Clarke lobbied over options tax change

SIMON PINCOMBE

Tax breaks abolished by the Inland Revenue on Monday will have no effect on Britain's highest-paid directors for technical reasons, it emerged last night.

The relief from income tax under Revenue "approved" schemes - which charged members capital gains tax when shares were sold rather than income tax when the options were exercised - was only available where options had not been exercised within three years of a previous exercise. "Most of the highest-paid directors would exercise options every year," said Brian Friedman, head of Arthur Andersen's executive pay and compensation practice.

The disclosure came as the Chancellor, Kenneth Clarke, came under severe pressure yesterday to reconsider his decision to withdraw income tax relief on discretionary share option schemes. Both Mr Clarke and Gordon Brown, the shadow chancellor, have received letters from the employee share ownership movement warning that the Government's response to the Greenbury report on pay abuse would hit even the lowest-paid workers.

There is concern that workers as well as middle managers will suffer as a result of the Government's decision. While large companies such as British Gas and BT have abandoned discretionary schemes for board members, others have embraced the concept as a way of rewarding entire workforces.

"There was a growing trend for these schemes to be used for large sections of the workforce," said Malcolm Hurlston of the ESOP Centre, which lobbies on behalf of employee share ownership plans. Savings-related share option schemes and profit-sharing schemes were not affected by Monday's news.

Asda, the supermarket group where Archie Norman is chief executive, recently introduced a discretionary share option scheme for employees to wide acclaim. Asda options are available to everyone who works more than 16 hours a week.

Similar schemes are found at Wellcome and National Home Loans. Alpha Airports introduced a workforce-wide scheme when it floated and Glaxo, the pharmaceutical giant, has between 8,000 and 10,000 members in its scheme.

Many opponents hope to persuade the Government to adopt a similar approach to US authorities, who tax options as income after face value exceeds $100,000 in a year. Below that, they are treated as capital gains.

"We will lobby for a threshold," said David Cohen of the Share Scheme lawyers' group. "We will argue that the schemes should be allowed to continue but that gains should be taxed at a higher rate over a pounds 25,000 or pounds 50,000 threshold."

Mr Cohen believes it could be as many as 250,000 people have outstanding share options, of which only 2,000 represent so-called "fat cats". As our table shows, the proportional increase in the tax burden falls on the lower-paid. More senior individuals typically get a greater multiple of salary in options up to the maximum permitted under the old Revenue rules of four times salary.

n Treasury ministers were accused by Conservative MPs of "failing to think through" the move. Michael Jack, the new Financial Secretary to the Treasury, was grilled at a meeting of the Tory backbench finance committee last night about whether National Insurance contributions as well as income tax would now be payable on share option profits.

The Greenbury effect

Salary Level of Gain on exercise Capital Gains Income Tax % Increase

pounds options granted pounds Tax payable payable after in tax

(max 4x salary) before Greenbury Greenbury

pounds pounds

30,000 30,000 9,930 1,572 3,972 153%

50,000 100,000 33,100 10,840 13,240 22%

80,000 240,000 79,440 29,376 31,776 8%

100,000 400,000 132,400 50,560 52,960 4.75%

500,000 2,000,000 662,000 262,400 264,800 0.9%

Assumptions:

* No other gains realised in the year. * Indexation ignored * Transfers of shares to spouse ignored Source: Arthur Andersen