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The Financial Secretary to the Treasury (Mr. Stephen Timms) I beg to move, That the clause be read a Second time.
I fear that I am unlikely to be able to emulate the barnstorming performance that the Committee enjoyed from my hon. Friend the Paymaster General. I want to explain what is intended by the new clause. It is part of a package of measures to help companies that are concerned about the way in which national insurance contributions arise on share option gains in a volatile stock market. The new clause provides tax relief to employees and builds on measures introduced in the Child Support, Pensions and Social Security Bill in another place earlier this week. The technical changes have been developed as a result of my consultations with companies, which were announced in the Budget. I hope that you will allow me, Mr. Cook, to mention the background of the changes to national insurance legislation so that the Committee can see the impact of the proposed tax relief. Taxable gains made by employees in respect of share options granted after 5 April 1999 have been subject to class 1 national insurance contributions since 6 April 1999. The contributions are now charged on share option gains at the same time and on the samebasis as income tax, except when the option or the shares are not readily convertible assets. For an employer, that means a secondary national insurance contributions charge equivalent to 12.2 per cent. of the option gain. Gains made on options awarded and exercised within an Inland Revenue-approved scheme are free from income tax and national insurance. Companies have pointed out that although they can plan for national insurance on regular pay, they often cannot plan for their national insurance contributions on share option gains, especially when the share price is volatile, as it is in the high-tech sector of the economy. Under accounting rules, employers are required to provide in their profit-and-loss accounts for the accruing national insurance liability based on the market value of the shares under option at the relevant accounting date. That creates an unpredictable liability, and makes it difficult for companies to control their costs and hit the numbers in terms of the quarterly results required by the stock market. That can put their investment strategies at risk, damage their growth by deterring investors and even make them insolvent. We want to continue to attract businesses and jobs to Britain to help our companies compete. That is the reason for the changes. At the moment, when the company does not have a track record of profitability, employers are statutorily barred from asking their employees to reimburse the national insurance liability, even when share prices have risen substantially and employees have realised large share option gains. The changes agreed in another place provide a technical solution to the problem by allowing the national insurance liability to be moved to the employee, who controls when the option is exercised, makes the profit and has the funds to meet the liability. The new clause gives employees tax relief when they bear the cost of the employer's national insurance contribution on share option gains. The relief is tied to two circumstances in which an employer and an employee can agree that the employee will bear the costs. The amendment that the Government introduced in the Committee that considered the Child Support, Pensions and Social Security Bill supplied a solution that several companies requested during a wide consultation. Many companies are now making plans to implement the arrangements envisaged in the Bill.
10.45 amMr. Flight: I ask for clarification on the tax relief. Am I right to assume that the employee would pay a net tax rate of 48 per cent. on the gain if he were a top-rate taxpayer? Mr. Timms: I think that the rate is 47.3 per cent., but the hon. Gentleman is right about the impact of the change. Companies with employees will receive a deduction from the corporation tax on their profits for the secondary national insurance contributions that they pay as part of the costs of employment. If the liability is transferred to the employee or the money is recovered from the employee, no corporation tax deduction will be offered. Therefore, it is only fair that the employee who bears the cost should benefit from a tax relief for it. The new clause supplies that relief by allowing a deduction from the amount of the share option gain that would be chargeable to tax. We have included safeguards to prevent an employee from receiving the relief when he has not paid the national insurance contributions within 60 days of the end of the tax year. That is a generous time scale compared with the normal time limit for accounting for national insurance to the Inland Revenue. Many employees will sell some shares to release funds to meet their liabilities when they make gains on their share options. We have included a measure that will allow employers to calculate the PAYE by taking the new relief into account, so the employee will receive the tax relief during the year through PAYE, rather than having to wait for a tax refund through the self-assessment tax return after the end of the year. The changes will help us to continue to attract businesses and jobs to the United Kingdom and will help companies to compete. The changes fully take into account the importance of share options for employers and employees, particularly in the new economy, and remove barriers to using share options in recruiting and retaining employees. They also meet our aim of a fairer tax and national insurance system, by ensuring that tax relief is given to whoever bears the cost of national insurance contributions on share options. I commend the new clause to the Committee. Mr. Letwin: We move from the sublime to the ridiculous. We had a useful session discussing a clause that will be important to millions of people and we are now tidying an understandable but rather egregious error by the Government. In our view, the right way of proceeding would have been to undo the original mistake of putting NICs on employee share options, then forget the whole thing. None of us sees the merit in a bizarre and restricted 47.3 per cent. marginal tax rate. It is bizarre because it applies to a highly restricted set of cases, and restricted, because it applies up to the upper earnings limit. There is a strange kink in the tax schedules. The measure has been introduced because the Government's first proposal, as the Financial Secretary fairly admitted, would have had a catastrophic effect on a range of high-tech companies setting up. To their credit, the Government listened to what was said about the matter and began to unwind their position. The provisions before us are entirely innocuous. People will not desist from offering their services to high-tech start-up ventures in the UK because they have to pay a tax rate of 47.3 per cent. before reverting to one of 40 per cent. That aspect of the measure will have no adverse effect, and the nation will be deeply grateful to the Government for undoing their mistake. It is an inelegant and bizarre way of solving a problem that could easily have been solved by withdrawing the proposal. It would be good if we came to a similarly bizarre and inelegant-but workable-solution to the problems in the measures on double tax relief and controlled foreign companies. If we did, the Committee and Report stages of the Bill would live in the memory for saving British industry from some of the most curious errors ever made by the Treasury. We were not exempt, when we were in power, from sometimes making curious and egregious errors. [ Interruption.] No, I will not make a list of them for the Financial Secretary. The present measures top the list of curious errors, however. We have got rid of one, but there are two to go. If Ministers felt inclined to begin now the process of unwinding the absurdities of the climate change levy, which they will otherwise have to engage in anon, we would enter very heaven. However, I will not test your patience by going on about that, Mr. Cook. Generally speaking, we welcome the Government's curious climbdown as being much better than nothing. Mr. Edward Davey: The hon. Gentleman could have added other measures to his list-for example, IR35. Mr. Letwin: I just want to say for the record that the hon. Gentleman is of course right. Mr. Davey: I should not have tempted the hon. Gentleman. Like him, I agree that the clause is an improvement on previous proposals, in that the Government have consulted the industry. However, I am not convinced-and I am not sure whether the hon. Member for West Dorset is convinced-that the measure goes far enough. The letter that the Paymaster General wrote to the right hon. Member for Wells, which was copied to myself and other members of the Committee, explained that the maximum tax rate would go down from 52.2 per cent. to 47.32 per cent. as a result of the measures. I leave aside the absurdity of having a marginal tax rate of 47.32 per cent. Will the measure deal with the competitive issue at the heart of the industry's concerns? Mr. Letwin: Does the hon. Gentleman share my view that the tax rate is not 47.3 per cent. all the way up, but on a particular band of capital gain that takes the taxpayer up to his upper earnings limit for NIC purposes? Mr. Flight indicated dissent.
Mr. Letwin: My hon. Friend is shaking his head. If the 47.3 per cent. applies all the way up to the total capital gain, it will have more impact and is less curious but more damaging. I agree with the hon. Member for Kingston and Surbiton that we need clarification on the matter. Mr. Davey: I am grateful for the hon. Gentleman's intervention because I had understood that the margin rate was 47.32 per cent. on all income, not only a band of income.
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