HC Deb 10 July 1973 vol 859 cc1429-36

Schedule 12 of the Finance Act 1972 shall be amended in accordance with the following provisions.

(1) In Part II, paragraph 1, after the words "Under the scheme" there shall be inserted the following words— provided that where the shares are in a company which is under the control of another company and are not quoted on a recognised stock exchange the scheme must be adopted by resolution of the holders of the ordinary share capital of a company controlling that company which is not itself under the control of another company".

(2) Paragraph 3 of Part II shall be omitted and the following new paragraph shall be added after paragraph 6:—

Disposal Price 7. Where the shares are in a company which is under the control of another company and are not quoted on a recognised stock exchange the following conditions must be satisfied—

  1. (a) the price at which the employee or director is entitled under the scheme to dispose of a share acquired by him under the scheme (together with shares or securities acquired by him directly or indirectly in right of such share) or of any interest therein must be computed by the auditors of the company and reported by them to the Board within one month of the consolidated profit and loss account and consolidated balance sheet ("the accounts") of the company having been approved in general meeting;
  2. (b) the manner whereby the price referred to in paragraph (a) above is to be computed must be stated in the scheme, and
    1. (i) must base the computation of the said price on the relevant items in the accounts adjusted as provided in sub-paragraph (ii) below;
    2. (ii) must require the auditors of the company to make the appropriate adjustment to any of the items referred to in sub-paragraph (i) above in the following circumstances:
      1. (A) If any such item is materially different from that which would have been shown in the account had the company not been under the control of another company;
      2. (B) If the period to which the accounts relates was longer than 53 weeks or shorter than 51 weeks;
        3. 1430
      3. (C) If the accounting practice of the company has altered in such a way as to materially affect any such item after the date on which the employee or director acquired the share (or an interest in, or right to acquire the share).
    3. (iii) must define the manner in which the auditors shall make any adjustment pursuant to sub-paragraph (b)(ii)(A) in relation to—
    1. (A) issues of shares or securities in the company;
    2. (B) loans to or from the company;
    3. (C) any transactions in which the company is involved;
    4. (D) the company's dividend policy.

At the inception of the scheme the manner in which the scheme requires the auditors to make these adjustments must be approved by the Board and a subsequent change in the aforesaid must be reported to the Board".

(3) In Part V the following new paragraph shall be inserted after paragraph 2: 3. If the shares are in a company which is under the control of another company and are not quoted on a recognised stock exchange the employee or director must not dispose of the shares or interest therein (or of any shares or securities acquired directly or indirectly in right of such shares) at any time other than within one month of the Board giving notice in writing to the company that the price reported to them by the auditors pursuant to paragraph 7(a) of Part II of the Schedule has been computed in a manner which complies with the requirements of that paragraph save that the provisions of this paragraph shall not apply to such disposal which occurs—

  1. (a) at a time when the shares are in a company which is not under the control of another company or are quoted on a recognised stock exchange; or
  2. (b) as a result of an offer to acquire the whole of the share capital of the company other than any such offer by a company which at the time of the offer was associated with the company; or
  3. (c) as a result of the liquidation of the company other than a solvent liquidation."—[Mr. Trew.]

Brought up, and read the First time.

Mr. Trew

I beg to move, That the clause be read a Second time.

The object of the clause is to make it possible to base share incentive schemes on the shares of unquoted subsidiary companies. The matter was discussed at length in the Committee consideration of last year's Finance Act and was touched on again this year.

In the present situation, in which it is not possible to base incentive schemes on the shares of unquoted subsidiaries, there is inequity as between the executive in an independent quoted company and his counterpart in a company which is a subsidiary in a group. The first can participate in a share incentive scheme tailored to his own efforts, whereas the executive in the subsidiary company cannot do so.

The executive in the subsidiary company can in theory participate in a scheme based on the shares of the holding company, but that is unsatisfactory for two reasons. First, he may be so far down the corporate hierarchy that he may not qualify for participation. Indeed, certainly in some cases, the number of people who can participate is fairly small. Even if an executive can participate, his activities in the subsidiary company of which he is an executive may well have little bearing upon the profits of the holding company. Everyone would agree that it is essential, if an incentive scheme is to be meaningful, that the participant must feel that there is some correlation between his efforts and the profitability of the company in whose shares he has an interest.

There is a further problem. An independent quoted company in which the senior executives participate in a share incentive scheme could well be taken over by, or merged with, another company. In those circumstances the rules of the scheme generally provide that they should be liquidated. In other words, executives in those circumstances will tend to lose their rights in such schemes.

We live in an age of mergers and takeovers, and the justification for them is that they increase efficiency. But if a consequence of them is that executives in the companies affected lose their rights in a share incentive scheme, that is a factor against efficiency rather than in favour of it.

We heard in 1972 and we have heard again this year of the Revenue's objection to basing schemes upon the shares of unquoted subsidiaries. They express the real fear that the profits between one subsidiary and another may lend themselves to manipulation. The object of the new clause is to lay down conditions for the operation of such schemes which will enable the Revenue to satisfy itself that such abuses do not take place.

There is now a gap in share incentive schemes. It is possible for people near the top of a company, whether an independent company or a group, to participate in executive schemes. It is now possible for people on the shop floor to participate in shop floor schemes. There are, however, many people in the middle executive ranks who cannot have any meaningful scheme suited to their needs. The new clause, if adopted, would enable firms to fill that gap. I hope that the Government will accept it.

Mr. Patrick Jenkin

I listened to my hon. Friend with careful attention and with a great deal of interest. I can agree with a great deal of what he said. I can understand the desirability of trying to extend share incentive legislation to cover an executive or group of executives put in charge of an unquoted subsidiary company of a group and being given either options or incentives under the legislation in last year's Finance Act.

My hon. Friend recognised that there are some pretty formidable difficulties in the way of administering such a scheme from the Inland Revenue's point of view. My hon. Friend has gone a long way in skilfully drafting the new clause to try to overcome those difficulties. However, without going into great detail, which perhaps would be inappropriate at this time of night, I am bound to tell him that many of the difficulties still remain.

My hon. Friend's proposals would put great burdens on the auditors of a company. In many cases auditors would have to rewrite the accounts between a parent and subsidiary company to reflect fully the arms-length conditions which would need to exist if the accounts of a subsidiary company were to be genuine accounts for the purposes of a share incentive scheme. They would then have to settle that with the Inland Revenue. That would be extremely difficult because there is no agreement within the accountancy profession on some of the accounting techniques and standards which would need to be applied.

I can see endless room for argument and disputation. It is not only that the accounts would be difficult to agree. A parent company is in a position to direct the flow of business between one subsidiary and another. It does not seem that any accountancy techniques would enable discernment and identification of the accretion in the value of the shares of a subsidiary company which owed itself not so much to the success of the company as to the decision of the parent board to steer business in that direction. In short, there are still—I regret having to say this—formidable difficulties which stand in the way of extending share incentive legislation to the unquoted subsidiaries of groups of companies.

There is a great deal in the merits of what my hon. Friend is advancing, and in particular I see the case he makes about the gap between the schemes available for the top executive of the parent company and the legislation in the Finance Bill offering share savings schemes for the generality of employees. I repeat the undertaking I gave in Committee to my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley) that we shall continue to search for some way of achieving the objectives which my hon. Friend and I share.

I will not express optimism or pessimism about whether we shall find a solution. I can assure my hon. Friend that the search will be genuine and thorough. I hope that next year we shall be able to come forward with something which we can put before the House as a workable scheme. I must say this without commitment. It may be that in the circumstances of this country, which are different from those in America, we shall find the problems insuperable. If that is the case, that is not the end of the line. I said in Committee that it is perfectly proper for a scheme to be set up for the executives of a subsidiary company which relate the targets to the performance of the subsidiary, even though the shares which are the subject matter of the scheme are the shares in the parent.

That view was challenged by Mr. Chown, writing in the Financial Times, but I am bound to say that I see no evidence upon which his challenge could stand. We have examined this carefully. There is a way round. The executives of the subsidiary company can participate in a group scheme in a way which links their performance with targets set for the parent company. We shall continue to search for a way in which we can make this link more direct by offering incentives in the subsidiary company. I hope that, given that assurance, my hon. Friend will not feel it necessary to press his new clause.

Mr. Ridley

I find myself in the difficult position of agreeing with my hon. Friend for Dartford (Mr. Trew) and with my right hon. Friend, although they are not entirely in agreement about this new clause. I see the difficulties which have been put forward by the Chief Secretary. Equally I find my hon. Friend's argument extremely compelling. It has come about that since we have adopted share incentive schemes we are giving all sorts of tax-free remuneration—or certainly remuneration paying less tax—to those who have successfully developing businesses.

These compare favourably with what is available to those who have to pay income and perhaps surtax on extra earnings because of successful activity. My hon. Friend has put the vital point, which is the way we motivate people in industry and make them feel that the results of harder, cleverer and sensible work will benefit them rather than some amorphous group of other people, the shareholders, who take the benefit and do no work.

This is much the most effective form of participation. It is the same sort of principle which, in a primitive way, underlies piece rate or bonus schemes or some other form of management incentive. All these have worked well at certain stages in certain forms. They carry full income tax and surtax, if applicable. What is intolerable—now that the Government have moved into the area of tax concessions to those who can increase their incomes through improvement of share values—is that they have a far better tax position than those who increase their incomes through hard work but have to pay tax on the increment.

I slightly question the argument, from the analogy I have drawn with piece rates and other forms of incentive, that it is likely that companies will manipulate orders or borrowings as between the parent and subsidiary simply for the purposes of magnifying the results of the subsidiary.

We do not find this happening with management incentive schemes and bonus schemes. It is unlikely that a board of directors would say "Let us somehow shift our assets into this or that subsidiary so that Bill, Jack or Joe can get their shares at peak value in the market".

That is conceivable, but I wonder whether the Chief Secretary is making a mountain out of a molehill in relying so much on that argument. It surely is difficult to envisage a situation in which that would work, particularly if the auditors were on the job and if the shares of the subsidiary were quoted. The clause relates only to unquoted shares.

11.45 p.m.

I am grateful to my right hon. Friend for saying that he will look at this matter. I only wish to emphasise that there are a good many hon. Members on the Conservative benches who attach great importance to his finding a solution to this problem. I see his difficulty, but I hope that he will take this matter seriously.

Having started on the share option scheme in industry, we must make sure that there are not two classes—those who can get incentives of this sort and those who cannot. On the question of differences in taxation—especially in terms of management in relation to whom taxation can be a heavy burden—we are seeking fairness in the system. I am grateful to my right hon. Friend for undertaking to look at this matter, and I wish him all success in his endeavours

Mr. Trew

I listened with interest to the argument put forward by my right hon. Friend the Chief Secretary. I am sorry that he does not feel able to accept the clause, but I am at least pleased that he accepts the need for something to be done. He has given a fairly firm undertaking that he will try to do something next year.

I endorse what was said by my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley) that my right hon. Friend the Chief Secretary should not make too much of a bogy out of the possiblity of abuse. It can be exaggerated.

In view of my hon. Friend's undertaking, I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

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