Finance Bill

Public Bill Committee, 12 June 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)

It is five minutes to the hour of nine on Thursday. I welcome all Committee members to this sitting. I am sure that the Committee will continue to make excellent progress. I keep very close tabs on what is going on even if I am not in the Chair, and I congratulate the Committee on the progress that it has made.Clause 136 Exemption where homeworker's additional expenses met by employer

Clause 136 - Exemption where homeworker's additional expenses met by employer

Stephen O'Brien (Conservative, Eddisbury)

I beg to move amendment No. 251, in

clause 136, page 81, line 7, at end insert—

'(2A) A payment equivalent to a weekly amount not exceeding twice the amount of the national minimum wage in force from time to time shall be assumed to be reasonable for the purposes of subsection (1).'.

I welcome you back to the Chair, Sir Nicholas, as we start our debate on employment income and taxation. We discussed clause 135 on the Floor of the House in relation to the various pressures and difficulties affecting such constituents as nannies, gardeners and butlers. With that background in mind, we arrive at this clause.

The clause permits employers to pay home workers. All Committee members will be deeply conscious of how much more significant the question of home working is these days. That is not just because of the demands of jobs and electronic opportunities to work at home; it would be helpful for Committee members to bear teachers in mind in relation to the clause. Under the clause, employers can pay home workers amounts free of tax to represent reasonable additional expenses that put them on a closer footing with site employees. I make no complaint about the need to put matters on a better footing.

The amendment is a probing one. It would be very helpful after I have outlined the reason for the amendment if the Paymaster General would outline whether the Government have target amounts in mind. The change is welcome, but Inland Revenue Budget note 3 states that no records will be necessary to substantiate a claim of up to £2 a week. We are concerned that £2 a week is a small figure, and is not necessarily commensurate with the £5 and £10 limits on personal incidental expenses that apply each night for night workers. We feel that £5 a week would be a

more realistic figure for the no-record keeping rule. That comes against a background of presuming that when the concession is formally published, it will refer to the need for the employee to keep records. It is difficult to see how an employer can provide the ''supporting evidence'' that the payment is wholly in respect of additional household expenses incurred by the employee carrying out his duties at home without record keeping by the employee, whom we note is not referred to in that context in Budget note 3.

Given the modern approach—the Paymaster General may want to confirm this in her reply—there is probably a case for a general review on the law relating to home working. It may be helpful if I highlight a case, which was helpfully brought to my attention by my hon. Friend the Member for Salisbury (Mr. Key), concerning tax relief for teachers. My hon. Friend's constituent, Mr. Chris Chelu, is a teacher who has engaged in extensive correspondence with the Paymaster General. He says:

''I feel that it would certainly help make teachers feel more valued if they were to have this tax relief.''

Mr. Chelu also makes this interesting point on home working:

''As regards the Unions and their attitude to the 1265 hours of directed time, if we assume that teachers work in school for 40 weeks of the year, this only works out to 31.6 hours a week of directed time. I can't imagine that the unions accept that teachers should only work these hours. The job would not get done properly if this was the case. We all know that teachers work much longer hours than that, as has been shown by many surveys, and we also know that the hours that they work cannot be all fitted in at school and that the vast majority of teachers work at home. This tax relief is not a vast amount of money, and giving parity with university lecturers would oil the wheels a little and encourage teachers to accept the constant changes that seem to be part of education policy these days.''

Mr. Chelu took his case to the ombudsman, who, understandably, disappointed him by saying that it was not within his remit to examine taxation. I raise the issue today because we are examining a combination of two issues, the sum and the absence of record keeping, which we must try to put on a realistic basis. The amendment is designed to probe the Government on the amounts that they have in mind. Mr. Chelu states:

''it is clear that I am not the only teacher to feel aggrieved by the attitude of the Government and tax authorities in this matter.

I feel that it is most unfair that one group of educational professionals, university lecturers, should be treated to a tax relief, whilst another group, school teachers are denied the same, when both have contracts which do not formally oblige them to work at home.''

The issue was first raised in an article in The Times Educational Supplement. Mr. Chelu continues:

''Dawn Primarolo says that there is no obligation on teachers to work at home . . . If all teachers took Dawn Primarolo at her word she would be responsible for the complete meltdown of the school education system.''

I do not endorse that argument and am not challenging the Paymaster General's position on the technical issue. However, I have drawn attention to that important area because we need to consider it.

I hope that the Paymaster General can elucidate the Government's thinking on setting a realistic amount that fairly reduces the bureaucratic burden of record keeping on the employer. The amount should relate to

people, such as teachers, who must work at home. The amendment suggests that the amount should be defined as a sum not exceeding twice the national minimum wage, which would be reasonable.

Michael Jack (Conservative, Fylde)

I welcome you, Sir Nicholas, back to the Chair.

I rise to support my hon. Friend the Member for Eddisbury (Mr. O'Brien) with my first question to the Paymaster General. What research did the Inland Revenue carry out to decide that £2 was the right figure? What enormous investigative analysis lies behind it? The amendment is correct to ask for a more realistic sum. If the home worker were to work five days a week, the per diem rate would be 40p. If they worked seven days, as many do, it would be even lower, at about 30p. In this day and age, when a home worker is required to use broadband technology to connect to their place of business, more than 30p a day worth of expenses may be incurred for that alone.

The clause states that

'' 'household expenses' means expenses connected with the day to day running of the employee's home.''

My conjecture is that one would knock up more than 30p to 40p a day just in having a brew a couple of times a day, making the odd phone call and keeping the light on. The Paymaster General will, no doubt, chastise us for having the nerve to question the £2 figure. She will say that the employer is not restricted from paying above that amount, but then at yet another cliff edge in the Bill we fall into the record-keeping arrangements that the clause ignores.

To be realistic about the matter, perhaps the Treasury should take a leaf out of the officeholder book, in which if one passes the wholly, necessarily and exclusively incurred rule, their expenses as predefined by their arrangement with their employer—the arrangement between the officeholder and the employer—can be automatically offset against income tax without the requirement for unnecessary record keeping.

The proposal is welcome but, to use a northern expression, a tad on the mean side. I look forward to hearing the justification for the £2 figure and, perhaps, the Paymaster General's agreement with my hon. Friend's proposal that a higher figure should be allowed in the clause.

John Baron (Conservative, Billericay)

I, too, Sir Nicholas, welcome you to the Chair this morning.

The majority of points have been covered. I rise in support of my right hon. and hon. Friends and would like to raise some further points. I, too, fully support this initial step to give a statutory exemption from income tax for the reimbursement of additional expenses that are incurred from home working. It is very welcome and I congratulate the Government on introducing it. It is worth remembering that some 1 million employees work from home in one form or another. The measure will be very welcome news indeed.

Home working is an important aspect of the modernisation of working practices in the UK. There is every indication that, if industry in this country is to remain competitive, home working will become an increasingly important characteristic of the way in which businesses lower costs and create a more flexible working environment. That is also welcome.

I wish to raise two very quick points. Could the Paymaster General give us some indication of how home working might be encouraged, and of the costs and benefits involved? What consultation is being undertaken on the matter? The impact of the uniform business rate and the difficulties in respect of travel expenses require full consideration in any such consultation.

My second point is about the sum of £2 a week. If we are to encourage home working, greater flexibility, and the modernisation of our working practices, welcome though the initial step of £2 is, it seems a little mean, bearing in mind the general running costs of a home. I ask the Government to consider the matter again and see what can be done.

Dawn Primarolo (Labour, Bristol South)

Good morning, Sir Nicholas. I am glad that the hon. Member for Eddisbury wisely described his amendment as one that was intended to probe the Government's intentions. I concur with the point made by the right hon. Member for Fylde (Mr. Jack). Let us be a little realistic in approaching the discussion.

The clause provides for a new income tax exemption for payments by employers towards reasonable, additional household expenses incurred by employees who work some, or all, of the time at home. Home working is not a new phenomenon. It existed under the previous Conservative Government. In fact, teachers' contracts were the same under the previous Conservative Government. Under existing law, most employees would be liable to income tax on such payments. The clause removes the tax disincentive for employers contributing towards additional household costs incurred by employees who work at home.

The amendment tabled by the hon. Member for Eddisbury does not give a figure, but pegs the amount to the national minimum wage. Although I am delighted by the belated conversion of the official Opposition to the national minimum wage, I should point out that there are different levels. Leaving employers to ascertain which level should apply would not, to put it mildly, be a sensible way forward in terms of trying to reduce the administrative burdens on them. It would have quite the reverse effect: it would increase those burdens.

Let me deal with the point raised by the right hon. Member for Fylde with regard to how we proceeded. The Inland Revenue had informal discussions with a number of employers that operate flexible working schemes. We went to those employers. The figure of £2 a week—£104 a year—was considered reasonable to cover the additional day-to-day household costs likely to be incurred by employees through working at home. Clearly, that figure will be kept under review. The

companies to which we spoke, which included British Telecom, consulted with the IT industry.

We went specifically to employers that currently pay expenses—because that matter is already provided for in the law. We will come on to teachers. We asked the companies what they considered to be reasonable in relation to the profile of what they were paying. I am sure that the right hon. Gentleman would agree that, as he often impresses on the Government, in such areas we should consider whether there is a real need and what the level is. The employers said that the move would help them. Up to that figure, no receipts are necessary and no agreement with the tax inspectors. No questions are asked: it can be paid.

The £2 per week is not the upper limit. Employers can meet the full amount of additional household expenses incurred by employees who work at home. They can already do that. The figure of £2 per week is intended as a de minimis to simplify matters for the employer. It is the de minimis that employers said would help them. They can pay up to that amount without needing to gather information about their employees' additional household costs. That does not preclude them from reimbursing above that level, but they would then be expected to ask for supported evidence of additional expenses. We can all use common sense over how large such costs are and whether the details are reasonable.

The hon. Member for Eddisbury asked whether employers will need to keep detailed records of additional household expenses if they reimburse by more than £2 a week. The answer is no. Employers can now agree with their inspector an average allowance based on reasonable estimates of their employees' additional household costs. The clause is incredibly modest, responding to representations from employers who currently make additional payments to their employees, and therefore know how the system operates.

The hon. Member for Eddisbury asked about teachers. They are in the same position as other employees. If their employer reimburses additional household expenses, they are covered by this exemption. The same rules apply to them as to everyone else.

The hon. Member for Billericay (Mr. Baron) asked a much wider question about home working. That ties in to the flexible work argument, and questions about what is and is not reasonable in the work-life balance. The current rules provide, without this exemption, for considerable flexibility of approach and discussions between employers and their inspectors. The hon. Gentleman asked what the future might look like. As a Treasury Minister assessing how that field of work will develop, I have an open mind over the best interests of the taxpayer and over whether the current tax rules will offer a way forward in supporting that alternative means of working without cutting across basic rules and assumptions in the tax system.

I cannot therefore describe to the hon. Gentleman our view on what the future will look like, but as more employees, with the consent of their employers,

consider more closely a combination of working from home and in the workplace, we are very sensitive to the need to consider the interaction of all the tax rules. That is what we are doing. As he rightly pointed out, there is an issue of travel expenses, and whether one is entitled to claim for travel to one's place of work. That can get rather complicated. This clause does not address such matters.

John Baron (Conservative, Billericay)

I welcome the Paymaster General's words. Although there have always been, to my knowledge, regulations that allow flexibility over home working, we are taking quite a big step forward in encouraging home working through the tax system with this apparently small step. Although that will create complexity, having taken that step, the Government need to think through in consultation with business, all the ramifications, such as the implications of the uniform business rate as well as travel expenses. I welcome the Paymaster General's words, but there is a long way to go.

Dawn Primarolo (Labour, Bristol South)

Any Government would need to be cautious in that debate because of the complexities of the tax system, as the hon. Gentleman has pointed out. That is why the Government are responding to requests from business for simplification. Businesses are just as cautious in recognising the issues for them, let alone the issues for the taxpayer and the Inland Revenue as the guardian of the taxpayer's purse.

This is not the first step we have made in that area. The hon. Gentleman will remember that there is an exemption for the use of computer equipment provided for employees to work at home. There is an exemption for the use of other employer equipment or services supplied for employees to work at home. We recognise that the nature of work is changing, and we intend to proceed in consultation with all those who represent employees and employers to ensure that we get that balance right.

The clause has been useful in exploring the wider issues. I hope that hon. Members will appreciate that because of the complexity of the area, and in response to direct requests from employers, the exemption with regard to record keeping—not the maximum—has been set a level that we think is practical, but it will have to be kept under review. I know that that is something that we say about the tax system as a whole, but it will have to be kept under review to ensure that the operation does not produce distortions in the tax system or encouragements to structure in a particular way when that may not be in the best interests of the employer or the employee in the long run.

With those comments, I hope that the hon. Member for Eddisbury will feel that I have answered his points, and not press his amendment. If he does, I shall ask my hon. Friends to oppose it.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful to the Paymaster General for a reply that sought to address our points. I am glad that she felt the debate was a useful exploration of the broader issues in what is an increasingly recognised and important constituent of the way people work and organise their lives. I certainly accept that it has been going on for many years.

I accept that the clause will be kept under review—I take the Paymaster General at her word. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 136 ordered to stand part of the Bill.

Clause 137 - Taxable benefits: lower threshold for cars with a CO2 emissions figure

Michael Jack (Conservative, Fylde)

I rise to speak on some of the principles that underlie the clause. As part of Government policy, it seeks to encourage companies, in particular, to purchase cars that are deemed to be more environmentally friendly by virtue of lower CO2 emissions. Will the Paymaster General say a few words about whether the Treasury has monitored the real-world effect of clause 137, and those parts of the law on motor taxation that it seeks to amend? A number of forces are moving inextricably towards the provision of more environmentally friendly motor cars. Manufacturers are using lighter materials to make cars with enhanced performance and lower fuel usage. We have discussed the development of environmentally friendly fuels and, as the explanatory notes rightly state, European Union targets are persuading motor manufacturers, without fiscal incentives, to produce cars with lower carbon dioxide output.

The Government's structure of motor vehicle taxation, including the clause, is complex and designed to play a part in contributing to the uptake of cars with lower CO2 emissions. However, given the variables in the equation, which I described, we do not know the effect of the Government's fiscal intervention in achieving those environmental objectives through the taxation structure on cars. It is aimed particularly at companies, which are large purchasers of motor vehicles and have a significant ability to increase at a stroke the number of vehicles with lower carbon dioxide outputs. Measuring the effectiveness of fiscal policy is important if the Government want to achieve their objectives. The only problem is that we mere mortals who observe such matters do not, as yet, have a detailed analysis of what is causing the reduction in emissions that the Government seek. I would like an undertaking from the Paymaster General that the Government will, in due course, produce an analysis to enable us to see the wood through the trees. I suspect that there will be no difficulty in finding people with the right econometric skills to do that work because they have now finished the analysis on the euro and will probably be looking for something else to analyse.

John Healey (Labour, Wentworth)

The Government are committed to using the company car tax system as part of their efforts to protect the environment and particularly to reduce carbon dioxide emissions, which contribute to greenhouse gases and global warming. The clause furthers the environmental incentives for that. It

reduces the level of carbon dioxide emissions qualifying for the minimum company car tax charge by 5 g per km to 140 g per km in 2005–06. That will provide a continuing incentive for company car drivers and their employers to choose more fuel-efficient cars and encourage manufacturers to produce cars with lower carbon dioxide emissions. The right hon. Member for Fylde is right to say that many changes can contribute to that policy and that average carbon dioxide emissions are falling because of improvements in manufacturing and engine technology. The importance of the clause is to provide a continuing incentive for manufacturers to continue to produce, and for employers and drivers to continue to choose, more fuel-efficient cars.

The right hon. Gentleman asked about monitoring. We are evaluating the effect of radical changes in the company car tax system. We are measuring its long-term effects and will produce an analysis in due course, but it is too early to say definitively what is happening, although the early findings from the ongoing evaluation suggests that the reforms are having the positive effect on the environment that we seek. Many company car drivers—97 per cent.—are already aware of the reforms; 85 per cent. of employers providing company cars support the environmental principles behind the reforms and more than half of employers providing company cars are already actively encouraging staff to switch to cars with lower carbon dioxide emissions. More than half have changed their policies on carbon dioxide emissions with the cars that they provide as a result of the changes. Overall, we expect the reform to the company car tax system, put in place last April, to lead to a projected reduction in carbon dioxide emissions that will save between 500,000 and 1 million tonnes of carbon by 2010.

Having set the level for company car tax reform when we introduced the changes, we are now setting the level for 2005–06 to give drivers certainty about how much their company cars will cost them during the next three years. For employees and employers renewing their company cars in the future, that furthers the incentive to choose more fuel-efficient cars, which are cleaner and more environmentally friendly. The right hon. Gentleman is right to say that company car purchases play a significant part in the market. Some 50 per cent. of new cars sold in the UK each year are sold to companies. Reducing carbon dioxide emissions from company cars is essential to help to protect the environment and to contribute to the Kyoto protocol and UK domestic cuts in carbon dioxide emissions. The clause continues our drive to reduce carbon dioxide emissions in this country, and on that basis I commend it to the Committee.

Question put and agreed to.

Clause 137 ordered to stand part of the Bill.

Clause 140 - Corporation tax relief for employee share acquisitions

Stephen O'Brien (Conservative, Eddisbury)

The clause relates to schedule 23, which we shall come to later. For the benefit of the Committee, by way of introduction to what will be an extensive and important aspect of this morning's proceedings, in the context of various amendments that have been tabled to schedule 23, I shall say briefly that the clause and schedule provide a statutory corporation tax deduction for employee share acquisitions, and apply to acquisitions of qualifying shares by employees in the employing companies' accounting periods beginning on or after 1 January.

Nicholas Winterton (Conservative, Macclesfield)

Order. I understand the hon. Gentleman's point about seeking to introduce a general debate in this area, but having looked at the clause it appears to me that very little can be said that should not be said under schedule 23. In a way, it would have been better to take this under the schedule.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful, Sir Nicholas. Although making those introductory remarks, I have also a specific point that arises as much under the clause as under the schedule. I had not quite got to that point.

Nicholas Winterton (Conservative, Macclesfield)

Order. Let me make it quite clear that if there is to be any form of debate on this clause, I shall certainly not be disposed to allow a stand part debate on schedule 23. There are many amendments to that schedule. I leave it to the hon. Gentleman to make a decision. If he wants to introduce the subject under this clause, I am happy that he should, but I have indicated the way in which I am likely to respond later on.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful, Sir Nicholas. I am going to make the important point on clause 140. If as a result of your ruling you do not wish to have a stand part debate on schedule 23, I shall make this a longer debate, rather than making one very short point now followed by all the amendments to schedule 23 and then a stand part on schedule 23. I have some further points that relate only to schedule 23, which would be brought up under stand part because no amendments relate to them. I wish only to make a brief point on clause 140 as it stands, then—

Nicholas Winterton (Conservative, Macclesfield)

Order. I think that the hon. Gentleman is seeking to be helpful and I am sure that I have taken his remarks in a helpful sense. If he is very brief, I understand his position and am happy for him to make a few remarks on the clause.

Stephen O'Brien (Conservative, Eddisbury)

I am most grateful, Sir Nicholas. On that basis, I have a couple of sentences to go.

Although we welcome the broad intention behind the legislation, we are, of course, keen to consider it properly, particularly in the light of the changes to employee share schemes, which we have debated. My point, which is intended genuinely to help the Committee and to compliment the Government, is to acknowledge that a final regulatory impact assessment has been made in relation to the clause and its accompanying schedule. It is important to acknowledge that the regulatory impact assessment relates specifically to the clause as well as to the schedule—the assessment is helpfully set out on the internet at www.inlandrevenue.gov.uk. It is estimated

that the cost to the Exchequer of the first full-year effect of the new relief provisions will be £45 million, rising to £95 million in the tax year 2007–08.

I am happy to follow your guidance, Sir Nicholas, on the other points relating to schedule 23 and will bide my time until we reach that point in proceedings.

Question put and agreed to.

Clause 140 ordered to stand part of the Bill.

Schedule 23 - Corporation tax relief for employee share acquisition

Stephen O'Brien (Conservative, Eddisbury)

I beg to move amendment No. 213, in

schedule 23, page 323, line 34, after 'company', insert 'or another group company'.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following:

Amendment No. 214, in

schedule 23, page 324, line 2, after 'company', insert 'or another group company'.

Amendment No. 216, in

schedule 23, page 324, line 22, after 'business', insert

', or the part of the business'.

Amendment No. 220, in

schedule 23, page 324, line 23, after 'company', insert

'or by a group company'.

Amendment No. 217, in

schedule 23, page 324, line 25, after 'A', insert 'part of a'.

Amendment No. 218, in

schedule 23, page 324, line 25, leave out

'or to the extent that,'.

Amendment No. 219, in

schedule 23, page 324, line 27, leave out 'the business' and insert 'that part'.

Amendment No. 221, in

schedule 23, page 325, line 11, leave out 'parent' and insert 'group'.

Amendment No. 222, in

schedule 23, page 326, line 40, leave out 'parent' and insert 'group'.

Stephen O'Brien (Conservative, Eddisbury)

The schedule is very long. On their first reading of it, I am sure that all members of the Committee found it extremely complex. Members of the Committee should bear in mind that amendments Nos. 213, 214, 220, 221 and 222 relate to a similar point and that the same arguments apply across them. Amendments Nos. 216, 217, 218 and 219 concern a separate point.

The amendments are probing amendments, but they are not exclusively so and we may press certain of them to a vote depending on the response from the Paymaster General. The amendments are designed to probe the intention behind the legislation and to explore the extent to which it will operate. In particular, I am interested in how the legislation interacts with clause 139 and schedule 22, which were ably dealt with in Committee by my hon. Friend the Member for Arundel and South Downs (Mr. Flight).

The amendments address the following points, which I shall list to avoid our becoming bogged

down: the availability of a deduction to a group of companies; the clarification of a situation in which only part of a business is within the charged corporation tax; the nature of the shares acquired; takeovers; the interaction with anti-avoidance legislation; the interaction with accounting requirements, particularly international accounting standards; the cancellation of options; transfer pricing; definitional issues; and commencement clarification. That is the headline to the group of amendments.

I shall start by addressing amendments Nos. 213 and 214, which would extend the ambit of the relief to match the world as it is for group companies. I note that the Law Society is keen to make a submission on the matter. Like me, it considers that where an employee works for a company that is not their actual employer, relief should be available to that company if the other conditions of the schedule are satisfied. I am sure that I am not unique in Committee in having worked for a company that sits within a group of companies.

Dawn Primarolo (Labour, Bristol South)

May I ask the hon. Gentleman to clarify that point? We are discussing share schemes given to employees by the companies for which they work in order to ensure that they share in the benefits. Why would we give relief to employees who have shares in companies with which they are not connected? If I have misunderstood his point, perhaps he will clarify it. The point of share schemes is that people receive shares in the company or group for which they work. How can it be an employee share scheme if the shares are in a company that is totally unconnected with the company or group for which someone works?

Stephen O'Brien (Conservative, Eddisbury)

I am grateful to the Paymaster General for raising that point, which graphically illustrates my point. I shall delve into my personal experience: if one is employed by a plc listed on the FTSE 100, that plc is patently one's direct employer, in which case it would be perfectly normal to be issued with plc shares as part of one's share options. A large international group often has an operating subsidiary company within the control of the plc, which has a majority holding. Across continental Europe, however, family members often retain a minority shareholding. A valuation is therefore often placed on the progress of the operating subsidiary to calculate the value of the family minority shareholding properly without necessarily relating it to the plc.

There is also the case of a joint venture—I know that the Paymaster General wants to intervene, but perhaps I can finish the example to see whether we can achieve a meeting of minds. Consider a subsidiary with operations in Northern Ireland, which would be inside the scope of both the United Kingdom and the legislation. Some 98 per cent. of it is owned by a plc and 2 per cent. of it is owned by a family member, who has retained their shares since the company was bought out. For the purposes of valuation, the plc will often have a direct interest in the executive management and should therefore be incentivised to

increase the value of the subsidiary company in Northern Ireland. If shares are issued for the Northern Ireland company or the plc company, there are two group companies in which the incentivisation to the employee, which is the legislation's purpose, matches their work.

Dawn Primarolo (Labour, Bristol South)

I am grateful to the hon. Gentleman for giving way again because he wants me to answer his point. His point is that the family already holds the shares. He suggests that the share schemes should be extended. The basic rule of share schemes is that participants work for the company. I think that he is suggesting that as a reward the employer should be able to give employees shares in any company and expect to get the relief. That is not the basis of the share scheme legislation.

Stephen O'Brien (Conservative, Eddisbury)

Perhaps I can try again. Let us imagine—this is based on my personal experience—that I am the executive director responsible for the management, growth, performance and accountability of a company called X Trading Company Northern Ireland Ltd., which is 97 per cent. owned by X plc. As the senior executive employee of the operating subsidiary in Northern Ireland, I would properly expect as part of the total group management to receive share options in the plc. Therefore, we are considering an attempt to ensure that the ambit of the relief extends to ensuring that a key employee in building X Trading Northern Ireland Ltd. as an operating, totally clear majority held subsidiary of X plc has the incentivisation as part of the total group effort to receive shares in X plc rather than the shares of their employing company, which is X Trading Northern Ireland Ltd., to which they are contracted. Is that helpful?

I hope that the issue at stake is on the record very clearly. The contract of employment will be with the operating subsidiary—rightly so, because that is where the identity of interest is. There are also jurisdictional considerations, not least in Northern Ireland. Many UK laws apply equally in Northern Ireland as in England and Wales, but some specific laws and regulations are unique to Northern Ireland. Therefore, it is important if one were resident in Northern Ireland not necessarily to be considered to be an employee of the plc, which would have other consequences.

Dawn Primarolo (Labour, Bristol South)

I am very grateful to the hon. Gentleman for giving way, because I am trying to get to grips with what he is saying. Let me summarise it. If I work for the subsidiary, I qualify for shares in the plc. I believe that that is correct.

I was questioning the hon. Gentleman on the basis that one cannot have shares in a company that is not connected with the company for which one works, because that would break the scheme. I believe that he is talking about a group relationship, which I shall deal with in my reply. I am very grateful to him for ensuring that I understood that complex point.

Stephen O'Brien (Conservative, Eddisbury)

I am equally grateful to the Paymaster General. I hope that she recognises that the amendments are designed to deal with the specific

point on which we have now come to a common understanding.

My other point is that that can work in reverse. I believe that the explanation has been helpful, because I had started by explaining that position but then moved to the opposite end. One can be an employee of the plc but have options in X Trading Northern Ireland Ltd. because it needs to have an identity of interest with co-management workers in the Northern Ireland subsidiary as that company grows, which could have an independent value if there were a very small residual family shareholding. For valuation, earn-out or fiscal purposes, it could be necessary to keep it at a separate valuation, although, of course, within broad plc accounting, normal consolidation under accounts principles would apply. However, in terms of valuation of the share options, there is nothing to stop the application of the valuation to a particular company's shares in the subsidiary operation. I hope that that more graphic example has been helpful.

Amendments Nos. 213 and 214 are basically designed to say that if the employee works for a company that is not his actual employer but, as the Paymaster General put it in her own words, is part of a continuing group relationship, relief should be available to the company if—this is an absolutely key requirement—the other conditions of the schedule are satisfied.

Amendment No. 220 follows the same argument. As I said earlier, the amendments are related. Amendment No. 220 would make relief available if the business were carried on by another company in the same group. The structure of the schedule is that relief is given to the employing company and that the business for the purposes for which the award is made must be carried on by the employing company. As in our previous discussion, that seems unnecessarily restrictive, particularly when matched against the genuine circumstances in the world of work, motivation and increasingly globalised business, in which there will necessarily be group operations, not least for fiscal purposes.

In many group situations, a dedicated group employer will employ all the staff and make their services available to other companies in the group. It is also common for staff to perform duties for more than one company in the group. It is frequently the case in a multinational group that a UK employee is actually employed by a company not within the charge to corporation tax but seconded to a UK trading company and receiving an award of shares or grant of option by reason of his work for that company. In such a situation, relief would appear to be restricted or lost. That relief should be available if the business for the purposes of which the award is made is carried on by another company in the same group.

I can best illustrate that with a simple example, and without straying too far into the overseas issue or the issue of companies that may not be chargeable in whole or part to corporation tax. As it happens, the matter arose in a rather amusing way during the course of the Eddisbury by-election in July 1999. Seeing that there was a by-election, Labour understandably put an enormous amount of effort

into researching the background of the Conservative candidate. Suddenly there was potentially a major story about why that candidate had 273 directorships listed at Companies House. It was seen as a massive opportunity to accuse the Conservative candidate of sleaze.

However, anybody who understands business recognises that in a plc it would be an absolute outrage to the shareholders, the customers, and all the stakeholders in the business, and the most inefficient use of management time and money, to have a company secretary for each of the 273 operating subsidiaries of that group company. In my case, the company was called Redland Secretaries Ltd. I was the chairman and director, and the assistant company secretary at group level, employed by Redland plc, was the other director. So, quite rightly, that person was secretary, under law, to all the operating subsidiaries. Naturally, I was therefore a director of 273 companies. When The Guardian was about to write the story, at the behest of Labour, I said, ''Please print.'' Unfortunately, because I was so keen for it to be printed, the story was withdrawn and the writer recognised that he had not understood business and nor had those who had been briefing him. That is the important issue.

George Osborne (Conservative, Tatton)

Is my hon. Friend aware whether the Labour party employee who dressed as a fox and pursued him around the constituency of Eddisbury for a month was on a share incentive scheme of any kind?

Nicholas Winterton (Conservative, Macclesfield)

Order. That is most interesting, but has nothing to do with the Bill.

Stephen O'Brien (Conservative, Eddisbury)

I am most grateful for your guidance, Sir Nicholas. I am fond of the memories, not least because neither the corporate accusations, nor the fox were able to take away from the fact that 500 MPs, desperately working to ensure that I did not arrive, none the less had to suffer my maiden speech. Although the example is personal, it ably demonstrates what we are discussing. My employer could have said, ''In order to make your administration of our group much more efficient, I want to give you an incentive by giving you shares in a company further down the chain than the plc.'' That would have given me a great incentive if the company could have been measured and valued in that way. There were plenty of opportunities, but, as it happens, I was granted plc share options. Sadly, they were under water, and I never benefited.

On amendment No. 221, the same issue comes up. The categories of companies whose shares can be acquired seem unduly restrictive, given the categories of companies set out in paragraph 4. It seems strange to extend the categories of companies whose shares can be acquired to consortiums, but to prevent shares from being acquired from the subsidiary of a listed parent, unless that subsidiary is the actual employer or a parent of the employer. The Law Society considers that any company in the same group as the employing company should qualify.

I have dealt with amendment No. 222. Amendments Nos. 213, 214, 220, and 221 all relate

to the same argument. I hope that it has been sufficiently demonstrated, and I look forward to the Paymaster General's response.

David Laws (Liberal Democrat, Yeovil)

The hon. Gentleman is developing quite an interesting and important argument in the light of the way in which modern business works. Can he perceive any asymmetry, in relation to how the Finance Bill might be amended, between allowing people to trade up through a group and to have shares in the group, and people trading down into quite small entities in the group that might be divorced from the interests of that part of the group in which the employee works.

Stephen O'Brien (Conservative, Eddisbury)

Obviously, that intervention was based on the hon. Gentleman's understanding of the way in which business works. I suspect that there may be some asymmetry in that the more that shares are granted down the chain, the more the areas in which any value creation or performance can be measured are restricted. The important point about share options is to harness key employees' incentivisation to the growth of shareholder value and the satisfaction of customers who produce that in a broad economic and commercial sense. The hon. Gentleman's point would have a negative effect on the argument only if one was looking to provide incentivisation at a more micro level within the group operating structure and if a fiscal benefit could be achieved by a company lower down the chain than at the plc, thus making the overall measurement of post-tax shareholder value more interesting at a geared and leveraged point relative to the performance and input of that key employee.

There may be that potential, but given that the overall group performance is where the shareholder value is measured, it is most likely to work in the other direction to maximise the contributory value of any subsidiary company operation into the overall consolidated accounts and thus the plc valuation. I hope that he recognises that my arguments on the nature of modern business, when there are often earn-outs with continuing residual family or former owner shareholdings and it could be important to create that value, or when there is a partial overseas operation and so often a tax grouping is available—for example, in Holland—which is not available here, it would be sensible to ensure that that was accessed if it could be done properly on a trade account basis to allow that measurement to be made.

I am grateful for the hon. Gentleman's question. I have put my answer on the record and if there are any wrinkles, they can be explored. I suspect that his anxiety is much assuaged by the motivation, which is to achieve maximum shareholder value, which is why share options are broadly seen to be an important part of today's remuneration package for key employees.

Amendments Nos. 216, 217, 218 and 219 would clarify the position when only part of a business is subject to corporation tax. The amendments speak for themselves, but we presume that when only part of the business carried on by the employing company is within that charge to corporation tax, the award or grant must be made for the purposes of that part of the

business carried on by the employing company, which is within the charge to corporation tax. If that is the intention, paragraph 3 should be clarified to make that clear, and that is supported by the Law Society. That is the purpose of the amendments.

KPMG is concerned about how the paragraph will operate in practice and equally concerned that many companies have mobile work forces with employees who may be seconded to work for overseas subsidiaries. It will not always be possible to assess whether the award is made for the purpose of the UK business or that of an overseas subsidiary. KPMG would appreciate clearer drafting or additional guidance to determine how companies will apply the rule as it envisages it causing considerable administrative inconvenience for companies with a mobile work force.

I hope that that approach is straightforward and deals with this group of amendments, albeit from two planks of argument. I look forward hearing the Paymaster General's response.

Dawn Primarolo (Labour, Bristol South)

In responding to this large group of amendments, which were helpfully and clearly laid out by the hon. Member for Eddisbury, I shall first make a few points about the purpose of the schedule. I will then be able to put his questions and amendments into that context.

Schedule 23 introduces a generous new corporation tax relief for the cost of employee share acquisitions and is deliberately targeted at shares that give employees a real stake in the business that they have worked for, encouraging productivity and growth. That does not extend to the use of shares in subsidiaries or unquoted companies or to non-commercial transactions that artificially manipulate the value of the shares. Those are characteristics of the avoidance scheme, which schedules 22 and 24 are aimed at. We have had that discussion already. Through that scheme, remuneration of £1.4 billion a year is channelled. I am sure that the hon. Gentleman would agree that it would be wrong to give statutory relief for avoidance schemes when the purpose of the schedules is to deal with them.

The draft legislation was published at the end of 2002, following informal consultation with the industry, and the new relief was widely welcomed as a set of clear, well-written rules that work effectively to deliver what companies want. As the Employee Share Ownership Centre puts it, it will deliver a major fillip to employee share ownership.

Schedule 23 matches relief for the employing company in tying in the amount with the taxation of the employee. That gives companies certainty against a background of uncertain accounting treatment. They told us during consultation that that was what they wanted above all else. It also provides a level playing field between the use of cash and shares as remuneration, and between large and small companies. It gives relief to the employing company in a group scenario, irrespective of the group company in which the employee works day to day, making for simplicity of operation. It will also enable companies

to do away with the complex and costly trust structures previously needed, benefiting smaller companies in particular.

It is expected that up to 5,000 companies will benefit and save a considerable amount of money. That has all been carefully drafted in consultation with the industry. It is important that we ensure that double relief cannot arise and that, wherever possible, it is not open to abuse. That incorporates a number of improvements suggested following publication of the pre-Budget report.

I begin by saying to the hon. Gentleman something that will be a theme as I proceed to respond during the debates. Taken in toto, the amendments that he tabled carry a cost of £2 billion. That should show him the scale of the avoidance or mischief that some, unfortunately, seek to achieve. I want to deal particularly with some of the hon. Gentleman's points.

Stephen O'Brien (Conservative, Eddisbury)

During the introduction of the amendments, I had a very useful exchange with the Paymaster General to clarify the aims of the amendments. They purely concern group operations. In relation to the mischief, she suggests that the amendments would cost £2 billion. First, it would be helpful if she could confirm whether that assessment is based on her original understanding or has been made in the light of our exchange. Secondly, does the £2 billion have an analysis attached to it? If so, it would be extremely helpful to see that so that I can ensure that my understanding of the source of the mischief is right, given that I still think that the amendments are an attempt to address the way in which real business works in the real world. We should not penalise those for whom incentives and remuneration are important.

Dawn Primarolo (Labour, Bristol South)

I want to stress, as I do not want any misunderstanding, that I am not suggesting for a minute that the hon. Gentleman is seeking to provide for mischief. I am referring to the total group of amendments—the whole debate on this schedule—because there are separate issues under these amendments, and I shall explain at each point where the possible double or triple relief would occur. I want to use that to underline the importance of striking the right balance between incentivising employees, providing relief for employers and delivering the policy objective for the company in which the employee works.

As I have already explained, the objective of the schedule is to simplify the corporation tax treatment of employee share schemes. Amendments Nos. 213 and 214 seek to remove the link between the employee and the employing company. They would make relief available to a company if an employee of a group company acquired shares by reason of employment with any company in the group. However, the relief is targeted at the employing company as the company with responsibility to maintain records for PAYE. That therefore minimises any additional administration resulting from the introduction of the relief, and makes it clear which company qualifies for the relief. We are talking there about the company that qualifies for the relief.

It is true that some respondents have voiced concern that the relief—I think that this is the point that the hon. Gentleman touched on—may not be available where employees move around a group, between options being granted and exercised, to acquire the shares. I can confirm that where that happens, relief is still available to the employing company that granted the option because that is the company that provides the shares. Although the amendments would not change the availability of the relief, they would lead—inadvertently, I am sure—to additional administration costs because groups would need to decide which company should qualify for the relief and ensure that the others did not incorrectly claim the relief as well.

Amendments Nos. 216, 217, 218 and 219 seek to change the rules requiring that the business awarding the shares is chargeable for corporation tax. I think that that arises from uncertainty about the meaning of ''business'' in the context of schedule 23. If that is the case, I can assure the hon. Gentleman on how the new rules will work, and say that the Inland Revenue will provide clarity on the rule in its guidance material. ''Business'' in this context refers to the trading and/or other activity of the company that is subject to corporation tax, not to the commercial activities of the company more generally. Because of that, the concept of part of a business does not exist. A trade, property-letting business or other activity is either taxable in its entirety in the UK, or it is not. If it is a UK taxable business, relief is available. If it is not, relief is not available. This is a sensible proposition about the UK tax system and encouraging growth in productivity and business that benefits the UK in terms of tax, productivity growth, jobs and future developments.

The amendments add nothing to the meaning of the rules. Amendment No. 218 may lead to excessive relief in the case of UK branches of a foreign-controlled company carrying on part of that company's trade in the UK. Amendment No. 220 seeks to expand the rule that requires business for the purposes of which the shares are awarded to be within the charge to corporation tax so that businesses can be the employing company or any other group company.

I am still not clear about the amendment's purpose. It might result from the need to make changes consequential on two other amendments, but it is more likely to arise from a misunderstanding of the way in which the legislation operates. The hon. Gentleman and I had an exchange as he was introducing it, where he raised the issues of service companies.

Officials in the Inland Revenue have received—this may be where the amendment comes from—a number of representations that relief will not be available if all employees in a group are employed by what is termed a service company. In such circumstances, rules would allow that service company to obtain relief. That is because it is the employing company, and its business is that of providing a work force to the rest of the group, for which it makes management charges. The amendment adds nothing to the way the relief works.

Amendments Nos. 221 and 222 seek to change the type of company whose shares, when acquired by employees, give rise to relief from corporation tax for the employing company. The new relief is designed to provide a corporation tax deduction for the costs of awarding shares that give employees a stake in the business, which is crucial to all the arguments on the amendments. It achieves that by allowing shares in the employing company, its parent company or a company above that in a group or consortium structure to be used. While the amendments make what appears to be a minor change by replacing ''parent'' with ''group'', the effect would be to allow shares in subsidiaries of employing companies or fellow subsidiaries in the group to qualify for relief.

I try to make it clear that the relief goes to the company that the employee works for. It is about where the relief goes, not necessarily where the shares are.

Stephen O'Brien (Conservative, Eddisbury)

The Paymaster General is relying on the idea that the relief is targeted and available to the company for which the employee works. Does that also mean, and is it intended to mean, that is the company with which the employee has their contract of employment? It is clearly possible to have a contract of employment with one company and also to work and devote one's services to another company within the operating group.

Dawn Primarolo (Labour, Bristol South)

Yes, it is the contract. That is precisely the point on service companies. I already answered that point for the hon. Gentleman about his fears about service companies. With regard to the change of parent or group, we do not consider that shares in fellow subsidiaries in a group structure or in subsidiaries of the employing company provide employees with a real stake in the business for which they work. The relief will work as designed, and will protect the Exchequer from loss of tax. The debate has been about clarification of the operation of the schedule. I believe that the hon. Gentleman moved his amendment on that basis. Where clarification of the practical use of the new rules is needed, that will be included in the Revenue guidance that is being prepared. That will be published in time to be of assistance to companies that are compiling their first self-assessment tax return for the accounting period starting on or after 1 January 2003.

We will pay particular attention to some of the points that the hon. Gentleman made this morning when we draft that guidance. I have given a long response to a large group of amendments, which go to the heart of the operation of the schedule. I hope that the hon. Gentleman feels satisfied. Should he seek to press the amendments, I will ask my hon. Friends to oppose them.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful to the Paymaster General for taking the care to offer clarification and address the issues that I have laid before the Committee. Amendment No. 220 should be

withdrawn in the light of the categorical assurance from the Paymaster General that business—

Nicholas Winterton (Conservative, Macclesfield)

Order. Amendment No. 220 has not been moved. Amendment No. 213 has been moved; we have simply discussed amendment No. 220.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful, Sir Nicholas, for your ensuring that I chart my amendments through arcane waters in which you have expertise beyond any that I am ever likely to have. Had amendment No. 220 been the lead amendment, it would have been fit to withdraw it in the light of the assurance given by the Paymaster General that the Inland Revenue intends to offer clarity on the definition of business.

The issues are genuinely complex. The Paymaster General made the valid point that there has been a helpful exploration of the broad thrust of the schedule. I am happy to postpone further consideration to another time. In the light of what is now on the record, others will be able to read our exchanges, and there may be further representations to Government and to us. It is possible that we will return to some aspects of this matter on Report, either on issues of definition or clarification. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Nicholas Winterton (Conservative, Macclesfield)

I congratulate the hon. Member for Eddisbury and the Paymaster General on the quality of debate on a very complex matter.

Stephen O'Brien (Conservative, Eddisbury)

I beg to move amendment No. 215, in

schedule 23, page 324, line 7, leave out

'the company mentioned in subparagraph (1)'

and insert

'the company by whom the employee is employed or if that company is not the company for which the employee actually works, the company for which he actually works.'.

I am grateful, Sir Nicholas, for your kind words—and I am sure that the Paymaster General shares my gratitude. It is rather concerning when one finds that people have been paying attention; they may have been listening too carefully on a subject that is always difficult to understand.

Amendment No. 215 seeks to extend the ambit of the relief. The point was raised with the Opposition—possibly with all Members of the Committee—by the Law Society, which considers that when the employee works for a company that is not his employer, relief should be available to that company if the other conditions of the schedule are satisfied. That point relates to points raised in the previous debate. I look forward to a brief response from the Paymaster General.

Dawn Primarolo (Labour, Bristol South)

The hon. Gentleman said that amendment No. 215 stems from a concern about how the relief will work when employees move around within a group. I hope that the amendment was moved merely to elicit clarification. We touched briefly on the subject in the previous debate.

Schedule 23 is designed to provide relief to the employing company when employees acquire qualifying shares, irrespective of where within the group the employees are working at the relevant time.

Relief is provided to the employing company rather than to another company in the group, because the employing company is responsible for operating PAYE. To fulfil that responsibility, the employing company keeps employees' remuneration records, which will also be needed to determine the timing and amount of relief available under schedule 23. Providing the relief to the employing company will therefore help to keep the administrative burden to a minimum.

The amendment would lead to an increased administrative burden, and to uncertainty about how the rules should apply. For instance, when an employee, such as a senior manager, is mobile within a group and works regularly at a number of different companies, the current rules provide relief to the employing company. However, the changes proposed in the amendment would mean the relief being apportioned to each and every company at which the employee worked; that would significantly increase administration and record-keeping requirements. That answers the hon. Gentleman's query about why we are keeping the relief in one place. We have married that provision with the PAYE obligations in order to produce simplicity of record keeping for the employing company.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful to the Paymaster General. Her explanation has added to the clarification that she gave on the previous group of amendments.

Only one point remains. The employing company receives the relief irrespective of where the employee is working within the group. My residual concern is that although I recognise both for companies and for the Revenue of the genuine administrative efficiency to be gained from ensuring that PAYE administration is kept at one company, the real issue is whether there is any potential distortion about which company should grant the options. My query is whether that is a PAYE administrative issue, or whether one should be trying to align the employees' incentives—as part of their remuneration package—to the true companies in a group that are the value creators for the shareholders, customers and all other stakeholders.

Dawn Primarolo (Labour, Bristol South)

Relief is given to the employer company to recognise the benefits of share ownership and to keep administration to a minimum. The hon. Gentleman touched on losses. If losses arise, group relief allows the group as a whole to retain the relief. At each point of its operation, we are trying to keep record keeping for the group as simple as possible, given the obligations on companies to report the issue of shares to the Inland Revenue.

Stephen O'Brien (Conservative, Eddisbury)

That was helpful. There is no question about the need to be administratively efficient in record keeping and in the normal consolidation procedure, both in accounting and, in relation to the reliefs, in the fiscal consolidation that enables tax buffers to be calculated, to try to get a steadier stream of earnings—which will then give greater confidence to shareholders, and greater value—given that there will be flexibility and, inevitably, volatility between markets where an international group of companies

is involved. All that is perfectly understood, and the Paymaster General's explanation was helpful.

All that I leave on the record is the need to ensure, as people reflect on our debate and consider whether there are other points that they wish us to address before or on Report, that there is no potential distortion caused by the administrative efficiency driver. That driver may not necessarily enable companies in the future to align incentivisation to the group company that is most likely to be creating shareholder value, which will be a greater company, with more sustainable job prospects.

Michael Jack (Conservative, Fylde)

I wish that I did not have to intervene on my hon. Friend. In his remarks, he teased from the Paymaster General a very brief, passing observation about company losses in connection with the reliefs to which the amendment refers. I was going to explore whether in a loss situation there is any roll-over for the reliefs related to the granting of the shares. Has my hon. Friend explored that intriguing point?

Stephen O'Brien (Conservative, Eddisbury)

I am grateful to my right hon. Friend for having placed the point on the record. In the normal operation of such matters, and where losses can be consolidated, there is a natural, in-built, roll-over provision in one sense because share option plans have a time period. However, that is primarily connected with reliefs, according to the fiscal accounting rules applicable to each company. I am sure that, by placing his point on the record, my right hon. Friend, too, has enlisted a future response. If it is worthy of a letter, I dare say that he will find one winging its way to him from either the Revenue or the Paymaster General. I am grateful to him.

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Gerry Sutcliffe (Labour, Bradford South)

I beg to move, That further consideration be now adjourned.

George Osborne (Conservative, Tatton)

I do not want to try to Committee's patience, or upset any agreement reached by the usual channels. I do not want to get on the wrong side of my hon. Friend the Member for Spelthorne (Mr. Wilshire)—I can see him looking a little surprised and concerned that I have got to my feet. However, I have a couple of concerns over why the Committee is being asked to adjourn at this stage, a full hour before we expected to, at considerable inconvenience to the diaries of many Committee members. I assume that the explanation is that there are Treasury questions in the House.

I see that one Treasury Minister is busy swotting up on his questions. Surely he should know the old adage given to schoolchildren: do not swot for exams at the last moment. I would have assumed that the Treasury Ministers had done their homework and spent many hours thinking of the careful and measured responses that they would give to Members' questions. It is really extraordinary that the Committee is being asked to adjourn to give Ministers a little extra preparation time.

There is of course another possible explanation.

David Laws (Liberal Democrat, Yeovil)

The reshuffle?

George Osborne (Conservative, Tatton)

As the hon. Gentleman says, it is a nervous day for junior Ministers. We understand the pain that they are going through. Their minds may not be entirely focused on the job, because they may not have one this afternoon, or they may have another job. I know that the Ministers will be keen to head off and sit by their telephones waiting for that all-important call. That is not an entirely proper reason to adjourn the Committee, but it is an entirely human one. I am prepared to consider the request.

Stephen O'Brien (Conservative, Eddisbury)

My hon. Friend the Member for Tatton (Mr. Osborne) has put his arguments on a certain basis. One of the very few things that we in the Opposition have, although it is frustratingly not sufficiently cogent in terms of the political firmament, is that Ministers cannot be sure which questions we shall ask. I hope that the swotting up is extensive.

The most important thing that we need to address is that the proceedings this morning will be foreshortened by 55 minutes. I am conscious of the fact that it is in the interest of the Committee and the House to seek to ensure that we cover the provisional selection of amendments by the conclusion of the Committee's proceedings intended at 5 pm on Tuesday 17 June. Taking any time to debate this sitting takes more time from our proceedings.

I cannot see how we are going to cover this schedule, which the Paymaster General accepts is not uncomplex. It requires a proper exploration. We understand what the Government are driving at, but it is proper that we should give it full scrutiny. I place on the record that we may need an extra sitting to get through the schedule. I hope that that will be part of the discussion that is going on.

Gerry Sutcliffe (Labour, Bradford South)

I may be able to shorten the debate somewhat. This is not an unusual step; those who have been on the Finance Bill Committee before have seen such clashes occur, and they have been accommodated on previous occasions. To answer the hon. Gentleman's point, we are looking at extra time to replace the hour lost this morning.

Stephen O'Brien (Conservative, Eddisbury)

I am most grateful, and welcome that. Once we get through schedule 23, I expect that we should be able to make rapid progress. It is important that we cover the whole Bill if we can.

Michael Jack (Conservative, Fylde)

I admit to being taken aback at the fact that we have been invited to end. Just as we were limbering up to our task this morning, we are stopped

in our tracks. There is an important point of principle at stake. The adjournment appears to be connected to Treasury questions, but that date was known when the original timetable for the Committee's proceedings was decided. If we are to adjourn in future, and there may be good reasons why an adjournment has to be sought, such things should be taken into account in the timetable. As a Committee picks up its own pace and rhythm and hon. Members can follow arguments, as my hon. Friend the Member for Eddisbury said, on complex, inter-connected amendments, one needs continuity of discussion and cerebral engagement. However, here we are being cut off—perhaps not at the head but at least at the knees. I can understand that, but I hope that the usual channels will reflect on it. The hon. Member for Bradford, South (Mr. Sutcliffe) said that there have been clashes. This is not a clash; it is a civilised discussion of an important motion.

David Wilshire (Conservative, Spelthorne)

I shall resist the temptation to speak until 25 minutes past 11. In my more mischievous, youthful days, I might have succumbed to that temptation. All I want to say is that I am grateful to my opposite number, the hon. Member for Bradford, South, for giving me notice of the motion. Our willingness not to fight this as a matter of principle is based on the offer of an extra hour in replacement. On that basis and that basis alone, Conservative Members are willing to accept the motion. It leaves open the other issue of whether, in principle, there is enough time for the whole Bill, but that is not the subject of this argument.

Nicholas Winterton (Conservative, Macclesfield)

Unfortunately the decision about the length of the Committee stage has been made by the House, but at all times I seek to represent the best interests of Back Benchers and all members of the Committee. Clearly, I am reassured by the Government Whip's assurance.

However, I give notice that, inevitably, as we are varying the decision taken by the Committee in respect of the motion to adjourn and the Government Whip has given us the assurance that we will have an extra hour, there will have to be a meeting of the Programming Sub-Committee. It is hoped that that will take place five minutes before our 2.30 pm sitting. I hope that those who are members of the Sub-Committee will take note of that and be here.

Question put and agreed to.

Adjourned accordingly at twenty-five minutes to Eleven o'clock 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 R&D tax credits for oil exploration.)

Gerry Sutcliffe (Labour, Bradford South)

I beg to move,

That the Order of the Committee of 15th May 2003, as amended by the Orders of 5th June 2003 and 10th June 2003, shall be further amended by leaving out in the second column of the Table the words ''5 pm on Tuesday 17th June'' and inserting the words ''6 pm on Tuesday 17th June''.

David Wilshire (Conservative, Spelthorne)

I do not know whether to congratulate my opposite number on still having his job or to commiserate that he has not been moved to something more important. We shall soon find out his fate.

I am more than happy to support the proposal, because it honours a specific agreement to make up the hour we lost this morning. If I repeated what I said at column 403 of the report of our proceedings, Sir Nicholas, you would tell me that I was repeating myself. Suffice it to say that our objections in principle still stand, but I shall not bore the Committee by repeating them. My view is that we do not have enough time in general to deal with the Bill, but I shall not rehearse the arguments.

Question put and agreed to.

Schedule 23 - Corporation tax relief for employee share acquisition

Stephen O'Brien (Conservative, Eddisbury)

I beg to move amendment No. 225, in

schedule 23, page 324, leave out line 30.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following:

Amendment No. 226, in

schedule 23, page 324, leave out lines 31 to 38.

Stephen O'Brien (Conservative, Eddisbury)

Sir Nicholas, I welcome you back to the Chair until you are temporarily replaced because of having to leave for very eminent matters.

The amendments target the same point and probe the thinking behind the provision. I hope that the Minister's response will not require me to press the matter further, but we must wait and see.

The origin of the ordinary share requirement comes from approved share plans when the state's intention was to ensure that employees received only proper shares. That now sounds a touch patronising, but in the days when share options and share plans were in their infancy it was understandable in order to

encourage that form of added incentive in the remuneration of key employees. The scheme has now spread, so that even the phrase ''key employees'' is redundant, because all parties in the House now want employees to have the widest possible share involvement in the enterprises with which they work.

There is no such limitation on tax changes in schedule 22, and PAYE is extended to any company that does not qualify for schedule 23 relief. The purpose of the amendments is to remove an unnecessary restriction. Paragraph 4(3) is causing problems in the private equity arena in which, as I am sure the Paymaster General is aware, flexibility, fluidity and liquidity are the key points of the approach to supporting enterprise fairly and competitively.

When more than half a company is owned by a private equity fund constituted as a limited partnership, relief will not normally be available because the shares, and thus the voting rights, will be held by the general partner—typically a limited company—on behalf of the partners. That seems unduly restrictive, particularly given the changes to PAYE and national insurance rules under paragraph 15 of schedule 22.

The Chartered Institute of Taxation puts it rather well. It comments that the ''kind of shares acquired'' condition in paragraph 4 must be met when an option is exercised for relief to be available. If an option is exercised over shares in an independent company—a company that is not under the control of another company—the conditions in paragraph 4(3)(b) will be met. However, an issue will arise if an option is exercised immediately following the takeover of a company. As we all know, that is not a rare event, particularly in this country. Thankfully, although there can be extreme pressure in relation to competitiveness and the independence of companies, that demonstrates that competitiveness exists and, above all, that there is liquidity, by sharp contrast with, for instance, the Mittelstand in Germany.

Many share option plans contain a rule that will allow an option to be exercised on a change of control or for a short period thereafter. However, if a company is taken over by another company, the requirement in paragraph 4(3)(b) cannot be satisfied on the date of exercise as, by definition, the company will be under the control of the company that has taken it over. Unless, for example, the acquiring company is listed, no corporation tax relief will be available in respect of the exercise of those options if relief is available under paragraph 4(3)(c). That appears to be an unintended result of the new legislation and seems to distort the takeover of companies in favour of listed acquirers. I dare say that the Paymaster General is not looking to favour listed acquirers over those that are not listed, not least because of the need to maintain a totally transparent and open opportunity.

According to the Chartered Institute of Taxation, a similar issue arises in the context of approved share options. The issue arises if the option is exercised following a change of control or if an option is exchanged for another option immediately following a

change of control. Again, that is not uncommon. In my experience, it can be quite common when a foreign company takes over a UK company, replacement share options are considered to be a benefit for those who continue as employees—very often that provides an incentive—and the share options are in a new company that is a UK subsidiary of the controlling foreign company.

The Chartered Institute of Taxation states:

''We understand that, in these circumstances, the Inland Revenue do not take the point that the shares would fail the test in, for example, paragraph 17 Schedule 4 ITEPA.''

It would be helpful if the Paymaster General confirmed that relief under schedule 23 will continue to be available in those circumstances.

I hope that I have made the main thrust of the two amendments clear. I look forward to the Paymaster General's response. If it is favourable, I certainly will not press the amendments further.

Dawn Primarolo (Labour, Bristol South)

The amendments seek to remove all restrictions on the types of shares that qualify for relief under the schedule. That defeats the policy aim of providing relief only for shares that give employees a real stake in the company for which they work. It would allow relief in respect of shares used in tax avoidance schemes, which is precisely what we are trying to deal with. The amendments would also leave the heading for paragraph 4 intact, and sub-paragraph (1) would read:

''The shares acquired must meet the following requirements.''

That sub-paragraph would be left in splendid isolation. I shall urge the Committee to resist the amendments if the hon. Gentleman decides to press them to a vote.

The schedule provides corporation tax relief to the employing company for the cost of providing shares to employees that give them a real stake in the business for which they work. Such shares must meet the criteria that they are part of the ordinary share capital, are fully paid up and non-redeemable and are shares in the parent company of a group, or in a subsidiary company, provided that the parent is a quoted company. Shares in independent companies also qualify. We discussed much of that earlier.

Shares in subsidiaries of unquoted companies, and other types of shares excluded by paragraph 4 of the schedule are, unfortunately, frequently used in tax avoidance schemes. The rules in the schedule exclude such shares from the definition of qualifying shares to ensure that those intent on manipulating the value of shares to avoid paying their fair share of tax and national insurance do not gain an unfair advantage in terms of the employing company's corporation tax.

We accept that in a limited number of circumstances relief under the schedule may not be available. That appears most likely to occur as a result of the way in which certain venture capital investments are structured. We touched on that issue in earlier debates. However, relief for the acquisition of shares

by employees is given when the employees are taxed as a result of acquiring the shares, which is often after the venture capital investors have relinquished control of their investment target. In such cases, the employing company or group would not be under the control of another company, and relief would be available.

Alternatively, relief for the cost of providing the shares may be available under rules in schedule 24, if contributions are made to an intermediary to provide shares to employees who do not meet the requirements of schedule 23. The amendments would remove the targeting of the relief to shares that provide employees with a real stake in the company for which they work, and would provide potential for those seeking unfairly to reduce their corporation tax, which I am sure is not the hon. Gentleman's intention.

Although it would be premature to relax the anti-avoidance rules, which are designed to protect the schedule, before the new rules in schedule 22 settle down, we shall closely monitor developments. As I confirmed to the Committee in earlier debates, Inland Revenue officials have already met the British Venture Capital Association and dialogue is taking place to ensure that, while the schedules interact to address the issue raised by the hon. Gentleman, the anti-avoidance rules remain intact. We must also see how the rules operate and how venture capital trusts continue to structure themselves.

I hope that, with that explanation, the hon. Gentleman will not press his amendment. Should he do so, I shall ask my hon. Friends to vote against it.

Stephen O'Brien (Conservative, Eddisbury)

That was helpful, particularly as the relief will be monitored as a matter of practice. I understand that a balance must be kept between the anti-avoidance intent and the need to retain competitive flexibility, not least through the British Venture Capital Association and others, which will no doubt continue to be consulted and to make representations. From what the Paymaster General said, we can expect guidance from the Inland Revenue, which will be a sensible way to proceed. If the legislation needs to be ameliorated or changed there may well be such measures in the next Finance Bill. The amendments were probing amendments, and the discussion has been helpful. Therefore, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Stephen O'Brien (Conservative, Eddisbury)

I beg to move amendment No. 227, in

schedule 23, page 325, leave out lines 6 to 7.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following:

Amendment No. 228, in

schedule 23, page 325, line 26, leave out 'award' and insert 'shares'.

Amendment No. 229, in

schedule 23, page 325, line 35, leave out from 'to' to end of line 41 and insert

'the amount on which the recipient is liable for income tax, or would be if the conditions specified in paragraph 7(2) were met.'.

Amendment No. 230, in

schedule 23, page 326, line 24, leave out from 'recipient' to end of line 28 and insert

'is liable for income tax in respect of the shares, or would be if the conditions specified in paragraph 7(2) were met.'.

Amendment No. 231, in

schedule 23, page 329, line 23, leave out from beginning to end of line 7 on page 332.

Stephen O'Brien (Conservative, Eddisbury)

Schedule 23 permits tax deductions for employers where employees receive share rewards, restricted shares or options, but it leaves out a lot of the new provisions introduced by schedule 22. We accept that we are seeking a balance, but because the provisions are anti-avoidance it is harsh to deny a tax deduction for the income. Shares subject to forfeiture are included in schedule 22 as an anti-avoidance provision, which the amendments are designed to address.

The likely answer from the advice that I have received, and my own speculation, is that schedule 23 may have gone out in draft form last Christmas and may have been prepared by people who were not necessarily involved in planning the surprises in schedule 22. I am sure that the Paymaster General will accept that that is not sufficient reason not to align the two schedules to allow employers' tax deductions for any share awards. If the legislation taxes an employee on the grounds that they have received an employment benefit, employers should be allowed a deduction. Amendments Nos. 227 and 228 are admittedly probing amendments, which are mirrored by amendments Nos. 229 and 230.

Amendment No. 231 proposes that part 4 should be left out—apologies are due to the draftsman who worked on it. I shall pray in aid of the amendment a couple of comments. The accountancy firm Grant Thornton says:

''Schedule 22 contains substantial amendments to schedule 23 (paragraphs 59 to 73). As Part 4 has been entirely substituted and a new Part 4A has been inserted, along with the numerous other amendments, it is virtually impossible to interpret the consequences. It is incomprehensible why the changes could not have been reflected in Schedule 23 itself.''

We have specifically sought to address that problem. I hope that the Paymaster General recognises that our approach is helpful rather oppositional.

Ernst and Young says:

''The Revenue are targeting a number of very specific types of planning.''

The Paymaster General used the word ''targeting'' in her previous answer. Ernst and Young goes on:

''It will be interesting to see . . . whether the Revenue have inadvertently caught any 'non-artificial' arrangements in their zeal to close these perceived loopholes.''

The Paymaster General will accept that a broad theme in the debate is our attempt to find, by proper scrutiny of the Bill, where the balance lies and what the Government truly intend by their judgments in putting forward the legislation. The probing amendments are important, not least because there is great concern about the lack of consistency and intelligibility in the interaction between schedules 22 and 23. I reserve judgment on whether we will press the amendments, but at this stage they are probing amendments.

John Baron (Conservative, Billericay)

I seek clarification from the Paymaster General on paragraph 8(1) of schedule 23, which is somewhat ambiguously worded. One could attach at least two or three different meanings to it and the consequences of following through the equations set out in it. I do not wish to go over old ground but, as we know, schedules 23 and 24 can give deductions in corporation tax for companies only if they provide benefits to employees. We know that schedule 24 restricts deductions, whereas schedule 23 gives deductions if benefits are provided to employees, which includes provisions to employees, to third parties and to employee benefit trusts. That is where paragraph (8) does not help, and I seek clarification from the Paymaster General.

I am thankful to the Law Society of Scotland for making me aware of what may be an anomaly. If I may just test the Paymaster General's patience for a second, I shall take her through an example that, I think, illustrates why paragraph (8) is badly worded. Let us say that a company made a contribution—gave money, or whatever—to an employee benefit trust of £50,000 to allow that EBT to purchase shares from employees at the then market value of £50,000. If the EBT then granted options to other employees to acquire shares from it at their then market value of £1 per share, and the options were exercised at a time when the shares were worth £500,000, it could appear from paragraph 8(1) that the company could claim a corporation tax deduction of £400,000. That is on account of two words in paragraph 8(1)(b), which I think need clarification: ''or another''. Paragraph 8(1)(b) reads altogether,

''the total amount or value of any consideration given, by the recipient or another, in respect of the shares.''

I should like the Paymaster General's clarification, because the meaning of that could be misconstrued.

I should also like to ask the Paymaster General to look at paragraph 8(1)(a). When defining the word ''award'', are we talking about the grant of an option or the exercise of a benefit? Which of the two meanings that one ascribes to the word ''award'' has a direct effect on the calculation. I would appreciate clarification because the meaning of the paragraph has caused some concern in certain circles. For example, it is felt that companies may be able, quite unfairly, to deduct far larger amounts by way of relief from corporation tax than they otherwise should.

Dawn Primarolo (Labour, Bristol South)

I need to start by posing a question to the Committee, having listened to the hon. Member for Billericay (Mr. Baron), who advanced the point that the Law Society of Scotland wanted to be raised in Committee, and who asked for clarification. Why should the Government provide for an alignment, which would cater for restricted and convertible shares to be used, when they are being used specifically for avoidance? During the six years in which I have held various posts in the Treasury and examined taxation, one of the challenges that I have found most difficult concerns trust. I have been chastised by the hon. Member for Yeovil (Mr. Laws) for that. I trust that the Government write legislation in a particular way and answer questions about the operations. People whom I never see cleverly make

sure that people get relief, even though that was not the intention. In considering the issue, and not wishing to take the hon. Gentleman's name in vain, I think that he questioned whether it was wise for a Government, or a Minister to demonstrate that type of trust, particularly when relief was being put into the system. We are talking about reliefs in the system, and ensuring that they are used for the purpose for which they were provided.

I urge the Committee to resist the amendments because they would remove part 4 of schedule 23. That part provides relief when the shares acquired are restricted shares. The effect of the amendments would be to remove completely part 4 of schedule 23 while appearing to preserve relief for restricted shares by making changes to the wording in part 2 of the schedule. However, they only partially remove references to part 4 where they occur throughout the schedule. That will produce an anomalous result and will not achieve the intended effect. For instance, references to part 4 would remain in parts 1, 3 and 5 of schedule 23, but part 4 itself would no longer exist. That is not what the hon. Member for Eddisbury (Mr. O'Brien) was trying to achieve, and I am sure that he would agree that that would be extremely unhelpful, to put it mildly, for those who would apply the rules in practice.

The amendments do not reflect the impact of the changes being made to schedule 23 by schedule 22. Schedule 22 changes the way restricted shares are taxed on employees and has allowed us to expand the relief in schedule 23. We are trying to curtail what we do not want in the tax system while trying to assist corporation tax relief, which we think is rightly and justifiably in the tax system.

After an appointed day, companies will get relief in relation to all types of restricted shares at the same time and equal to the amount on which the employee is taxed in respect of those shares. Previously, relief was available only in respect of forfeitable shares at the time when the conditions of forfeiture were lifted. Although the amendments would remove part 4 from schedule 23, they would not hinder the introduction of the new and extended part 4 from the same appointed day from which the changes introduced by schedule 22 take effect. The consequence would be legislation with incorrect and ineffective references and signposts, which would be impossible to operate.

Schedule 23 provides relief on the correct basis in respect of restricted shares acquired by employees, and that is why the Government have included the schedule. A number of questions were encapsulated in what the hon. Member for Eddisbury said: first, why is schedule 23 amended by schedule 22? The reason is clarity, and that relates to the fact that schedule 23 is effective from 1 January 2003, with changes being made to it from an appointed day to coincide with the rules introduced in schedule 22. By making the changes to schedule 23 in schedule 22, employers have certainty that the rules in schedule 23 will apply from 1 January until they are changed and extended by schedule 22 on the appointed day. That

avoids the need for the complex transitional rules that would have been required to make all the changes in schedule 23.

Furthermore, because of the changes to the way in which restricted and convertible shares are taxed, it has been possible to extend the scope of the relief provided by schedule 23 to include shares that carry restrictions other than the condition for forfeiture and shares acquired on conversion of convertible securities. Employers who offer employees such shares should welcome the exemption.

The hon. Gentleman asked about alignment. The rules in schedule 22 have been designed to ensure that restricted and convertible shares that are used properly in normal commercial circumstances are subject to a fair taxation system. In such cases, it is right to give the employer the corporation tax deduction. However, if such shares are misused for avoidance purposes through artificial value manipulation, schedule 23 is designed to ensure that no corporation tax relief is given. Surely, that point had to be addressed.

Finally, the hon. Member for Billericay gave an example of the interaction of paragraphs 8(1)(a) and (b) in respect of the grant of options and the exercise of benefit. I wonder whether he will bear with me and allow me to write to all members of the Committee on the matter. My answer will be placed in the Library and, as such, would become part of the record. To be perfectly honest, I cannot just at this moment manage the intellectual acrobatics that are necessary to ensure that I get the answer right.

John Baron (Conservative, Billericay)

I fully accept that explanation and shall look forward to receiving the Paymaster General's letter in due course. I just wish to ensure that she understands the point that I am trying to make, because it is extremely important.

I believe that we all agree that a company should get tax relief only on the amount of value that it transfers. The paragraph is worded such that that would not be the case, given the interaction between paragraphs 8(1)(a) and (b). Paragraph 8(1)(b) could allow companies to claim tax relief far in excess of the value of benefits that they had given to employees. It is only fair that the wording should be reconsidered, if only because it creates ambiguity.

I stress the two phrases that need clarification. What is meant by ''award'' in paragraph 8(1)(a)? Is it the grant of an option or the exercise of a benefit? In paragraph 8(1)(b), ''or another'' must be clarified, because it could mean that the actual cost of the transfer is double counted. I look forward to receiving the Paymaster General's clarification on those questions.

Nicholas Winterton (Conservative, Macclesfield)

Order. That was a rather long intervention.

Dawn Primarolo (Labour, Bristol South)

I thought, Sir Nicholas, that it was a helpful intervention. I understood the hon. Gentleman to be asking about the difference between the value of the share when it was transferred and the market value, and about the point at which the employee will be taxed and the company will get relief.

The award of shares is not exercised on an option. It is the giving of the shares to the employee for less than the market value that is the issue. The employee would be taxed on the value obtained, as the hon. Gentleman said. Corporation tax relief would be due on that amount. He asked for clarification of the interaction of those three points. That explanation stands, but I shall write to him on the either/or point to ensure that I have given him the correct answer. However, as I understand it, that is how the clause operates.

John Baron (Conservative, Billericay)

I thank the Paymaster General for that answer. To help me to understand her answer when she finally writes, I suggest that she uses the example that I have given—the £50,000 and the £500,000—because it would keep the argument consistent and help understanding.

Dawn Primarolo (Labour, Bristol South)

Yes. I confirm that we will take the details from Hansard to make sure that we follow that example closely, and I shall ensure that all members of the Committee receive that letter. That is no problem.

Stephen O'Brien (Conservative, Eddisbury)

The Paymaster General has helpfully addressed the points raised by my hon. Friend the Member for Billericay. I welcome her promise of a letter of further clarification to be placed in the Library, using the example that my hon. Friend quoted. My hon. Friend's point about interaction is important and valid, but he will find that some of the principles underlying paragraphs 8(1)(a) and 8(1)(b) will surface in our discussions on amendment No. 232 and the amendments grouped with it. I believe that most of the arguments will be contained in that section, so we may be able to explore the issue a little further.

The issue was touched on in the last debate and we hope that, although the Paymaster General may have been in post for six years, she will not be denied completion of her trenchant defence of the Bill from this day forward. We hope that we shall be able to welcome her to her continuing post.

I shall not go back to the detail of our discussion, which would, to coin a phrase that I have not heard since I was studying at university, be otiose. I hope that it is common ground that nobody is trying to gain relief from corporation tax or to promote anti-avoidance schemes to the detriment of revenue due from the taxpayer to the Government. However, a balance must be struck between what the Paymaster General described as the impossibility of operation and intelligibility, or the impossibility of understanding in the first place. Intelligibility is based on consistency and easy cross-referencing of the provisions. As the Paymaster General admitted, there is an interesting interaction between schedules 22 and 23, not least because some of the provisions are hooked to the appointed day. However, consistency not only improves monitoring but enables those who have to put the provision into practice to understand it and, therefore, to comply. We have been seeking intelligibility, as that is most likely to lead to compliance with the provisions and will help the Government to secure the anti-avoidance mischief that they want to address.

The amendments, which I said at the outset were probing in nature, were deliberately framed to cover alignment. I hope that the Paymaster General does not treat seriously the fact that some drafting inconsistencies may remain. The amendments were intended to elicit a response. I shall not press them to a vote, but I hope that, as a record of the debate will be studied not least for the preparation of the letter, those who have to operate the relief will appreciate any further thoughts that can make the matter clearer. Ultimately, that will also benefit the Government and, in due course, taxpayers who are in receipt of those funds via the Government. I therefore beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Stephen O'Brien (Conservative, Eddisbury)

I beg to move amendment No. 223, in

schedule 23, page 327, line 27, after 'consideration', insert

', apart from the release of the old option,'.

The amendment relates to old options. A Law Society representation considers that, in determining the amount of relief when there has been a takeover, any consideration given in respect of the grant of the new option that consists of the release of the old option should be disregarded. If the release of the old option is not disregarded, the amount of relief available when the new option is exercised may be unduly restricted. The amendment is intended to enable the release of an old option to be disregarded for the purposes of determining the amount of relief.

The amendment is intended to probe, but as it is simple I hope that the Paymaster General will accept it.

Dawn Primarolo (Labour, Bristol South)

I understand the hon. Gentleman's point. His amendment seeks to put it beyond doubt that the value of options given up in the circumstances dealt with in paragraph 13 is disregarded from the calculation of the relief in the same way as it is disregarded when taxing the employee.

I am sorry to do this to the hon. Gentleman, but officials have consulted parliamentary counsel—always the ace in a Committee. Parliamentary counsel confirms that the additional words proposed in the amendment are not necessary to clarify the interpretation. However, it would assist the day-to-day application of the new relief if the point were clearly explained in the Inland Revenue guidance on the operation of the schedule.

I said that I was sorry to do that to the hon. Gentleman because, as far as Ministers are concerned, parliamentary counsel is all four aces when it comes to being the final arbiter on the drafting of Bills. Ministers challenge the interpretation at their peril. I sincerely hope that aspiring Ministers in the decades to come will also consider such challenges unwise.

Mr. Michael Jack (Fylde) rose—

Nicholas Winterton (Conservative, Macclesfield)

I fear that I have to call a former Treasury Minister.

Michael Jack (Conservative, Fylde)

I do not want to intrude on the tremendous interplay of intellect, but it has always been my understanding that Ministers are ultimately responsible for the legislation that goes before the

House and Committees. Parliamentary counsel is wise, but not infallible. Ministers are responsible and it is for them to decide. If, in the judgment of the Paymaster General, the words require further exemplification and clarification in Treasury guidance, that raises the interesting point that there may still be, in the words of my hon. Friend the Member for Eddisbury, some scintillas of doubt. If that doubt remains, on Report a further and entirely clear version of what we are discussing could find its way into the Finance Bill.

Nicholas Winterton (Conservative, Macclesfield)

Order. I think that the Paymaster General was trying to be helpful and transparent.

Stephen O'Brien (Conservative, Eddisbury)

That is your unique interpretation, Sir Nicholas. The capacity of parliamentary counsel for the work that they have to undertake to meet the volumes of legislative proposals that emanate from the Government knows no bounds, but when they are prayed in aid it is an extraordinarily difficult area of parliamentary proceedings. Making that advice transparent and available to us is always resisted. The issue is real and serious. When parliamentary counsel is prayed in aid the advice should be available to Members for consideration.

John Burnett (Liberal Democrat, Torridge and West Devon)

I apologise that I was not able to be here at the start of proceedings today, and I am only just catching up with the debate.

Presumably, there can be a netting down if the transactions are done in the same document. Presumably what concerns the hon. Gentleman is that if there is a netting down, the adjudication office might want to consider the matter. It seems entirely unfair that there should be two doses of duty if there is a set-off cost surrendered against the new price.

Stephen O'Brien (Conservative, Eddisbury)

What the hon. Gentleman says is broadly correct, but the thrust of my proposal is to put the matter beyond doubt and ensure that there is clarity. My right hon. Friend the Member for Fylde (Mr. Jack) asked whether Treasury guidance was needed. If it is needed, it is welcome, and we hope that it would be available. The amendment was an attempt to include it in the Bill.

I think that the Paymaster General would agree with me in saying that hopefully the pride of authorship would never creep in to the defence of the drafting of any legislation. I still feel that the amendment makes a helpful clarification to the Bill. It was, after all, Sir Winston Churchill who famously referred to ''advisers on tap, not on top''. It is true that however much parliamentary counsel says guidance is not needed, it is something on which clarification has been sought.

Rather than press the matter to a vote, I shall withdraw the amendment. It may be helpful on Report if we introduce a broader clarification of the matter. The fact that we have placed this on the record, may allow the Paymaster General to reflect on it.

Dawn Primarolo (Labour, Bristol South)

There is obviously a lesson here for me: do not try to be helpful to the hon. Gentleman.

I was more than surprised by the comments of the right hon. Member for Fylde. I would not care to go through the debates on previous Finance Bills and see how many times he came down on the side of parliamentary draftsmen. Of course I take responsibility for the matter, so let us try another way. Not only is the amendment not needed, but to make it work would require changes in a large number of other areas. New rules would have to be introduced into schedule 22. I was trying to be kind to the hon. Member for Eddisbury. Not only is the amendment unnecessary; it does not even work and would require more changes to schedule 22, which would make the provision more complicated.

John Burnett (Liberal Democrat, Torridge and West Devon)

Perhaps the Paymaster General would clarify the matter by saying the net price that would be charged to stamp duty.

Dawn Primarolo (Labour, Bristol South)

I am not sure whether the hon. Gentleman was in the Room when I clarified the position on the point made to me. The takeover is the value of the old option disregarded. That proposition was put to me, and I answered it. I shall not repeat my answer; if the hon. Gentleman checks the record, he will find it.

Stephen O'Brien (Conservative, Eddisbury)

When the hon. Member for Torridge and West Devon (Mr. Burnett) looks at the record, perhaps he might want to consider the tax we are dealing with. We dealt with stamp duty last week; we are now on to corporation tax. [Interruption.] The Paymaster General says from a sedentary position that she was trying to be even more helpful by not observing that fact. I hear what she says.

Where an amendment is put forward in an attempt to flush out something that is important, I do not claim pride of authorship. A genuine point has been identified. If the Government then table amendments to address any irregularities and make the measure work, that would be welcome. However, there is enough on the record for us to consider the matter again when there has been time for reflection.

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Stephen O'Brien (Conservative, Eddisbury)

I beg to move amendment No. 232, in

schedule 23, page 328, line 25, at end insert—

14A. Where under generally accepted accounting practice the employing company recognised an expense in connection with the grant of an option, the amount of relief is equal to the amount of the expense recognised on grant.'.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following:

Amendment No. 236, in

schedule 23, page 329, line 2, at end insert—

'Cancellation of options

15A (1) Where the holder of an option is paid consideration in money or money's worth for the cancellation of an option then relief is available for an amount equal to the amount of the consideration paid together with any NIC charge on that amount charged on the payer.

(2) The payment must be made either by the employing company, or a company which subsequently becomes a qualifying company within the meaning of paragraph 13 following a takeover of the company whose shares are the subject of the option.

(3) Relief under this paragraph shall be claimed by the company which makes the payment in respect of the accounting period in which the payment is made.

(4) In this paragraph—

''NIC charge'' means a liability to pay national insurance contributions under section 6 (Class 1 contributions), section 10 (Class 1A contributions) or section 10A (Class 1B contributions) of the Contributions and Benefits Act; and

''the Contributions and Benefits Act'' means either the Social Security Contributions and Benefits Act 1992 (c.4) or the Social Security Contributions and Benefits (Northern Ireland) Act 1992 (c.7).'.

Amendment No. 235, in

schedule 23, page 329, line 18, leave out from beginning to end of line 22 and insert—

'(1) Relief shall be given for the accounting period or periods in which, applying generally accepted accounting principles, the employing company would recognise an expense or a provision against a future expense (in either case ''the accounting expense'') if—

(a) the employing company were to expend a sum as a payment to the recipient at the time that the recipient exercised the option; and

(b) the amount of such sum were equal to the total amount of relief available under this Part.

(2) The amount of any relief available in any accounting period shall equal the amount of any corresponding accounting expense which would have been recognised for that period.

(3) Where relief has been given under this Part in respect of an option which subsequently lapses or is cancelled without being exercised then—

(a) where the option lapses without any payment being made in money or money's worth, the employing company shall be deemed to have received profits or gains chargeable to tax under Case VI of Schedule D in the period in which such lapse occurs of an amount equal to the deductions claimed in respect of that option for prior periods; and

(b) in any other case, the employing company shall be deemed to have received profits or gains chargeable to tax under Case VI of Schedule D in the period in which such lapse occurs of an amount equal to the deductions claimed in respect of that option for prior periods, less the amount of money or money's worth given in consideration for the lapse of the option.'.

Amendment No. 233, in

schedule 23, page 329, line 18, leave out 'The relief' and insert

'Relief under paragraph 15 (amount of relief on exercise)'.

Amendment No. 234, in

schedule 23, page 329, line 19, at end insert—

'(1A) Relief under paragraph 14A (amount of relief on grant) is given for the accounting period in which the option is granted.'.

I call Sir Stephen O'Brien—he is not that yet. It is Mr. O'Brien.

Stephen O'Brien (Conservative, Eddisbury)

I think that I am right in saying that I am 27 years behind you in my parliamentary career, Sir Nicholas, and do not aspire to the dizzy heights that you have reached.

The purpose of the amendments is to probe the Government's intention and policy. As my hon. Friend the Member for Arundel and South Downs (Mr. Flight) said during discussion of schedule 22, which allows tax relief for options on exercise only—my hon. Friend the Member for Billericay may hear an echo of some of his arguments on schedule 8—international accounting standards are changing and

companies will have to represent a PNL charge on grant equal to the Black Scholes value of the option.

George Osborne (Conservative, Tatton)

I do not want to press my hon. Friend, but what is the Black Scholes option?

Stephen O'Brien (Conservative, Eddisbury)

That is a challenge that I had anticipated would come from a Government Back Bencher. We could spend the rest of the sitting on the Black Scholes value of an option. Suffice it to say that back in 1969 two young, exceptionally clever Americans, Mr. Black and Mr. Scholes, invented a model to value options. They tried repeatedly to have it published and when they eventually succeeded it became probably the leading mathematical model for valuation of all time. Without giving the definition, which might tax the Committee, the model's equation is simply C=SN(d?1?-KeŽ(-rt)? N(d?2?) when C is the theoretical call premium, S is the current stock price, N is the cumulative standard normal distribution and d?1? is 1n(S/K)+(r+sŽ2?/2)t over st.

Paul Farrelly (Labour, Newcastle-under-Lyme)

On a point of order, Sir Nicholas. Do we have to suffer lectures in amateur corporate finance?

Nicholas Winterton (Conservative, Macclesfield)

I am not responsible for what hon. Members say so long as they are in order, and the hon. Member for Eddisbury is in order, whether we like it or not. I am only worried whether the Hansard writers can get it right.

Stephen O'Brien (Conservative, Eddisbury)

I shall make my notes available for the Hansard writers. I hope that the hon. Member for Newcastle-under-Lyme (Paul Farrelly) does not think that corporate finance is boring. I am willing to accept that I am an amateur, but I suspect that every corporate financier, by definition, is an amateur.

George Osborne (Conservative, Tatton)

I found my hon. Friend's explanation useful. If the hon. Member for Newcastle-under-Lyme thinks that my hon. Friend is an amateur, perhaps he could rise and repeat what my hon. Friend said.

Nicholas Winterton (Conservative, Macclesfield)

Order. With respect, I want to help the Committee. We have a lot of ground to cover and this discussion is not helpful.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful to be able to move on.

I was explaining that, under international accounting standards companies will shortly have to represent a PNL charge on grant equal to the Black Scholes value of the option. It is not clear whether that charge will be deductible for employers under general principles or whether the Inland Revenue will try to argue that schedule 22 overrides the deduction. The matter needs to be clarified. The Chartered Institute of Taxation commented that paragraph 17, as amended by paragraph 67 of schedule 22, states that the time when the deduction is available is the time when the employee

''acquires a beneficial interest in the shares''.

That was exactly the point that the Paymaster General confirmed when she responded to my hon. Friend the Member for Billericay. The amount of the tax deduction is quantified by paragraph 15(1), as amended by paragraph 66 of schedule 22, and is based on the market value of the shares when they are acquired.

On options over unissued shares, the date on which the employee exercises the option may be different from the date on which they acquire the beneficial interest in the shares. For example, if an option were exercised on Monday, the shares might not be issued until Wednesday. That would mean that the employee could not acquire the beneficial interest in the shares until Wednesday, as they would not have been issued before then. To save companies from having to perform two lots of calculations to work out the market values of the shares—once on exercise for PAYE purposes and once on the beneficial interest being acquired for corporation tax purposes—it would be helpful if the two days could be aligned. Amendments Nos. 232, 233 and 234 address that point.

As the Paymaster General and Committee members will readily have appreciated, we are also considering amendment No. 235. That is an alternative way of approaching the same issue and addressing the problem. It is a variation, so by definition some of the amendments have to be probing. I hope that those alternatives that are not probed to the point of destruction will be accepted by the Paymaster General. Amendment No. 235 leaves out from the end of line 22 and inserts a large paragraph. The Bill permits a tax deduction for employees for their share option gains, but delays that until the exercise of the option, as we have discussed. As that will lead to uneven tax charges and contradicts the trend in modern accountancy to smooth expenses over time, the amendment would simply allow for deductible provisions prior to exercise, which is the norm under the existing common law planning that the schedule replaces. It would also provide a clawback where the option is not exercised. The arguments that I have set out form one package of points on this group of amendments—Nos. 232, 233 and 234, and amendment No. 235 as an alternative.

Amendment No. 236, which is also in the group, is on a separate point. It would introduce much new wording, and I shall address its rationale. Schedule 23 makes no provision for a deduction for a payment to cancel an option. There might be perfectly sound commercial reasons for doing that, such as local regulatory restrictions on share acquisitions or a defect in the rules of an approved plan that prevent exercise prior to a takeover or afterwards. That might include an unlisted company acquiring an unlisted target, a situation in which the company might want to buy out the options, because under the current effect of schedule 23 the options would cease to qualify for corporation tax relief, as we have discussed. Quite simply, why do we not allow cancellation payments to be deductible? After all, they are taxable and NICable—however one wants to coin that phrase—on the employee.

I hope that those explanations have put complex points—not least the Black and Scholes model, on which I hope I have not added to the mud rather than to clarity—as briefly as possible. I look forward to

hearing what the Paymaster General has to say on the amendment.

John Baron (Conservative, Billericay)

May I briefly seek clarification from the Paymaster General on one other point? I shall take your guidance on this issue, Sir Nicholas, as I am not sure under which group of amendments one should raise it. It is a very general point on schedule 23.

Nicholas Winterton (Conservative, Macclesfield)

I advise the hon. Gentleman that although I may not be in the Chair when we reach the schedule stand part debate, I will advise Mr. McWilliam when he takes over from me that it was my intention—I hope that it will be his—to allow a short stand part debate.

John Baron (Conservative, Billericay)

With your permission, Sir Nicholas, I will leave my comments for the stand part debate.

Dawn Primarolo (Labour, Bristol South)

The group of amendments are rather expensive.

Stephen O'Brien (Conservative, Eddisbury)

They are alternatives.

Dawn Primarolo (Labour, Bristol South)

None the less, they provide in their various guises for either double or triple relief. I shall explain to the Committee how that would occur, although I am sure that that was not the hon. Gentleman's intention. If he presses the amendments to a vote, I shall urge the Committee to oppose them.

The amendments seek to change the timing and amount of deduction under schedule 23 and, in some circumstances, would provide relief more than once, which is clearly not a good idea—I presume that it was not intentional.

Schedule 23 provides relief to the employing company for the cost of providing shares to employees to give them a real stake in the company for which they work. It achieves this by matching the deduction for the company in terms of timing and amount with the taxation of the employee as a result of acquiring those shares. The amendments appear to be an attempt to move away from that policy objective despite the fact that the informal consultation carried out over the summer of 2002 showed almost universal support for that approach.

Amendment No. 232 inserts a new paragraph that would provide relief at the time an option is granted. That would be in addition to relief under the existing rules, which provide relief at the time that the option is exercised. Although I am sure that it was not the intention of the hon. Member for Eddisbury, the inevitable consequence of amendment No. 232 would be double relief.

Amendments Nos. 233 and 234 introduce alterations as a result of the changes made by amendment No. 232 to the rules in paragraph 17, which determine the time at which the relief is due. They are irrelevant if amendment No. 232 falls.

The intention behind amendment No. 235 is unclear. The hon. Gentleman suggested that it is an alternative. On one reading, it appears to allow relief at the time a share option is granted; on the other hand, it appears to provide relief instead at the time of exercise.

The proposed changes also appear to ignore the new paragraph that amendment No. 232 seeks to introduce, and they would again provide a duplicate relief. Whichever way the hon. Gentleman takes his combination of amendments—all of them or some of them—they produce double relief.

Amendment No. 232—amendment No. 235 is an alternative to it—inserts a number of deeming provisions that would add significant complication to the interpretation of the new relief. The amount of relief would no longer be based on the amount on which the employee is taxed. Instead it would be deemed to be the amount that the employee would be paid when the option was exercised if the employee received cash rather than shares. If an option lapsed or was cancelled, the employing company would be deemed to receive taxable income equal to the amounts already deducted. Any compensation paid as a result of the option being cancelled would be ignored in arriving at the deemed income, which would provide a double deduction and further opportunities for tax avoidance.

Amendment No. 236 would also provide greater opportunities for avoidance, as there could be a triple deduction for the same amount. It seeks to insert another half page of rules to provide relief for compensation paid to employees when options are cancelled. That not only runs contrary to the policy of providing corporation tax relief for employee share acquisitions but also leads to double deductions for the same amounts, not only for the amount of compensation payable but also for the employer's national insurance contributions. The rationale for the latter relief is completely unclear, because an employer will always obtain relief for employer's national insurance contributions.

If an employee is paid cash compensation for the cancellation of a share option, relief may be available under normal accounting and tax principles, in which case the amendment would again lead to excessive and multiple deductions. I am sure that the hon. Gentleman had no intention of doing that—in fact, he has confirmed that.

The hon. Gentleman also referred specifically to the date of exercise differing from the date of acquisition. The point is not necessary. The employee is taxed on acquisition, not on exercise; therefore, there is no mismatch.

I understand the hon. Gentleman's point about the complexities of the share ownership arrangements in the schedules. However, the legislation deals with the best way to deliver the reliefs, about which for several years there have been discussions and consultation. I understand the hon. Gentleman's reluctance to support the Government on the matter, but I say in all honesty that, should he press the amendments to a vote, they will not be carried, because I will encourage my hon. Friends to oppose them. He would find himself defending a policy position that is, frankly, indefensible.

Stephen O'Brien (Conservative, Eddisbury)

I listened carefully to the Paymaster General, who will have noted that I introduced the amendments as probing amendments. She also

knows—I believe that she sought to ensure that this was placed on the record—that I am happy to confirm that there is no intent on my part or that of Conservative Members to seek in any way to assist avoidance that is not considered to be proper in the due relationship between the taxpayer and the Government.

The amendment was intended to clarify the matter. I recognise her latter point that consultations have taken place over a period of time, but it is our role as parliamentarians not only to scrutinise the Bill to seek to make it as clear as possible but also, given the enormous amount of work that is done by a host of professional and other bodies, as well as interested parties, which have to read a Finance Bill very rapidly after it is published, to reflect representations made to us that we believe deserve exposure through the course of our deliberations.

On that basis, I have ensured that not only these but alternative amendments were on the amendment paper, in case one approach had more merit than another. Therefore, I hope that no point is made of the inconsistencies between amendments, given that I have sought at times to discuss in the usual ways the fact that one cannot flag alternatives on the amendment paper. That might be a helpful thing for the Procedure Committee to think about on a future occasion.

Amendments Nos. 232, 233 and 234, with the alternative to those, amendment No. 235, were probing, and we have listened to what the Paymaster General had to say. The record of these proceedings will assist those who have to contend with the provisions in the future and they may be able to tease out more guidance and clarification from the Revenue. However, amendment No. 236 raises a more substantive point. I shall not press it, as I had not flagged in my earlier remarks that I might want to separate it out, but as I have before, I should like to reflect on what has been discussed today and reserve my position over coming back to this issue either on Report or in a future Bill.

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Stephen O'Brien (Conservative, Eddisbury)

I beg to move amendment No. 224, in

schedule 23, page 333, line 10, after 'shares', insert

'and, in a case where the shares are acquired under an employee share scheme, corporation tax shall not be chargeable on any amount paid or payable by the employing company in respect of the participation of the employee in that scheme.'.

Paragraph 25 of schedule 23 provides that where relief is available under the schedule, no other deduction is allowed in respect of the cost of providing the shares. That includes a deduction for any amount paid or payable by the employing company for an employee's participation in an employee share scheme. I have given this some thought—the Law Society has made representations on it—and consistent with the disallowance of any amount paid or payable by the employing company for its employee's participation in an employee share scheme, we consider that any amount received by a parent company from that company for its participation in such a scheme should be exempted

from tax if it would otherwise give rise to taxable income or a capital gain in the parent company.

If that is not done, the legislation will discriminate against cases in which payments are made by subsidiaries for their employees' participation in an employee share scheme. Let us suppose that a UK parent company has a wholly owned UK subsidiary whose employees participate in a scheme enabling them to acquire shares from the parent company—a very common situation. If the subsidiary makes no payment to the parent company, the subsidiary will obtain a statutory deduction for the market value of the shares acquired by its employees, less any payments made by the employees. The parent will obtain no tax deduction but, equally, will have no taxable receipt in respect of the subsidiary's employees' participation in the share scheme. If, by contrast, the subsidiary does make a payment to the parent company, the subsidiary still obtains a statutory deduction of the same amount in respect of the award of shares to its employees. Paragraph 25 prevents the subsidiary from obtaining a tax deduction for its payment to the parent company. Nevertheless, unless the payment is structured as a capital receipt for the issue of the shares, it may be taxable in the hands of the parent company, resulting in a greater overall tax liability than if no payment had been made. I believe that the legislation should achieve neutrality between those two situations.

Although that may have sounded a little convoluted, I have tried to encapsulate the situation as briefly as possible. The Law Society has been extremely helpful in its representations. Amendment No. 224 would prevent discrimination where payments are made by subsidiaries for their employees' participation in an employee share scheme.

Dawn Primarolo (Labour, Bristol South)

I hope that I can deal with the amendment quite briefly because I think that it is based on a misunderstanding of the way in which the rules will work. The hon. Gentleman raised the specific question of payment from a subsidiary to a parent for shares awarded to the subsidiaries' employees, and asked whether that would be excluded from tax. Perhaps I can explain.

The amendment would have the effect of excluding from tax any amount received by a parent company from the employing company in respect of the participation of its employees in the parent company's share scheme. The result would then be a double deduction for the cost of shares. Paragraph 25 ensures that relief is given only once. It does this by disallowing all other deductions in company accounts in respect of the

''cost of providing the shares''.

Where the parent company uses a trust to purchase shares on the open market, the cost of the shares will be borne by the employing company, because it will reimburse its parent for those shares. The parent company will not bear the cost of the shares and so there is no deduction to be disallowed in its corporation tax computation. Schedule 23 ensures

that the employing company gets the relief for the cost of the shares. It operates with the mechanisms, which answers the hon. Gentleman's question about the subsidiary company.

I will not respond in detail to the amendment because the hon. Gentleman said that it is a probing amendment. Issues of cost or double taxation are not particularly relevant because he was trying to tease out the issue of a subsidiary to a parent, which I hope that I have dealt with.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful to the Paymaster General. The discussion is on the record and I am satisfied by her response. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Stephen O'Brien (Conservative, Eddisbury)

I beg to move amendment No. 237, in

schedule 23, page 334, line 26, at end insert—

''Transfer pricing

29A Any provision made by any company on the basis of the rules in this Schedule is an arm's length provision for the purposes of Schedule 28AA to the Taxes Act 1988 (provision not at arm's length).'.

This is a bit more important. The amendment deals with transfer pricing, which is an important commercial matter. The transfer pricing rules in schedule 22AA to the Taxes Act 1988 allow the Inland Revenue to rewrite the pricing of intra-group transactions if it suspects that companies are avoiding UK tax by shifting expenses into high tax jurisdictions and shifting profits into low tax jurisdictions by not using an arm's-length price. Such schemes are familiar to all those who have examined that area.

The Inland Revenue has recently started to attack multinational share option plans on the grounds that they are business facilities and UK parent companies should be charging a taxable profit down to those subsidiaries. The converse case is that the UK subsidiaries should be making deductible payments to foreign parents, but the Revenue seems to be far less concerned about that. It is helpful to refer to the decision of the special commissioners in the Waterloo case, with which the Paymaster General and her advisers will be familiar. The Inland Revenue is probably—I say this without hesitation—technically correct, but the policy raises the question of what constitutes an arm's-length price, which is not unique in tax law. In practice, most people use the option gain and have parent companies recharge it to their subsidiaries, mainly because it is more tax efficient than using—I hardly dare mention this again—a Black-Scholes option valuation on grant, which is recharged. I hope that no one asks me about that because I have handed my crib sheet, which is downloadable from the internet, to the Hansard writers.

Some people have gone as far as describing the policy as stupid, which is a bit strong, but it is amazing that the Inland Revenue has said that it wants to see option gain recharging into the UK but Black-Scholes valuations for payments going out, which is illogical but increases the UK tax net. I understand that the

Revenue may be interested in the policy to raise revenue, but it does not appear to sit well with the continuing defence, which the Paymaster General is entitled to present to us, that anything that we do to scrutinise the Bill and to gain clarification through amendments attacks her anti-avoidance proposals. The amendment does not relate to the anti-avoidance issues. In parenthesis, I worry that those issues are pedalled out to see me off, but they cannot be genuinely presented on this occasion because they would be easy words and not relevant. Frankly, a lot of frantic planning is going on at the moment.

Dawn Primarolo (Labour, Bristol South)

Good afternoon, Mr. McWilliam; it is nice to see you back.

If amendment No. 237 is pressed to a vote, I shall ask my hon. Friends to resist it. When the amendment was tabled, I was a little unclear on its purpose in this part of the Bill. The amendment would make a statutory link between the new corporation tax relief and the rules that apply to cross-border transactions between connected companies. The intended purpose of the amendment was not entirely clear, although the hon. Gentleman has spoken to it. It does not appear to change how an employing company obtains relief under schedule 23, but it does seem to result in double taxation, not double relief, in certain cases, which is clearly contrary to the policy intention of schedule 23. I do not think that companies would be enamoured with that prospect.

Perhaps an example would illustrate that problem. A UK employing company might provide workers to its overseas affiliate and charge for that service. To conform to the UK transfer pricing laws, that charge should be at an arm's length rate. The amendment would require the service company to charge any amount calculated by the rules in schedule 23 if relief is available in respect of shares acquired by those employees. That would result in the charge not conforming to the arm's length rate. The other tax authority would be within its rights not to allow the payer a full deduction for that amount, resulting in the same amount being taxed twice.

Stephen O'Brien (Conservative, Eddisbury)

I was following what the Paymaster General was saying carefully. She used the phrase ''an overseas affiliate'' rather than subsidiary. It is a bit unlikely whether share options would be granted if the parent company was not the majority owner, and the affiliate was a minority owned interest. If ''affiliate''

was intended to convey that it was not majority owned, the example seems not to stack up.

Dawn Primarolo (Labour, Bristol South)

It does stack up. The hon. Gentleman knows that from debate on the previous schedules when he raised the issue about a group of companies. The problem for the hon. Gentleman is that he is trying to make an interaction between two sets of rules that do not interact. The Organisation for Economic Co-operation and Development guidance sets out what an arm's length price is for cross-border transactions between connected persons, but it is open to individual Governments to provide the reliefs that differ from those arm's-length prices in their own jurisdictions. Schedule 23 does that by providing relief to companies that exceed the amount allowable by OECD guidelines. I assure the hon. Gentleman that if I go back through that sentence so that it reads ''A UK-employing company might provide workers to its overseas subsidiary and charge for that service'', the example still stands. Therefore, if the company does not conform to arm's length rates, it will find itself liable to tax from the other tax authority.

Schedule 23 is designed to provide relief to companies offering their employees a real stake in the business for which they work. The hon. Gentleman's amendment appears to be unrelated to that policy objective, and could result in the international groups concerned being double-taxed. The amendment simply does not work and the schedule does, so I urge my hon. Friends to oppose the amendment.

Stephen O'Brien (Conservative, Eddisbury)

I have listened carefully to the Paymaster General and I agree with her re-reading of the sentence with the words ''overseas subsidiary'' rather than ''affiliate''. She has given an example that works with the term ''an overseas subsidiary''. I did not think that it worked for something that was not a subsidiary, which was why I questioned the word ''affiliate''. In an annual report and accounts it is normal parlance to use the word ''affiliate'' deliberately, to ensure that one is referring to something other than a subsidiary.

However, having given the example, I think that I have made my position clear. Initially, I had thought that we might press amendment 237 to a vote, but the last thing that the official Opposition want to do is get involved in the question of double taxation. I do not want to encourage the Paymaster General to think that every time she says ''anti-avoidance'' or ''the amendment seems to provide a double taxation opportunity'' I shall immediately retreat. We have never intended to impose double taxation—where it does not already exist—or anti-avoidance.

Dawn Primarolo (Labour, Bristol South)

It seems that, whatever I say this afternoon, I cannot win. If I tell the Opposition honestly why their amendment does not work, they say that I am pulling rank with the parliamentary counsel; and if I tell them that it breaks the anti- avoidance rules, they say that I am hiding behind the anti-avoidance issue. If I am absolutely honest and gentle with them and tell them that their proposal would allow double taxation, which in my humble opinion would be unwise, they complain about that as

well. How am I to answer their amendments if they do not allow me to describe the position?

Stephen O'Brien (Conservative, Eddisbury)

I hope that the Paymaster General is not misinterpreting me. I am saying that, given those answers, the official Opposition do not intend to press to a vote an amendment that she has just explained would have the unintended consequence of giving rise to double taxation. Hence, we are listening to her very carefully.

I take the Paymaster General at her word—I would not want that to be misunderstood—but the specific issues raised, and therefore addressed by amendments, are answered not simply on those grounds but on the ground of the clarification sought in relation to the schedule? Ultimately, the practitioners, if they can understand it, will be the Government's best friends in relation to compliance in seeking to address the anti-avoidance mischiefs in the clauses.

I was anxious to put two matters on the record, having had this discussion. Although I had thought that we might press the amendment to a vote, I do not intend to do that, because I have taken seriously the Paymaster General's comments about possible double taxation in certain circumstances. She gave an example, which we have had clarified, and also made the important statement that in trying to scrutinise the Bill and the interaction between schedules 22 and 23 we are being inconsistent. She said that that interaction between the two schedules is causing misconceptions on our part. It is only right to say that we are not alone. People in practice and knowledgeable professionals in this area have made representations about the interplay and interpretative skills necessary to understand how schedules 22 and 23 are likely to operate, and they have said that it is one of the most difficult matters to interpret in the Bill.

I shall not press the matter to a vote, but I hope that this discussion has made it clear that this is a genuine attempt to gain clarification. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

John McWilliam (Labour, Blaydon)

I assure the Committee that when I was trying to get my head round the schedule this morning, it took me a quite a long time.

Stephen O'Brien (Conservative, Eddisbury)

I beg to move amendment No. 238, in

schedule 23, page 334, line 41, after 'shares', insert

'that is not a warrant'.

John McWilliam (Labour, Blaydon)

With this it will be convenient to discuss the following:

Amendment No. 239, in

schedule 23, page 334, line 41, after 'shares', insert 'including a warrant'.

Amendment No. 240, in

schedule 23, page 334, line 44, leave out from 'includes' to end of line 1 on page 335 and insert

'has the same meaning as ''securities'' in section 420 of the Income Tax (Earnings and Pensions) Act 2003.'.

Stephen O'Brien (Conservative, Eddisbury)

Amendments Nos. 238 and 239 are deliberately contradictory in that if one is right, the other cannot be right. We are testing the Government and hope that one of the amendments will be adopted.

This group of amendments was designed to probe and to establish the scope of schedule 23, and to test a possible uncertainty. As the Paymaster General is aware, the Law Society identified in schedule 22 a possible anomaly in that warrants come within the new definition of securities but options do not. Under the previous law, both would have been taxed as options.

We tabled a Law Society technical amendment to schedule 22, and it is worth making a equivalent point on schedule 23. If an employee holds warrants rather than pure options, is the employer within the relief? I direct the Committee's attention to the discussion on 22 May at column 249, which was ably led by my hon. Friend the Member for Arundel and South Downs, when we considered amendments Nos. 107 and 108. The Paymaster General's response at column 255 was for consistency of application.

It would be more sensible to align the definition of shares to match securities in schedule 22. If something is considered a taxable employment benefit, it is only fair and reasonable that it should be deductible as an expense for the employer. Amendment No. 240 addresses that point separately from the deliberately contradictory amendments Nos. 238 and 239.

Dawn Primarolo (Labour, Bristol South)

I gently point out to the hon. Gentleman before he takes offence that if the amendments or any combination of them were accepted, they would be very expensive and cost around £500 million. I am just putting that on the record very gently, but not to provoke him.

I accept the hon. Gentleman's points that some of the amendments involve either/or suggestions, but they would produce similar results. If he presses them to a vote, I shall ask my hon. Friends to resist them.

Amendments Nos. 238 and 239, which may be alternatives, seek to change the meaning of ''option'' for schedule 23 purposes. Amendment No. 238 would exclude warrants from the definition of ''option'' and amendment No. 239 would specifically include them. The definition of ''option'' in schedule 23 is widely worded to ensure that any right acquired by an employee that later gives rise to the acquisition of qualifying shares will allow the employing company to qualify for relief. Amendments Nos. 238 and 239 would, respectively, exclude or include warrants from the definition and would serve no purpose except to add complexity and confusion.

Amendment No. 240 would change the definition of shares to include any securities defined for the purposes of the new rules introduced in schedule 22. As I have said many times, schedule 23 provides relief for companies in respect of shares acquired by employees that give them a real stake in the company for which they work. Other securities, while admittedly awarded to employees as part of their remuneration package, do not fall into that category. To include such securities within the rules of schedule 23 would undermine the policy objective.

It should also be remembered that assets other than shares can be purchased and held by the employing company prior to being awarded to employees, and the cost of acquiring those assets might be allowable for tax purposes in accordance with ordinary accounting and tax principles. That change might also require additional rules to ensure that companies could not obtain a double deduction, hence the cost. Those additional rules do not exist, so the double deduction would stand. I urge my hon. Friends to resist the amendments.

Stephen O'Brien (Conservative, Eddisbury)

Not dissimilarly to the Paymaster General's response to my hon. Friend on 22 May, she sought to clarify the position concerning warrants, which is not as simple as some representations to us suggested. In the light of her explanation, I am happy to withdraw the amendment. As our discussion is on the record, guidance may be forthcoming. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Stephen O'Brien (Conservative, Eddisbury)

I beg to move amendment No. 241, in

schedule 23, page 335, line 29, at end insert

'The award of shares or grant of an option prior to that date shall not prevent relief being given under this Schedule in respect of those shares or that option.'.

This may be the tail-end Charlie amendment and it should be the shortest. It is unquestionably a probing amendment to obtain a ministerial statement with belt-and-braces clarification that awards made prior to commencement are not outside the new rules. The matter has been raised by a number of people who made representations to us, and the point is obviously worth making given the apparent confusion over commencement dates and so on elsewhere in the Bill. I look forward to hearing the statement that the Minister has already prepared, and I shall not press the amendment to a vote.

John McWilliam (Labour, Blaydon)

I did not hear that last comment.

Dawn Primarolo (Labour, Bristol South)

The cost of the amendment would be between nil and £1 billion. The hon. Gentleman said that it is a probing amendment, and understanding his sensitivities on such matters, I have said that the amount could be nil or £1 billion. The amendment seeks to add an additional phrase to the commencement rules to provide that relief would be available in respect of shares awarded or options granted before the start date in January 2003. It appears to be an attempt to add further certainty to the new rules, but in reality it would serve only to increase unnecessarily the length of the legislation. Also, and rather unfortunately, as I am sure that the hon. Gentleman will agree, the amendment's wording could mean that in the first year of the new relief a company would receive a corporation tax deduction in respect of every share that it has ever awarded to its employees. Hence the cost. That cannot be the result that the hon. Gentleman or the Committee would wish to endorse.

I assume that the hon. Gentleman is seeking clarification that the new reliefs apply to shares awarded or options granted before the 1 January 2003 start date. I can assure him that if shares are acquired after that date pursuant to an option granted

before that date, or if the employee becomes chargeable for tax as a result of having acquired shares before that date, the relief will be available to the employing company. The transitional rules will apply to ensure that the same amount is not relieved more than once. I think that that directly answers the question that the hon. Gentleman asked, so I shall conclude my remarks on the amendment and hope that that has dealt with the point that he was trying to tease out.

Stephen O'Brien (Conservative, Eddisbury)

The statement that the Paymaster General has made and the concluding part of her remarks are satisfactory. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That this schedule be the Twenty-third schedule to the Bill.

Stephen O'Brien (Conservative, Eddisbury)

As indicated earlier by the previous Chairman—I know that he was going to have a word with you, Mr. McWilliam—we intend to have just a brief stand part discussion. That is because there are no amendments that deal with one particular aspect of the schedule. We have received several representations from people who will have to deal in practice with paragraph 33, particularly the question of the transitional provisions. Although we have had some discussion on those, one of the most important things to keep in mind—this goes to the points raised by my hon. Friend the Member for Billericay—is that under schedule 23(33) relief is not available in respect of shares to the extent that a deduction has already been claimed under the old rules.

KPMG, backed up, so far as I have seen, by the Institute of Chartered Accountants in England and Wales, Grant Thornton and Ernst and Young, has said that there is a lack of clarity over how the rule will apply and how the relief already claimed will be calculated, particularly if a QUEST—qualifying employee share ownership trust—has been used and if shares have been acquired at various times and at various prices using tax relief from the company. I can go into greater detail if that is of any assistance, but I think that the Paymaster General will be aware of the point that I am making, because representations have already been made directly to the Treasury. What is sought, at the very least, is a commitment that the Revenue will clarify how paragraph 33 will be applied as part of the overall schedule. If that commitment is given, I dare say that there will be satisfaction all round.

John Baron (Conservative, Billericay)

I rise to support my hon. Friend's remarks and to seek clarification on two matters. One I have already raised, and I know that the Paymaster General, very generously, is going to respond to it in writing using the examples that I have given. It is on the clarification required over paragraph 8, which my hon. Friend has alluded to.

My second point relates to those paragraphs in which schedule 23 appears to allow companies to claim a corporation tax deduction if the acquisition of shares by, for example, an employee benefit trust, has been funded by a loan from the company. That is when a company has lent money to an EBT for it to purchase

shares. I will take the Paymaster General's guidance on this, but I would suggest that if a loan is secured, it is unclear whether schedule 23 allows it to be set off by way of relief against corporation tax. Can she clarify that? It is an interesting point that does not seem to be covered by the schedule, unless I have missed it.

Howard Flight (Conservative, Arundel and South Downs)

May I add my welcome to you as you chair our endeavours this afternoon, Mr. McWilliam?

I have a brief question for the Paymaster General. To what extent have the provisions of the schedule been crafted to interact with the expected results of the Accounting Standards Board guidelines on accounting for share schemes as charged for profit and loss? Has any of that led to the particular nature of these arrangements, or will there be the potential for considerable differences between the expected accounting treatment and tax treatment?

Dawn Primarolo (Labour, Bristol South)

Three sets of questions have been asked: the first about loans offset, the second about the new accounting standards and the third on the transitional rules. To start with the latter, the hon. Member for Eddisbury wants to have confirmed on the record the discussions that have already taken place between the Revenue and companies. I am happy to do that for the record. The transitional rules, as we have explained, have been kept as simple as possible. They are intended to ensure that companies do not achieve a deduction twice for the same amount, but they do not create a tax charge if the amount already obtained for a share is greater than the relief due under the new rules, because that could be argued to be retrospective.

There were many ways in which companies achieved deduction before the new rules came into force, and it will be difficult to write detailed rules to cover every circumstance while ensuring that the right amount of deduction already claimed is justified under those rules. Several companies and tax practitioners have asked the Inland Revenue for guidance on how the transitional rule will operate in practice. It would be unusual if a company were to apply that rule before completing its next tax return in 2004. The Inland Revenue will, therefore, work with the interested parties who have expressed views on the issue, to develop the guidance on it. The main thrust will be to achieve a reasonable result based on the circumstances of each case. That has been the discussion to date.

The hon. Member for Billericay asked whether the loan for purchasing the shares will be offset against corporation tax. There is no relief for the principal loan, but the ancillary finance costs of obtaining the loan will qualify, together with any interest on it. I have been advised that that is the position.

John Baron (Conservative, Billericay)

May I be absolutely clear? For a loan, the simple answer is no. Will the Paymaster General confirm that schedule 23 does not actually restrict deductions to outright payments? For example, it does not appear to exclude loans. Does she agree that that should be clarified? Otherwise, it is ambiguous.

Dawn Primarolo (Labour, Bristol South)

I do not think that schedule 23 is ambiguous or needs clarification. However, as the hon. Gentleman has already asked that that should be part of my written response—as well as the earlier point that I said I would write to him about, notwithstanding my comments on it in Committee—I shall certainly revisit the matter and ensure that he gets an appropriate answer.

The final question was from the hon. Member for Arundel and South Downs on the alignment with accountancy treatment. The timing and amount of the corporation tax deduction is matched as far as possible with the tax charge on the employee. Although the rules depart from the proposed new accountancy treatment, they should not give rise to significant extra work for companies. The hon. Gentleman may know that the accounting treatment of share-based payments is undecided.

The timing and amount of the statutory tax deduction will be clear and accurate, and the new provisions will make no distinction between listed and unlisted or large and small companies. The companies that were consulted were not unduly concerned about timing issues or the fact that the relief does not follow the accounts treatment, favouring certainty above all else. The issue was touched on, but it also impinges on other areas of tax legislation as well as accountancy treatments and standards.

I hope that those remarks have dealt with the three outstanding queries on the schedule. There are no further remarks that I can make, as I have covered through the amendments the pertinent points that are contained in the schedule.

Question put and agreed to.

Schedule 23 agreed to.

Clause 141 - Ending of relief for contributions to QUESTS

Stephen O'Brien (Conservative, Eddisbury)

I beg to move amendment No. 242, in

clause 141, page 82, line 8, at end insert—

'(1A) Section 68 of that Act (principal charges to tax) shall be amended as follows:

(a) in subsection (2)(c) for ''the rate applicable to trusts'' substitute ''the chargeable rate'';

(b) insert a new subsection (8)—

''(8) For the purposes of this section the 'chargeable rate' is—

(a) in respect of a chargeable event occurring before 1st January 2003, the rate applicable to trusts, and

(b) in respect of any other chargeable event, the average marginal rate of corporation tax of all qualifying companies''.'.

John McWilliam (Labour, Blaydon)

With this it will be convenient to discuss amendment No. 243, in

clause 141, page 82, line 17, at end insert—

'(ba) in subsection (5) insert—

''(dd) the payment of any sum or transfer of any asset, after 31 December 2002, to the trustees of another trust for the benefit of the same or substantially the same beneficiaries as the trust'';'.

Stephen O'Brien (Conservative, Eddisbury)

I should like to record my appreciation of all members of the Committee for having had the patience to wade through the most difficult area of schedule 23. I was glad to have the

opportunity to place the arguments on the record and to gain such clarifications as were possible. That has been a major part of our proceedings this afternoon, and I hope that we will now be able to make more rapid progress.

Clause 141 ends relief for contributions to QUESTs—qualifying employee share ownership trusts—which are a special type of employee trust introduced in 1989 with specific statutory corporation tax deductions for contributions. Because of the restrictive statutory rules on how they could operate, they were mainly used as part of a tax planning scheme and not necessarily for their intrinsic merit. The statutory deduction has been replaced by the rules in schedule 24.

One draconian aspect of QUESTs is the clawback, whereby money going in attracts a deduction of 30 per cent. but is re-taxed at the trust rate of 34 per cent. if it is applied for a non-qualifying purpose, thus creating a net loss to employers. That is particularly harsh when, for example, a takeover of the group could leave cash stranded in a QUEST with no possibility of using it for a qualifying purpose, because QUESTs cannot buy shares in a company that is controlled by another company. Unquestionably, that will be common ground.

Given that relief for QUESTs has now gone, amendment No. 242 would remove the draconian aspect by reducing the clawback rate from 34 per cent. to the group's average corporation tax rate.

John McWilliam (Labour, Blaydon)

Order. I am listening carefully to the hon. Gentleman's argument and looking carefully at the amendment. I suggest that if any Member has any comments to make on clause stand part, it would be useful to do so during this debate, because the amendments cover the whole principle of the clause.

Stephen O'Brien (Conservative, Eddisbury)

I am certainly content with your advice, and I dare say that all the other members of the Committee are too, Mr. McWilliam. We can treat this as a combined discussion.

The Chartered Institute of Taxation has also picked up on the matter and has suggested that an amendment should be made. It states:

''It will make it easier for companies to stop using QUESTs if the definition of 'original funds' in''—

section 69(3AD) of the Finance Act 1989—

''is expanded to include cash received from option-holders on the exercise of SAYE options granted before 27 November 2002 (but not options granted or company contributions made after that date). For example, if a company wants to stop using a QUEST on 1 February 2003, it will have to deal separately with any cash that may arise on the exercise of options between November 2002 and 1 February 2003.''

Amendment No. 243 is being taken at the same time for the convenience of the Committee. The background arguments are exactly the same and, as you have rightly indicated, Mr. McWilliam, they effectively contribute to a stand-part debate. Given that QUESTs have now gone, the amendment removes one of the draconian aspects by allowing trustees simply to clear out whatever is in the trust, transfer it to a less restrictive common-law trust and start again.

Those are common-sense proposals and I hope that the Paymaster General will consider them a useful contribution.

Dawn Primarolo (Labour, Bristol South)

I urge the Committee to resist the amendments. They seek, as the hon. Gentleman says, to change the qualifying employee share ownership trust rules in the Finance Act 1989. QUEST works by providing generous, up-front corporation tax relief for payments into the trust. There are detailed rules, including allowing up to 20 years to distribute shares to the beneficiaries, that determine whether relief is already claimed and will be lost.

Relief for future payments into QUEST is being ended by clause 141 to coincide with the start of the new corporation tax deduction, while leaving the other rules unchanged. Companies that have already claimed QUEST relief will not lose it if they continue to satisfy the QUEST rules. Ending future QUEST relief when the new corporation tax deduction is introduced is another step in simplifying the corporation tax treatment of employee share schemes. It avoids the potential for excessive relief and the associated need for complex anti-avoidance rules, and reduces the administrative burden on employers operating share option schemes.

Amendment No. 242 is intended to change the rate at which tax is charged if a chargeable event occurs because the QUEST rules are breached. An inevitable consequence of the amendment would be lost tax to the Exchequer, because the rate resulting from the proposed new wording could be as low as zero. That would be an open invitation to those who abuse the generous relief for avoidance purposes to extract funds from their QUEST without risk of losing the generous relief already enjoyed. Clearly, the Government are not attracted to that and I urge the Committee not to be attracted to it or allow it. I urge my hon. Friends to vote against the amendment.

Amendment No. 243 is intended to change the rules that determine whether relief already claimed should be clawed back. It would allow any asset held by the QUEST to be transferred to another trust without any risk of relief being lost. The amendment would make the current clawback rules ineffective.

I urge my hon. Friends to reject both amendments and to leave the rules as they apply intact.

Stephen O'Brien (Conservative, Eddisbury)

I have listened to the Paymaster General. It would not necessarily be appropriate to press for a vote. That said, there will be continuing concern and representations about tidying up the residual consequences of the cessation of QUESTs. In withdrawing the amendment, I urge the Paymaster General to ensure that the Revenue gives as much guidance as possible.

Dawn Primarolo (Labour, Bristol South)

I really do not think that guidance is needed. The rules on QUESTs have always been in place. All clause 141 does is end future relief, but there is no reason to go back and change the rules, which the hon. Gentleman is trying to do, on how QUESTs operate. Everybody knows how QUESTs operate, but his amendment would change the rules. If we reject his

amendment the rules will remain the same and no guidance will be necessary.

Stephen O'Brien (Conservative, Eddisbury)

I have listened carefully to the Paymaster General. I am conscious that my hon. Friend the Member for Arundel and South Downs wishes to intervene, so I should let him have a chance.

Howard Flight (Conservative, Arundel and South Downs)

I may not understand the situation clearly, but given that QUEST is ending, people with money in QUEST funds may wish to move to the new arrangements. However, the old tax rules mean that the money will be blocked in the old fund because if they took it out they would suffer a net tax loss. Is that a correct understanding of the issue? Is that why the issue comes up in the context of moving to the new arrangements?

Stephen O'Brien (Conservative, Eddisbury)

My hon. Friend understands the position. The word ''blocked''—I am sure that the Paymaster General will intervene if I have got this wrong—indicates a serious disadvantage and disincentive given the incentive to move on to new arrangements following the cessation of QUEST. It is therefore an in-built penalty. If I understand the Paymaster General's response correctly, her answer is ''That is where the current law stands and that is where it will therefore be left.'' The clarification is on the record, although many people will not want to hear it. My intention to withdraw the amendment has not altered, but I daresay that representations will continue to be made. If nothing changes and QUESTs that have ceased have a lot of cash in them, the subject may have to be revisited.

Dawn Primarolo (Labour, Bristol South)

QUESTs have not ceased. People can still use their QUEST trust, but no corporation tax deduction for payments into QUESTs will be available from now on. That is the position.

Stephen O'Brien (Conservative, Eddisbury)

I understand the situation, but it depends on whether we are leaving things in aspic or whether there is an incentive for people to move towards the new arrangements. The clause preserves the situation in aspic without giving people an incentive and an obvious opportunity to move to the new arrangements. The Paymaster General has clearly stated the position, and those who need to consider their dispositions will have paid heed to what has been said in Committee. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 141 ordered to stand part of the Bill.

Clause 142 - Restriction of deductions for employee benefit contributions

Stephen O'Brien (Conservative, Eddisbury)

I do not want to have a stand part debate because we will inevitably consider its broad context along with the amendments.

John McWilliam (Labour, Blaydon)

Order. We are in this difficulty because the meat of the clause is in the schedule. I will call the amendments under the schedule.

Question put and agreed to.

Clause 142 ordered to stand part of the Bill.

Schedule 24 - Restriction of deductions for employee benefit contributions

Stephen O'Brien (Conservative, Eddisbury)

I beg to move amendment No. 244, in

schedule 24, page 336, line 40, after 'asset', insert 'on trust'.

John McWilliam (Labour, Blaydon)

With this it will be convenient to discuss the following:

Amendment No. 291, in

schedule 24, page 337, line 16, at end insert—

'(5) For the purposes of subparagraphs (3) and (4) above, the making of a contribution to a third party includes the holding of funds to the order of that third party notwithstanding that the funds are never transferred into a bank account in the name of that third party.

Amount of subsequently allowable deduction

1A (1) This paragraph applies where a deduction for an amount of employee benefit contributions is disallowed under paragraph 1 but a deduction becomes available for a subsequent period because of the later provision of qualifying benefits.

(2) The amount of deduction available in the subsequent period shall be the sum of—

(a) the higher of—

(i) the just and reasonable proportion of the original employee benefit contribution as is attributable to the provision of the qualifying benefits in question, and

(ii) the amount on which the recipient is subject to income tax (or would be if the conditions specified in paragraph 2(3) below were met); and

(b) the amount of any NIC charge (if any) arising on the provision of the qualifying benefit in question.

(3) A deduction shall be allowed only once in respect of any amount or part amount of any employee benefit contributions and any associated NIC charges (if any).

(4) Where more than one person could claim a deduction under this paragraph in respect of any NIC charge it shall, unless the parties agree otherwise, be claimed by the person who employs the recipient at the time that the charge arises.

(5) ''NIC charge'' has the meaning given it in paragraph 2.'.

Amendment No. 292, in

schedule 24, page 337, line 20, leave out 'loan' and insert

'a loan which does not give rise to an employment income tax charge'.

Amendment No. 293, in

schedule 24, page 337, line 26, leave out 'subparagraph (1)(a)' and insert 'this Schedule'.

Amendment No. 294, in

schedule 24, page 339, line 20, at end insert—

'(aa) in respect of the provision of any benefit which does not give rise to an employment income tax charge or to an NIC charge (as those terms are defined in paragraph 2),'.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful, Mr. McWilliam. I rose on the previous stand part debate because I discussed the matter with your co-Chair earlier today. He recognised the difficulty caused by the propensity to draft single line sentences in clauses to make schedules legally operative. We end up having to say whether or not we support the provisions in the schedule. We are

now moving on to the schedule and discussing the meat of our concerns.

John McWilliam (Labour, Blaydon)

Order. It may assist the Committee to know that were it to decide that it did not like the schedule and to vote it down, all that would happen is that there would be a clause in the Bill that would do nothing, which is why there would be no point in debating it.

Stephen O'Brien (Conservative, Eddisbury)

I am content, but I think that the discussion will persist. There is a degree, depending on one's logic, of illogicality. Clause 142 and schedule 24 determine the timing of deductions for payments the employer makes to a third party, including the trustees of an employee benefit trust, to provide benefits to employees. That measure was first announced in the pre-Budget report to counter the avoidance of tax and national insurance charges through employee benefit trusts. Countering the avoidance of tax is understood and supported by us.

Our amendments are essentially probing in nature; I place that on the record, up front. They consider whether the legislation is intended to go beyond trust relationships, practical issues, timing and evaluation issues or equality of treatment between taxation of the employee and deductions for the employer. We are considering all the amendments to the schedule in one group, and I hope that I have given an encompassing introduction.

The schedule contains anti-avoidance measures that will clamp down on employee trust structures, but there is obviously some concern about how far that goes. Amendment No. 244 is a probing amendment to find out whether the schedule will deal with the holding or use of money or an asset on trust. That requires clarification. Amendment No. 291 raises a probing, practical point. As the Paymaster General will recognise, money does not often move in relation to certain planning structures. When money does not move, why should additional bankers' charges be paid? I suspect that that question would draw sympathy from several Committee members. For instance, if the title to the funds has legally passed, the employer cannot use the funds, so it is worth clarifying that a contribution has still been made. That would head off challenges from the Revenue, which were not intended by the Government under the provisions of the schedule.

Amendment No. 291 is intended to clarify the matter by adding a new sub-paragraph (5), defining for the purposes of sub-paragraphs (3) and (4) that the making of a contribution to a third party includes the holding of funds to the order of that third party, notwithstanding the fact that the funds are never transferred to a bank account in the name of that third party.

Amendment No. 291 covers not only the point I have just made, but a totally new provision, and would insert a new paragraph 1A. That addresses the point of the amount of subsequently allowable deductions. If the value of the contributions increase between payment into the trust, and payment out to the employee, the employee will be taxed on the higher value when the benefits come out. It is only fair,

therefore, that the employer should receive a higher deduction. They might have to take a higher profit-and-loss charge in any event, depending on how the arrangements are structured. New paragraph 1A would encompass that effect.

Amendments Nos. 292 and 293 are concerned within the area of deductions for employee benefit contributions. The new rules are designed to defer employer tax deductions until the employee receives a taxable benefit. We have already discussed that in part. The schedule provides that lending assets out of the trust to an employee does not constitute a triggering event that allows an employer to claim a deduction, but in certain circumstances the loan itself could be a taxable benefit. The amendments provide that a taxable loan of that kind constitutes a qualifying benefit. I therefore hope that there will be an opportunity to address some of the helpful comments that my hon. Friend the Member for Billericay has made in that respect.

The final amendment in this group is amendment No. 294, which relates to paragraph 8 of the schedule. We believe that the schedule contains a technical flaw. It defers employer tax deductions until the employee is subject to income tax and national insurance. That is presumably intended to catch national insurance avoidance schemes using offshore trusts. However, the trust may provide a benefit specifically excluded for tax and/or NIC because, as a matter of policy, the Government want to encourage it. Paragraph 8 lists a few worthy causes, but the list is not exhaustive. Employers providing such a benefit would be penalised and would never get a tax deduction. That is an important point that I hope the Paymaster General will welcome and accept.

Just to put it on the record, the Institute of Chartered Accountants in England and Wales, KPMG and others from the professions have unquestionably helped us to understand the issues that arise from the Bill.

John Baron (Conservative, Billericay)

I seek clarification from the Paymaster General on one or two points. We know that the schedule restricts deductions unless qualifying benefits are provided to employees and so on and that a company cannot get relief for corporation tax unless various conditions are met. Paragraph 2 lists those qualifying benefits and conditions, one of which must be the payment of money or transfer of assets to employees that lead to income tax and national insurance contributions being payable.

Will the Paymaster General confirm that in the case of a private company—a company whose shares are not listed—the granting of those shares will not attract national insurance contributions and, therefore, no corporation tax relief will be available under the schedule? In other words, the provision of shares to employees will not attract a national insurance charge, as the shares are not listed. Will the Paymaster General confirm that that is the intention of the schedule? I fully understand that relief may be available in such cases under clause 140 and schedule 23, but the interaction of the two is complex to say the least, and the availability of the relief is not clearly signposted in the Bill.

I ask the Paymaster General to confirm those few points. I do not want to put too fine a point on it, but the Bill seems to discriminate, however unintentionally, against private companies and unlisted shares.

George Osborne (Conservative, Tatton)

I want to raise a concern that has been brought to my attention and that of other members of the Committee by the Institute of Chartered Accountants in England and Wales. It is unclear what happens if the benefit is taxable, but the measure of the tax charge is completely unrelated to the cost of providing it. The example is given of the provision of cars to disabled employees. Clearly it is an issue of some concern, and I should be interested if the Paymaster General could address it.

Dawn Primarolo (Labour, Bristol South)

I shall focus first on new clause 42 and schedule 24. They are designed to prevent the avoidance of tax and national insurance through the use of employee benefit trusts and other third-party structures, which are, unfortunately, used by employers to provide benefits to their employees and then try to make them look like shares. The measure levels the playing field between employers who remunerate employees direct and those who do so through third parties, and it has a yield of £300 million.

The measure works in this way. It defers the timing of an employer's tax deduction for its contribution to a third party until the employees receive benefits from that contribution that are subject to income tax and national insurance. It allows for a deduction when an employer's contribution is used by the third party to pay the operating expenses of the employee benefit arrangements. It does not apply to contributions used for pensions, retirement benefit or accidental benefit schemes, redundancy or termination payments, employee share schemes that fall within the statutory corporation tax deduction allowed in schedule 23 and other legislation, or schemes in which the employers' making of the contribution is itself taxable as a benefit to the employee. It applies to contributions made on or after 27 November 2002. I am informed that the amendments were not contained in the comments made subsequently by any of the representative bodies, because the intention has been known for some time.

As I said, the schedule is an anti-avoidance measure. It prevents avoidance by employers who provide benefits to their employees via third parties, usually trusts. It works by deferring the employer's tax deduction for certain contributions to the third party until the employees are taxed and subject to national insurance on receipt of benefits derived from those contributions. This matching mechanism seeks, as far as possible, to put the employer in the same position as if they had provided the benefit direct to the employee. It is a fair and proportionate response to the extensive avoidance of tax and national insurance that we know is taking place.

Amendment No. 244 would limit the application of the new anti-avoidance rules to contributions by

employers to third parties in respect of cash and assets held on trust. It would continue to allow avoidance opportunities by using third parties that are not trusts. For that reason, I am not attracted to the amendment.

Amendment No. 291 would allow the employer to obtain a tax deduction on an amount greater than its contribution to the third party, where the employer's deduction is deferred to a later period. It would allow a deduction for at least the aggregate of the employer's contribution used to provide benefits to the employee and the amount of the benefits received by the employee. The schedule is not intended to enhance deductions to which businesses would otherwise be entitled under the normal rules. There is no justification for providing such generous and expensive enhancement.

The exception to that is where an employing company awards shares to its employees that give them a real stake in the company. That is at the heart of the schedules. Such shares are excluded from the rules in schedule 24 and are dealt with in accordance with the rules providing the new, generous corporation tax relief in schedule 23.

Amendment No. 292 would allow the employer to get a deduction for a contribution used by a third party to provide employees with loans that give rise to income tax and national insurance charges, regardless of the amount of income tax or national insurance charged. Giving that creative use of loans to directors and key employees has been the source of much tax and national insurance avoidance through employee benefit trusts. The amendment would significantly undermine the effectiveness of the schedule.

The intention behind amendment No. 294 is unclear. It would make the whole of schedule 24 ineffective as an anti-avoidance measure—perhaps that is the intention. It adds to the list of deductions to which schedule 24 does not apply those deductions that do not give rise to a benefit that is subject to tax or national insurance. However, the whole purpose of the schedule is to restrict deductions unless they give rise to a benefit that is subject to tax and national insurance. The amendment appears to undermine the fundamental policy intention, and I cannot believe that Opposition Members really wish to do that. Amendment No. 293 is a consequential amendment, which stands or falls with amendments Nos. 292 or 294, so I shall not discuss it. I urge my hon. Friends to vote against the amendments.

Even comments in the quality newspapers have described the schedule as a neat way of stopping what the Government see as abuse of employee benefit trusts. That is precisely what we intend, and we will reject the amendments, which would undermine that process.

John Baron (Conservative, Billericay)

I am disappointed that the Paymaster General seems not to have addressed my point. Schedule 24 appears to discriminate against private companies in the sense that unlisted shares are being granted because they do not attract national insurance contributions and will not attract relief in respect of corporation tax. I have said, and now repeat, that such

relief may be available under clause 140 and schedule 23, but the interaction between the two clauses is somewhat complex, so the availability of that relief is not clear.

I ask the Paymaster General again whether she can confirm that it was the intention for schedule 24 to discriminate—as it clearly does—against private companies. If not, is that an oversight that can be put right? The complexity of the interaction between schedules 23 and 24 means that private companies might be discriminated against anyway. I question whether that is the Government's intention, but it could be the effect of the clauses and schedules. I know that the Paymaster General and the Chief Secretary are already writing a number of letters to me and to all colleagues, which I welcome, but could clarification on this point be forthcoming from the Government?

Dawn Primarolo (Labour, Bristol South)

I am writing only one letter.

John Baron (Conservative, Billericay)

I want nothing more, but it appears that the schedules discriminate against private companies, and if that is the Government's intention, I question why; if it is not, can we get them tidied up? Will the Paymaster General give that due consideration?

George Osborne (Conservative, Tatton)

The Paymaster General has not addressed my concern, which was raised with me by the Institute of Chartered Accountants, about the situation in which a benefit is taxable but the measure of the tax charge is completely unrelated to the cost of providing it. The example that I gave was the provision of cars for disabled employees, which is a serious issue.

Stephen O'Brien (Conservative, Eddisbury)

This has been a difficult area to discuss. My hon. Friends the Members for Tatton (Mr. Osborne) and for Billericay have rightly raised several points. Indeed, I was aware of the representation that involved the provision of cars for disabled employees. We recognise the difficulty in seeking not to be emotional while we push for the clarification that is genuinely required to understand the provisions, and it is inevitable that we have had to be somewhat clinical. Unquestionably, there are real-world consequences.

My hon. Friend the Member for Billericay also made a very important point about loans.

Dawn Primarolo (Labour, Bristol South)

I am sorry to do this to the hon. Gentleman, but does he agree that the discussion is about the transfer of the ownership of an asset? The circumstances that the hon. Member for Tatton described do not fit at all, because the asset is not transferred—ownership remains elsewhere.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful to the Paymaster General. I hope that she does not resent our seeking to raise points. This has been quite a long sitting, and it may have been somewhat trying, but it is important to place on the record those issues that others have raised with us. In addition, our deliberations are an important part of the process of clarifying the Bill. As the Opposition, we do our very best to understand what are complex provisions with, it has to be said, exceptionally limited resources, whereas the Government patently have been living with the

provisions for a good period. I hope that they feel very comfortable about the debate.

Paul Farrelly (Labour, Newcastle-under-Lyme)

This has indeed been a long session. I do not wish to worry the hon. Gentleman, but I believe that the hon. Member for Arundel and South Downs has expired.

Stephen O'Brien (Conservative, Eddisbury)

My hon. Friend is very well. Anyone who is a passionate classical music concert-goer will know that people may very often appear to be asleep when they are actually concentrating the most.

Dawn Primarolo (Labour, Bristol South)

The snoring gave him away.

Stephen O'Brien (Conservative, Eddisbury)

They concentrate the most when things are most sublime.

John McWilliam (Labour, Blaydon)

Order. Examining the inside of one's eyelids is in order; snoring is not.

Stephen O'Brien (Conservative, Eddisbury)

I heard no snoring whatsoever today, Mr. McWilliam. On the contrary, it is only because of the great support of all members of the Committee that we have been able to examine the issues in the necessary detail that they merit.

Let it be placed on the record that there is no attempt to undermine the major thrust of the Government's policy on anti-avoidance. That is not part of the Official Opposition's case in seeking clarification of the issues. However, the Bill not only raises issues, but prompts probing. As I properly and honestly pointed out when introducing the amendments, it is necessary to probe, and the amendments do just that.

The amendment that has had the least satisfactory response is amendment No. 294, but I shall not press it to a vote because I did not distinguish it from the group and flag it on the way through. In addition, if I am honest with the Paymaster General, regardless of how much I may have identified the issue, I frankly cannot actually think of an example. If I cannot think of a real-world example, it would be inappropriate to press the amendment to a vote, particularly as so much of what I have said this afternoon has been said in an effort to root what the Paymaster General is trying to achieve in the world as it is, rather than in some theoretical ivory tower of the sort that such legislation as this inevitably engenders.

George Osborne (Conservative, Tatton)

We're back to Black and Scholes.

Stephen O'Brien (Conservative, Eddisbury)

I shall not go back to Black and Scholes. I have exhausted my mathematical abilities for a lifetime.

Having listened, then, to the Paymaster General's very clear statements as to what the intention is—she is totally right and has made it abundantly clear that it is a question of whether there is a transfer of ownership—I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 24 agreed to.

Further consideration adjourned.—[Mr. Sutcliffe.]

Adjourned accordingly at Five o'clock till Tuesday 17 June at five minutes to Nine o'clock.