§ Motion made, and Question proposed, That this House do now adjourn—[Mr. Berry.]2.30 pm
§ Mr. Kenneth Carlisle (Lincoln)
I am grateful for the opportunity to debate a subject that is close to my heart and to the hearts of many of my colleagues, that is, the encouragement of profit sharing. I am also grateful to my hon. Friend the Minister for coming here to reply. I know that the Government fully accept the importance of profit sharing but, like many Governments before them beset by problems, the good seed has been choked by the thorns and worries of more immediate troubles. That is why I felt it necessary to bring the matter before the House. The impetus in that area has been lost.
I was amazed to hear a member of the Government say in the House, only a few months ago, that there was little point in extending the scope of profit sharing because no profits were being made. That is the same as saying that, after an earthquake, there is no point in building houses because none has survived. We must prepare profit-sharing schemes now, ready for the eventual upturn so that the benefits can be fully reaped. In the same way, we should invest now in plant and capacity so that we can produce when demand returns.
To deal with the subject in a proper manner, we must see profit sharing in its correct context. ICI has a good profit-sharing scheme. It rightly says that profit sharing is only one aspect of good management, which cannot possibly succeed unless it is accompanied by other facets of good human relations in industry. We all know that we desperately need to foster better communications, consultation and participation. Indeed, industrial unrest has been muted during the recession. But if we are to secure the many gains that have been painfully won when prosperity returns we must cement the feeling of partnership, and in that profit sharing has a central role to play.
We all know that wage awards in the private sector have been restrained and realistic during the past year, but they will remain sensible when better times come only if the work force knows that it will earn a fair share of the renewed profits of their enterprises. Apart from the crucial aspect of good industrial relations, profit-sharing has other benefits. It helps to give people a stake in capitalism. I am talking about profit sharing in the context of the Finance Act 1978, which led to the allocation of shares to people in the schemes. Therefore, profit sharing is attached to a wider ownership of shares.
Although 14 million people own shares in life assurance and pension schemes, that is only an indirect ownership. There is nothing like owning shares directly to make people feel that they are part of our capitalist system. The Conservative Party, beyond any other, has always proclaimed the benefits of a property-owning democracy. Surely, if we believe in the merits of property and the responsibility that that brings, we must encourage profit sharing and the resulting spread of wealth and shares as widely as possible.
Let us examine our record in this regard. We gave full support to the Finance Act 1978 which established the first real infrastructure for profit-sharing share schemes for all the workers and which created the necessary tax incentives to encourage them. Indeed, much of the impetus of the 1155 1978 arrangement derived from the creative work of many Conservative Members while in Opposition. As we know, the scope of that Act was then extended by the Finance Act 1980, although it is important to understand that this merely relaxed the tax provisions. It did not do much more than that, and the general scope for profit sharing remained the same. In addition, the Companies Act of last Session encouraged profit sharing a little by enabling companies to buy their own shares.
In the end, any reform must be judged on its results, and the response to the legislation has been less than was hoped for. Fewer than 300 companies have registered schemes under the Finance Acts and many of those had profit-sharing schemes before 1978 anyway. If as a party and a Government we are genuine in our desire to encourage profit sharing, we must consider why the success has been less than was needed. We must be full-hearted in our attempt to find a more effective way to proceed.
Progress must be made in two areas especially. First, the tax reliefs currently given are insufficient and too complicated. Since 1980, profit-sharing shares are released from retention after two years, although full tax is payable if the employee sells the shares before four years have passed. After four years, the tax tapers until the shares are free of tax after seven years. Clearly, there must be some delay before the tax concessions are earned. Profit sharing must not be seen simply as a tax avoidance gimmick. The employee should also be encouraged to hold on to the shares. Nevertheless, if cash remains more attractive than shares to the employee, the spread of such schemes will be feeble. Under the present scheme, although cash is taxed it is undoubtedly far more attractive to employees than shares.
In order to reverse that, I propose, first, that the shares should lose their tax liability completely after three years, with no tapering thereafter. That period is long enough to prevent the charge of tax avoidance, but short enough to give a major boost to the attractiveness of such schemes. I believe that this will make shares more attractive than cash. Moreover, it will greatly simplify the registration and administration of the schemes. The present tapering arrangements are too complicated.
The second and in my view by far the most important reform concerns the range of businesses able or likely to adopt such schemes. At present, only companies of a reasonable size are likely to participate. Small private companies either do not have marketable shares or are fearful of dilution of ownership, while partnerships and unincorporated businesses are almost entirely excluded from the schemes. It must be borne in mind that 95 per cent. of all enterprises in the United Kingdom employ fewer than 200 people. In this context, I am delighted to see that the Under-Secretary of State with responsibility for small businesses is present. Those enterprises provide about 20 per cent. of employment in the private sector. Moreover, subsidiaries of foreign multinationals, which employ about 10 per cent. of the British manufacturing work force, also have difficulty in benefiting from the present law. The obstacles can be overcome, but they effectively discourage such people from participating.
I believe that it is wrong that so many people in the private sector should, to all intents and purposes, be excluded from these profit-sharing schemes. The practical solution that I wish to see implemented is as follows. All businesses should be allowed to invest their profit-sharing 1156 money in the shares of other quoted British companies or in investment funds which pledge to hold 60 per cent. of their funds in British equities. These shares will qualify for the tax reliefs in the normal way; there would be full tax relief after three years.
If this scheme were adopted, the employees of all manner of businesses, even of the tiniest businesses employing two or three people, could become shareholders in their profit-sharing schemes. Many employers, too, would have their inhibitions or inabilities to enter these schemes removed and British industry would have a new source of investment funds. Thus simplifing the tax reliefs and enlarging the scope of the businesses that can participate will give a new impetus to the sickly and wan infant that profit sharing has become.
Finally, I should like to touch on the political need to develop profit sharing. It is understandable that, after two and a half years of incessant work, and in the embrace of a suffocating world recession, the Government should lose something of their vision. That now needs to be restored. People need to know that our present struggles form part of a wider and better theme. Profit sharing and that wider ownership of shares are a thread in the tapestry which the Government must now seek to weave and present to the nation as an integral whole.
In stating that wish, I think that I speak for a very large proportion of Conservative Back Benchers. We wish to see the Government resume their philosophical impetus and carry forward their ideas in an integrated theme. I suggest that profit sharing has an important role to play here and that the time for modest and timid adjustments to what has been achieved in the past is over.
§ The Financial Secretary to the Treasury (Mr. Nicholas Ridley)
I am grateful to my hon. Friend the Member for Lincoln (Mr. Carlisle) for raisng this matter—and for braving the snow, whether to get here or to get back to Lincolnshire, or both, I know not—because he performs a service in raising this subject for this Adjournment debate. It is always a relief when an Adjournment debate is on a broad policy subject and not on a purely constituency matter, so I am grateful to him for many reasons.
I am also grateful to my hon. Friend for his pamphlet, which he wrote in 1980, setting out his views about profit sharing. I assure him that I personally and the Government share his views that profit sharing is a major political objective which we should pursue by all the means that we can use.
I think that there is an added advantage in the present situation in that not only is the present scheme—the 1978 scheme—bipartisan, but it is tripartisan in the sense that all parts of the House gave it support when it came into existence, and we have simply built upon it and developed it with all-party support. Indeed, our manifesto said:We will expand and build on existing schemes for encouraging employee share ownership.That progress should continue; indeed, it has continued.
As my hon. Friend said, in the 1980 Budget my right hon. and learned Friend the Chancellor built on that scheme. First, we increased the amount allocated to any one participant from £500 to £1,000. I think that my hon. Friend would like to see that figure higher, but it was a 1157 very big jump, and I am certain that, as experience shows and as resources allow, the Government will want to keep that limit under review.
We also reduced the compulsory retention period, when shares were to be held in trust, from five years to two years, which was a major reduction, and we cut from 10 years to seven years the specified period after which shares can be drawn out free of income tax. My hon. Friend's first major point was that the seven years should be reduced to three years. While I do not want to disappoint him in his good intentions, it seems to me that there is a difficulty the shorter the period becomes. It ceases to be compulsory to hold the shares in the company concerned and they become a general savings asset. There is nothing wrong with that. There is nothing wrong with wider share ownership.
The essential link in the scheme in helping people to participate in the companies in which they work, to feel a part of those companies and to further their interests, becomes weaker the shorter the period is made. As my hon. Friend remarked, there is always the battle between the wish to take out one's share of the profits in the form of cash or in the form of shares. The shorter the period is made, the more quickly those shares can be converted into cash. One is torn between the dilemma of trying to keep people by settling them through the law into shares in their own company and trying to free the system to make the money more available. I can only say that the Government will keep the period under review. My right hon. and learned Friend the Chancellor of the Exchequer will certainly be reviewing it in due course.
The Government varied the tapered tax charge that operates to the benefit of the participant. My hon. Friend said that this was too complicated. The complication was in order to confer further advantages rather than to confer difficulties upon the participant.
The Government also introduced the new reliefs for savings-related share option schemes on the model of the old 1973 scheme. We have introduced the legislation for companies to buy their own shares which will have to be accompanied, in due course, by tax legislation. The tax treatment will be the subject of consultation. These are examples of the Government's desire to facilitate share ownership by the employees of companies.
My hon. Friend was, I think, a little dismissive of the results that have been obtained. These are early days. It is only just over a year since the 1980 measures came into effect. My hon. Friend will be interested to know the latest figures. The number of employee share schemes set up by companies and approved by the Revenue when the Government came to office in May 1979 was under 30. On 1 December this year, it was over 360. This breaks down into 259 profit-sharing schemes and 109 share option schemes. The figure probably understates considerably the number of companies concerned. Groups with many subsidiaries are treated as one company for purposes of the statistics whereas many companies may be participating, often with separate schemes.
The Government have not yet obtained figures for the number of employees involved in share option schemes. There were 145,000 employees involved in approved profit-sharing schemes in the 1979–80 tax year and 245,000 in the 1980–81 tax year. Again, probably, the true position is considerably underestimated because approved 1158 share option schemes or any unapproved schemes are not covered. A large number of schemes are not technically approved.
We estimate that companies employing a total of 1½ million employees have some type of employee share scheme, whether approved or unapproved. That is a fairly sizeable total for such a short time after the schemes came into existence. Schemes are coming into the Revenue for approval at a steady rate.
My hon. Friend also suggested that we should make such schemes available to a wider range of people. Profit-sharing schemes are available to private companies and to multinational companies, but difficulties are associated with both. The legislation does not preclude extending the schemes to any part of the industrial and commercial sector.
The difficulty with private companies is in obtaining share valuations and ensuring that employees can find a market if they want to sell their shares. That difficulty applies because of the nature of private companies. One cannot buy and sell shares in a private company as one can in a public company. It is not a difficulty which can be overcome. One is tied in for a longer time because of the nature of a private company and that is as it should be. The facilities are available and if we can resolve any difficulties which stand in the way we shall be ready to examine them.
§ Mr. Kenneth Carlisle
I agree that private companies can take part in existing schemes, but it is often difficult for them to do so because of the complexities involved. I want to create a system under which it will be simpler for private companies to operate profit-sharing schemes so that they are more likely to participate in them.
§ Mr. Ridley
I accept that. There is still scope for employees to participate in the smallest private companies if a way of doing so can be found. The difficulties are created not by Government, but by the nature of private companies.
My hon. Friend suggested extending to small companies, partnerships and unincorporated businesses the right to operate some form of profit-sharing scheme which participates in buying shares in other companies, probably public companies, or in funds investing over 60 per cent. in British companies. That involves a different concept. Employees would be participating not in the profits of the companies for which they work but in the profits of industry generally or in stocks and shares quoted on the London market. I have one or two small worries about that and one fundamental worry.
One must bear in mind the difficulties for the trustees or administrators of such schemes if somebody changes his job often and if he picks up little bits of entitlements to little bits of companies here and there. It would be difficult for trustees to trace people. One must ensure that administrative arrangements do not lead to too much paperwork. That is a small caveat that we must watch.
The second argument, which is slightly more important, is that in a genuine profit-sharing scheme under the 1978 Act the value of the shares is retained in the business and adds to its working capital. In the suggestion put forward by my hon. Friend, the share would be bought from the employees' share fund and so the money would come out of the employing company into the company being invested in, and I am sure that a large number of 1159 small businesses would not like to feel that money devoted to share investment schemes on behalf of their employees was going to finance the equity of some of the largest companies in the country which they felt were doing well enough, anyway. But that is a secondary matter and not one to be stressed too much.
The real question facing the House in thinking about my hon. Friend's suggestion is that we have to consider two principles. One is that employees should be able to participate in the profits of the company in which they work, that they should own a stake in their company, and that they should be motivated to try harder on its behalf by the financial incentive of the shares that they own. The other, which is an equally laudable but separate proposition, is that the more widely share ownership can be spread throughout the community, the more individual investors there are in the stock market, and the more all our citizens own capital, the better it will be for general political reasons.
I share both those objectives, as do the Government, but we must distinguish between the two in working out the detailed arrangements.
If we are to encourage wider share ownership by allowing people tax concessions to buy shares, it will be wrong to limit those people to one class—the people who work in small companies, partnerships and unincorporated businesses. We should have a scheme available to everyone to help everyone to become share owners, and that brings us perilously close to the loi Monory. I am not sure that my hon. Friend goes quite that far. I am not sure that the Government go quite that far. We have many savings reliefs through a series of tax concessions and different mediums, and it might be a good idea to look at all those savings reliefs and tax concessions to see whether 1160 they need bringing up to date and making more rational in modern times. It may be that out of that can be found some way of general assistance to the purchase of shares to make us all owners of capital within society.
I am not resisting that. We should study it. Probably the loi Monory is less appropriate to the United Kingdom than it was to France, where conditions are different, and we do not want to copy that slavishly. But the Government are attracted to the idea of looking at the subject, and I am grateful to my hon. Friend for leading us in that direction.
We can afford to be and we can justify being partial in giving tax concessions to one section of the community only if the object is to help the acquisition of a stake in one's own company, which is an incentive to profit sharing and participation to those who are in the position of being employed in a company. But we cannot be partial in measures to promote the property-owning democracy that my hon. Friend and I want to see and allow tax privileges only to one section of the community for the general acquisition of capital assets. I feel that we have to bear those two different propositions in mind in considering my hon. Friend's proposal.
The Government share both objectives with my hon. Friend. We are looking at ways of enacting measures to help, and we watch the position very closely. However, my view is that we should keep separate the two different concepts of profit sharing and the general promotion of a property-owning democracy, not because they are contradictory but because in tax law they should be treated separately.
I am grateful to my hon. Friend for drawing attention to these subjects. He has done the House a service.
§ Question put and agreed to.
§ Adjourned accordingly at one minute to Three o'clock.