PROFIT SHARING SCHEMES (Hansard, 17 July 1980)

§ Sir William Clark
I beg to move amendment No. 165, in page 32, line 7, leave out '75' and insert '50'.

Mr. Deputy Speaker
With this we may take the following amendments: No. 166, in page 32, line 22, leave out from cent 'to end of line 26.
1802 No. 167, in page 32, line 31, at end insert in relation to shares appropriated in any one year of assessment". No. 168, in page 32, line 31, at end insert— '(7) Subsection (1) above does not apply in relation to the exercise by or on behalf of a participant of the rights arising under a rights issue, as defined in section 55(5) above, if subject to agreement of the Board the trustees arrange—

(a) for the value of such rights to be taxed forthwith as income of the participant in the same manner as the receipt of a sum of money under section 59 below;

(b) for the locked-in value of the shares which gave rise to such rights to be reduced by the value of such rights as has been taxed forthwith; and

(c) for any shares acquired on behalf of the participant with such rights to be transferred to his name forthwith notwithstanding the provisions of section 54(1)(c) above.'.

§ Sir William Clarke
I do not think that this amendment need take very long, as it was fully debated upstairs. Despite the fact that the profit-sharing schemes which this Government have introduced are very welcome, and despite the fact that many people in the country are grateful for them, the Inland Revenue has made rather a meal of all this.
Let us, for example, take the rate of taxation. If one is in a profit-sharing scheme, for the first two years one cannot sell the shares. In the next two years, if the shares are sold, one pays 100 per cent. tax on them. If one sells after another year the rate of tax is 75 per cent. It then decreases to 50 per cent. and 25 per cent. in subsequent years. That is an unnecessary and excessive complication. The effect of my amendment is to provide that shares should not be sold for the first two years, but if they were sold within the following five years, the sales would be taxed at a rate of 50 per cent. This would be administratively sensible and it would save the Inland Revenue a considerable amount of time and taxpayers' money.
On the question of rights issues that are given to profit-sharing schemes, one could have the position whereby an employee who participates in the scheme takes up and pays for a rights issue. But alas, as I read the clause, it means that those shares that he got from his rights issue are still subject to the same regulations as the original shares given under 1803 a profit-sharing scheme. I hope that the Government will look at this. I do not think that my amendments will cost the Inland Revenue anything, but they will lead to administrative saving.

§ Mr. Richard Wainwright
I do not think that the House will be surprised that I, as a Liberal Member, wish to make one or two comments about these admirable amendments to what was originally and admirable scheme. Many employees are benefiting from such schemes. If the schemes could be simplified and better publicised by the Government, and if sanctions for the schemes could be more rapidly forthcoming from the Inland Revenue, a great many more people would benefit. In fact, we might even succeed in getting as many people into the schemes as the Treasury already assumes, for the purposes of costing reliefs. In fact, for the purposes of costing the reliefs proposed in Committee, the Treasury blithely assumed that between 3 million and 4 million employees were involved. That is very much to be desired, but it is a wholly unrealistic estimate.
Not only do the amendments benefit employees financially; they have the great merit of simplifying what is at present an inordinately complex scale of gradations of tax relief. It really is a bit much the way Treasury Ministers use the argument of increasing the simplicity of tax law and dispensing with Inland Revenue clerks when it suits them to do so. But when they feel a need to cling on to the last penny of tax from employee shareholders, they have no hesitation about imposing four different levels of tax. The Government, who have done away disastrously with the lower rate band of income tax on the ground that it was a band too many, apparently have no shame in producing a scheme for employee shareholders with four different reduced rates of tax.
I should like to report some of the comments of leading companies that have installed schemes under the provisions for employee share ownership. I shall quote from British Caledonian Airways Limited, which was quick to take advantage of the new share ownership provisions of 1978. In writing to the Chancellor of the Exchequer with commendable promptitude on 5 May—very soon after the Finance Bill was published—the chair- 1804 man of British Caledonian, inter alia, said: It is essential that an incentive is simple to explain and to understand if it is to be effective. However, I am sure that you are aware that these schemes are already complex and demanding to administer. Unfortuately, some of the measures that you announced in the budget will make the already difficult task of operating the scheme even harder. He went on: The tapering relief in its existing three stages is already difficult to explain. A reduction in the proposed four stages is, therefore, greatly desirable. I shall read out some quotes from other well-known companies which have adopted the scheme. One of them says: We find the entire framework of regulations tiresome and largely beyond the comprehension of our non-financial participants. Another says: I am bound to say I agree with you that, apart from any other considerations, four rates of tax do seem particularly fussy and, I would have thought, cumbrous for the Inland Revenue to administer. Another well known company says: It would be much simpler to have only one, or a maximum two, tax bands covering a period of say, five years, at the end of which time the shares could be released free of tax. The final comment that I wish to quote is The major difficulty in introducing this kind of scheme is the communication with employees and I do not think this has received sufficient attention by the Government. Leaving aside the administrative complications that even this more beneficial scheme still causes, the difficulty of communicating anything which is as complicated as this legislation … should not be underestimated. The amendments, which were so clearly outlined by the hon. Member for Croydon, South (Sir. W. Clark), would simplify the scheme and add to the financial incentives to employees. On those two grounds I hope that the Government will concede his case.

§ Mr. Kenneth Carlisle (Lincoln)
I welcome the Government's proposals for increased profit sharing, and support the desire of my hon. Friend the Member for Croydon, South (Sir W. Clark) for simplicity. We are aiming to get more and more businesses engaged in profit-sharing. The more simple the schemes, the more attractive they will be, not only to the firms, but also to those who work in them. However, I believe 1805 that the schemes could be simpler still if, after the retention period, which is now four years, the shares were released free of tax. I should also like to see the retention period shortened to three years.
My hon. Friend's amendments are one step, but I hope that the Government will bear in mind the scope for profit sharing and what it can mean in terms of good employee relations. I hope that they will see the Bill and these amendments as a first step in what for a Conservative Government must be a sensible and serious pilgrimage.

§ Mr. Lawson
My hon. Friend the Member for Croydon, South (Sir W. Clark) moved his amendment succinctly and ably. The first amendment sets out to simplify the concession by having two rates of tax instead of four. My hon. Friend advanced a strong argument. However, the present system is not inordinately complicated, as the hon. Member for Colne Valley (Mr. Wainwright) suggested. The figures are 75, 50, 25 per cent., and nil, which does not seem too difficult. The hon. Gentleman underestimates the intelligence of the average working man.

Mr. Richard Wainright
On that showing, can the hon. Gentleman explain why in the Budget his Government abolished one reduced rate of income tax for the great majority of taxpayers?

§ Mr. Lawson
We debated that matter fully in Committee and yesterday. The reason was not that it was difficult to conceive or comprehend the figure of 25 per cent.
My hon. Friend's proposal is simpler, but at the end of the day disposals in year 7 would attract 50 per cent. instead of 25 per cent. tax. It would also be tougher on an individual member of one of these schemes. It is six of one and half a dozen of the other, but on a fine balance I believe that it is sensible to stick where we have stuck. We shall not be dogmatic, and no doubt we can look at the matter again in future years.
My hon. Friend is correct in thinking that working rights issues into such a scheme is complicated. We discussed the issue yesterday on new clause 29, and he will recall what I said then. We have to find a better way of dealing with rights issues. The system should be simplified, 1806 provided that the tax position is protected. Officials from the Inland Revenue recently met members of the Wider Share Ownership Council to discuss the problems and consider proposals to remedy the difficulties. As I indicated yesterday, it is a complex area. We shall need wider consultation.
5.45 pm
It would be premature to accept the amendment at present. We are giving the matter sympathetic consideration, with a view to proposing a remedy for the difficulties encountered by trustees in time for next year's Finance Bill.

§ Mr. Dalyell
Is it really the Financial Secretary's considered opinion that it is sensible to stick where we have stuck? If so, that is "suck it and see" again.

§ Sir William Clark
In view of the general review of capital taxation, and my hon. Friend's assurance that the matter will be considered between now and the next Budget, I beg to ask leave to withdraw the amendment.

§ Mr. Lawson
I beg to move amendment No. 106, in page 33, line 2, at end insert— '(9A) In paragraph 6 of that Schedule (conditions as to shares)—

(a) the word "either" shall be omitted; and

(b) at the end of paragraph (b) there shall be inserted "or

(c) shares in a company which is under the control of a company (other than a company which is or would if resident in the United Kingdom be a close company within the meaning of section 282 of the Taxes Act) whose shares are quoted on a recognised stock exchange."
(9B) At the end of paragraph 8 of that Schedule (majority of shares of same class to be held by persons unconnected with the scheme) there shall be inserted the words" and (c) in a case where the shares fall within sub-paragraph (c) and do not fall within sub-paragraph (a) of paragraph 6 above, companies which have control of the company whose shares are in question or of which that company is an associated company within the meaning of section 302 of the Taxes Act.".'.

Mr. Deputy Speaker
With this it will be convenient to take Government amendments Nos. 110, 111, 112, 113 and 114.

§ Mr. Lawson
These amendments involve invaluable technical improvements 1807 to the profit-sharing schemes and savings-related share option schemes. I shall be happy to answer any questions.

§ Mr. Roger Moate (Faversham)
The amendments extend the scope of share option schemes to be applied to subsidiary companies of quoted companies at home or abroad. The amendments are significant, but I wish that they had gone further.
My hon. Friends have praised the steps that the Government have taken to extend profit sharing. I endorse those sentiments. My hon. Friend the Member for Lincoln (Mr. Carlisle) described the proposals as a step on a pilgrimage. There is still a long way to go before profit-sharing becomes a significant feature of our lives, My hon. Friend is well qualified to speak on the subject. He has produced a book called "Share in the profits", which has an added title to try to win over the Tribune group— A popular future for capitalism". I am disappointed that the amendments do not extend the scope for profit sharing and wider share ownership schemes to subsidiary companies in general. I recognise that until now a general stance has been adopted against companies that were unquoted and those that were subsidiary companies. There are dangers in having such profit-sharing schemes for subsidiary companies. Particularly if they are unquoted, there is the problem of establishing a proper valuation for the shares. There are doubts about whether all transactions between parent and subsidiary companies are truly arm's length transactions. By extending the scope of these schemes to subsidaries of quoted companies the government have conceded that those problems can be overcome. Even the relationship between a subsidiary and a quoted parent still presents recognisable difficulties. Why can we not go a step further and extend the schemes to all subsidiary companies, subject to whatever safeguards may be deemed necessary by the Government? If we are to make wider share ownership a reality for a large number of people it is important to allow such schemes to be applied to subsidary companies.
It is reasonable to assume that a subsidiary company, being a smaller part of the whole, is likely to involve a group of 1808 individuals to a greater extent. Their contribution to a subsidiary is likely to be that much greater, and we are anxious to encourage such participation.
International companies are increasingly establishing subsidiaries in this country. If we want those subsidiaries to have a large number of United Kingdom shareholders, namely, employees in this country, we must allow the subsidiaries, which may be subsidiaries of unquoted companies abroad, to be able to offer shares to their employees.
I can think of substantial, private, unquoted companies operating in the United Kingdom that are subsidiaries of an unquoted company and wish to introduce share option schemes for their employees. I am sure that everyone would like to see such companies introduce share ownership schemes, but they cannot do so at present. That is regretable.
I appreciate that there are technical difficulties. My hon. Friend the Financial Secretary has gone half way, but I wish that he had gone further. There will be disappointment that he has not done so. I know that he shares the general desire to extend share ownership schemes as far as possible and I ask him to look at the question of subsidiary companies, with a view to coming back next year—I sometimes wish that another place could consider Finance Bills, so that amendments could be introduced there—to extend these vital schemes to the vast number of subsidiary companies that are at present excluded.

§ Mr. Lawson
The Bill and the Government amendments under discussion go a long way to increase the number of companies that may introduce employee share schemes and, therefore, to increase the number of employees who may benefit from such schemes. We called for that when we were in Opposition and we have carried it out. In particular, we have extended the scheme to unquoted subsidiaries of quoted companies.
My hon. Friend the Member for Faversham (Mr. Moate) asked why we did not go further and extend the scheme to unquoted subsidiaries of unquoted companies. He is not so naive as not to have been able to guess the reasons. An unquoted parent company could manipulate 1809 the value of an unquoted subsidiary's shares at will and make nonsense of the scheme. It would open the door to the most flagrant abuse.
There is some risk in what we have done already in providing that schemes may be introduced by unquoted subsidiaries of quoted companies, but the restraints on the behaviour of a quoted company are much greater than those on an unquoted company. We have gone a long way and to go further would leave the scheme wide open to abuse.

§ Mr. Lawson
I beg to move amendment No. 39, in page 33, line 16, leave out '13(1) of that Schedule' and insert '13 of that Schedule—

(a) in sub-paragraph (1)'.

Mr. Deputy Speaker
With this we may take Government amendment No. 40.

§ Mr. Lawson
The purpose of the amendments is to make clear by statute that on the release date the trustees can transfer shares to the name of the beneficial owners.