§ Mr. Hanley
I beg to move amendment No. 225, in page 20, line 12, at end insert—'(7) In paragraph 1(5) of the 1984 Schedule, delete "before 1st July 1985".'.I thank my right hon. Friend the Financial Secretary for paying me such a warm tribute by saying that I was so often right. I hope that he meant that I am always right and I hope that that opinion will extend to this amendment. I know that I was right when I greeted my right hon. Friend to the Committee on his appointment as Financial Secretary to the Treasury. I know that I was right to greet him warmly on his elevation to being a Privy Councillor. I hope that I can make three in a row. My right hon. Friend also knows that I moved six amendments in Committee and all six were accepted. In fact, one will be moved a little later by my right hon. Friend.
I wonder whether my right hon. Friend can help on this amendment, although the blame may lie elsewhere than in statute. The amendment is an attempt to redress an injustice to 155 people who have suffered from a bureaucratic mishap. All I ask is that the intention of the Finance Act 1984 be carried out for those employees.
I have written to my right. hon. Friend on the matter, as indeed has my hon. Friend the Member for Stratford-on-Avon (Mr. Howarth). We have both talked at length on the subject and feel that there is an injustice which can be altered quite simply.
The injustice has been suffered by the employees of a company called BET. The company decided to introduce a share option scheme under section 38 of the Finance Act 1984. The scheme was approved by shareholders at the annual general meeting on 6 September 1984 and the first grant of options took place during the ensuing six weeks permitted by the regulations.
A formal application for approval of the scheme was submitted to the Inland Revenue, as required, before 1 January 1985, thus ensuring that the income tax 1261 concessions that were available in the Act for such schemes should apply from the outset. I admit that that was a generous concession by the Revenue.
In return, the Inland Revenue requested three minor amendments to the draft rules, each of which was entirely formal in nature, prior to confirming its approval. Those rule amendments were carried out on 16 May 1985, but it was not appreciated at the time that the Inland Revenue needed to be notified. In fact, the time period for such notification was 1 July 1985. Consequently, the Inland Revenue did not finally give written approval to the scheme until the rather late date of 11 February 1986.
In the meantime, the company had made a second grant of options, believing that the scheme had been allowed, during the six weeks following the announcement of the company's results on 18 July 1985. BET claims that, mainly through having been inadequately advised by its consultants, the company did not appreciate at that time that, because the grant formally took place after 30 June 1985 and before Inland Revenue approval had been received, the options granted would not be eligible for the relevant income tax concessions. That was an expensive and tragic mistake to many employees who have worked extremely hard and who have fallen foul of a bureaucratic slip-up.
The employees were severely hit. There were 155 employees who took up nearly 2 million shares. The price payable on exercise of those options was £3.20 per share, compared with the current market value of approximately £4.40. That would mean that the employees' benefit would stand at about £2,300,000. The increase in market value makes it difficult to restore the expectations of the employees by further grants.
The Inland Revenue regards itself as powerless to rectify the position by treating its approval as retrospective, although, as we know, much of the scheme has been facilitated by retrospective legislation. The company maintains that the situation that I have described is an unreasonably severe consequence of a minor deficiency in the documentation relating to the introduction of the scheme, which was perhaps caused by bad advice or negligence.
However, the matter could be rectified by a simple amendment and that is exactly what I have moved. As matters stand, a substantial number of employees are losing a benefit which the Act intended them to have. In Committee on 24 May 1984 my right hon. Friend the Member for Croydon, Central (Mr. Moore), my right hon. Friend's predecessor, said that that intention was clear both to politicians and the Revenue. Therefore, I beg my right hon. Friend to look with sympathy on this case, as I know he has looked sympathetically on other cases since he has taken over his important position.
§ Mr. Norman Lamont
The amendment of my hon. Friend the Member for Richmond and Barnes (Mr. Hanley) addresses a detailed point about the status of options granted by a company in advance of the Inland Revenue approving its share option scheme under the provisions of the Finance Act 1984. In the case of options granted after such approval has been obtained which are exercised in accordance with section 38(3) and (4) of the 1984 Act, the option gain is free from income tax.
1262 When the principal legislation was introduced, it was appreciated that the merits of the new scheme would probably result in many companies applying to establish schemes quickly and that there would be a serious risk that the Inland Revenue could not cope with all the approvals. Therefore, it was decided in Committee on the Finance Bill that the legislation should provide that options granted on or after 6 April 1984 but before 1 July 1985 under a scheme formally established by a company might be allowed to benefit from the favourable tax treatment. The provisos were that the scheme was submitted to the Inland Revenue for approval under the 1984 Act's provisions by 31 December 1984, and that it subsequently obtained such approval. Thus, where an established scheme was submitted for approval by the end of 1984, any options granted under it between 6 April 1984 and 30 June 1985 could qualify for the favourable tax treatment, provided that the scheme was subsequently approved. Only if approval was not forthcoming by the end of June 1985 would any options granted after that date be incapable of qualifying, and then only options granted between the end of June and the granting of approval.
I cannot accept the amendment, because it seeks to remove completely the limitation for this retrospective treatment—a limitation which was deliberately included in the original legislation. A realistic deadline for options granted to benefit from retrospective approval was placed in the transitional legislation to ensure that companies did not ignore the need to obtain approval from the Inland Revenue. Without such a limitation, companies could have continued to grant options while neglecting to take any action necessary to bring their scheme into line with statutory requirements. To avoid that, the legislation was drawn up to deny income tax relief for options granted under a scheme after 30 June 1985 unless the scheme had already been approved.
As the then Financial Secretary explained, the provisions allowed companies to design their schemes and put them into operation in the period before the Royal Assent and during an initial period thereafter while the Inland Revenue would have the heavy influx of new schemes. The provision was limited. It was not designed to have unlimited retrospective effect. Once the new legislation had been introduced and the initial surge of new schemes examined, the measure would be spent. As I explained earlier, the transitional legislation operated accordingly.
On the length of the transitional period, it is worth stressing that the statutory date, 1 July, was decided following consultation with representative bodies. At 1 July 1985, and in most cases well before that date, the Inland Revenue had fully examined all applications for Finance Act 1984 schemes drawn up during 1984 and notified the applicants of any points that needed attention. All schemes where the applicants responded satisfactorily and which were therefore capable of approval as at that date had been formally approved. The only instances where approval had not been given occurred where the applicants failed to respond to inquiries.
It is no doubt a relevant factor in the mostly successful outcome that the significance of the 1 July deadline was given considerable publicity. Apart from the debate in Committee, there was a Press release dated 19 June 1984 which I have given to my hon. Friend the Member for Richmond and Barnes. I have read it, and it gives full details of the transitional arrangements. In addition, the 1263 Inland Revenue published explanatory notes to the legislation in December 1984 which included a chapter describing the transitional provisions. Just to underline the accuracy of the time limit, the general compliance with it and the effectiveness of the target, the Inland Revenue is aware of only two cases where options were mistakenly granted after 30 June 1985 before the company's scheme had been formally approved.
The share option scheme was given considerable publicity. Almost all the companies which adopted the scheme took steps to observe the requirements of the legislation and apparently did so without difficulty. At that time, many such schemes were introduced.
My hon. Friend the Member for Richmond and Barnes said that I accepted many of his amendments. All that I can say is, "You can't win 'em all." I cannot go along with my hon. Friend on this amendment. I have every sympathy for the people in the company that he mentioned, but the legislation was clear. It was given much publicity, including press handouts, and everything possible was done. It is the responsibility of professional advisers and of those who create such schemes to make themselves aware of the conditions under which the schemes are created. No special circumstances apply to the firm. I have every sympathy with the company and the employees, and perhaps the firm's professional advisers must consider their responsibilities in the matter. I cannot comment on that, but I must say to my hon. Friend that I cannot alter the legislation, which was already generous in its retrospective effect.
§ Mr. Hanley
I am grateful to my right hon. Friend the Financial Secretary for examining this case with such care. He has fully explained the publicity that was given to the various documents. He has also given me some booklets and leaflets which show clearly that notice was given to those who, perhaps, should have given more competent advice to their clients. I fully understand my right hon. Friend's position, although it is to be greatly regretted that those 155 people cannot benefit through a small amendment to the legislation which, as I said earlier, would give them exactly what the legislation intended.
The fact that formal approval had not been given, but that informal approval had been given many months before the cut-off date and that the three minor amendments had been achieved two months before the cut-off date, must be especially galling to them. I am sorry that legislation cannot give them what they deserve, but I shall pass on to those individuals my right hon. Friend's words, especially with regard to the responsibility of the advisers. I am grateful for the fact that he has taken such trouble over this matter. I beg to ask leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.