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Thursday, 1 June, 2000, 15:46 GMT 16:46 UK
Share option row hots up

Start ups offer share option packages on top of the salary
Internet start-ups can offer one big incentive to lure the cream of employees, hefty share option packages.

For these fledgling companies, it is their key selling point in a tight labour market.

But a row over national insurance paid on share options has been bubbling ever since last year, when the Treasury introduced a 12.2% charge. High-tech companies claim the national insurance charge could eat up their profits.

The Treasury is notoriously difficult to shift ... it is probably the last bastion of the old economy

John Higgins, Computing Services and Software Association
Last month, the Treasury offered a compromise, but many firms warn that this still is not enough to prevent high-tech companies from leaving the UK.

So what now is the answer to the national insurance dilemmna for workers?

The Treasury's move last year was prompted by the realisation that some companies were avoiding paying tax by paying their staff in share options.

Taxing options

Government approved share option schemes are limited to a maximum of 30,000, a ceiling introduced by Tory Chancellor Kenneth Clarke.

Back then, National Insurance was payable when share options were granted, but only if the options were granted at a discount and the charge was limited to the amount of the discount.

But since April 1999, unapproved schemes attract both income tax and a 12.2% national insurance charge on the employer when the employee exercises the option.

This change hit technology companies particularly hard, firstly because they rely on share option packages to entice employees and secondly, volatility in their share price means it is hard for them to calculate how big the National Insurance charge will be.

Industry fury

Industry wrath at the insurance charge has prompted a string of threats to either leave the UK or concentrate expansion overseas.

The new change was a "kneejerk reaction to a very small problem," the CBI's policy advisor Jamie Bell said.

QXL chief executive Jim Rose became the latest industry figure to criticise the government when the online auctioneer released its results on Wednesday.

QXL had to set aside 11.6m for the charge for 1999 and 4.4m in the last quarter. In both cases, the charges are greater than the company's turnover.
Internet surfer
Start ups can find it difficult to recruit staff

Some UK companies are now ready to pack up and leave.

"One member company reported that a planned development facility with an employment potential of up to 1,500 people would now be located in Singapore rather than the UK, the decision tipped by the UK's NIC [National Insurance Charge] cost," John Higgins, director general at Computing Services and Software Association said.

"A leading multinational supplier indicated that it could well freeze further employment of its 3,000 plus UK workforce in favour of expansion elsewhere," he added.

Some reports quote Vance Kearney, Oracle's vice president of human resources in Europe, as saying that "our future expansion is likely to be in Ireland, where the tax system is much more favourable."

Treasury relents

After one year of intense lobbying by high-tech companies, the Treasury relented in May.

It proposed moving the national insurance liability from the company to the employee.

"Allowing employers and employees to come to an agreement to recover or transfer the National Insurance charge should provide a technical solution by completely eliminating the unpredictability of the charge," Financial Secretary Stephen Timms said in a statement.

But this isn't enough, say industry experts.

"Companies only grant options as an incentive to their employees and it's going to be difficult for an employer to say here is your reward for working so well and so hard, but by the way, you have to sell them straight away to pay the National Insurance Contribution on them," the CBI's Jamie Bell said.

Some see it as an example of how shoddy the government's dotcom credentials are.

Prime Minister Tony Blair
The National Insurance row casts doubt over the government's commitment to the new economy
"It is an example of how the government isn't making it easy for companies to innovate," Bell added.

The Computer Services and Software Association ( CSSA) says the only solution is for the government to abolish the new charge.

"Drop it. Go back to the situation before it was changed.Take the view that the tax take from the growth would exceed that gained from national insurance," its director general John Higgins said.

But he isn't optimistic about the chances for change.

"The Treasury is notoriously difficult to shift...It is probably the last bastion of the old economy," he said.

One compromise solution had been to introduce a tax exemption for high-technology industries, but this has been rejected by the European Commission, reports say.

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20 Mar 00 | Business
Seeking a fair share
30 May 00 | Business
E-business pay bonanza
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