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Mr. Timms indicated assent.
Mr. Davey: The Financial Secretary is nodding in agreement. Mr. Flight: Self-evidently, the employer NIC contribution rate is not earnings capped. The measure simply puts the liability for that on to the employee. Mr. Davey: I am grateful for the hon. Gentleman's intervention, which has helped to clarify my thinking. The principle of transferring employers' tax liability to employee seems odd, but I shall deal with that point later. If the marginal tax rate is 47.32 per cent. on all the capital gain, it is a large impost. When we analyse whether that is the right way forward, we should consider the international comparisons behind all the representations that the Minister will have received. I understand that the rate is not dissimilar to rates charged in other European Union countries. However, the Paymaster General says in her letter that the rate:
My information is that that is not the case. California taxes, for example, amount to 46 per cent.-40 plus six when state tax is included. The key point is that there is also a United States federal tax break on the long-term capital gains tax rate of 20 per cent. when one holds stock for a minimum of one year. That brings down the comparative rate in the US vis-à-vis the rate that we are being asked to accept, so that the comparison is between 47 per cent. and 26 per cent., including state taxes. Mr. Letwin: I apologise for the fact that we are doing our homework on our feet, but this is a very new clause. If the guidance that we received in the form of helpful nods from the Financial Secretary is correct, are we not actually dealing with something like a 59 per cent. marginal tax rate for the employee who has no other income and gets a gain? The amount up to his upper earnings limit that he pays will be his own NIC-12, if I remember the number correctly, plus 47. Let us suppose that it is simply a matter of addition. That gives 59 per cent. Once he hits the upper earnings limit, he will pay 47 per cent., because of the employer's uncapped tax-deductible contributions that he has taken over. That creates the kink that I was describing, but at a higher level-and a pretty high level in comparison with other places. I am beginning to think that the hon. Member for Kingston and Surbiton is right that we should be worried. Mr. Davey: I think that the hon. Gentleman is not quite right to add the 12.2 per cent. employee's NIC to the 47.32 per cent. marginal rate. Obviously, on income up to the upper earnings limit, the 40 per cent. top rate tax does not apply, so there is no cumulative 59 per cent. rate. Nevertheless, the substantive point is that there is a large impost. Mr. Letwin: The hon. Gentleman is right. I was wrong. Mr. Davey: I am grateful. I think that we are all liable to make a few errors when we exchange different marginal tax rates that we appear to be making up on the back of an envelope in Committee. I hope that certainty about the marginal rates that we are discussing will be established during the debate, and certainly from the Minister's initial response. As I understand it, the marginal rate on bands of income, from the top rate tax band at least, that will apply under the proposals is 47.32 per cent. We can compare that with the 26 per cent. rate that would apply in California. Therefore, the basis concerns of industry remain. It is dealing with internationally mobile labour. One reads in the specialist press that various firms in California are stuffed full of employees from Europe, who want to become involved in high-tech industry and achieve the best remuneration that they can. Given the tax regimes that pertain in this country and mainland Europe, they are attracted to the US. It is not simply because there is a well-performing high-tech industry in California, because we all know that Europe has its own well-performing high-tech industries. The issue that is driving many of them to California is the comparative tax rates.
11 amI understand that the Minister has looked at this with some care, but he needs to share in rather more detail some of his thoughts and experiences. What other alternatives has he looked at? For example, some in the industry have pressed for the gain to apply at the time of the granting of the share option rather than its exercise. Would that be a more appropriate way of dealing with the issue? Can the Minister explain why he has not gone down that route? According to The Independent on Sunday, the Minister looked at the possibility of an exemption for high-tech firms in this area. I was worried to read that he had sent a senior Inland Revenue official to Brussels to meet the competition commission. I hope that he will say that that was not the case because I am not quite sure what remit the European Union competition commission would have in that area. Even if the official did go, I hope that Europe was not involved- Dr. Nick Palmer (Broxtowe): You sound like a Tory. Mr. Davey: Not at all. The hon. Gentleman will know that I am a passionate pro-European but I believe that we should retain autonomy and control over taxation powers. [ Interruption.] There are a number of sedentary interventions. I am tempted to respond to them, but I am sure that you would bring me to order if I did, Mr. Cook. A rather odd principle is being put into the tax system with the new clause and the amendments that were passed recently in the other place-the idea that the employer's tax liability can be transferred to the employee. I know that it is by an election and so is presumably a voluntary agreement between employer and employee, but it raises some issues of principle. Will that happen in future with corporation tax, for example? Is it just a one-off or is it a route that the Minister would wish to go down in other areas? I hope that it is not. It is a bizarre approach and very inelegant. A potentially unwelcome principle is being introduced into the tax system. Mr. Flight: I urge the Government to rethink here and to go back to square one. I cannot think that they can be satisfied with creating yet another different rate of capital gains tax. The Government seem to be stuck unnecessarily on an issue of principle. I confess that the Opposition started the issue of principle in the argument, which was started under the last Chancellor, that other group share options represented a form of earnings and that that justified the application of NICs as well as income tax under certain circumstances. That principle of income tax and NIC alignment has not been put into effect by the Government in relation to charitable giving. Where individuals make payroll gifts, which, under the gift aid scheme, enjoy deductions against income, it is income after national insurance. If one wants to apply the logic of the principle that the Government are hooked on, it should be applied the other way around when people are giving from their income-it should be on the gross income before both income tax and national insurance. The Government are not sticking to the principle of complete alignment of national insurance and income tax. However, on the specific issue, the measures taken by the previous Conservative Chancellor were not intended to expose either employers or employees to uncontrollable and excessive liabilities via NIC charges. The liability was placed on the granting of a share option, to the extent that options were granted at a discount-the issue referred to by the hon. Member for Kingston and Surbiton. Under the old regime a discount was granted on market value, as the employee had earned that immediate benefit and because it could be anticipated and planned by the employer who was granting the option. When the Government introduced the crackpot proposals to charge NIC on the exercise of the share option, they claimed that it was for the administrative convenience of employers to align the charge with income tax. That was disingenuous and, as the Minister conceded, it produced all sorts of problems, especially for high-tech businesses without profits but with potentially volatile share prices. On a tangential point, the Minister said that such companies would have to make provisions in those cases; I noted that there was no argument in earlier debates, as with insurance companies, that the provisions should be discounted. That seems inconsistent; when should a provision be discounted for tax purposes? Both territories relate purely to stealth-tax gathering and not to the principle of the matter. The Government's tortuous arrangements to get out of the problems are unnecessary. They will not be significant in terms of revenue, and the correct solution to the problem, which is of the Government's own making, would be to go back to square one of the old arrangements. How do the Government justify a 47.3 per cent. tax rate when they say that they want to encourage employee ownership and participation, venture capital, entrepreneurship and so on? The net effect of their proposal in certain areas of economic activity will be to give employees the highest capital gains tax rate of the lot. Mr. Timms: I am a little hurt that Opposition Members think that the new clause is inelegant or, as the hon. Member for Arundel and South Downs described it, tortuous. It is an elegant solution to a difficult problem and I hope that I can persuade the Committee to agree with me. We had an interesting debate about whether the figure should be 52.2 per cent. or 47.3 per cent.; it was apparent in my discussions with many companies that the 50 per cent. level was psychologically significant. One or two companies said that if they ended up with a rate above 50 per cent. it would be disastrous, but a rate slightly below that figure would be fine. As a result of the new clause, the rate will be significantly below 50 per cent., which will help many firms. I had a discussion with a US firm that wanted to establish a high-tech manufacturing facility in Plymouth. It was so worried about the effect of the problem on its operations that it considered not going ahead with its investment. I am delighted that, on the basis of the changes made in the other place and in Committee, the company is going ahead with its plans and is happy with the framework being introduced in the new clause. The hon. Member for Kingston and Surbiton asked about arrangements elsewhere in the world; I shall come to those in a moment. A couple of weeks ago, I attended a conference for European high-growth firms, at which there were 400 or 500 people from all over the EU. It was evident that the view everywhere else in the EU was that the UK was the best place by a considerable margin in which to establish and to grow such a firm. I had an interesting discussion with a French entrepreneur who had decided to establish a dot.com enterprise and who felt that he could choose any location in the world, although he felt that France was not an appropriate location due to the environment there. In the end, his choice was between the UK and the US. He chose to come to the UK, partly because of the difficulties of finding staff in the US because of the tightness of its labour market. From a recruitment point of view, he felt that he would be significantly better off. That perhaps makes the point that it is necessary to consider a range of issues facing companies, not simply one issue, when thinking about international competition. I shall return to the point about different levels of taxation in other countries later. The previous Government, of course, removed the cap on employers' national insurance contributions. As a consequence, some companies have sought highly inventive ways in which to avoid national insurance on large cash bonuses. That has been the case in the City especially, where there was significant and extensive use of share options for that purpose. To do away with national insurance contributions on share option gains, as a few Opposition Members have advocated, would again provide a route by which that avoidance might take place. Our view, which I hope is shared across the Committee, is that we should not create avenues for very well-paid people that allow them to avoid paying national insurance on a substantial chunk of their remuneration. For that reason, I would not favour returning to the old arrangement.
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