'Section 20 of the Finance Act 1974 shall be amended by the addition to subsection (1)(a) thereof of the words "to savings-related share option schemes approved under Part III of
Schedule 8 to the Finance Act 1973; and" and by the addition to subsection (1)(b) thereof of the words "to savings-related share incentive schemes approved under Part II of Schedule 8 to the Finance Act 1973; and".'.—[Mr. MacGregor.]
§ Brought up, and read the First time.
§ Mr. MacGregor
I beg to move, That the clause be read a Second time.
As those hon. Members who were on the Standing Committee will know, this will be a re-run of the very short debate that we had in Committee rather late at night—in fact, somewhat later than the hour at which we are to discuss the matter now.
It is right to bring the new clause back on Report. It relates in an important way to the clauses now numbered 42 to 49, the profit-sharing clauses. The reason why it is right to bring it back again now is twofold. First, our debate in Standing Committee was brief, and, if I may say so, it seemed to me that the Financial Secretary did not take seriously the points which were then raised. I am glad to see that the Minister of State is to respond to this debate. The Financial Secretary did not reply to even one of the points which we raised, and one reason for this debate is that it gives us an opportunity to elicit from the Government a reply to the arguments in favour of the clause, since the response in Committee was wholly unsatisfactory.
The second reason stems from what the Financial Secretary said at the end of his reply:Of course, further consideration will be necessary and the matters raised by the hon. Gentleman—referring to me—will form part of the examination.Since the right hon. Gentleman clearly did not understand most of the points made in the debate, we have given him time since then to look again at the new clause, and, as I say, I am glad that the Minister of State is to reply.
It is worth noting that on Report we have about 99 new clauses, new schedules and amendments to the Bill as a result of our debates in Committee. That shows the importance and value of our Committee process. We made many valid points at that stage, and the new clause raises yet another. A new clause of this 1428 kind will be important if profit-sharing schemes are to succeed at least in about 50 of our major companies.
In Committee, the Financial Secretary made three points to show why the new clause should not be accepted, and I shall deal with those before coming to our constructive reasons for bringing it forward again. First, the right hon. Gentleman said—this will be familiar to those who took part in the Standing Committee, but perhaps not to others—that what we were trying to do was to bring back the same tax reliefs or reliefs on a somewhat equivalent basis for the SAYE share option schemes permitted under the Finance Act 1973. He gave as his first reason for rejecting that that under the 1973 share option scheme, as he put it, an employee did not necessarily get any shares at all, he may not have exercised his option, and there was no compulsion for him to do so.
There are two answers to that. First, the employee may have exercised his option, and he may therefore have shares under the share option scheme which will get no tax advantages because of the change in legislation made by this Government in the Finance Act 1974, which removed all the tax advantages of the original 1973 scheme. Also, an employee could renounce his right under the present scheme, so that he would get no shares at all. That is not a valid objection to trying to put the 1973 scheme on the same basis.
The Financial Secretary's second reason was:In introducing the profit sharing scheme—the one in this Bill—we implemented what was desired by the majority of firms which made representations to us.His point was that, in the original Inland Revenue document, produced in December last year, which led to the current profit sharing proposals, there were three possibilities, the second of which was a share option scheme and that because the majority of firms preferred the third option—the one in the Bill—there should be no changes to put the 1973 scheme on the same basis.
That is a strange argument. Although the majority of firms preferred the third option—it is the one that I myself find 1429 most attractive—we should not exclude the minority who originally introduced share option schemes. The Financial Secretary was basically saying, "Bad luck," to the 50 major companies which have introduced such a scheme: "Because everyone else went against you, you will be at a disadvantage compared to the many who will be allowed to introduce a scheme of their own." But that is a bad argument as well.
The Financial Secretary's third argument was that he did not oppose share option schemes under the 1973 Act. They can continue—admittedly, without the tax advantages. He said:… I see no reason why they should not fall to be considered subsequently in the light of the development of profit sharing schemes."—[Official Report, Standing Committee A; 27th June 1978, c. 1802–4.]The point that he has completely failed to take into account is that already many of the companies which introduced profit-sharing schemes under the 1973 Act are aware that they will be put at a disadvantage. We shall not need many years' experience of the new scheme to know that.
I see no reason why the Financial Secretary should say that we should wait and see and that if my predictions are proved correct that can be put right in a subsequent Bill. We know from representations that they have made that the companies already feel that they will be disadvantaged. I see no difficulty in putting that right quickly, so that both sorts of scheme can go ahead on the same basis.
So all three arguments were very weak. What is more important, he did not deal with the points we put forward to show why the companies which had already implemented share option schemes felt that they were disadvantaged.
On that occasion, I galloped through my five arguments why the 1973 schemes should have some tax advantages restored to them. I do not intend to go on at length, but it is important that they should be restated, because they should be answered, as they were not on that occasion.
First, it is generally conceded that now that employee share schemes are to be encouraged by all parties—we are delighted at the conversion of this Govern- 1430 ment to the concept—companies should be sure of a period of tax stability to enable them to introduce the schemes and encourage their employees to take them up without tax changes for a reasonable period. The Financial Secretary was not taking account of that point when he said in Committee that we could again change the tax advantages of the 1973 scheme if that proved necessary in the light of experience. He suggested that at some point we might actually do what we are asking the Government to do now. I believe that in the interests of general stability that step should be taken as soon as possible.
The second argument is that the tax treatment of the different employee share schemes should be as equitable as possible. I repeat the point I made in Standing Committee, that it is not only illogical but biasing the argument in the wrong direction that the tax treatment of an employee who has acquired his shares through the scheme under the present Bill and to which he may not have had to contribute should be better than the tax treatment of the employee who has had to contribute his savings over a period of five years in order to acquire his shares under the original share option scheme, in that at the end of the day the employee who is given his shares finds that he is in a better tax position than the employee who has saved up over five years to acquire them.
That is illogical and unfair. It is made doubly unfair because of the third point, which is that many employees in the companies which have already introduced 1973 share option schemes will find that they will be unable to take advantage of the profit-sharing scheme envisaged in the Bill.
It is important to spell this out for the benefit of those who did not take part in our debates. The reason is that many of the 50 major companies which have already, without the tax advantages, decided to introduce 1973-type share option schemes will find that they are unable to participate in this type of scheme because they will already have allocated a certain amount of their equity to the previous scheme. Perhaps many of their employees will not necessarily take them up, but at this stage the companies do not necessarily know that, and 1431 many of their institutional shareholders may well be reluctant to see an extension of profit-sharing schemes for employees because they know that at present there is an option for a number of their own employees to take up new equity.
I must say to the Chief Secretary, who I see is looking at the clock, that I was misled last time: I ran through these arguments but received no answer from the Financial Secretary. Therefore, I am prepared to continue tonight until I do.
Many of these companies feel—they feel this at present, because they have made representations to us—that they will not be able to take advantage of the provisions of this year's Finance Bill because they already have a potential commitment to the extension of their equity to their employees as a result of the SAYE share option schemes. This could be a real hindrance in many major companies to the extension of this type of profit-sharing scheme.
The fourth argument follows on directly from that. This is very unfair to the employees in these 50 companies because, as I said earlier, they will not have in the SAYE scheme they have taken up tax advantages of the sort that we see and welcome in this 1978 scheme. They will see that their companies, which in a very enlightened manner were taking advantage of the 1973 SAYE scheme, are disadvantaged simply by nature of the fact that this year's Finance Bill introduces better taxation advantages than the original 1973 Act—in fact, not the 1973 Act, for in 1974 the Labour Government removed the tax advantages given in the 1973 Act.
The final argument, which I should have thought would appeal to the Government, is that there could well be an implication for national savings as a whole if the type of change that we advocate in the new clause is not made. As I indicated in Standing Committee, I understand that the total value of all SAYE contracts linked to share schemes so far is about £45 million to £50 million which is about 10 per cent. of all SAYE savings. It is important that it should be understood that the tax advantages now being extended to other schemes should also be available to those SAYE schemes. There is, therefore, an implication for National Savings as a whole.
1432 I make no apology for bringing back this new clause on Report. The three arguments we had from the Financial Secretary in Committee were inadequate. There was a total failure to deal with the five points put forward from the Opposition Benches about the disadvantages of not extending some tax benefits to the SAYE schemes introduced by the previous Conservative Government, whose tax advantages were removed by this Government. Above all, it seems to be inequitable that we should have a situation whereby, because the Government have happily changed their mind about the advantages of employee share schemes and given tax benefits, they should positively discriminate against the employees of the companies which were sufficiently enlightened earlier, before the Government's conversion, to introduce these other schemes.
For all these reasons it seems right to press that the SAYE schemes introduced in 1973 and then hit in 1974 by the Government should as a result of the change of heart on the part of the Government, be brought into line and given the tax advantages which we welcome in this Bill.
§ Mr. Denzil Davies
The hon. Member for Norfolk, South (Mr. MacGregor) has gone through the five points made in Committee, arguing for an extension of the tax reliefs under the profit-sharing arrangements in this legislation to share option schemes. He did not argue for share incentive schemes, as I understood him. I believe that there is a difference. Many of the share option schemes take advantage of the SAYE system and were originally introduced by the previous Conservative Government in 1973.
The hon. Member asked why cannot the tax incentives in the Bill be given to the share option schemes. I am sorry to have to give the same answer as he received in Committee. I know that the hon. Member does not like it and will say that the point has not been dealt with, but it is being dealt with. It is just that he does not like the answer because it does not accord with his views. The point is that a share option scheme is different in nature from the kind of profit-sharing scheme being put forward in the Bill.
The hon. Gentleman gave the game away because he said that in a share 1433 option scheme a person has to contract in to get shares. In other words, a person has to opt for his shares. He sought to draw a distinction between the present scheme in which an employee can renounce his shares. That is the basic difference. A share option scheme requires a contracting in. The scheme under the Bill requires a contracting out. It is that distinction between the identification with the company which is the basis of the Government scheme and which is different from share option schemes.
After considerable consultation following the publication of the Government's consultative paper—and the third option in that paper was the one preferred by most people—we deliberately decided to go along that road and to give the tax relief to that type of scheme. I accept that it is galling for those who have introduced, since, 1973, other types of scheme. It is galling when tax rates change, when taxation changes. It affects property and contractual rights from time to time. But to suggest that we should look back, at those who have entered into contracts of whatever kind and try to adapt taxation for the future to bring such people into the present tax regime, is going too far and is something that cannot be done in most cases. It is not possible to go back, when tax incentives are given, and changes are made, and try to rewrite contracts for the benefit of those who introduced various schemes in the light of the prevailing tax position but which proved to be not so attractive as at first thought.
I think that what the hon. Gentleman is asking for in this respect is unreasonable, and that is why my right hon. Friend the Financial Secretary could not accept the amendment. The hon. Gentleman shakes his head, but I should have thought that my point is a reasonably fair one. It is not possible to go back and look at all the contracts of all the people who have been affected by tax changes.
§ 11.45 p.m.
§ Mr. Davies
Of course that has to be done, because the hon. Gentleman is asking for tax reliefs in relation to other 1434 schemes, and we have decided that this kind of profit-sharing scheme, where the individual is indentified with the company, is the one that we favour and the one that most people favour. It is unfortunate for those firms which chose to go along another route, but it is not possible at this point of time to introduce another kind of profit-sharing scheme along the lines that the hon. Gentleman is asking.
§ Mr. MacGregor
Would the right hon. Gentleman not agree that a number of companies—not all the 50 but a number of companies—introduced the SAYE scheme on the basis of the original 1973 tax advantages, and that it was this Government which came along and removed them?
§ Mr. Davies
I accept that entirely. It happened in 1974. But is the hon. Gentleman saying that Governments are not entitled to change taxation or to impose taxation or to relieve from taxation? This surely is not a proposition which I would have thought he would normally put forward. It is unfortunate that this has happened, but people in business and in industry know the position very well. People who enter into commercial agreements fully appreciate that taxation and tax rates can change. This is a fact of life with which, reluctantly perhaps, they have to live, and that is the answer to the hon. Gentleman. We have introduced a major profit-sharing incentive in this legislation. We feel that this is the best way to do it. We are talking about tax relief and we think it right that tax relief at the moment should be confined to the schemes introduced in this Finance Bill.
§ Mr. Nelson
I wish to intervene, only very briefly, to support my hon. Friend the Member for Norfolk, South (Mr. MacGregor), because it seems to me that, both in this debate and in the one that we had in Committee, the Treasury Ministers have been unduly obstinate.
The case put on its five points by my hon. Friend seems to be both persuasive and powerful. The Bill seems to me to be unduly prejudicial towards the many companies which entered into the 1973 scheme. In particular, many of those companies will have been the most adventurous and the most concerned at the time to ensure that their employees had an association with and a binding 1435 loyalty to the companies. In many cases these are exactly the sorts of companies within which the Government should now be anxious to encourage employees to benefit under the sorts of schemes provided in the Bill.
I think that it will be extremely difficult to dismantle the old schemes and set up the new schemes. In addition, while accepting the point about contracting in and contracting out, and the difference that this implies, there are other points as well. Clearly, under the scheme included in the present Bill, whereby shares are allocated on an annual basis to employee trusts, there will be an income in the form of dividends coming in from those shares which will be held in trust for or go to the benefit of the employee, whereas under a share option scheme there is no such income coming in until the option is exercised and the shares are required by the employee, and dividends will accrue only as from that date.
In an additional way, the individual is prejudiced by having accepted the 1973 scheme. On top of that, insult is added to injury and he does not get the same preferential tax treatment as is provided in the Bill. It seems to me, therefore, that on the basis of equity and on the basis that the five points put by my hon. Friend have not been accepted—and above all because the Government have done a somersault on their own policy, in that they reversed their own support for such schemes and then introduced a new sort of scheme—this sort of anamolous treatment and this sort of reversal of policy acts to the prejudice of consistency on which industry should be urged to make provision for and to give encouragement to its own employees. The new clause moved by my hon. Friend is persuasive and should be supported.
§ Mr. Nigel Lawson (Blaby)
My hon. Friend the Member for Norfolk, South (Mr. MacGregor) led the Committee through Part III of the Bill dealing with profit sharing with clarity, perspicacity and assiduity and did a service to the entire Committee. He has now added to that by his service to the House on Report in putting forward more fully than he was able to do in Committee the Opposition's argument about the treatment by the Gov 1436 ernment of Save-as-You-Earn share option schemes.
I have never heard such a deplorably dog-in-the-manger attitude as that expressed by the Minister of State. The facts are that the last Conservative Government introduced an employees' share ownership scheme with a tax incentive in the 1973 Act. This was the SAYE share option scheme. The first act of the present Government was to destroy that employees' share ownership scheme. That was in 1974. Now, four years later, they come forward with a scheme of their own.
We welcome the Government's turn round. We welcome their U-turn. We welcome their belated conversion. We do not say in a dog-in-the-manger way, as the Minister of State does, that because it is not the scheme that we devised, we are opposed to any tax incentives, tax concessions or tax remissions being attached to the scheme. We welcome the scheme that is in the Bill. But that is precisely in reverse what the Minister of State is saying. Because the SAYE share option scheme is not a scheme that this Government thought up—indeed, it is a scheme from which they removed the tax incentive—he argues there must be no tax incentive for it at all. It is a deplorable, petty and small-minded attitude, and one which does the Minister of State no credit.
The Minister did not give the real reasons for his objection. However, the ostensible reasons which he gave rested on two different arguments. First, he drew a distinction between a scheme where the employee had to contract in to get the shares and a scheme where the employee contracted out. But this is a distinction without a difference, because it does not matter. At the end of the day, what is important is that the employee is a shareholder in the company for which he works.
There is that distinction, but it is no distinction on the basis of which the Minister can say that there should be a tax incentive for one and not for the other. Indeed, there are many trade unionists who would prefer the scheme where the employee chose voluntarily whether to have the shares in the company for which he worked rather than those shares being part of his emoluments which he cannot take in another form very easily.
1437 The other objection raised by the Minister of State was even more far fetched. He implied that there was some great administrative difficulty, and that it would be necessary to go back over all the records to discover all the companies which had such schemes and for which tax concessions they would be eligible.
§ Mr. Lawson
In that case, it is impossible to understand the point of that section of the right hon. Gentleman's speech, because that was the only conceivable point that he could have had.
The 54 public companies which have since 1973 incorporated and introduced SAYE share option schemes employ about 750,000 people. Of those 750,000, more than 20 per cent have taken up voluntarily these share option schemes. The figure would have been considerably greater had not the present Government removed the favourable treatment in the 1974 Finance Act.
Therefore, this is a very important phenomenon. It is an important and substantial development and it is not something just to be brushed aside simply because it is different from the scheme that the Government have put forward. There is no reason whatsoever why these two schemes should not sit side by side. The House does not have to decide which is the better of the two.
The Minister of State gave a very inadequate answer, but I do not want to detain the House much longer because there are other new clauses to discuss tonight. The Financial Secretary, when he replied to this debate upstairs in Committee, said this about the Save-as-you-Earn share option schemes:I see no reason why they should not fall to be considered subsequently in the light of the development of profit sharing schemes." —[Official Report, Standing Committee A, 27th June 1978; c. 1804].That is very interesting. It is a most obscure statement. What evidence is the Financial Secretary looking for? What is he saying? Is he saying that if the employees' share ownership scheme introduced in this Finance Bill turns out to be a lamentable failure and there is a negligable take-up, only in those circumstances will he contemplate a tax incentive for the SAYE schemes?
1438 Whatever the experience of the success or failure of the present scheme—and we wish it well—that is no argument one way or the other for discriminating against the SAYE share option scheme. All the evidence is already there of the difficulties companies are having in introducing this new scheme on top of their existing SAYE share option schemes. These are facts that are there for the Minister of State to see. He does not have to wait until some time in the future to discover this.
The meaning of the Financial Secretary's undertaking is therefore totally obscure. From his remarks and those of the Minister of State, it is obvious that neither of them has really understood what this issue is about. It is about time that they applied their minds to it.
§ Question put and negatived.