Mr Clarke announced he was abandoning his plans to tax retrospectively executive share options for 200,000 people because of the public outcry over the way it would hit some shopfloor workers, including Asda supermarket check-out workers.
The Chancellor will go ahead in his Budget in November with taxing as income executive share options obtained on or after 17 July, the day on which he made his "dawn raid" to coincide with publication of the Greenbury committee report on boardroom pay. There will be no attempt by the Treasury to end the tax break for those before that date.
Sweeping aside claims that he had shown incompetence, Mr Clarke said: "I looked at various options for drawing a dividing line between fat cats and little cats. Distinctions of any kind would be quite impractical. There was no way of doing it without causing anomalies by trying to draw lines."
Gordon Brown, the Shadow Chancellor, last night said Mr Clarke's U-turn - the second he has been forced to make this year - had let the utility bosses off scot-free.
There were strong indications last night that Mr Clarke was forced to perform his hasty retreat under pressure from John Major, the Prime Minister, to sort out the mess before they both left for their summer holidays tomorrow. Downing Street was anxious to avoid further damage to Mr Major's attempts to restore confidence after the leadership election.
But it represented a set-back for the Prime Minister's drive to tackle excessive boardroom pay-outs for the public utilities chiefs. The inquiry by Sir Richard Greenbury, chairman of Marks & Spencer, was set up at the request of Mr Major to deal with the "fat cats" but now they will be allowed to cash in their executive share options without paying income tax on the profits.
It is also unlikely to satisfy Sir Richard, who wanted the Chancellor to target the "fat cats" by imposing the tax on those with higher earnings, or bigger profits from share options. Both ideas were rejected by Mr Clarke.
Sir David Lees, a member of the Greenbury team that began the debacle, said the Chancellor "had acted wisely" yesterday. The CBI also welcomed the move but Archie Norman, chief executive of the Asda group and one of the most vociferous critics of last week's changes, said a campaign for further changes would continue.
David Shaw, the Tory MP leading the campaign to stop the tax, was also unhappy because the Chancellor had not abandoned the whole scheme. Mr Clarke may have done enough to stop a defeat in the Commons by Tory rebels, however. "It's divide and rule," said Mr Shaw.
Mr Brown estimated that the senior executives of the utilities were sitting on pounds 100m worth of share options profits. It would be subject to capital gains tax, rather than taxed as income. "The Chancellor has now given them the green light to cash them in free of income tax," he said. "The Greenbury committee's recommendation to tax share options as income has now been made worthless by the Chancellor in relation to the privatised industries."
Labour will seek to re-impose the tax on the "fat cats" in the autumn, but is now unlikely to get Tory backbench support. Malcolm Bruce, the Liberal Democrat spokesman, said it did not go far enough, and would vote against the proposals in the Finance Bill.
Answering the charge that the "fat cats" had gone free, Mr Clarke said: "It's total nonsense. Greenbury had a lot of important recommendations about linking high pay to performance.
"I have made all share options subject to income tax. It is a decision I am sticking to. All the old ones are not just owned by public utility directors. They are Asda shop girls as well." He said he had responded to the representations made to him by the Greenbury committee, who met Michael Jack, the Financial Secretary, at the Treasury; and a powerful City and business lobby, including Next, the retail chain, supported by Tory MPs.
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