in other EU countries are corporate rather than trusts, so one suspects that there may be an increase in the number of charities in this country that are structured as corporate bodies rather than trusts in the future.

The purpose of the provision is to sort out the position of trusts, but if it then creates an anomaly in the overall amount of tax to be paid under the different regimes, that should be addressed, because it is undesirable to have tax arrangements that provide incentives for one sort of structure but not another. The issue needs to be addressed, but it is not fundamental to the objective of the clause. I shall not press the amendment to a vote, but I would like to hear the Economic Secretary's response.

John Healey (Labour, Wentworth)

As I explained, our proposed changes are designed to assist charitable trusts and deal specifically with the difficulty that was created by the 1998 changes, which did not affect charities constituted as companies. As we always do, we shall keep the provision under review and if the sort of anomalies that the hon. Gentleman is concerned about arise and it becomes apparent that they are unjustified, we will consider taking appropriate action.

Howard Flight (Conservative, Arundel and South Downs)

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 154, in

schedule 34, page 404, line 10, at end add—

Part 5

Removal of Double-counting of gains

16 In section 541(1) of the Taxes Act 1988 (life policies: computation of gain), delete ''and'' at the end of subparagraph (i) in each of the paragraphs (b) and (c), and at the end of subparagraph (ii) of each of those paragraphs insert ''and

(iii) to the extent that, apart from this subparagraph, a gain would otherwise be treated as arising on the happening of the chargeable event in question, the lesser of that gain and the total amount of any gains treated as accruing on the happening of any previous chargeable events which comprised an assignment of the policy;''.'.

This is another issue that was raised by the Law Society. The intention in the amendment is, in parallel with the capital gains tax amendment to clause 156, to remove an equal and opposite anomaly in the income tax legislation on gains on life policies. Clause 156 deals with capital gains tax but is one sided in tackling anomalies between the income tax chargeable gains regime and the capital gains tax regime for life policies and deferred annuity policies. To deal with a particular scheme that had exploited that, clause 156 eliminates the anomaly that worked in the taxpayer's favour, but does nothing to maintain the balance by tackling the equal and opposite anomaly, which can give the Revenue two tax liabilities on the same sum, which in the taxpayer's hands may not be a gain.

The editor of Taxation magazine raised the matter and I understand that the problem would arise particularly in the second-hand market for insurance policies when a tax bill arises if someone disposes of a single-premium policy at a profit. If someone buys it and on-sells it they can be left with a tax liability and a real loss. The Minister may have seen the arithmetic set out in the Law Society's example.

John Healey (Labour, Wentworth)

The purpose of the amendment is to reduce the size of a gain on the maturity or surrendering of a life assurance policy when there was a previous gain from an earlier assignment or assignments of the policy. As the hon. Gentleman explained, the reason for the amendment is the capital gains tax proposals in clause 156 which are designed to put an end to avoidance schemes that are used purely and directly to create tax losses. The possible income charge at which the amendment is directed is not connected with the capital gains proposal and I do not agree with the hon. Gentleman that the capital gains changes justify the amendment.

The legislation governing chargeable event gains is notoriously complex, as I have discovered in recent days. I regret to tell the hon. Gentleman that his amendment will compound rather than simplify the problem. It addresses an apparent unfairness in the way that the policy gains are taxed. The solution that it provides would merely add to the complexity and, in many circumstances, would be quite unworkable because the information needed to make it work would not be available to the taxpayer or the insurance company. I accept that in theory there is the possibility of a double charge for life insurance policies. The question is whether that possibility is so severe and sufficiently common in practice to justify making complex amendments to the law. They would be far more complex than the hon. Gentleman or those who framed the amendment perhaps envisaged.

Legislation has been in place for 20 years, and there is little evidence that it has caused or is causing difficulties of the sort to which the amendment is directed. The hon. Gentleman will know that the commercial market in second-hand policies is a sophisticated market, and those who are involved in it are well aware of the tax rules and their consequences. He will also know that it is almost always a market of qualifying policies, where the original assignment will not give rise to a gain. In practice, therefore, double charges do not arise in any great number. That is why the legislation has not been changed before now by this Government or previous Governments.

I do not consider that the closure of the capital gains loophole justifies the proposed change. On that basis, I encourage the hon. Gentleman to withdraw the amendment.

Howard Flight (Conservative, Arundel and South Downs)

It strikes me as a pity that the Government should tidy up the tax law in one area and, as the Economic Secretary effectively admitted, leave an unsatisfactory structural situation on the other side of the coin. There is a situation in which double tax could arise. I will duly blame the Law

Society for the form of its amendment if what the Economic Secretary says is correct. There is no point using it if it cannot achieve what it is intended to achieve. However, it raises the problem and, although it should not arise where qualifying policies are involved, no market should be messed around with by wrong tax arrangements.

Michael Jack (Conservative, Fylde)

My hon. Friend is teasing my interest in the matter. Did the Law Society quantify the amount of tax that it thought would be affected by its proposal?

Howard Flight (Conservative, Arundel and South Downs)

Not in the aggregate, but in terms of an individual situation it did. The prevailing situation in which the tax arrangements apply seems extremely tax anomalous. It may well be that the volume of such business affected is modest with regard to additional tax revenue. That is not a sound argument for having a tax regime that is manifestly wrong. However, partly on the basis of the amendment not achieving its objective, and partly on the basis of materiality, I feel that there is no point in pressing it to a vote. I hope that the Government will consider tidying up the matter in due course, and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 34 agreed to.

Clause 171 ordered to stand part of the Bill.

Clause 172 - Gains on policies of life insurance etc: rate of tax

Howard Flight (Conservative, Arundel and South Downs)

The clause establishes new rules that give policyholders a 20 per cent. credit on their paid-out policies so, self-evidently, higher rate taxpayers will pay a further 20 per cent., the equivalent policyholder rate for life companies having been reduced from 22 to 20 per cent. The effect will be that someone who is paid out a 20-year policy, of which 19 years were under the old regime, will get only a 20 per cent. credit although the tax will have been deducted at 22 per cent. or more for the overwhelmingly majority of the policy's life.

We appreciate that that situation is not different from what happened in the past when the basic rate dropped from 25 to 22 per cent., but this matter has not been given much publicity, so policyholders may not be aware of the change in their liabilities. Our forthcoming amendment to the schedule deals with that.

John Healey (Labour, Wentworth)

The clause introduces schedule 35. The provisions are part of a number of changes to the tax rates applying to life insurance which will have the combined effect of saving insurers and policyholders an estimated £40 million of tax a year. Under the special taxing rules that apply to life insurance, the capital gains and income arising on the funds held by the insurer to meet its obligations to policyholders are subject to corporation tax in the hands of the company. Insurers pay the tax on income and gains as a proxy for the policyholders. In turn, the

policyholders are treated as having paid tax at the basic rate—currently 22 per cent.—on any gains arising on the benefits that they receive under the policy.

The cut in tax will benefit policyholders generally by increasing the post-investment returns, but it would be illogical and inappropriate for policyholders to continue to be treated as if tax of 22 per cent. had been paid on the gain when the insurer is paying tax only at the maximum rate of 20 per cent. The clause reduces to 20 per cent. the rate of tax that individuals and trustees are treated as having paid.

John Baron (Conservative, Billericay)

Further to the comments made by my hon. Friend the Member for Arundel and South Downs, would it not be fair at least to have some form of transitional provision to cater for cases in which the gain has accrued over a significant period prior to the introduction of the changed regime for insurers?

John Healey (Labour, Wentworth)

I believe that the hon. Member for Billericay (Mr. Baron) is a little ahead of himself. That is precisely the debate that we will have when we come to the amendment to the schedule. It will be appropriate to deal with those points then.

The clause will not take effect until next April. That is simpler for taxpayers, who will not have to deal with two rules for the same year, saves insurers from having to make administrative changes overnight and increases the value of the tax cut. Policyholder funds will be boosted at once by the reduction in insurers' tax bills, but no extra income tax will actually be payable until January 2006—in more than two and a half years' time—when income tax for the year of assessment 2004–05 is due. On that basis, I commend the clause to the Committee.

Question put and agreed to.

Clause 172 ordered to stand part of the Bill.

Schedule 35 - Gains on policies of life insurance, etc: rate of tax

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 153, in

schedule 35, page 405, line 10, at end add—

'Transitional relief

6. (1) Where a person to whom a gain in respect of a policy is treated as accruing after 5th April 2004 by virtue of the provisions of this Chapter was entitled to the policy since before 1st April 2003, and provided that on or after 9th April 2003—

(a) no additional premium has been paid under the policy (other than a premium the payment of which was already required by the terms of the policy), and

(b) no sum has been paid for the acquisition of the policy or rights or interests in it,

that person may by notice to the Inland Revenue elect that the following provisions of this paragraph shall apply in relation to the amount of tax treated as deducted from the sum included in his income by virtue of section 547(5) (on its own or as applied by section 547(5AA)).

(2) Where an election is made under subparagraph (1) above the amount of tax treated as so deducted shall be ascertained by reference to the proportion of the person's period of ownership of the policy which fell after 31st March 2003, by applying the following table—

proportion of the taxpayer's period of ownership which falls after 31st March 2003 proportion of gain from which tax is treated as deducted at the lower rate proportion of gain from which tax is treated as deducted at the basic rate not exceeding 10% 0% 100% not exceeding 30% 25% 75% not exceeding 50% 50% 50% not exceeding 75% 75% 25% over 75% 100% 0% (3) A notice of election under subparagraph (1) above must be given in writing and may be given at any time not later than 31st January in the second year of assessment following the year in which the sum was included in his income.'.

When we exhaustively worked our way through clause 169 and schedule 33 on Tuesday, the Economic Secretary or the Paymaster General—I forget which—made the point that these complex arrangements, which have pluses and minuses, will save the insurance industry £40 million a year. The Economic Secretary has now said that it is specifically the changes that we are now discussing that will save the industry £40 million a year. Can he clarify that? I think that he did not mean two £40 millions and that it is these arrangements, not those under clause 169 and schedule 33, that have the net tax-saving effect.

The amendment is intended to provide transitional relief in respect of the increases in the effective rate of tax for taxpayers liable at more than the basic rate, when policies have been held for a significant time during which tax was paid by the insurance company at the basic rate, rather than the lower rate. Although we recognise that a truly fair system that took account of that might give rise to some complexity, there should be some form of transitional provision to cater for cases in which the gain has accrued over a significant period prior to the introduction of the changed regime for insurers. We suggest that that might be done by means of a sliding scale, as set out in the amendment, and that the relief should apply on an elective basis so that those who do not consider it worth while to invoke it need not go through the relevant complex calculations.

John Healey (Labour, Wentworth)

The amendment is designed to defer the full impact for higher rate taxpayers of the reduction in the rate at which tax is treated, as already paid on gains from life insurance policies. I will put the amendment in the context of the schedule, and will therefore range a little more widely.

The insurance company has paid tax as a proxy for the policyholder, as I explained in my opening remarks on clause 172. As a result of other changes in the Bill, the rate of tax payable by the company on capital gains realised on assets that it holds to meets its obligations to policyholders has been reduced from 22 per cent. to 20 per cent. I can confirm that the £40 million is a net tax saving. It is the net effect of all the life insurance measures. There is a similar reduction this year in the rate of tax payable on income from property.

The changes mean that insurance companies are now not liable at a rate higher than 20 per cent. on any of the income and gains that arise on policyholders'

funds. Other income on the funds has, since 1996, been taxed at a rate equivalent to the 20 per cent. lower rate. Higher rate taxpayers have benefited from the rate reduction since then, as they have continued to be treated as if tax had been paid at the basic rate on all their investment returns.

The amendment does not recognise the fundamental principle of the present taxing regime, which is that a gain on a life policy is income in the year in which it arises and is chargeable to tax in that year at the rates appropriate to that year. If the higher tax rates applying have fallen in the year in which the gain arises, as has generally been the case, the taxpayer will benefit. The amendment also takes no account of the fact that the reduction in the rate of tax payable on gains will benefit all policyholders to a much greater extent than the increase at which the amendment is directed. Nor does the amendment take account of the fact that no one will have to pay tax on this account before January 2006.

The changes proposed by the Government, as part of the package, merely alter the way in which the tax is distributed between the insurance company and the policyholder. They do so in a way that matches what happens and therefore reflects reality.

Since the regime for taxing life insurance was introduced in 1968, there have been up to 20 changes in the tax rates applying to basic rate taxpayers and life insurers. In all that time, under this and previous Governments, there have never been any adjustments of the kind proposed in the amendment. I encourage the hon. Gentleman to pause to reflect on why that is the case. If there had been such changes, policyholders would find them impossible to cope with. There is no good reason to delay introducing the Government's proposal beyond next April. The measure strives for simplicity. There are a few rough edges but, overall, it is a fair and sensible solution and is part of a measure that is of significant benefit to taxpayers. On that basis, I encourage the hon. Gentleman to withdraw the amendment. If he does not, I encourage my hon. Friends to reject it.

Howard Flight (Conservative, Arundel and South Downs)

The complexity point was why the amendment was proposed on an optional basis. The explanatory notes suggest that the reduction of the credit to the lower rate follows from the reduction of the tax rates payable by insurance companies. I note that the reference to schedule 32 is incorrect—it should be to schedule 33.

The explanation is somewhat misleading. For many years to come, policies that mature and give rise to chargeable gains will have accrued those gains in years prior to 2003, when the underlying gains will have been subject to the basic rather than the lower rate. It is somewhat misleading to imply, as paragraph 15 of the explanatory notes, does that

''all of the profits representing the policy holders' share of income and capital gains are liable to tax at a rate equivalent to the lower rate''.

The explanatory notes recognise that the effect for a higher rate taxpayer will be to increase the rate of tax

for which he will be liable from 18 per cent. to 20 per cent. That unfairness, which will affect policies that have been held for a long time, could be dealt with along the lines of our amendment. Therefore, we believe that this is an opportunity to sort out the issue.

Question put, That the amendment be made:—

The Committee divided: Ayes 6, Noes 16.

Clause 173 - Personal pension arrangements: limit on contributions

Howard Flight (Conservative, Arundel and South Downs)

As I understand it, the clause results from a particular court case and is intended to put it beyond doubt that employer contributions for employees are subject to the pension earning cap. The clause also makes it clear that the facility to carry back contributions to a previous year is available only for contributions paid by the member who made the personal pension arrangement. I wish to ask the Economic Secretary the reason for the second element. In the round, we desperately need to encourage private pension saving, and I do not see any reason for the rule as a matter of principle.

John Healey (Labour, Wentworth)

The clause makes some technical amendments to personal pensions legislation to ensure that it works as originally intended. The original intention behind the legislation is clear, well understood and generally accepted by the pensions industry and by scheme members. Some have claimed, however, that the legislation does not successfully apply the earnings cap limit to contributions paid by a scheme member's employer. To put that matter beyond doubt, the clause makes some minor changes to the wording of the legislation, to take effect from Budget day.

On the hon. Gentleman's second point, a new cap is not being imposed. The old cap, which has been in place since 1989, limits the tax privileges available to people with high incomes. The purpose of the clause is to ensure that the cap cannot be avoided. The system will be simplified from 2004, when reliefs will be capped in a different way.

Question put and agreed to.

Clause 173 ordered to stand part of the Bill.

Schedule 21 - Approved share plans and schemes

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 13, in

schedule 21, page 246, line 4, leave out from 'participants' to end of line 6 and insert

'identifying by name and national insurance number those participants who have participated in the approved SIP and the awards made to them.'.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following:

Amendment No. 103, in

schedule 21, page 246, line 4, after 'participated', insert

'in the same tax year'.

Amendment No. 104, in

schedule 21, page 246, line 6, at end insert

'but only to the extent that the necessary information is available to them or has been provided to them by the participants or the company'.

Howard Flight (Conservative, Arundel and South Downs)

We, and the commercial community, welcome many of the simplification measures contained in schedule 21—I discussed the less welcome measures on the Floor of the House.

Government amendment No. 166, which we shall discuss shortly, will cancel the proposed new share incentive plans dividend share arrangement, which did not work. The Confederation of British Industry, the Law Society and others have raised other issues that our amendments seek to address. There are problems with the trustees of share incentive plans having to police the new anti-avoidance rules. In particular, the new national insurance contributions liability on employers and employees, which contains a withholding obligation in respect of shares acquired on or after 9 April 2003, presents a significant problem.

It seems to the CBI, and to us, that the proposed arrangements are an unfair piece of overkill. They were not announced before Budget day and are retrospective for grants made before then. They are especially unfair on employees, who may not be able to recover tax and NIC liabilities from employees. The practical legal provision for employers to seek out employees' agreement to bear the employer's NICs is insufficient, assuming that the employees are still being employed.

On SAYE option schemes, the legislation does not achieve anything. New paragraph 34(5A) will give a scheme company the choice of arrangement A or arrangement B. Arrangement A is currently on offer; arrangement B would allow the relevant employees to exercise their options only if they are good leavers. Those who remain employed until their bonus date cannot exercise their options because a constituent company or an associated company of the scheme organiser will not employ them. It seems inconceivable that a company would choose arrangement B, because, by so doing, it would deprive all stayers of the opportunity to exercise their options.

Most company share option plan schemes allow for options to be exercised on retirement. A special retirement age is referred to in very few cases, and

most references are to normal retirement age. If a company fails to insert a specific retirement age in its CSOP rules, those who exercise on retirement before the third anniversary of grant will not qualify for the new exemption from income tax. I am sure that the Government did not want that outcome, which could be avoided if the legislation provided that any exercise on retirement permitted by the scheme rules on or after the age of 55 would enjoy relief from income tax.

Finally, many companies may be unable to collect NICs on the exercise of CSOP options. That raises particular problems for international companies—this is not a question of avoidance—which may have three-year option scheme arrangements over which there is no statutory authority for the deduction of tax under PAYE because the new withholding power in new paragraph 34 applies only to non-PAYE income. Furthermore, the provision applies only if the employee does not object to it.

Amendments Nos. 13, 103 and 104 are alternative ways to achieve the same objective. They seek to address the fact that the changes in schedule 21 are intended to simplify the operation of approved share schemes. The new provision in the SIP legislation requires the independent trustee to police the new anti-avoidance measures. That will not simplify the operation of SIPs because the trustees are in no position to police the employers. The trustees, probably acting through their lawyers, will ask the employers to confirm the position and to indemnify them against risk, and the employers will ask their tax advisers to write back with the answer as a form of independent audit. Tax advisers can only rely on what employers tell them; everything depends on honest information from the employer, who will be behind any non-compliance in the first place.

All the provision achieves is the racking up of professional costs. It is not particularly workable and the simplification will not encourage employee share ownership. Surely it would be much simpler for trustees to compile records of participants and their national insurance numbers—trustees must compile such information in order to do their jobs—to catch any double awards through the employer's national insurance scheme.

Amendments Nos. 103 and 104 address the same problem by ensuring that any record-keeping obligation on the trustees is reasonable.

Nicholas Winterton (Conservative, Macclesfield)

I welcome the Paymaster General back to the crease, which is an appropriate phrase to use today.

Dawn Primarolo (Labour, Bristol South)

I hope that the weather improves to allow us to see some dynamic batting.

In introducing the amendment, the hon. Member for Arundel and South Downs made several general points about schedule 21 to which I shall quickly respond. The schedule's purpose is to produce a balanced package aimed at simplifying and modernising the operational schemes. The majority of the proposals are a response to industry

representations and have been welcomed. The operation of the PAYE mix on early exercise of existing options to close a loophole in legislation has not been welcomed. Anti-avoidance measures rarely are, because those exploiting the loophole wish to continue to do so. The proposal has been balanced with withdrawal of the tax charge under the second three-year rule, which has been welcomed. We shall come to all those changes at various points in our debate.

There are four changes to the share incentive plans provided for in the schedule: the one-off payment allowing the purchase of partnership shares, which is welcomed; flexibility in the amount of salary to be used for purchase of partnership shares; employees who move between companies in a group can participate in more than one SIP, which is welcomed; and simplifying the dividend share holding period, to which the hon. Gentleman has referred. I will come to that later during debate on the Government amendments.

There are five changes to the company share option plans. There is a change to PAYE and national insurance, operated if options are exercised within three years of grant. The definition of material interest has been aligned with that for SIP and SAYE. Only changes to key features in the scheme rules need to be approved. We will provide for what we call good leavers, touched on by the hon. Gentleman, which are injury, disability, redundancy and retirement. In those cases, people are able to exercise an early option tax-free. The second three-year rule has been removed. There are three administrative changes not requiring legislation, and there are two changes to SAYE.

Overall the changes have been welcomed. There is a particular issue with the company share option plan, which the hon. Gentleman has touched on, regarding the closure of the loophole and the PAYE mix. Some people think that we should not do that without giving a year's notice, so that others may continue to use it. We will debate that later. The changes to SAYE have been generally welcomed, but there are some concerns about the changes, particularly in relation to demergers. I know that the hon. Gentleman will want to touch on that. Schedule 21 has been welcomed overall, and it provides for many good improvements in the operation of the schemes.

I turn to amendment No. 13. Currently, if employees participate in a share incentive plan, they are unable to participate in another SIP in the same tax year. That is the point I made about connected companies. We have been told by the industry that that rule penalises employees who have moved between connected companies in the same tax year. They have to leave one SIP but they cannot join the next until the next tax year.

We are proposing to allow employees who move to a connected company following a group restructuring to participate in the SIP of the connected company, even if they have participated in another SIP plan in the same year. At the same time, the trustees of the SIP must keep records of the share award limits, to check

that those are not exceeded in any tax year. That is perfectly reasonable and an obvious step. We have not specified how the records should be kept, as trustees already have to keep records and details, which they report to the Inland Revenue. Amendment No. 13 seeks to specify and so limit the records that share incentive plan trustees need to keep for people who have participated in more than one SIP established by the same company or connected company. That is unnecessary, and it is unusual for legislation to specify the types of record that are to be kept.

The legislation needs to provide the general framework for the administration of the SIP, while allowing the practical details of administration and record keeping to be determined, as has always happened in the past, by those who know the field best: the trustees and administrators, in conjunction with the Revenue. The amendment is simply unnecessary and, if I may say this ever so gently to the hon. Member for Arundel and South Downs, an overreaction to the good suggestion in the proposals.

John Baron (Conservative, Billericay)

I seek clarification from the Paymaster General on that point. Is she saying that trustees will be allowed to police these share schemes in the manner suggested in the amendment if they wish? That is the important point. She suggests that trustees have much greater freedom than is, perhaps, detailed in the Bill. If that is the case, it is an important point on which the Committee should dwell.

Dawn Primarolo (Labour, Bristol South)

I am not talking about whether the rules in the amendment are better. The rules that currently operate—which are not the rules in the amendment—have been negotiated and discussed, are understood by the Revenue, administrators and trustees, and are perfectly reasonable. They operate now and there have been no developments to suggest that we need to change them. Therefore, the amendment is simply unnecessary, going against the grain of the current procedure that operates between the Inland Revenue, the administrators and SIPs. The amendment would change that and disturb a balance that is clearly operating well. I cannot see the reason for pursuing the system in the amendment, when the current system operates correctly. I am sure that there are continued discussions between the administrators, SIPs and the Revenue in making the returns each year. We want to ensure that the limit is not exceeded and that the rules are properly applied in a scheme that has been widely welcomed as progressive.

Amendment No. 103 seeks to limit the trustee record-keeping requirement to the same tax year for participants who have participated in one or more approved SIPs established by the company or by a connected company in that year. The amendment is not necessary, which harks back to the point that I have just made, because trustees need to keep records of all participants—not just those participating in one or more incentive plans—in order to report details of the share awards to the Inland Revenue. The information required in the amendment is already reported each year.

Amendment No. 104, if accepted, would mean that the trustees would not need to keep any records of participants in one or more approved SIPs established

by the same or a connected company in the same year if the company or participant did not inform the trustees of the participation. That would mean that the trustees would have no way of knowing whether the share award limit had been exceeded. In developing the proposal to allow participation in one or more approved SIP plans established by the same or a connected company in the same year, we were assured by the industry that, in general, there would be only one trustee acting in such a situation and that the keeping of records and reporting would be relatively straightforward. The situation envisaged by the amendment should not, therefore, arise.

I have explained to the Committee how the rules operate now. In making the change to a connected company, there was negotiation and discussion with the people who represent those who operate the schemes. They asked for this change and believe that it is the best way forward. Therefore, it seems entirely inappropriate to disturb that scheme now by accepting the amendments.

Clearly, discussion between the Revenue and the trustees and administrators of SIPs is a constant dialogue. I have every confidence that that collection of organisations is perfectly capable of ensuring that the rules are applied and the limits adhered to in the most efficient, simplest and best way for all concerned. I ask the hon. Member for Arundel and South Downs to withdraw the amendment.

Howard Flight (Conservative, Arundel and South Downs)

The ability to participate in two different SIPs in one year is welcome, but throws up the possibility that considerable legal costs will be incurred for trustees to maintain records, even though that might not necessarily result in their always having accurate records. I hope that that issue can be thrashed out with the Revenue before the Bill becomes law.

If trustees, in the event, do not have perfect records because they have not received the necessary information from the company or from participants, that ought not to be a breach of the plan conditions. In response to the good point raised by my hon. Friend the Member for Billericay, the Paymaster General said that it was up to trusts to decide how to go about keeping their records. Amendment No. 13 is a probing amendment designed to put forward an approach that would provide appropriate record keeping. I think that it is the only approach that would not rely on a whole circle of information and much compliance administration—which would deliver nothing better than that which employers will eventually feed back anyway. It would be helpful if the Paymaster General could confirm that it will be a satisfactory approach for trustees to compile records for participants including their national insurance industry number, which they have to compile anyway, and which affords checking.

Dawn Primarolo (Labour, Bristol South)

I thought that I made it absolutely clear to the Committee that when we were approached over the change to connected companies, the industry itself accepted the arrangements and operation that we have put in place, and requested no changes. Therefore, however persuasive the hon. Gentleman

might be, I am not about to disturb or change that agreement. If he is seeking a confirmation from me, I am afraid that I am not going to give it. The measure is the result of negotiation and careful planning, and, notwithstanding some of the points that he has made, the industry has accepted that this is the correct way to proceed.

Howard Flight (Conservative, Arundel and South Downs)

Unfortunately, the Paymaster General's comments contradict what she said in the first part of her response. I take the point that there is an effective trade body that represents businesses in this field, whose primary job is to negotiate the arrangements that it wants. However, our points, one of which, as she is aware, was raised by the Law Society and one by a different part of the industry, are practical ones. It is entirely reasonable to want to have arrangements that, without merely going through the motions or being unsatisfactory, are as simple as possible.

Dawn Primarolo (Labour, Bristol South)

I make two simple and very clear points: first, the information has already been collected; secondly, we have been assured by the very industry to which the hon. Gentleman now refers that there is no extra work or cost—that is why the changes have been proposed. Therefore, there is no reason why I should doubt the industry's word as given to the Inland Revenue in the discussions, or why I should relax the arrangements that are clearly necessary to deal with SIPs.

Howard Flight (Conservative, Arundel and South Downs)

The Paymaster General ought to think behind the representations that she receives about potential problems. The representatives of the industry with whom the Revenue has been in negotiation have themselves created the problem with dividend shares by not thinking things through fully. Therefore, just as a matter of principle, it is not wise always to rely on discussions between a particular body of people and the Revenue and conclude that there is not a problem and that, therefore, this is how things will work.

The amendments are designed to expose what could be a problem. That is why the Law Society and lawyers have focused on them. This is not a huge issue, but a better principle would be to permit, if nothing else, the simplest and most reliable approach to deal with the basic needs that are involved in such a case.

I wish to return to one technical point, which was raised by the Law Society and which is behind amendment No. 103. New paragraph 71A appears to relate to new paragraph 18A, inserted by paragraph 2 of the schedule, but new paragraph 71A ought to refer to the period to which it applies.

Dawn Primarolo (Labour, Bristol South)

I am grateful to the hon. Gentleman for passing on the Law Society's observation on whether the sections are correctly cross-referenced. An answer does not immediately spring to mind, which is hardly surprising, but I shall double-check and come back to him. I believe that the Law Society has misunderstood the interaction of the paragraphs, but it would not be difficult to do that, because this is a complex area.

On the points that the hon. Gentleman and I have been discussing, certain records must be maintained in order to ensure adherence to the rules of SIPs. Clearly, requirements should be kept to a minimum and should

ensure the smooth operation of the plan. Discussions with the industry indicate that the present balance has been struck correctly.

As the hon. Gentleman rightly knows, there are continuing discussions about how the arrangements may be improved. However, for the purposes of the amendments, I do not propose to change the arrangements for connected companies, because I have been assured that they work correctly.

Michael Jack (Conservative, Fylde)

I am listening carefully to the Paymaster General's arguments. I understand her concern about changing an agreement, but my hon. Friend the Member for Arundel and South Downs has put forward some important concerns. She mentioned the groups with which the Revenue and the Treasury have had discussions about the practicalities and the operation of existing and revised arrangements. Can she give the Committee an assurance that the interested parties will meet, perhaps every six months, to review the practical operations in order to ensure that her view is correct or that if changes are necessary they may be made at some time in the future?

Dawn Primarolo (Labour, Bristol South)

I am sure that the right hon. Gentleman will remember from when he was Financial Secretary that Ministers do not need to set time limits to encourage people to make representations. If they believe that a scheme is not running smoothly, they make representations regardless of time limits. He will also appreciate that this area of taxation requires close and consistent work between the Revenue and the representative bodies, and I have no doubt that that will continue. I do not want to set a six-month limit because, if they chose to speak to us before the six months, that would be agreeable.

Howard Flight (Conservative, Arundel and South Downs)

The matter has been well aired and I shall sum up by saying that what is new is that the trustees are required to police the new anti-avoidance provisions in the schedule. Those provisions present problems of greater record keeping and the trustees are not in a position to police employers. Much depends on the honesty of the employers, and if they or the employees decide to act improperly the trustees may not be able to find that out. The industry may not have thought about this, but it is sensible to consider a practical arrangement—it need not be written into law—to provide access to accurate information. The new arrangements go slightly beyond the situation as it has been. There is an issue to sort out, whether regularly or more frequently, and the representatives of share incentive plans may not have thought about that because they are not necessarily the same people as the trustees.

On the basis that the matter will be considered further, it is not appropriate to put the amendment to a vote. We have had a full discussion and a potential problem has been recognised. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Dawn Primarolo (Labour, Bristol South)

I beg to move amendment No. 166, in

schedule 21, page 246, line 28, leave out from beginning to end of line 17 on page 247.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following:

Amendment No. 14, in

schedule 21, page 246, leave out lines 29 to 35.

Amendment No. 15, in

schedule 21, page 246, line 33, leave out from first 'the' to end of line 35 and insert

'fifth anniversary of the award of the shares on which the relevant dividend was paid'.

Dawn Primarolo (Labour, Bristol South)

We might call this a score draw between the Government and the Opposition, given the way in which the amendments would operate. Government amendment No. 166 withdraws the proposal to alter the tax-free holding period for dividend shares in a share incentive plan. That is the period during which the dividend shares must be held in a plan before they can be taken out tax free. Although the proposed change achieves the simplification that the industry asked for, it seems that those asking for the change did not establish with the administrators the full impact of the change. Feedback from the industry is that the proposed change would increase rather than decrease the amount of administration for employers, and they would prefer to remain with the existing rules. Our amendment responds to that and withdraws the new rules.

Amendments Nos. 14 and 15, which were tabled by the hon. Member for Arundel and South Downs, refer to the proposed changes to the rules of SIP dividend shares.

I said that this was a score draw, because the Government have the advantage of parliamentary draftsmen. Amendment No. 14 seeks to remove the proposed changes to the tax-free period for dividend shares. It is defective because it would fail to remove the consequential changes to paragraphs 10 to 15 in schedule 21. Amendment No. 15 would redefine the tax period, but Government amendment No. 166 also does that.

I hope that the hon. Member for Arundel and South Downs will welcome our action in tabling Government amendment No. 166, and will understand why we needed to table it. However, he can take some comfort from the fact that had he had access to parliamentary draftsmen he might have beaten us to it, and I might have been accepting his amendment. None the less, I hope that he welcomes our amendment.

Howard Flight (Conservative, Arundel and South Downs)

We raised the issue on the Floor of the House, and we are pleased that the Government's amendment will get rid of the problem. Our amendments Nos. 14 and 15 are not longer relevant.

Amendment agreed to.

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 16, in

schedule 21, page 247, line 17, leave out

'the day on which this Act is passed'

and insert '1st January 2004'.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following:

Amendment No. 18, in

schedule 21, page 249, line 27, leave out '9th April 2003' and insert '1st January 2004'.

Amendment No. 19, in

schedule 21, page 249, line 38, leave out

'the date on which this Act is passed'

and insert '1st January 2004'.

Amendment No. 21, in

schedule 21, page 250, line 32, leave out 'of the right' and insert

'of a right to acquire shares granted after 9th April 2003 where that right is exercised'.

Amendment No. 22, in

schedule 21, page 250, line 32, leave out 'of the right' and insert

'of a right to acquire shares granted on or after 1st January 2004 where that right is exercised'.

Amendment No. 194, in

schedule 21, page 250, line 38, after 'acquired', insert 'under options granted'.

Nicholas Winterton (Conservative, Macclesfield)

I call the Paymaster General. No, I call Mr. Howard Flight.

Howard Flight (Conservative, Arundel and South Downs)

It is no compliment to the Paymaster General to be mistaken for me.—[Laughter.]

Amendments Nos. 21, 22 and 194 offer a slightly different approach to the same problem, but the key amendments are Nos. 16, 18 and 19. The latter offer the choice of deferring the changes to next year to enable employers to adapt their systems, especially in view of the chaos that could arise if there were different sorts of dividend shares. That has now gone, but a year's delay would allow time for problems to be solved. Amendments Nos. 16, 18 and 19 are slightly outdated as a result of Government amendment No. 166, but I would like to press amendment No. 194.

Amendments Nos. 21, 22 and 194 offer three different approaches to the provision that the Bill introduces for PAYE on approved options exercised before the third anniversary of grant. Unlike previous changes, options in existence at the time of the change are not grandfathered under the present rules. The usual method of handling PAYE is to include a rule in the scheme permitting the employer to sell some of an employee's shares to fund the tax, but options already granted will not include that rule. Employers cannot be certain that employees would agree to its provision. Amendments Nos. 21 and 22 suggest two ways of grandfathering to protect options granted before Budget day or to protect options granted before January 2004. In essence, they address the same problem.

Amendment No. 194, which was suggested by the CBI, would be the best way in which to deal with such issues. I emphasise to the Paymaster General that it is not only lawyers who are worried about the problems. The CBI has expressed extreme upset at the proposal and, after all the Government's efforts to befriend business over the past five years, it will be yet another cause célèbre if a compromise were not achieved. Until the Budget announcement, the tax laws that applied to approved CSOP schemes meant that the exercise by

employees of options granted by employers under an approved scheme were not subject to national insurance regardless of when the CSOP options were exercised. Companies that granted such options formally communicated the applicable tax rules to employees at the time of grant, and employees had to take such tax rules into consideration when deciding whether to accept such grants formally.

As a result of the Budget announcement, the law now applies a new employee and employer NIC liability for options granted under an approved CSOP scheme if such options are exercised prior to three years from the grant. Those new rules apply retrospectively, in that we are not talking about grants made since 9 April last, but those made before then. Employers can seek the agreement of employees to accept employers' NIC liability in respect of new option grants, but that is not practicable for existing CSOP grants because it is unlikely that employers would be willing to accept such liability.

The new employers' withholding obligations may be impossible to implement in the case of existing CSOPs, as they are unlikely to permit collection of tax and NICs while the plan remains approved. The employer's right of deduction would therefore be limited to net of tax paid due in the same month as the option is exercised. The deduction of tax and NICs in subsequent months without specific written authorisation by employees would involve breaches by employers of the wage reduction provisions under part 2 of the 1996 Act.

It is worth my referring to one or two specific points that have been highlighted by the CBI. Many multinational companies have implemented approved option schemes that permit the exercise of options within three years after the date of grant. There are many business reasons surrounding the decision not to impose a vesting restriction until the third anniversary of the date of grant. For example, companies that do not impose a three-year exercise restriction may do so to maintain some consistency between the terms and conditions associated with the stocks granted to UK-based employees and stock options offered to employees in other countries.

The further imposition of a three-year fifth vesting restriction merely to ensure that employees take advantage of the personal tax benefits of CSOPs would impose a tax planning decision on employees and would not allow them to weigh share price volatility risk against the benefit considerations. The NIC liability, in particular, was first imposed on the exercise of unapproved stock options in April 1999. It was imposed only on grants made prospectively after the change in legislation. It was not imposed on retrospective gains.

I come now to deduction problems. An employer's right to deduct income tax and NICs pursuant to the regulations is limited to net of tax pay due to employers during the same month in which an option is exercised and to the arrangements as they stand. The employer, through no fault of his own, could leave companies with quite substantial NIC and tax bills as a result of a retrospective change to arrangements. The NIC charge introduced by the

Budget is retrospective, and as a minimum the application of NICs and withholding procedures should not apply retrospectively. The current wording should therefore be amended to apply only to grants made after 9 April 2003, which is what amendment No. 194 would achieve.

We are aware that the reasons for the changes were to block what the Government perceived as avoidance. It is overkill if that creates unjust liabilities for employers in an environment in which many companies are not likely to be in a strong cash flow position if such retrospective liabilities may arise.

David Laws (Liberal Democrat, Yeovil)

We, too, are happy with most elements of schedule 21. We welcome the fact that the Government, in introducing amendment No. 166 and others, have clearly been willing to listen to the views of those people who will be affected by the proposals in the schedule. We hope that the Government will show a similar willingness to listen to tax practitioners and business in relation to the amendments that we are debating, and pay heed to their views. I notice that the Paymaster General already looks enthusiastic about that prospect.

Our concerns relate to amendment No. 194, which we agree is the most important of the amendments being debated. Our concerns are those set out very clearly by a number of tax practitioners: the Chartered Institute of Taxation, the Institute of Chartered Accountants, and the CBI. The concerns relate to the retrospective elements of schedule 21, and have been set out clearly by the Chartered Institute of Taxation in the briefing document that it has helpfully prepared on the Bill. It found less than welcome a particular aspect of the change to PAYE and the NIC treatment of company share option plans exercised within three years of grant. The institute has said that the change should apply to options granted on or after 9 April 2003 rather than options exercised. It says that applying the change to options exercised after 9 April 2003 has two key implications for companies that are retrospective in nature.

Those two key implications have already been set out thoroughly by the hon. Member for Arundel and South Downs, so I shall not go into them in great detail. First, the new rule will mean that employers will often have to pay the PAYE and NIC to the Inland Revenue without, in some cases, having any practical method of recovering it from employees. We hope that the Paymaster General will respond to the practical issues that are raised by those concerns, which have also been touched on by the CBI and the Institute of Chartered Accountants.

The second issue is the NIC liability that will fall to the employer under the new elements of schedule 21. That is described by the Chartered Institute of Taxation as a new liability that it could not have previously provided for. When the Paymaster General introduced schedule 21, she said that the Government were seeking to close a loophole by bringing in the measure related to the NIC charge. We had a debate the other day, which you will be pleased to know I shall not revisit, Sir Nicholas, about the difference

between tax loopholes, the ordinary application of the tax system as it is at any point in time and measures that the Government bring in that might be described as tax loopholes, but which are there to serve a particular purpose. Without going back over the argument, I merely note that the CBI points out in its submission to the Committee that the change operates as a retrospective application of a new NICs liability. That is to say, as a new tax as opposed to an avoidance reduction measure. The thrust of the explanatory notes in this area is different from the clearly anti-avoidance thrust of the explanatory notes that relate to some of the VAT measures.

We do not question the fact that the Government are bringing in the change and that, in future, NICSs will be applied in such a way. However, we question whether it is fair in the circumstances to introduce a change retrospectively. We appreciate, and can anticipate, some of the Paymaster General's arguments on retrospection. We can all think of many tax changes introduced in Budgets that have had, to some extent, a retrospective impact. However, I hope that the Paymaster General will accept that, when possible, Governments should avoid retrospective tax elements in Budgets and Finance Bills because they are unfair to taxpayers, who, before the measures were introduced, were simply trying to order their affairs in perfectly legitimate way under the tax system at that time.

In responding to those concerns, will the Paymaster General address a number of other specific issues? My understanding from this year's Red Book is that the revenue effect of the schedule, and presumably this measure, will be to raise some £20 million in the 2004–05 financial year, rising to £40 million in the 2005–06 financial year. Can the Paymaster General tell us what the effect would be on those revenues if amendment No. 194 were agreed? In other words, how much revenue would be lost if the retrospective element were not included?

It would be helpful to know what the Government's principles are in relation to retrospection. I suspect that we will have an argument over whether the measure constitutes retrospective taxation or the legitimate closing of a loophole. Does the Paymaster General accept that, as a working rule, the Treasury should avoid retrospective taxation? How does she justify the change in question in relation to other retrospective changes that might be made? Has she considered the matter, and have her officials given advice on other ways of introducing the schedule so that it has a less draconian element of retrospection, while still respecting the Government's desire that, after the date in the schedule on which the measure becomes effective, there should be an NICS charge—probably perfectly legitimately—in respect of new transactions?

John Baron (Conservative, Billericay)

I share the welcome given by my hon. Friend the Member for Arundel and South Downs and the hon. Member for Yeovil (Mr. Laws) to many aspects of the schedule. The change that means that the Inland Revenue does not have to be consulted

before plans can be altered simplifies administration plans and, therefore, costs.

However, I share the concerns of those who have already spoken. There are retrospective elements to the schedule, relating particularly to the PAYE and national insurance contribution treatment of options under the company share option plans, which could make bad law. I ask the Paymaster General to address one or two of those elements.

The example on which we have focused so far has been the change to PAYE and NICS treatment of options exercised within three years of grant. That is a case in point. Applying the change to options exercised on or after 9 April has two retrospective implications for companies. The first, which has been adequately dealt with, appears to make the employer responsible for withholding PAYE and NICSs from the employee. The new rule will mean that employers often will have to pay PAYE and NICSs without having any practical method of recovering it from the employee. I ask the Paymaster General to address that point.

However, I wish to focus on the second implication of the proposed changes, which is that the employer will now have his own NICS liability on the exercise of options. It has been mentioned that that is a potential liability, but it is more than that—it is a real liability. I suggest that it will typically amount to 12.8 per cent. of an employee's option gain.

As the new rules apply to options exercised on or after 9 April 2003, the employer will have a new liability for which it could not have previously provided. The key point is that when NICS rules were amended to allow employers to transfer NICSs liability on unapproved share options to employees, many companies attempted to include similar provisions in their approved share option plans in case NICSs became due on exercise, as is now the case. However, the Inland Revenue refused to approve share option plans that contained such a provision.

For that reason, I ask the Paymaster General to consider this important point. It could be argued that these paragraphs in schedule 21 are nothing other than yet another stealth tax imposed by the Government. That that is how it is being viewed in many sections of industry. A small change is being introduced in the small print, so to speak, via the schedule, but the effect on the bottom line will be an additional cost for employers. In addition, the fact that the change is retrospective makes it particularly damaging. I ask the Paymaster General to address the specific point about additional costs and the Committee to support the amendment.

Dawn Primarolo (Labour, Bristol South)

I need to put two important points to members of the Committee so that they can understand that this is neither a stealth tax—actually, it is an anti-avoidance measure—nor retrospective. Company share option plans were introduced by the Conservative Government to encourage giving share options to employees for three-year periods in order to connect them to the development and improvement of a company, from which they would benefit. I shall come in due course to amendment No. 194, which

seeks to overturn the rules that deliver those objectives.

In the ever-inventive tax planning methods that appear continually to develop, ways were found around the three-year rule. To answer the hon. Member for Yeovil, the schedule is not a stealth tax. It seeks to restore the rules to their originally intended form. The people who exercised their options before three years should have paid tax on them. The intention has always been that the tax charge should fall after three years

George Osborne (Conservative, Tatton)

I am relatively new to the House and did not follow the matter closely at the time. When the Conservative Government brought in the original measures, did the Labour Opposition support them?

Dawn Primarolo (Labour, Bristol South)

I must admit that I cannot remember, but the point is not particularly relevant—the hon. Gentleman can inspect Hansard and answer the question for himself. The rules by which the schemes should operate have not been complied with, and the changes will rectify that. The integrity of the tax system, which has developed over many years, is based on the Government of the day taking responsibility for the system that they inherit.

John Baron (Conservative, Billericay)

Will the Paymaster General give way?

Dawn Primarolo (Labour, Bristol South)

May I turn to the amendments? The hon. Gentleman can intervene when I address the appropriate amendment, when I will willingly give way.

My point, which I have tried to make clear from the beginning, is that a three-year limit has supposedly been operating since the scheme was introduced. Some have sought to get round the rules, which is what the Government seek to prevent.

Stephen O'Brien (Conservative, Eddisbury)

The Paymaster General made that point clear when she framed her introductory remarks to the schedule on anti-avoidance. Some of those outside the Committee who are following our proceedings—there are more of them than I had imagined—have wondered whether the Government truly recognise that there are three categories: tax planning, tax avoidance and tax evasion. All of us abhor and would condemn tax evasion. Tax planning is perfectly legitimate and is expected. Tax avoidance is not illegal, and, at its very worst, it involves finding ways in which to exploit loopholes. Can the Paymaster General confirm that she does not regard tax avoidance as being illegal but as a continuing debate between the taxpayer and the Government?

Dawn Primarolo (Labour, Bristol South)

I can absolutely confirm to the hon. Gentleman that tax evasion is illegal while tax avoidance is not—hence the need for anti-avoidance legislation. I am more than happy to debate the matter, but this is not the appropriate time to discuss the differences between those three categories. I will therefore return to the amendments.

As the hon. Member for Eddisbury (Mr. O'Brien) said, it is surprising how closely those outside this place follow every dot and comma of discussion on the Finance Bill. I want, therefore, to put on the record an

omission that I made in responding to the hon. Member for Buckingham (Mr. Bercow) in the Committee of the whole House on 14 May, on the early exercise of company share option plans. In case there is any doubt, I should like to make it clear that employees exercising their company share options within three years of grant can no longer do so tax-free and national insurance-free, which is the subject that we are discussing. Employers who have been using company share option plans in the intended way—they should be used to encourage employees to have a long-term stake in the company for which they work—will not be affected by the changes.

We can put amendment No. 16 to one side because it harks back to Government amendment No. 166.

Nicholas Winterton (Conservative, Macclesfield)

Order. May I help the Committee? The Paymaster General should perhaps direct her main remarks to amendment No. 194, which is the amendment in which the Opposition parties are most interested and on which they would most like to vote.

Dawn Primarolo (Labour, Bristol South)

Indeed, Sir Nicholas. That is why I said for the record that I would not refer to amendment No. 16, which has already been dealt with.

Amendments Nos. 18, 21 and 194 seek to limit and delay the introduction of PAYE and national insurance on company share option plans. I have made it clear that it is right for employees to pay their fair share of tax and national insurance on all forms of employment-related remuneration. Only to bring options granted after 9 April 2003 within PAYE and national insurance rules would mean that companies and their employees who have sought to avoid paying their fair share of tax and national insurance would continue to do so. It would effectively reward those employers and employees who have exploited loopholes in the legislation by awarding options that are exercised early to avoid paying national insurance.

As the hon. Member for Yeovil said, the scale of the avoidance and the use of such share awards is substantial. It costs the Government, and therefore the taxpayer, more than £35 million a year. It cannot be right to allow those who apply the rules and pay their fair share to be put at a disadvantage because of those who are not following the rules in order to gain financial advantage. The Government do not want to send out a message to the majority of employees and employers who are paying their fair share of tax that we will allow others disdainfully to avoid their tax liability.

David Laws (Liberal Democrat, Yeovil)

In terms of the Government's broad intentions on tax policy, can the Paymaster General make it clear that if a particular individual or entity has been involved in tax avoidance, the Government will always seek to claim back the tax retrospectively, if they are in a position to do so? Is that the broad principle?

Dawn Primarolo (Labour, Bristol South)

The hon. Gentleman has not been listening. There is no retrospection; the gain arises when the option is exercised. Employees who exercise

their options on or after 9 April 2003 will do so in the full knowledge of the tax consequences, which we seek to restore. The principle of retrospection goes much wider than that, and I do not intend to go down that path.

Howard Flight (Conservative, Arundel and South Downs)

May I make the point that there are perfectly valid situations in which approved options may have to be exercised early—the takeover of a company is an obvious example? The broad principles of the scheme that the last Conservative Administration introduced required, for obvious reasons, a minimum of three years because it was all about working hard to build up a company. However, not everything was necessarily taken account of at that time. Is the Paymaster General saying, as I understand her to be, that where there is what I would call a bona fides exercise prior to three years, that is regarded as avoidance?

Dawn Primarolo (Labour, Bristol South)

I referred in my opening remarks to employees who have left their employment for reasons other than injury, disability, redundancy or retirement. I call those the ''good leaver'' points. Therefore, the new relief applies only to employees who have to exercise their option within three years of the grant because they have lost their job through injury, disability, redundancy or retirement.

Howard Flight (Conservative, Arundel and South Downs)

An equally common situation might be an enforced takeover of a company when, we hope, an employee keeps his or her job. My understanding is that that is regarded as avoidance, but I think as a matter of principle that it would fall most unfairly on such an individual if that situation was not one of the exclusions.

Dawn Primarolo (Labour, Bristol South)

Indeed. We are getting into some complicated matters here, on the inter-relationship between pieces of legislation. Where an employee has to exercise an option because of a company takeover, which was the point that the hon. Gentleman made, he or she may be able to take advantage of the option roll-over provision included in most plans. The option roll-over provision allows the existing option to be held in the new company and exercised after three years. It is quite unusual for no option roll-over provisions to be available on a company takeover, but where that is the case, an employee may be able to take advantage of the new relief if the takeover means that the employees are made redundant, then re-employed by the new company. Employees who may be allowed by the company to exercise their option early because they have been dismissed will have to pay tax and national insurance. My understanding is that such provisions tend to be in the plans themselves, as agreements between employer and employee.

Rob Marris (Labour, Wolverhampton South West)

Does the Paymaster General agree that that point was a complete red herring? If a company is taken over and the employee loses a job, he or she is protected under the provision that my hon. Friend has already outlined. If the employees continue to work for their former company, albeit with a different majority shareholder, they are still working for the company. If they end up working for the new company, they are protected by the Transfer of Undertakings (Protection of Employment) Regulations 1981.

Dawn Primarolo (Labour, Bristol South)

I am grateful for my hon. Friend's comments. If Committee members will forgive me, I prefer the way in which I have explained the matter for the record. However, my hon. Friend reinforces many of my points, especially with regard to the option to roll over the provision.

Howard Flight (Conservative, Arundel and South Downs)

My recollection is that the protection mentioned does not apply. I have also observed situations in which the acquirers of a company wanted full control, and did not want to roll over options. My underlying point is that it seems potentially unjust in itself for any exercise, quite aside from leaving within three years, to be considered automatically to be some form of tax avoidance.

Dawn Primarolo (Labour, Bristol South)

There is considerable improvement in the rules in the changes that we are making. I am not sure where the hon. Gentleman is coming from. If people exercise their options before the end of the three years, they do so in the sure knowledge of the tax and national insurance situation. If a period of three years cannot be fulfilled, as in the examples that I gave, the case is clear. If the hon. Gentleman says that he would like the provisions relating to takeovers of companies to be clearer, I have to say that the rules are those that we had before, and that is not the subject of any of the amendments. If he is looking for ways to improve the legislation, I am happy to take a representation from him in writing, as I would from any taxpayer who sought to make such changes, but that is not the subject of the amendments that we are discussing. I have tried to be as helpful as I can about the points that he raised.

Stephen O'Brien (Conservative, Eddisbury)

Will the Paymaster General give way?

Nicholas Winterton (Conservative, Macclesfield)

Order. The hon. Gentleman may intervene as long as it is to do with an amendment and not the wider issue.

Stephen O'Brien (Conservative, Eddisbury)

My point is precisely about the amendment and picks up on the points that both the hon. Member for Wolverhampton, South-West (Rob Marris) and my hon. Friend the Member for Arundel and South Downs made. Both the amendment and the discussion that we have just had sought to address the point and it may be worth looking the precise application of the TUPE provisions in greater detail because I think they are not quite as cut and dried as the hon. Member for Wolverhampton, South-West said.

There is a great phenomenon now of takeovers by foreign companies, and the characterisation of the schemes that apply may not necessarily be as uniform as the Paymaster General, whom I thought was trying to be helpful in her reply, was saying. That may be worth further investigation, without our pursuing the point directly within the context of the amendment.

Dawn Primarolo (Labour, Bristol South)

I will not pursue the point directly. I take note of the point that the hon. Gentleman made about takeovers by foreign companies. I shall reflect on it and respond to him and other Committee members in writing. I have said why we do not accept that the charge is retrospective. For that reason, simply out of fairness, we do not accept that we should delay implementation.

John Baron (Conservative, Billericay)

Will the Paymaster General give way?

Dawn Primarolo (Labour, Bristol South)

I want to return to the amendments, and it is quite difficult to refer to them in a logical order. I shall give way at this point, but if the hon. Gentleman would then allow me to make a little more progress, I would be grateful.

John Baron (Conservative, Billericay)

I thank the Paymaster General for her generosity. Would she re-examine the point about retrospection? Because we are discussing options that are exercised, as opposed to granted, on or after 9 April, there is surely an element of retrospection. Many of those options existed before 9 April, perhaps for many years, so I return to my point about this being an additional unforeseen cost for employers—I used the terminology stealth tax—because the employer will now have to face a new liability that it could not have previously provided for. That is the central point when we talk about retrospection. I ask the Paymaster General to address that point specifically.

Dawn Primarolo (Labour, Bristol South)

I am doing my best to get to the point at which it would be logical to address that, but I am struggling with this concept of retrospection. When there were rules in place that said how the schemes should operate, there were those who did not operate those rules, even though they should have. They are now being required to operate by the rules that existed all the time; how that amounts to retrospection I do not know, but I will come to that point in more detail in a moment.

The amendments would delay several beneficial changes, and I do not understand why the hon. Gentleman would want that. Let us take amendment No. 19, for example. A rule under company share option plan law prevents a person from participating in a company share option plan if he or she has a material interest of more than 10 per cent. of the ordinary share capital in the company offering the plan. For SAYE and SIP plans, the rule applies only to a person who has a material interest of more than 25 per cent. in the ordinary share capital of the company.

There is no good reason for the amendments. As I have said, I have difficulty understanding why the hon. Gentleman would wish to block or delay the change, when it is clearly beneficial.

Howard Flight (Conservative, Arundel and South Downs)

The issue to which I briefly referred on those amendments was systems. It has certainly been put to us that several smaller and medium-sized businesses may have difficulty getting their systems in place to cope with a degree of complexity. I completely agree in principle that no one wants to delay improvements, but my point was really about systems, and, more widely, about sorting out the major issue of amendment No. 194.

Dawn Primarolo (Labour, Bristol South)

I dealt with that point when I talked about the consultation. I hope that the hon. Gentleman accepts that amendment No. 19 is unfortunate. It would delay the implementation date for a number of beneficial changes that have been roundly asked for.

On retrospection and the points made by the hon. Member for Billericay, the charge arises if employees exercise their options after 9 April 2003 and within three years of grant. Employees who exercise in those circumstances will do so in the full knowledge that they will pay tax and national insurance, on the basis of the law as it applies when exercised. Employees knew when they were granted company share options that they would need to hold them for three years to qualify for tax relief. As I have said, the change will not prevent employees from exercising before three years have passed if they have good reason. I have referred to those as good leavers—retirement being one example.

On whether employers and employees knew that, it is for employers and employees to make arrangements for the recovery of any PAYE or NICs, if that is what they want. The Inland Revenue has approved some company share option rules that have withholding provisions to allow the recovery of PAYE and NICs.

David Laws (Liberal Democrat, Yeovil)

Some?

Dawn Primarolo (Labour, Bristol South)

Yes, some were applying the rules correctly; that is precisely the point. Where that is not the case, companies can make such arrangements with their employees.

I doubt whether there would be costs of £35 million if amendment No. 194 were made. He also raised the question of unfairly hitting international companies that operate worldwide. which is a CBI point. The change to the company share option rules levels the playing field. It is the company's choice whether to give employees a right to exercise their options within three years of grant. It is only right, therefore, that companies that use the company share option plan as intended—to encourage their employees to take a long stake in the company—can expect us to ensure that PAYE and national insurance are paid when company share option plans are not used in that way.

What will the hon. Gentleman say to companies and employees who have correctly applied the rules and paid their tax and national insurance at the correct time? Why should they apply the rules fairly and allow others not to do so? What would we say to those employees and employers?

The hon. Member for Yeovil referred to the question to which he keeps returning. He will have to do a lot more work. It takes a lot of work to define the fine line between avoidance, evasion and tax planning, and between understanding what is retrospection and what is not. No British Government have operated active retrospection as a matter of policy. The Bill does not provide for it, and the Government do not do it.

The opportunity to avoid PAYE and NICs is being marketed by the industry. It is possible to find it on the internet. It is publicised in the specialist press and on the websites of a number of practitioners. The schemes being marketed are drafted to allow early exercise of company share option plans when that was clearly not the policy intent.

The company share option plan return submitted to the Inland Revenue also provides tangible evidence that that is increasingly the case, and that company share option plans are being exercised within three years of grant. In 1997–98, approximately 40 per cent. of them were in that category. By 2000–01, the figure had risen to 60 per cent. In a previous debate, the hon. Member for Arundel and South Downs asked whether any Government have responsibility when putting reliefs into the tax system. Those reliefs cost us in excess of £1 billion each year. That is a good reason to encourage employers to benefit from the growth of their companies.

It is the responsibility of the Government to ensure that rules operate correctly. We had a scheme where the rules were not operating correctly, and the changes in the schedule ensure that they will.

Howard Flight (Conservative, Arundel and South Downs)

Can the Paymaster General be more specific? Is she referring to 60 per cent. of schemes, or scheme values? Is she saying that 60 per cent. of all the outstanding approved option schemes are exercising within three years? I do not believe that that is correct.

Dawn Primarolo (Labour, Bristol South)

The information that I have been given by the Inland Revenue is that, in 1997–98, approximately 40 per cent. of company share option plans options fell into the category of trying to exercise within three years that I have described. In 2000–01 the figure had risen to 60 per cent. That means that in 2000–01 about 16,500 company share options were exercised within the three years of grant without national insurance and PAYE being paid. That cannot be allowed to continue.

George Osborne (Conservative, Tatton)

Will the Minister give way?

Dawn Primarolo (Labour, Bristol South)

I have concluded my remarks.

Nicholas Winterton (Conservative, Macclesfield)

Order. I am conscious of pressure of time. I seek to represent the best interests of the Committee as a whole. I am sure that hon. Members are aware that a knife falls at 5 pm and that critical matters should be debated between now and then. I hope that the Committee will not get bogged down. We have had a reasonable debate. I must therefore ask the hon. Member for Arundel and South Downs to wind up his speech.

Howard Flight (Conservative, Arundel and South Downs)

Thank you, Sir Nicholas. I respect your comments. Notwithstanding what the Paymaster General has said, it is clear that the arrangements will impose new NICs liabilities on employers and a situation in which they may not be able to recover the liabilities from employees under the provisions. It was the general practice of the Revenue to refuse to allow companies to put into schemes arrangements to protect themselves against NICs liabilities on approved schemes. In that context, we take the view that the measure is retrospective. We shall later wish to put amendment No. 194 to the vote, but for now I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 17, in

schedule 21, page 247, line 22, at end insert—

'( ) Omit paragraph 5 (unnecessary and non-incidental features)'.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss amendment No. 20, in

schedule 21, page 249, line 28, at end insert—

'( )Omit paragraph 5 (unnecessary and non-incidental features).'.

Howard Flight (Conservative, Arundel and South Downs)

The Bill introduces measures that we understand are intended to streamline the approval of changes to approved schemes by requiring Inland Revenue vetting of changes only to key features, such as those in schedule 3 of the Income Tax (Earnings and Pensions) Act 2003. It is my understanding that paragraph 5 of that schedule states that an approved scheme cannot include any feature that is not essential or not reasonably incidental. As interpreted by the Inland Revenue, that surely means that only the statutory key features will be included in the scheme rules. I cannot quite see the meaning of streamlining changes. Surely it means that streamlining changes are ineffectual and meaningless unless paragraph 5 is deleted.

Dawn Primarolo (Labour, Bristol South)

We have covered much ground already. The schedule contains several proposals that simplify and modernise the operation of save-as-you-earn schemes or company share option plans. On the subject of our previous discussion, we have also acted to prevent employers and employees from exploiting loopholes in the law to avoid paying their fair share of tax and national insurance. Unfortunately, and I am sure that that was not the intention, the amendment could undo much of the good work that we have undertaken in preventing employers and employees from avoiding their tax and national insurance contributions. The provisions that the amendments seek to remove stop employers including in their save-as-you-earn schemes and company share option plans features that have nothing to do with the award of share options to their employees.

To relax that narrow requirement might mean that employers and employees could put in place arrangements through, for example, approved tax advantage schemes, enabling them to provide for employees to receive cash payments as an alternative to shares. That is not what the legislation intended. If the hon. Gentleman wishes to push the amendment to a division, I will ask my hon. Friends to oppose it.

The hon. Member for Arundel and South Downs raised the matter of simplification. A balance must be maintained between simplification and modernisation, but I agree that we should seek it wherever we can. However, we must ensure that that does not weaken the rules to the point at which they open up opportunities for employers and employees to avoid their fair share of tax. I am afraid that although the amendment is motivated by the best of intentions on simplification, it would go further than the hon. Gentleman intended and open up such avoidance possibilities. I therefore ask the Committee to oppose it.

Howard Flight (Conservative, Arundel and South Downs)

This is not a huge issue, so I shall waste no time debating it further. In essence, our perception is that schedule 3 of the Income Tax (Earnings and Pensions) Act 2003 covers the kinds of restrictions that

we accept are needed. However, that is a legal point that is not fundamental to the objectives of the schedule. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment proposed: No. 194, in

schedule 21, page 250, line 38, after 'acquired', insert 'under options granted'.—[Mr. Flight.]

Question put, That the amendment be made:—

The Committee divided: Ayes 5, Noes 13.

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 23, in

schedule 21, page 250, line 39, at end insert—

'Part 4

Updating of scheme rules to reflect this Schedule

26 Where before 1st April 2004 the scheme organiser of an approved SIP, or of an approved SAYE scheme, or of an approved CSOP scheme, applies to the Inland Revenue to amend the rules of that scheme to reflect the provisions of this Schedule then, at the election of the scheme organiser, any such amendment may be deemed to have been included in the original rules of the scheme in question and the terms of any award or grant made under it.'.

Howard Flight (Conservative, Arundel and South Downs)

Schedule 21 makes significant changes to the running of approved schemes, and when past Conservative Governments made equivalent technical revisions there was always a window for employees to adopt the new rules—for example, the introduction of roll-over rules that permitted SAYE options to be exercised after a merger.

Schedule 21 has no such rule, which could create a problem: existing rules and awards may have terms that are incompatible with the new imposed rules. That would have been the case with the dividend shares. The CSOP options are now subject to PAYE: without rules to permit collection of PAYE, the Revenue would refuse to accept that on the grounds that they were unnecessary.

If employers try to implement these new rules for existing awards, the judgment of the Eurocopy case suggests that they are open to the charge from the employee or the Revenue that the alteration has the effect of scrapping the existing award and creating a new grant. The amendment would do the sensible thing: it would permit employers to adopt the new rules as they see fit and to simplify appliance issues if they so wish.

Dawn Primarolo (Labour, Bristol South)

I shall ask my hon. Friends to oppose the hon. Gentleman's amendment because the powers that it gives employers go much further than he intends.

Amendment No. 23 would give employers the power to amend their share scheme rules to give effect to changes in schedule 21 and to deem that the changes made had always had effect. The start dates of the proposals included in schedule 21 would also be delayed: we have already had a debate about that, and it is another reason for opposing the amendment.

The amendment would mean that the changes proposed in the Finance Bill will be deemed always to have been included in the approved share option scheme rules and the terms of the options and shares awarded under those rules. However, it goes further: it gives the employer the right to vary those schemes. That would cause difficulty with options and shares that have already been awarded. Under the SIP, we are allowing people to participate in successive SIPs if they move between connected companies. Does the amendment mean that it would be backdated through time?

Most importantly, the deeming power provision is very general and can affect the terms of the options granted. That could lead to the old options being cancelled and new options being issued with all that that would mean for the tax-free holding periods, so it could leave the employee worse off.

Howard Flight (Conservative, Arundel and South Downs)

We do not want to propose anything that could leave the employee worse off. However, the

general intent of the amendment—that schemes can be updated to meet the new rules—is appropriate, so we might return to this matter, but, at present, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 21, as amended, agreed to.

Nicholas Winterton (Conservative, Macclesfield)

May I congratulate the Committee on the expeditious way in which it has dealt with the Bill so far? It is clear that there will be some very serious debates on the schedule that we are about to come to.

Dawn Primarolo (Labour, Bristol South)

On a point of order, Sir Nicholas. I understand that you will not be with us in Committee this afternoon. May I take this opportunity, on behalf of all Committee members, to wish you a pleasant short break and to thank you for the excellent way in which you have stewarded the Committee to this point? We have greatly benefited from your knowledge and expertise.

Howard Flight (Conservative, Arundel and South Downs)

Further to that point of order, Sir Nicholas. I second what has been said, and I wish you a refreshing break so that you can deal with the challenges that will have to be faced when we return.

It being twenty-five minutes past Eleven o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Two o'clock.

Standing Committee B

(Except Clauses 1, 4, 5, 9, 14, 22, 42, 56, 57, 124, 130 to 135, 138, 139, 148 and 184 and Schedules 5, 6, 19 and 25, and any new Clauses and Schedules tabled by Friday 9th May 2003 relating to excise duty on spirits or RÿD tax credits for oil exploration.) - Schedule 22 - Employee securities and options

John McWilliam (Labour, Blaydon)

Order. It is rather warm, so those hon. Members who have not already removed their jackets may do so. Ladies, as always, need not ask.

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 107, in

schedule 22, page 252, leave out lines 42 to 44.

John McWilliam (Labour, Blaydon)

With this it will be convenient to discuss the following:

Amendment No. 108, in

schedule 22, page 253, line 35, leave out 'or pretended purpose'.

Amendment No. 105, in

schedule 22, page 253, line 47, at end insert—

'(ca) a partnership interest in a venture capital investment partnership as defined in paragraph 2 of Schedule 7AD of the Taxation of Chargeable Gains Act 1992 or in a partnership which is itself a partner in such a partnership'.

Amendment No. 24, in

schedule 22, page 254, leave out lines 5 to 8.

Amendment No. 106, in

schedule 22, page 254, line 13, after 'them', insert

'or an interest in a partnership which holds securities,'.

Howard Flight (Conservative, Arundel and South Downs)

Welcome to the Chair, Mr. McWilliam.

On the Floor of the House, I broadly expressed our criticism of the provisions in schedule 22, particularly their complexity, their potential for unintended consequences and the element of overkill. I shall draw attention to some of the comments made by the Institute of Chartered Accountants in that context because they should be considered with the amendments and as a point of principle.

The institute welcomes the repeal of the dependent subsidiary charge and, up to a point, the acceptance that it is not right for the charges on conditional interests and removal of restrictions to catch the whole post-acquisition appreciation in value. However, it wants to register a strong protest against the relevant clause and schedule. It understands the Government's need to prevent avoidance, but is disappointed that the legislation, other than the provisions on approved schemes, has been fundamentally redrafted without prior consultation or notification. It is unhappy about the great complexity of the new provisions, which take up 72 pages, and suggests that the amendments were not drafted by the rewrite team because it would not

have done so in this way. Many of the amendments are incomprehensible—for example, new section 428—and the institute points out that its members will question the commitment of time and resources to the redrafting project. The result is that the case for continuing its involvement in the rewrite is undermined.

The institute believes that as the new provisions were not subject to prior consultation it is vital that the explanatory notes provide assistance, but they barely scratched the surface of the more complicated provisions. It said that warrants are treated as securities but options are excluded and there is a muddle between the two. The commencement rule for the new provisions on convertibles seems to give rise to a double charge on shares issued at less than market value. The institute believes that the reference to payments for group relief in the relevant new sections should include a reference to the analagous payment for transfer under section 179 of the Taxation of Chargeable Gains Act 1992 liability. It finds it difficult to follow the interaction between new sections 428 and 446E and questions the justification for the latter. It also questions the justification for imposing a charge every 5 April for six years by reference to the same depreciatory transaction, which it believes will happen if the transaction has a lasting effect on the value of the shares. It feels that section 446L imposes a charge on non-commercial increases of value on each 5 April when nothing else happens and the employer receives no benefit. It also feels that new section 446L(7)(b) has the effect that non-commercial increases are taxed with no set-off for non-commercial reductions. Finally, it points to the typographical error, which the Government have already acknowledged, where ''2002'' should read ''2003'' in new section 446F(2)(b).

The amendments all deal with four key areas. The first is employment-related securities. New chapters 2 to 4 of the Income Tax (Earnings and Pensions) Act 2003 appear to catch many situations where one would not normally expect the shares to be employment-related securities. For example, if an entrepreneur sets up a company, subscribes for shares and becomes a director, it seems that the shares would be caught as shares made available by the company that became his employer. If the definition is not changed, we would welcome guidance on the application of the legislation there.

Secondly, there are problems with the restricted securities territory. The definition of restricted securities is wide and appears to include provisions placed in a company's articles of association. Many companies that operate share schemes contain bad-leaver provisions in their articles, which require shares to be sold at less than market rates when an employee leaves employment in defined circumstances. It must be remembered that the usual purpose of providing employees with equity is to motivate them to perform. If an employee leaves the company, the other shareholders will not want them to continue to benefit from the company's performance.

New section 424 (b) gives a limited exception from the restricted securities chapter where an employee is required to sell his securities at less than market value

if his employment ceases due to misconduct, but a bad leaver is normally defined as a leaver who does not leave of his own choice or owing to death, redundancy or retirement. If the intention is to provide companies with the scope to contain bad leaver conditions in their articles of association, the exception in 424 (b) should be widened. It is not clear whether shares with different rights from ordinary shares also fall within these provisions. We assume that they do not, but clarification is needed.

Thirdly, there are issues surrounding the timing of elections. The proposed elections in new sections 430 and 431 in chapter 2 are welcome as they provide employees with the opportunity to disapply, but 14 days is a short time scale for an election given that employees must consider whether it would be beneficial. As it is a joint election, employer and employee have to agree. Is 14 days sufficient in principle? I shall come anon to timing for the immediate future.

Finally, new sections 430 and 431 require that elections be made ''in a form approved'' by the Revenue. I believe that such forms are not available, but chapter 2 applies to securities acquired on or after 16 April and more than 14 days have already elapsed since then. I think that the Government have dealt with that issue in one of the amendments, but it raises the whole question of the time limit.

A wider point is that we appreciate that most of schedule 22 is billed as anti-avoidance. It will make unapproved option schemes a nightmare, which will demotivate companies from using them. That, together with the problems with which we dealt this morning, implies that the Government are really anti option schemes, other than EMI—enterprise management incentive—options. The Chancellor is frequently on record as wanting the UK to learn from the United States in the world of entrepreneurial success. If we end up with a highly complex fiscal nightwear regime on options, which can be extremely important for medium-sized companies, that will take us in the other direction.

John McWilliam (Labour, Blaydon)

I was following the hon. Gentleman quite closely and I was with him totally until he came to an expression that I could not recognise. Could he please explain what fiscal nightwear is?

Howard Flight (Conservative, Arundel and South Downs)

Fiscal nightmare.

Dawn Primarolo (Labour, Bristol South)

Perhaps the hon. Gentleman did not hear the hon. Member for Eddisbury (Mr. O'Brien), who suggested that fiscal nightwear was the Committee without a jacket.

Howard Flight (Conservative, Arundel and South Downs)

You add some humour to a dry subject, Mr. McWilliam, for which I thank you.

On the first group of amendments, which includes amendments Nos. 107 and 108, the objective is to make it clear that warrants are not to be treated as securities for the purposes of chapters 2 to 4, which are the provisions dealing with restricted shares, convertible securities, securities with artificially depressed values, securities disposed of for more

than market value, and post-acquisition benefits from securities. Although warrants are not the same as options, there is good reason for distinguishing them. The point illustrates the need for clearer drafting.

I move on to amendment No. 108 and the definition of securities being expanded to include rights under contracts for differences or contracts similar to contracts for differences, which ensures that the provisions relating to shares are not avoided by other types of interest or securities providing similar benefits, but having different characteristics. The definition of contracts similar to contracts for differences appears to go too far in referring to a ''pretended purpose.'' Amendment No. 108 corrects that drafting error.

Amendments Nos. 105 and 106 go together. They relate to an important area. They ensure that venture capital partnerships are outside the scope of the Bill. We hope that the Paymaster General will make a statement saying that the terms of the joint Inland Revenue and British Venture Capital Association letter will continue to apply, or else state what practice will. The amendments are designed to exclude interests in a limited partnership from the definition of units in a collective investment scheme.

On amendment No. 24, it is inappropriate for the Treasury to have the right to rewrite fundamentally the basis of tax legislation by order, which is what the relevant provision allows.

To summarise, the important territory is venture capital. I cannot believe that the Government intend to catch it in all the complexities, nightmares and traps of the schedule.

David Laws (Liberal Democrat, Yeovil)

It is worth picking up on one of the points that the hon. Gentleman made about the comments of the Institute of Chartered Accountants on the schedule. It is regrettable that, after all the efforts that have been put in in respect of the tax rewrite project, the institute should feel it necessary to be so critical of the schedule and even to raise the possibility that its complexity might put in doubt the institute's commitment to the project. I simply look for a commitment from the Paymaster General, not only to consider the way the project is going hand in hand with the new measures under the Bill, but to tell us whether she shares some of the concerns that have been expressed.

John Baron (Conservative, Billericay)

I, too, want to express some concern about the schedule in relation to the tax law rewrite project, but first, I wish to point out that parts of the schedule are welcome, particularly the changes to the amount of tax payable when shares are converted or are no longer subject to a risk of forfeiture and so on.

However, I share with the hon. Member for Yeovil (Mr. Laws) and my hon. Friend the Member for Arundel and South Downs (Mr. Flight) the concern that schedule 22 was introduced with hardly any warning and with inadequate explanation in the Budget day press release. More than 70 pages of

legislation will completely rewrite rules that have been developed over some 10 to 15 years, and it is a shame that extensive tranches of the newly rewritten legislation that had been drafted in the tax law rewrite style, which we fully support, in the Income Tax (Earnings and Pensions) Act 2003 that came into effect on 6 April is to be replaced with this Bill's bland drafting, most of which is not in the new style, which may cause problems. Will the Paymaster General confirm what action she will take to put that right, if she can?

Amendment No. 105 is a particularly important amendment because it asks whether venture capital partnership funds are outside the scope of the Bill. If the amendment does not find some favour with the Government, I would reinforce the point made by my hon. Friend that some ministerial statement should be made to clarify whether the terms of the joint Inland Revenue-BVCA letter will continue to apply. I look forward to hearing the Paymaster General's comments.

George Osborne (Conservative, Tatton)

I have a specific interest, in that a family business, for which I do not work, is involved in a management buy-out. I believe that the schedule will have an impact on management buy-outs.

In general, before speaking to the amendments, I wish to say that I share the concern expressed by all Opposition Members—Conservatives and Liberal Democrats—at the sheer complexity of the provisions. The Paymaster General should take serious note of the concerns that have been expressed by organisations such as the Institute of Chartered Accountants and the Law Society. Frankly, when they say that something is totally unintelligible and very hard to follow, one really must sit up and pay attention. They deal with documents that are unintelligible and hard to follow, so they must know what they are talking about. If tax law is difficult even for qualified accountants to follow, let alone lay members of the community—ordinary people—one has to question whether it is bad law.

My second point was also raised by my hon. Friend the Member for Arundel and South Downs. The House has just gone through an entire rewrite project. I remember the admirable speech by my hon. Friend the Member for Eddisbury on the tax rewrite provisions. I believe that he went on for more than an hour, explaining to the House of Commons exactly why the project was important. It is striking that only 10 days after the Income Tax (Earnings and Pensions) Act 2003 came into force we had in the Budget and now in the Finance Bill a huge rewrite of the rewrite. As various professional organisations have pointed out, the Bill does not use the same language, it is inconsistent and it seems to defeat many of the objectives of the rewrite. The various people and organisations that spent so much time on that process rightly ask whether it was worth all the effort when, less than a fortnight later, the Government introduced all sorts of changes that undermined the whole purpose of the exercise.

The third concern that I would flag up is the lack of consultation. The changes are substantial and

important. As the Institute of Chartered Accountants points out, there was no prior consultation. Surely such important and complex matters should have been discussed with the tax accounting industry if no one else. It was not evident from the press releases issued on the day of the Budget that the Government were envisaging such far-reaching changes.

The amendments under discussion, which were tabled by my hon. Friend the Member for Arundel and South Downs, and those we will debate later this afternoon attempt to tackle some of those problems. The Government have already tabled 17 amendments to the schedule, which tells us what a rushed job it has been. It is poorly drafted, it increases the complexity of tax law and it is contrary to what the whole rewrite was supposed to achieve. The Paymaster General owes us an explanation.

Dawn Primarolo (Labour, Bristol South)

A large number of the arguments put forward so far have been general points about the entire schedule rather than specific to the amendments. Perhaps I could spend a few minutes responding to those, without trying your patience, Mr. McWilliam, and then move as quickly as possible to the amendments.

Schedule 22 provides a coherent, consistent and fair way forward for all of those involved in share schemes. There is tax value when it is unlocked and accessible by reason of employment. There are major avoidance schemes that need to be blocked and we are happy to give details of them, but hon. Members can see those advertised on the internet. The rules must ensure that there is fairness throughout the system. Some people may have been paying too much tax. There is a risk that others might pay too little by identifying weaknesses in the wording. The wording must be coherent and consistent and we must ensure that as many errors are removed as possible.

Hon. Members continued to advance the argument that there was no consultation. There was considerable discussion for some time with those involved in this highly complex area of tax. In those discussions, avoidance issues were flagged up by some representatives who disapproved, and other areas where the rules should be rewritten and eased were mentioned. We will come to that in the discussion of the amendments. Some people were being taxed too much, frankly.

Mr. Osborne rose—

Mr. Baron rose—

Dawn Primarolo (Labour, Bristol South)

I will give way to the hon. Member for Billericay (Mr. Baron). The hon. Member for Tatton (Mr. Osborne) can keep his seat until I have dealt with tax law rewrite.

John Baron (Conservative, Billericay)

On consultation, while I accept what the Paymaster General said, many professional bodies in London and the country as a whole are unaware of the consultation on schedule 22, which she claims has taken place. I do not doubt her word, but I ask her to bear that in mind. Consultation on the Income Tax (Earnings and Pensions) Bill extended for some two to three years. The consultation period for schedule 23 started at about Christmas time, but many are saying

that there has been hardly any consultation on schedule 22. If the Paymaster General has had discussions, could she inform the Committee with whom she has had them?

Dawn Primarolo (Labour, Bristol South)

Indeed. The repeal of the dependent subsidiary regime, for example, which it would not be an overstatement to say was universally hated, was introduced by a joint working party with full consultation on the basis that it did not work. I do not want to mislead the hon. Gentleman by saying that a draft of schedule 22 was sent out for consultation. The lengthy consultation concerned the inconsistencies and problems between and within the schemes and the schemes' interactions with the capital gains regime. In a moment, we will come to venture capital, which is important. During those discussions, numerous points were made about how practitioners would like to see the schemes improved.

The changes to the three-year period in schedule 21 were removed by Government amendment No. 166. The consultation produced the argument, which was apparently universally accepted, that we should make that change, but disagreements emerged on the detail. The hon. Member for Billericay is right to ask how I can guarantee that we consult with everybody—I cannot, of course, guarantee that and we have to do our best.

John Baron (Conservative, Billericay)

I take the Paymaster General's point. Having said that—I hope that she will excuse my pressing this point—there is a general perception that very little consultation has taken place. For example, the Institute of Chartered Accountants has stated that much of the tax legislation in this area

''has been fundamentally redrafted with . . . no prior consultation or publicity''.

I apologise for pressing the point, but it is important: over what period of time has she consulted and with whom? The general feeling is that there has been little consultation.

Dawn Primarolo (Labour, Bristol South)

The discussion on how the schemes work has gone on for a considerable time. I cannot answer the hon. Gentleman's question now, but I understand the question and am happy to examine the matter further to provide him with examples.

I say to the hon. Members for Tatton and for Billericay that Mr. David Cohen of Norton Rose, who is chairman of the share scheme lawyers group—it is not unreasonable to presume that he knows what he is talking about—wrote a two-page article in The Tax Journal succinctly setting out the changes. The article discussed why the changes were being made, the reasoning behind them, whether the industry felt that they were good, whether it was indifferent to them or whether it felt that they did not go far enough.

We can discuss whose opinion is the most relevant all afternoon. I have already conceded to the hon. Member for Billericay that, while we do everything that we can to ensure that those who should be involved are, we inevitably rely on organisations. That might be unreasonable given that organisations have a

great deal else to do, but the argument revolves around the definition of ''consultation''. If consultation meant consulting every single person in addition to the representative bodies, we could not move ahead. It is widely accepted that since 1997 the Government have made enormous strides on how and when we consult. The fundamental point about the schedule is that the complexities of avoidance are dealt with by the interaction between the various chapters of the legislation. As I said in the Committee of the whole House, it would have been extremely foolhardy to publish a road map of avoidance before consultation.

On the tax law rewrite, the new legislation is built on the strong foundations of clear English enshrined in the Income Tax (Earnings and Pensions) Act 2003, which was produced by the tax law rewrite team and enacted earlier this year. The user-friendly structure and phrases have been taken directly from that work and are used in the new legislation. As I said, the subject matter is highly complex and the drafting complexities inevitably reflect that. I am happy to put on record not only the Government's commitment to the tax law rewrite, but my personal commitment to it as a Minister. The right hon. Member for Fylde (Mr. Jack) knows about that commitment because he is one of the people who spent a huge amount of time to such great effect on the rewrite.

George Osborne (Conservative, Tatton)

That is not what the professional organisations involved in the rewrite say. The Chartered Institute of Taxation states:

''We now appear to have a position which we had always feared, namely that after spending so much time and effort in rewriting the UK tax code, the rules become overlaid with poorly drafted and incomprehensible new legislation.''

That is pretty strong stuff. Can the Paymaster General explain why the CIOT feels like that?

Dawn Primarolo (Labour, Bristol South)

Perhaps the CIOT would also explain to members of the Committee how the Government should address large-scale avoidance involving £1.4 billion of remuneration in one year. That money passed through artificial equity remuneration schemes. How could we conduct a public consultation on that?

The CIOT is an active, but mostly friendly, critic of the Government in challenging how we proceed with our legislation. I do not know why it thinks that. In the end, we are the elected Members. I am a Minister and have to examine the information before me. I take advice from my expert officials and I—not the CIOT—have to take a decision to protect the public purse, which I have done.

John McWilliam (Labour, Blaydon)

Order. We are debating a group of amendments, not the activities of the CIOT. We are dealing with a group of technical amendments to a complex schedule. I am taking a relaxed view of the debate because of the breadth of the group of amendments and of the schedule. May I ask Members to come a little bit closer to order?

George Osborne (Conservative, Tatton)

The amendments are necessary because of the poor drafting of the schedule. The Paymaster General has dismissed the CIOT, but the tax law committee of the Law Society states that

''the amendments themselves although superficially following the style of the rewrite are not consistent in the language of rewritten statutes and in many places are extremely hard to follow''.

That is the view not of one organisation but of the whole tax industry, and the right hon. Lady must respond to it.

Dawn Primarolo (Labour, Bristol South)

I disagree. I rest my argument on the two pages written by Mr. David Cohen, which I will circulate to every member of the Committee, so that they may have the benefit of his clear and incisive understanding of exactly what we are seeking to do.

George Osborne (Conservative, Tatton)

Arise, Lord Cohen.

Dawn Primarolo (Labour, Bristol South)

I think that you will deeply regret that comment when you speak to the gentleman concerned.

John McWilliam (Labour, Blaydon)

Order. When the Paymaster General uses the word ''you'', she refers to me, and I did not actually say anything.

Dawn Primarolo (Labour, Bristol South)

I apologise, Mr. McWilliam. I was referring to the hon. Member for Tatton, who made that comment about Mr. Cohen from a sedentary position. If he would like to put that on the record, Mr. Cohen might like to respond to it. That article was in The Tax Journal, that well-known paper avidly read by all Committee members.

I shall explain why I shall be asking my hon. Friends to resist all the amendments if they are pressed to a vote, and I shall respond specifically to the points made by the hon. Member for Arundel and South Downs on venture capital. I urge the Committee to resist the amendments because they either seek to narrow the definition of security for the purposes of schedule 22 or restrict our ability to define security in a way that responds to taxpayer concerns or protects the Exchequer efficiently.

As I have explained, the Exchequer is exposed to loss by tax avoidance schemes using assets such as options over gilts because the existing definition of share is too narrow. A definition is needed that will cover a wide range of financial and legal products or arrangements. I believe that the proposal in amendment No. 107 to exclude warrants stems from representations that, because warrants at their most basic are a simple type of right to acquire a share or option, their inclusion in the list of securities is unnecessary. As rights to acquire shares or options, warrants are dealt with in the provision relating to gains arising from options. However, including a wider term in the list of securities will prevent the possibility of more complex and exotic forms of warrant being developed and used to perpetuate the avoidance of tax and NICs. I have examples of that, should the Committee wish to hear them. Again, I got them from the internet, where they are being marketed as means of avoiding tax and NICs.

The proposal in amendment No. 108 to remove the words ''or pretended purpose'' from the definition of a contract similar to a contract for differences would narrow the scope of that term, which is taken straight from the definition used in the Financial Services and Markets Act 2000. The generally accepted meaning of a contract for differences is an arrangement to profit or to avoid loss by reference to movements in the value

of a commodity, instrument or index. Where such profits are employment related, they should be subject to income tax and national insurance. The wording ''or pretended purpose'' is intended to embrace contracts that are similar in nature to contracts for differences where the intention of the parties is not reflected in the written terms of the contracts.

It has been suggested in representations—I think from the CIOT—that the inclusion of those words goes ''too far'', but no explanation of what is meant by ''too far'' is provided. The inference is that the wording would catch things that should not be caught—in other words, that are not employment-related income on which tax and national insurance should be paid. But inference is not a basis on which to open the door to possible avoidance. If something similar to a contract for differences were to be given to an employee by reason of employment, it is difficult to see any good reason for excluding the value acquired by the employee from normal tax and national insurance treatment.

Amendments Nos. 105 and 106 deal with partnerships. Amendment No. 105 seeks to remove interest in venture capital investment partnerships from the list of securities, and amendment No. 106 seeks to remove an interest in partnerships from that list. In some circumstances, an interest in a limited partnership will fall within the definition of a collected investment scheme, and an employee given such an interest may thus be acquiring an employment-related security. It would be unusual for a partnership interest to be acquired by reason of employment, but it does happen where an employee in a venture capital scheme is allowed to acquire an interest in a limited partnership set up as an investment vehicle.

A point to emphasis here is that the rules introduced by schedule 22 seek to tax value obtained by reason of employment. If the person pays full, unrestricted market value for the security, no tax or national insurance would arise, despite the fact that the security may fall within the definitions of schedule 22. That is because the amount paid for the security is always taken into consideration when calculating tax charges.

On venture capital, I am sure that hon. Members appreciate that the venture capital arrangements have adopted new and complex forms in recent years. It is necessary to understand those in order properly to consider the tax consequences. The current agreement with the British Venture Capital Association, in so far as it relates to share scheme issues, sets out the consequences of the current rules governing shares subject to restrictions and conditions for employees in companies backed by venture capital. The current rules will remain in force until shortly after Royal Assent.

As I said in the Committee of the whole House, we will discuss the impact of the new rules on venture capital with the BVCA, and do so with the utmost speed. I understand that Inland Revenue officials have already written to the BVCA inviting it to discussions. Adopting the amendment without fully exploring all the issues with that association would be premature and could lead to an unsatisfactory outcome for all

concerned. Although I oppose amendments Nos. 105 and 106, I would not rule out a future Treasury order, through the powers conferred in new section 420(6), if I were satisfied that such a course of action were appropriate to deal with these issues.

On all the amendments, should hard evidence emerge in future that income is being caught that should not be, it will be simple to amend the list of securities through Treasury order. I say that that will be simple; that is as long as amendment No. 24 is rejected. That amendment seeks to remove the very power to amend the list of securities by Treasury order that would help in those circumstances.

I have explained to the Committee how I intend to proceed, in particular over venture capital. The discussions that I mentioned are important and need to be held with some urgency. As I have explained, should it emerge from them that steps need to be taken I intend to use the Treasury order procedure to do that as quickly as possible.

John McWilliam (Labour, Blaydon)

Order. Before the Paymaster General sits down, may I ask her and other hon. Members to spell out any acronym that they wish to use before they use it? It gives the people writing Hansard the chance to know what is being said.

John Baron (Conservative, Billericay)

I should be grateful if the Paymaster General would clarify one point. If I may return briefly to amendment No. 107, the definition of securities includes warrants according to new section 420(1)(c)—we know that a warrant is a sort of option—and new section 420(5)(e) excludes options from being securities. As new section 420(1) is subject to new section 420(5), there seems to be no point in new section 420(1)(c). I do not expect an explanation now, but I would appreciate clarification from the Paymaster General.

Dawn Primarolo (Labour, Bristol South)

That is not the advice that has been given to me, and I congratulate the hon. Gentleman on managing to connect all those provisions. It goes to show that when one applies oneself, it is not quite as difficult as some may think.

Perhaps the issue should be considered the other way round, although the hon. Gentleman got the chain right. Section 421 gives a list of financial instruments that are included in the list of securities. That list is then qualified by new section 420(5)(e) which provides that if the instrument that would otherwise be a security is a right to acquire another security the instrument is excluded. That ensures that the receipt of an option is not covered by chapters 2 to 4 because it is specifically covered in chapter 5.

Howard Flight (Conservative, Arundel and South Downs)

I thank the Minister for her response. One purpose of amendment No. 107 is to ensure that the definitions do not include options within the scope of the charge because warrants and options are different, as the Financial Services and Markets Act 2000 makes clear. There is some confusion in this territory, and it may be of benefit to the Inland

Revenue and the Law Society to ensure that they have a common understanding.

I welcome the Paymaster General's comments on the venture capital industry. Does she envisage that discussions to review the joint letter are likely to be well under way when we come to Report? It is important with such a major change of legislation that the full effects are understood. I understand the logic of her opposing amendment No. 24, but it is unsatisfactory if the Government can rewrite the law on a whim. There is an important point of principle where those two points interrelate.

To revert to the second part of the venture capital amendment, No. 106, can the Minister clarify the meaning of ''employment-related'' in British venture capital? A statement of interpretation would clear up the other aspects of concern raised in this area.

Before sitting down, I cannot resist commenting that two eminent lawyers involved in the share scheme lawyers group have raised complaints with me, and I quoted one on the Floor of the House. One may have appeared in print, but that should be not taken as evidence that the others were unsatisfactory.

To conclude, we would like further clarification on the venture capital aspect, and if that clarification is not satisfactory, we shall press amendment No. 105 to a vote.

Dawn Primarolo (Labour, Bristol South)

On the question of meetings with the British Venture Capital Association, I cannot give an absolute undertaking on whether enough progress will have been made by Report, but I hope to be in a position to provide further information about the issues and how we intend to proceed, if not the conclusions of those discussions. I appreciate that this is a matter of concern. I know that early dates have been offered to the association, and it is a matter of whether those dates are convenient for the individuals. I hope that the hon. Gentleman understands that we are doing our best to conclude the matter as quickly as possible for the sake of certainty, and I hope to be able to give further information on Report.

Howard Flight (Conservative, Arundel and South Downs)

The latter statement is particularly important. On the basis that there will be scope to address the issue again if the outcome is not satisfactory, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Dawn Primarolo (Labour, Bristol South)

I beg to move amendment No. 167, in

schedule 22, page 255, line 2, leave out

'a beneficial interest is acquired'

and insert

'the person acquiring the securities or interest becomes beneficially entitled to those securities or that interest'.

John McWilliam (Labour, Blaydon)

With this it will be convenient to discuss Government amendments Nos. 168, 169, 177, 178, 180, 182 and 183.

Dawn Primarolo (Labour, Bristol South)

On the advice of parliamentary counsel, the amendments make the same alteration at the relevant points. Schedule 22 contains a number of references to a person acquiring or being entitled to a

beneficial interest in employment-related securities. The term was used in the original part 7 of the Income Tax (Earnings and Pensions) Act 2003 in accordance with the source legislation and was carried over in the tax law rewrite to schedule 22 to ensure continuity of language and understanding. However, schedule 22 includes a definition of an interest in a security being an interest of less than full beneficial ownership. I have been advised that the conjunction of those two legal phrases may, inadvertently, lead to uncertainty about the meaning of the phrase ''beneficial interest''. The amendments were tabled on the advice of parliamentary counsel to put the matter beyond doubt.

John Baron (Conservative, Billericay)

Does the Paymaster General agree that much of the drafting of the Bill has been hurried and that a large tranche of it is not written in the new style, which is unfortunate?

Dawn Primarolo (Labour, Bristol South)

I concede that, without a shadow of doubt, the legislation is extremely complex, and it was complex before the changes in schedule 22. As I said earlier, wherever possible, we carried forward the style, phraseology and layout from the tax law rewrite, but, unfortunately, the world does not stand still, planning mechanisms move on, new complexities emerge, and tax law must reflect that and achieve consistency. That is what we seek to do in the schedule.

Amendment agreed to.

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 110, in

schedule 22, page 255, line 8, leave out

', or by a person connected with a person's employer,'.

John McWilliam (Labour, Blaydon)

With this it will be convenient to discuss the following:

Amendment No. 109, in

schedule 22, page 256, line 13, leave out from first 'connected' to end of line 14.

Amendment No. 111, in

schedule 22, page 257, leave out lines 6 to 15.

Amendment No. 112, in

schedule 22, page 257, line 17, after '3', insert ', 3A, 3B'.

Amendment No. 113, in

schedule 22, page 257, line 22, leave out '3A to' and insert '3C and'.

Amendment No. 25, in

schedule 22, page 257, line 40, at end insert

'Participation by an employee or prospective employee in an offer to the public where that offer or ancillary arrangements contain provisions relating to employment or the ability to dispose of securities acquired through the offer shall not of themselves mean that any securities so acquired are not acquired under the terms of an offer to the public.'.

Howard Flight (Conservative, Arundel and South Downs)

Amendment No. 110 is designed to prevent a new provision deeming a right or opportunity to acquire securities to be available by reason of employment from having too wide an ambit. In the legislation dealing with benefits in kind, provision of benefits by an employer to an employee is deemed to be by reason of employment. Such provision has not been introduced into the legislation dealing with share-related income. Therefore, it is a new departure.

shown that a person has acquired an interest in shares as a director or employee, pursuant to a right conferred on him or an opportunity offered to him by reason of his office or employment. It is now proposed to insert a provision that gives a right or opportunity to be available by reason of employment, if made available by a person's employer. If the shares available by reason of this opportunity are acquired, the new provisions apply.

The ambit could be extremely wide. For example, if A, employed by a particular company, has shares in a different company in a private capacity and the first company takes over the second company, I understand that the new shares issued would fall within the ambit of the definition.

Indeed, if the provision extended to offers by connected persons, it would be extremely wide and could have unexpected results. For example, if a company is controlled by three shareholder directors who have entered into a shareholders' agreement for the purpose, the shareholders are likely to be connected with each other and the company. However, if one shareholder transferred shares to another pursuant to the shareholders' agreement, the transaction would be within the remit of schedule 22. The employing company may know nothing of the transaction or, even if it knew, it might not be able to prevent it.

If the Paymaster General will not accept the amendment, I hope that she will say something to confirm that such situations are not captured by schedule 22.

Rob Marris (Labour, Wolverhampton South West)

On page 254, new section 421B(1), the penultimate line, which refers to the hon. Gentleman's first example of the company takeover, says that

''the right or opportunity to acquire the securities or interest is available by reason of an employment of that person''.

Surely that means that, in the hon. Gentleman's company takeover example, that would not apply if the individual had shares in an individual capacity in another company that then took over his or her employing company. Therefore, the situation is covered.

Howard Flight (Conservative, Arundel and South Downs)

I thank the hon. Gentleman for his intervention. He is a good lawyer, and I hope that his interpretation of those words is correct. However, the point has been raised by the Law Society, which is not entirely happy that the new definition does not overrule that understanding and bring in the type of situation that I described. I am sure that if the hon. Gentleman were a member of the Government, his statement would be extremely welcome.

Rob Marris (Labour, Wolverhampton South West)

As a member of the Law Society, I am happy with the wording.

Howard Flight (Conservative, Arundel and South Downs)

I am glad to hear that, but I trust that the hon. Gentleman has a broad enough mind to realise that some of his colleagues are not. Therefore, clarification would be a very good thing.

Stephen O'Brien (Conservative, Eddisbury)

I have been caught by the excitement of that exchange. I wish to assure my hon. Friend that although the hon. Member for Wolverhampton, South-West (Rob Marris) may speak for himself and for like-minded members of the Law Society, he certainly does not speak for all members of the Law Society, because I am one, and I do not share his view on that point.

Howard Flight (Conservative, Arundel and South Downs)

Amendment No. 109 seeks to provide consistency with the rewrite of the income tax legislation, which led to the Income Tax (Pensions and Earnings) Act 2003. It was provided in section 168(3) that all provision made by an employer for members of his family or household was deemed to be by reason of employment. Household was defined to include dependants and guests. That definition of household remains in the 2003 Act, but is not used in relation to the share-related changes in the benefits provision. The reference to household seems to have crept back into the provision. That definition should surely not be perpetuated in the clauses. It is antiquated and somewhat uncertain in its scope.

Amendment No. 111 would prevent additional securities acquired on or after 16 April 2003 in respect to securities acquired before that date from being within the new provisions, and would also prevent unforeseen results of the extended provisions in subsections (5) and (6), which deem increases or reductions in interests and security to be by reason of employment, and would give rise to charges under the new provisions. Under the existing income tax provisions that provide for share-related income, only the provisions applying to post-acquisition benefits and shares in chapter 4 contain provisions that treat additional securities acquired in a company reorganisation, for example, as being acquired in the same way as the original employment-related securities.

The effectiveness of the other share-related provisions could, therefore, be reduced by large bonus issues, for example, being made after employment-related securities had been issued. For example, if an employee were to receive 100 shares by reason of employment that fell within the conditional shares regime, the issue of a further 900 shares in a bonus issue to that employee would not fall within the regime. Such additional shares would be acquired qua shareholder, and not qua employee.

New section 421D makes a general provision applying to all the share-related income provisions whereby such additional shares are treated as acquired by reason of the same right or opportunity as the original shares. The provision is sensible and would remove anomalies in the existing rules.

We would like to see a ministerial statement on what new section 421D(5) is supposed to mean and how the Government intend to operate it. Where, for example, a beneficial interest grows over time and someone else's correspondingly withers, does the Inland Revenue propose to raise a tax charge on a

continuing basis? In the interests of time, I have resisted going through the extended comments of the Law Society on the matter, but there is a lack of clarity.

Amendment No. 112 would limit the application of chapters 3A and 3B to employees who are ordinarily resident in the UK, and would restore the status quo under the existing legislation. If anti-avoidance provisions are extended to all non-resident employees, any liabilities will fall on to the company in question and the Inland Revenue will be obliged to proceed against the employer. I assume that that is the intent, but I suspect it is a step too far in the area of anti-avoidance measures. Those are the objectives of amendments Nos. 112 and 113.

Amendment No. 25 deals with a practical point where a ministerial interpretation would be helpful. Employees may acquire shares in a public offer but still be required to enter into lock-in agreements not to dispose of the shares after admission to the market. It would clearly be undesirable to discourage employees from participating in such public offers, if there is a threat of adverse tax treatment.

John McWilliam (Labour, Blaydon)

Order. As a humble engineer, I never expected to preside over what appears to be a sub-committee of the Law Society.

Dawn Primarolo (Labour, Bristol South)

I am not a member of the Law Society. The earlier exchange proved my point with regard to agreement or disagreement on some of the schedule. However, let me go straight to the amendments and respond to the points made by the hon. Member for Arundel and South Downs.

Stephen O'Brien (Conservative, Eddisbury)

I do not know how the Paymaster General expects lawyers to make a living if they all agree with each other.

Dawn Primarolo (Labour, Bristol South)

I would like the hon. Gentleman to consider coming and sitting on the Government side, because what he is saying—even in jest—about disputes over words and interpretations and the difficulty that the Government face in drafting legislation to deal with all the eventualities applies very well to interpretations that lawyers may put on different things.

Let us return to the amendments.

George Howarth (Labour, Knowsley North and Sefton East)

Will the Paymaster General give way?

Dawn Primarolo (Labour, Bristol South)

Indeed. My hon. Friend is not a lawyer.

George Howarth (Labour, Knowsley North and Sefton East)

Exactly. I am a former engineer. Will my right hon. Friend the Paymaster General accept that in my experience there is no such thing as a humble engineer?

Dawn Primarolo (Labour, Bristol South)

I will move on to the amendments, following the adage that when one is in a hole, one should stop digging.

The effect of amendment No. 110 would be to introduce a very simple avoidance opportunity, which I am sure is not what those tabling the amendment envisaged. If the amendment were agreed, an employer could arrange for an affiliated company to make securities available to an employee. They would then be outside the charge to tax and national insurance. It

will not be surprising to hear that I am not in favour of that. I ask the Committee to reject the amendment.

Amendment No. 109 goes even further than amendment No. 110. Not only would it allow the avoidance that I have just described, but it would allow income tax and national insurance to be avoided simply by arranging for the securities to be received by a partner in a relationship with the employee that is not marriage.

George Osborne (Conservative, Tatton)

I am sure that the Paymaster General is correct about the effect of the amendment. However, in tabling the amendment my hon. Friend the Member for Arundel and South Downs intended to draw attention to the use of the word ''household'', which was removed in the tax rewriting process from share-related charges in the benefit provisions. The phrase involving ''household'', which is antiquated and uncertain in scope, has crept back in. That is our general point about the rewrite.

Dawn Primarolo (Labour, Bristol South)

The hon. Gentleman is not making any point at all, except that he might like to serve on the tax law rewrite committee when a vacancy next occurs. The purpose of responding to the amendments is to demonstrate how they would interact with the legislation and why the Government cannot accept them.

Amendment No. 111 would remove a specific anti-avoidance provision. The legislation states, in effect, that if a small interest in securities is increased to a larger interest, the acquisition of the additional interest is employment related, so within the charge to income tax. That is designed to counter avoidance schemes, such as those known as ''geared growth'' schemes, in which, for example, an employee initially holds a 1 per cent. interest in the securities, but by the time that the securities are sold, has become entitled to 99 per cent. of the sale proceeds. Amendment No. 111 would allow that value, which is employment related, to escape the charge to income tax and national insurance. That is not right. I do not know how many times I will have to repeat the fact that if it is employment related, it is subject to tax and national insurance.

John Baron (Conservative, Billericay)

Will the Paymaster General give way?

Dawn Primarolo (Labour, Bristol South)

In a moment, if I may just finish this point.

Amendments Nos. 112 and 113, if adopted, would take workers from overseas outside the scope of the new anti-avoidance rules in chapters 3A and 3B. I think that hon. Members will agree that there is no reason why people coming to work here from overseas should be treated differently from anyone else when it comes to applying new rules aimed at stopping tax and national insurance avoidance.

John Baron (Conservative, Billericay)

I thank the Paymaster General for her generosity. I seek clarification on subsections (5) and (6) of new section 421D and the relationship between them. Perhaps it is me, and I am willing to admit that I am wrong, but I have read them twice now, trying to eke out some clarification on the interaction between them, but they seem to be gibberish. Where a beneficial interest grows over time, so correspondingly someone else's interest declines or withers, does the Inland

Revenue propose to raise a tax charge every day, every month or every minute? That is what the interaction of those two subsections tends to suggest to me.

Dawn Primarolo (Labour, Bristol South)

I just explained that point to the hon. Member for Arundel and South Downs, but perhaps I should have done so with reference to new section 421D(5). It is designed to counter schemes such as those known as ''geared growth''. I gave an example of such a scheme, where an employee initially held a 1 per cent. interest in a security but had a 99 per cent. interest in it by the time it was sold.

Let us be quite clear about what the Government are trying to do here. The new rules target only non-commercial, artificial value manipulation, which often involves substantial cash bonuses. Schedule 22 deals with employment-related securities. Where shares are acquired as part of a public offer, the rules provide that they are not employment related. Amendment No. 25 is designed to take account of public offers where certain provisions are made and to ensure that in such cases the shares do not become employment related. However, provided that the employees in such circumstances pay the same price for the shares as other members of the public—so they are not receiving a preferential price because they are employees—the shares will be accepted as being within a public offer. There is, therefore, no need for the amendment. It is quite clear what happens in such circumstances.

The amendments are either unnecessary or, unfortunately, introduce loopholes that I am not persuaded should be included in the legislation. Should the amendments be pressed to a vote, I shall ask my hon. Friends to vote against them.

Howard Flight (Conservative, Arundel and South Downs)

I am glad that the Paymaster General was able to give the statement requested on amendment No. 25. With regard to amendments Nos. 112 and 113, there is perhaps a misunderstanding between us. She said that people who came from overseas to work here should be treated in exactly the same way as natives. There is no disagreement on that. My understanding of the schedule is that people who work overseas and are not resident at all in the UK could fall within its ambit. That was the Law Society's concern.

Dawn Primarolo (Labour, Bristol South)

That could not be the case.

Howard Flight (Conservative, Arundel and South Downs)

It could.

Dawn Primarolo (Labour, Bristol South)

The position is as I described it. I think that there is a misunderstanding here about a charge that might arise but will not. I am happy to respond to the hon. Gentleman and the Law Society in writing specifically on that point.

Howard Flight (Conservative, Arundel and South Downs)

I thank the Paymaster General. On amendments Nos. 110 and 112, she set out the tax avoidance that the schedule is designed to block and argued that the amendments would undo some of that blockage. The purpose of the amendments seemed to be entirely reasonable. I take the point about false situations, but what about genuine situations where a company may be taken over and it is not some contrivance to benefit from the scheme? It would be extremely unfair if someone got caught, as I set out in

my explanation of amendment No. 111. There are similar points relating to amendment No. 110.

Some issues relating to amendment No. 111 have nothing to do with avoidance schemes, but are genuinely fair non-avoidance situations that could get caught. I would ask the Paymaster General and the Inland Revenue to bottom both of those territories with the outside parties with whom they are holding discussions. The amendments were intended not to undermine anti-avoidance measures, but to protect the innocent.

Dawn Primarolo (Labour, Bristol South)

I said in my closing remarks that the rules were targeted only at non-commercial, artificial value manipulation that often results in substantial cash bonuses, which are clearly outside what those schemes were supposed to allow. That is my understanding, but having said that, I always listen carefully to what the hon. Gentleman says. I will do so on this occasion, but what I have said to the Committee holds absolutely and the point that he has raised is a simple misunderstanding of what are complex rules and I will respond to him on that.

Howard Flight (Conservative, Arundel and South Downs)

It may be that I am misunderstanding, but I do understand the objective. The issue is whether the drafting catches a wider situation, and where the Law Society and others fear that it may. However, on the basis of the Paymaster General's assurances, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 26, in

schedule 22, page 258, line 22, leave out

'as holders of the shares'.

John McWilliam (Labour, Blaydon)

With this it will be convenient to discuss the following:

Amendment No. 37, in

schedule 22, page 267, line 23, leave out

'by virtue of holdings of shares of that class'.

Amendment No. 44, in

schedule 22, page 273, line 43, leave out

'by virtue of holdings of shares of that class'.

Amendment No. 58, in

schedule 22, page 289, line 16, leave out

'by virtue of holdings of shares of that class'.

Howard Flight (Conservative, Arundel and South Downs)

The section in question represents earlier legislation offering an exemption from anti-avoidance charges, but we fear that it may contain a flaw. There are two basic exemptions. The first is where employees hold ''proper'' shares—that is, the majority of shares affected by any transaction are held by investors who are not employees—and the assumption is that the transaction is bona fide commercial. The second basic exemption is for an employee-controlled company, where the assumption is that any nefarious transactions will only affect the employees themselves.

The employer-controlled exemption bites only where the class of shares affected is the one that

gives employees control, which may not always be the case. For example, a company may have 100 A shares and 100 B shares, and all shares are held by employees, but because neither the A shares nor the B shares give control in themselves, a company 100 per cent. employee-owned could never have the benefit of the employee-control exemptions. The amendment would ensure that it would.

Amendment No. 37 makes the same point in relation to a different part of the schedule, as do amendments Nos. 44 and 58.

Dawn Primarolo (Labour, Bristol South)

Amendments Nos. 26, 37, 44 and 58 all seek to extend the category of securities that are excluded from the rules for tax and employment related securities introduced by part 7 of schedule 22 of the Income Tax (Earnings and Pensions) Act 2003. Where employees control a company, a charge to income tax and national insurance is not appropriate in respect of the shares that provide control. The value that accrues to the holder of such shares is derived from the controlling interest in the company rather than from employment.

For that reason, chapters 2, 3 and 4 do not create a tax charge where the shares that control the company are being adjusted—whether through the application of a restriction, a conversion right or some other condition—provided that these three conditions are met: first, employees hold the majority of the shares; secondly, employees can control the company; and thirdly, the shares concerned give the employees control of the company. The amendments would remove the third condition, which would make it easy in small, private companies controlled by director-shareholders to avoid tax and national insurance. The employee to be rewarded would acquire an ordinary share and then receive by reason of their employment the majority of a special class of shares. The value of those shares would be manipulated and the employee would receive what would be in reality a cash bonus without being taxed. If the amendment were adopted, the anti-avoidance legislation would be weakened and it would be possible to make arrangements to exploit the change. I, therefore, ask the Committee to reject the amendment.

John McWilliam (Labour, Blaydon)

Order. Before I call the hon. Member for Arundel and South Downs, the hon. Member for Warrington, South (Helen Southworth) appears to be reading a newspaper, which is strictly forbidden.

Helen Southworth (Labour, Warrington South)

May I apologise, Mr. McWilliam? I have received some figures on policing and apologise for examining them in Committee.

John McWilliam (Labour, Blaydon)

I thank the hon. Lady.

Howard Flight (Conservative, Arundel and South Downs)

To some extent this is a probing amendment. The Government's drafting is designed to catch avoidance activities, but it could exclude an employee-controlled company from the employee-controlled exemption, which cannot be their objective. Although we do not want to put the amendment to a vote, it would be worthwhile for the Government to see whether their drafting can be

improved in the interests of justice and in order not to exclude bona fide situations. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 27, in

schedule 22, page 259, line 45, leave out 'given' and insert 'received'.

John McWilliam (Labour, Blaydon)

With this it will be convenient to discuss the following:

Amendment No. 28, in

schedule 22, page 260, line 24, at end insert

'An event which qualifies under more than one of the paragraphs of subsection (3) below shall be a reportable event only in respect of the earliest paragraph by virtue of which it is a reportable event.'.

Amendment No. 29, in

schedule 22, page 261, line 19, at end insert—

'( ) Where a responsible person, or a person connected with a responsible person, agrees with the Inland Revenue to provide the information required by section 421J in respect of any employee or designated class of employees, then they shall be the sole responsible person for the purposes of this section in respect of that employee or designated class of employees.'.

Amendment No. 30, in

schedule 22, page 261, line 21, after 'question,', insert

'where the award or issue of the securities to an employee is made or arranged by or notified to that employer,'.

Amendment No. 31, in

schedule 22, page 261, line 22, after 'question,', insert

'where the cost of any award or issue of securities is borne by that host employer,'.

Howard Flight (Conservative, Arundel and South Downs)

Amendment No. 27 amends the provision on deadlines for reporting information to the Inland Revenue. Perhaps it is cheeky to say that the Inland Revenue has not had much luck in sending documents out to people on duly prescribed dates. It might be more sensible and prudent for the time to run from actual receipt rather than from theoretical date of dispatch.

Amendment No. 28 is designed to avoid duplication. Under the old rules, the same event could theoretically be reported four times—twice each by two separate companies.

On amendment No. 29, as a matter of practice the Inland Revenue has always allowed a single group company to handle the reporting for all employers caught by the old reporting requirements. The new rules are much wider and the intention is to enforce them with greater vigour. It might be best to put current practice on to a statutory footing unless the Government intend to use non-reporting fines as a line of additional revenue.

Amendment No. 30 makes a practical point: local employers do not always know the incentives that have been awarded to their staff, particularly in the case of a company with a US parent corporation. Grants are often made in secret by head office without consulting the local subsidiary in order to protect employee confidentiality. Our amendment would clarify that the Government really want to report the details to the Revenue, including best knowledge about incentive awards. Otherwise, it may be unrealistic to pursue the

Revenue for information that it will not have. Amendment No. 31 makes the same point.

Dawn Primarolo (Labour, Bristol South)

As the hon. Gentleman has just said, amendment No. 27 would change the start date of the period within which the Inland Revenue notice must be completed and returned to the date of receipt by the taxpayer rather than the date of issue of the notice. That is a common debate throughout the tax system. The amendment would only add confusion.

An Inland Revenue notice is always dated and will specify the date by which it must be completed. If the date were to run from receipt of the notice, the Inland Revenue would need to know when the notice had been received to check whether the company had complied with its responsibilities, and that would not work in practice. I understand that the hon. Gentleman wishes to ensure that the date of receipt and return are as they should be but, as he knows, that happens elsewhere in the tax system and there are steps that can be taken.

The Inland Revenue is happy to give an assurance that it will not normally require completion of a return before 7 July following the year in question—the period available for the information to be provided without the issue of a return. A return would be required at an earlier date only if the Inland Revenue suspected significant avoidance or evasion.

Amendment No. 28 would result in insufficient information being provided. A transaction may fall into two or more categories. For example, securities may convert into other securities: that is both a conversion of the old security and an acquisition of the new. Both events need to be reported. The amendment would require only the initial acquisition to be reported and not the conversion. That would make the information difficult to interpret. Under the Bill, while the information would need to cover both events, only one return must be made containing all the information required.

Under the new reporting requirements each of four persons has a responsibility to provide information, as the hon. Gentleman said. They are the employer, the host employer in the UK, when the actual employer is overseas, the person providing the securities and the person issuing the securities. Amendment No. 29 would involve the Inland Revenue entering into an agreement with all four persons that only one of them would provide the information. The requirement on the others to provide information would then not be enforceable.

In practice, one of the four persons is likely to take on the responsibility. Once that person has provided the information, the others have no responsibility to do so, but if the Inland Revenue were to give up the opportunity to pursue one of the four relevant people to get the information, that would seriously inhibit the gathering of the information.

Amendment No. 30 would provide an excuse not to furnish information where a fellow group member had not provided a host employer with the necessary information. In practice, that could open the door to an employer avoiding his responsibilities. If a host employer is used, there is an obligation on the group to

keep it informed, so that it can comply with its obligations. Failure to do so should not provide a legislative excuse to avoid the information requirements.

Finally, amendment No. 31 would absolve a host employer from its responsibilities where the cost of issuing the securities is not borne by that company, thus preventing the return of information on the equity reward of many employees seconded to a UK subsidiary of an overseas parent. Without that information, the Revenue's compliance work would be significantly hampered, if not very difficult to achieve.

Schedule 22 substantially changes the legislation on equity remuneration. To ensure that the changes are properly implemented, it is essential that the information powers be improved. We do not think that the requirements are unduly burdensome, and the Inland Revenue will, of course, provide full guidance in due course to help companies comply with their responsibilities as easily and as efficiently as possible.

The combined effect of the amendments would make it much harder for the Inland Revenue to police the new legislation. That would not be acceptable to the Government. If the hon. Gentleman wishes to press any of his amendments to a vote, I will ask my hon. Friends to oppose them.

Howard Flight (Conservative, Arundel and South Downs)

The amendments were intended to highlight the complexity and potential problems of the extended reporting requirements, particularly for the subsidiaries of overseas multinational groups. The objective was to pressure the Government and the Revenue to agree a practical way of handling the extended reporting requirements, and to avoid potential non-compliance and unfair penalties in what are, broadly, unintended situations.

I am glad that the Paymaster General was able to give an assurance that a straightforward procedure and guidelines will be issued by the Revenue. Again, our point is that the less complex the better, and the less costly the better. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment made: No. 168, in

schedule 22, page 262, line 42, leave out

'entitled to any beneficial interest in the'

and insert

'beneficially entitled to the employment-related'.—[Dawn Primarolo.]

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 32, in

schedule 22, page 263, line 41, at end insert—

'( ) Employment-related securities are not restricted securities or a restricted interest in securities by reason only that—

(a) the holder of those securities enters into an agreement not to dispose of them for a period of time following an admission to listing of securities on a recognised stock exchange;

(b) the holder of those securities enters into an agreement not to dispose of them for a period of time following the appointment of a person as a director of the issuer of the

securities, at a time when its securities are listed on a recognised stock exchange; or

(c) the holder of the securities is prohibited from disposing of them by the operation of any securities or regulatory law or the provisions of any code governing securities transactions applying to the officers and employees of companies listed on any recognised stock exchange.'.

John McWilliam (Labour, Blaydon)

With this it will be convenient to discuss amendment No. 33, in

schedule 22, page 263, line 41, at end insert—

'( ) Employment-related securities are not restricted securities or a restricted interest in securities if they are not listed on a recognised stock exchange and the articles of association of the issuer provide that—

(a) the holder will be required to offer for sale or transfer the employment-related securities on ceasing to be employed by the employer or a person connected with the employer;

(b) certain causes of cessation of such employment will mean that the holder receives an amount which is less than the market value of those securities at that time;

(c) such causes are stated in the articles of association, either directly or by implication by stating the causes of cessation of such employment for which the holder will receive market value for those securities;

(d) the identification of such causes is not dependent upon the discretion of the officers of the issuer but set out on objective grounds; and

(e) the holder will always be entitled on such sale or transfer to an amount at least equal to the market value of those securities on a cessation due to his death, disability, ill-health or retirement.

In this subsection ''articles of association'' means the constitutional documents of a company, notwithstanding their official designation in the jurisdiction in which the company is incorporated.'.

Howard Flight (Conservative, Arundel and South Downs)

This is an amendment by which we are again looking for a ministerial statement of interpretation. If that is not possible, we believe that we should press it to a vote. The amendments would prevent current stock exchange practices from having an adverse tax effect on employees of listed companies.

There are some flaws in the Bill that could present commercial problems. For example, the restricted shares rules are designed to attack income that is camouflaged in the form of under-valued shares, but its wide-ranging drafting could expose to adverse tax treatment three categories of people: those who enter into a lock-in agreement on a flotation, which now is more or less a commercial requirement of sponsors; directors who agree to maintain a minimum shareholding in their listed companies, which everyone now agrees is a good thing; and employees who are prohibited from dealing in shares by the model code on insider dealing. It would make for better legislation specifically to exempt those categories.

Similarly, amendment No. 33 seeks a ministerial interpretation and statement. There is a problem with the restricted shares rules in the Bill. Commercially, an unlisted company will want to recover shares from departing employees and will not want to pay full value to a bad leaver. The old law allowed for that, but the new law omits it entirely. Unless that is rectified, unlisted companies that seek to give equity to employees could be hit hard.

Dawn Primarolo (Labour, Bristol South)

Good afternoon, Mr. Pond. How nice to see you sitting there.

I wish to respond to the points made by the hon. Member for Arundel and South Downs, and I hope that I will be able to show by my comments that his amendments are not needed. The new rules in chapter 2, which deal with restricted employment-related securities, are being introduced following representations from the share schemes industry to put the taxation of securities subject to restrictions on a fairer basis. They achieve that by taxing a reduced value at the time of award to reflect the effect of the restriction on the market value, and by taxing the remaining value obtained by reason of employment when those restrictions are lifted or varied. That ensures that the employee pays tax and national insurance contributions on the value received by reason of the employment. Any subsequent growth in value, on which income tax has been paid, is then not within the income tax regime.

Howard Flight (Conservative, Arundel and South Downs)

I think that the Paymaster General has persuaded me. I beg to ask leave to withdraw the amendment. However, I trust that the Revenue and

the Government will satisfy themselves that the specific cases that I cited could not lead to unfair treatment.

Amendment, by leave, withdrawn.

John McWilliam (Labour, Blaydon)

Order. May I point out to the hon. Gentleman that the minute that he says that he begs to ask leave to withdraw the amendment, I am supposed to put the question? If he is going to do that again, please will he make his argument and then withdraw the amendment.

Amendment made: No. 169, in

schedule 22, page 265, line 3, leave out from 'is' to 'after' in line 5 and insert

'beneficially entitled to the employment related securities'.—[Dawn Primarolo.]

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 34, in

schedule 22, page 265, line 17, at end insert

'It shall not be regarded as a removal or variation of any restriction where, by the operation of law, another person is entitled to require the sale to him of the securities and exercises that entitlement.'.

John McWilliam (Labour, Blaydon)

With this it will be convenient to discuss amendment No. 35, in

schedule 22, page 265, line 17, at end insert

'For the purposes of this Chapter there is not a variation of a restriction relating to any employment related securities if there is any variation in the rights attached to, or the issued number of, any other securities in the company in accordance with the terms of those other securities.'.

Howard Flight (Conservative, Arundel and South Downs)

This is a commercial amendment intended to clarify the meaning of restricted securities in order to give guidance to the investment industry. There could be a technical flaw in the drafting. The legislation will charge income tax on increases in value when restrictions on sale are lifted, including a premature acceleration. That is an innovation intended to catch awards of shares subject to initial restrictions to depress value. It seems a little harsh to charge tax on someone where the restriction falls away because a purchaser exercises his compulsory purchase rights under new section 428 after a takeover.

On amendment No. 35, under the old law, the Inland Revenue issued a press release stating that negative ratchets, for example in management buy-outs, which diminished the value of investor shares in line with performance hence inflating the value of employee shares, were exempt from anti-avoidance provisions by Revenue practice. The amendment is intended to clarify that negative ratchets are equally protected under the new law. It would again be helpful if the Paymaster General could comment on that.

Dawn Primarolo (Labour, Bristol South)

On amendment Nos. 32 and 33 I tried to explain the proposed new approach to the taxation of restricted securities. It would not be right to tax the whole value of restricted securities at acquisition, but tax should be payable when restrictions that affect the value of the securities are lifted or varied.

Amendment No. 34 would exclude from the definition of the variation or removal of a restriction circumstances in which the employee is required to sell the securities by operation of the law. I presume that

that refers to bankruptcy or similar situations. Such an event leads to the sale of the employment-related securities, so is a chargeable event in its own right by virtue of another part of the taxing provision. The amendment would not therefore achieve the effect of removing the tax charge in those circumstances.

Moreover, if the sale of the securities, forced or otherwise, results in the employee receiving real value, it is right, and fully in line with the policy intention as I have explained it to the Committee, that there should be a charge on the value assessed at that time.

Amendment No. 35 is equally unnecessary. I do not believe that the variation of rights attaching to other securities is a variation of a restriction attaching to employment-related securities. That would mean that such an event would not trigger a chargeable event under chapter 2. If the variation or imposition of rights affecting other securities takes place for non-commercial purposes, the value manipulation anti-avoidance rules in chapters 3A and 3B come into play to counter that. Where tax charges are deferred, as they are in the new restricted securities regime, that could tempt avoiders to look for ways to avoid triggering the charge at the later time. Introducing specific exclusions, such as those in amendment No. 35, for no sound policy reason—which is shown by the examples that I have given—would unfortunately point such avoiders in a direction where they might find a rich vein of opportunity.

Amendment No. 35, like amendment No. 34, adds nothing to the working of chapter 2, but together they would add complexity and ambiguity that could be exploited. I hope that that gives the clarification that the hon. Gentleman seeks, and that he will withdraw the amendment. If not, we shall have to vote against it.

Howard Flight (Conservative, Arundel and South Downs)

From what the Paymaster General has said, I am satisfied that amendment No. 35 is not necessary. I am still not entirely clear what the tax situation would be in relation to the example that I cited under amendment No. 34. As I said up front, we are getting into a new regime of restricted securities, where there is considerable confusion even among experts. I should like the Paymaster General to say that the Revenue will issue a clear, practical definition of restricted securities in due course to help those poor devils who must operate this nightmarish, complex provision without too much expense.

Dawn Primarolo (Labour, Bristol South)

On the hon. Gentleman's point about MBOs, I was trying to say that if value is received by reason of the employment, it would be taxed under the rules. That is clear.

Turning to the advice, I am sure that if the Inland Revenue were called on to provide information it would do so, but I need to check whether it would be in the form of guidance. Perhaps the hon. Gentleman would allow me to come back to him on that.

Howard Flight (Conservative, Arundel and South Downs)

On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

The rest of the debate is in Hansard.