Clear objectives needed for tax break system

Well done, Kenneth Clarke, for doing the right thing for the wrong reasons and rather late. The 10 days it took for your partial U-turn on share options was a lot slower than your record - the reversal of theRevenue's meddling with mortgage insurance taxation in the spring. But better late than never.

Your basic judgement that the Inland Revenue should drop the executive share option scheme is right. Those misnamed tax breaks for bosses, in fact available to all employees, have outlived their usefulness.

Archie Norman of Asda is outraged because he uses options as an integral part of employee remuneration. Ignore him. A recent survey found one in seven public companies extended share options to non-management staff. But this one must be nipped in the bud, or it will mushroom like the tax relief on profit-related pay, which costs the Exchequer 10 times as much as executive options. Taxpayers should not be giving open-ended subsidies to employee costs.

When executive share options were introduced in 1984, the top marginal tax rate was 60 per cent and income tax 40 per cent. It seemed a sensible idea at the time to give a strong push to share ownership.

But with the top rates of capital gains and income tax long since aligned at 40 per cent, the scheme has become irrelevant to top earners, for whom the pounds 6,000 CGT allowance is a flea bite. Significantly, tax advisers for some time have been telling clients to go straight for an unapproved option plan liable to income tax. It may not yet have dawned on Gordon Brown, the shadow Chancellor, but abolition will not kill executive options, just the Inland Revenue-approved version.

The real mistake of the dawn raid on options was, of course, the retrospection, which caught a lot of the lesser paid who had joined schemes expecting a tax allowance, and who then found it whisked away. Existing schemes have been given back their CGT allowance.

But the schemes have not achieved their objective of encouraging managers to be long-term shareholders, because most sold on exercise. All that guff about aligning employee interests with shareholders was hot air. It became just another dodge.

It is good for employees to own shares in their companies. The best way to encourage this is to give them shares, which is what happens with Inland Revenue profit-sharing schemes. Next best is saving for options, the basis of the save as you earn scheme. Both these could be improved and extended.

But such tax breaks are only justified when they have clear objectives and mechanisms that ensure they are achieved, which was not the case with executive share options.