HC Deb 14 July 1987 vol 119 cc1019-25
Mr. Blair

I beg to move amendment No. 33, in page 70, line 23, leave out '80 per cent.' and insert '50 per cent.'.

This is clearly a probing amendment but it is worth discussing to ascertain the basis on which the Government have drawn up the rules on profit-related pay. At first blush, it is difficult to see why profit-related pay can operate only if 80 per cent. of the work force agrees to it. Presumably employers are able to have different pay systems for those taking part and for the remainder up to 20 per cent. Why must 80 per cent. agree?

I could see an argument for saying that, unless everyone agreed, the scheme could not be introduced because of the administrative difficulties involved in calculating two different bases of pay, but it is plainly accepted that up to 20 per cent. of people within the same employment unit and presumably doing the same type of work under the same terms and conditions can nevertheless opt out of the scheme. So why has the figure of 80 per cent. been chosen? Why should not anyone who so wishes be allowed to participate and the others be allowed to opt out? I see no rational basis for seizing upon the figure of 80 per cent. The real distinction must be between having everyone or no one in the employment unit on profit-related pay or allowing diversity within the same unit. I should be obliged if the Minister would explain that to me.

Mr. Tim Smith

I sympathise with the comments of the hon. Member for Sedgefield (Mr. Blair). It is not clear to me why 80 per cent. has been chosen. I am also not sure exactly what the words to whom the scheme relates mean. Perhaps my hon. Friend the Minister will clarify that.

My hon. Friend the Member for Woking (Mr. Onslow) asked me to raise a number of points about schedule I which were put to him by a firm which for 15 years has operated in the specialist area of employee participation arrangements, particularly employee share schemes, and which numbers about 350 of the top 500 United Kingdom companies among its clients. One of its concerns is the 80 per cent. rule. The firm says: It appears that Inland Revenue will interpret this Rule to mean not that such plans must be 'available' to at least 80 per cent. of employees but that 80 per cent. of employees must actually receive payments thereunder. Companies are very conscious that a dissident minority of 20.1 per cent. of the work force could effectively lose the tax efficacy of an otherwise splendid scheme for the majority of their colleagues. I rather agree with the hon. Member for Sedgefield that once one concedes the principle that 100 per cent. of employees are not needed to participate in the scheme, why not simply say that all those who wish to participate may do so regardless of the proportion?

Mr. Brooke

The hon. Member for Sedgefield (Mr. Blair) has moved a probing amendment and my hon. friend the Member for Beaconsfield (Mr. Smith) supported him.

The profits to which pay will be related are the profits of the whole employment unit. Therefore, as the hon. Member for Sedgefield implied, ideally all the employees of an employment unit would participate in profit-related pay because the profits relate to the efforts of all of the employees. However, when the Green Paper was published last year we recognised that there would be circumstances in which it would not be appropriate or possible for all the employees to be eligible. Therefore, there is a need for some flexibility for employers.

The benefits that we believe will flow from the widespread adoption of profit-related pay will be best achieved if a substantial majority of the employees in each unit participate. That goes back to the discussions that we had on clause I stand part.

The Government considered that 80 per cent. was a reasonable, minimum level if tax relief is to be made available. I appreciate that the hon. Member for Sedgefield was arguing that his figure of 50 per cent. was chosen simply as a probe against the Government's figure of 80 per cent., but I am puzzled that the Opposition are seeking to reduce the percentage. The lower the figure is taken the easier it is to have what I would euphemistically describe as an arrangement. The more people who are required to take part in the scheme, the less likely it is that some artificial arrangement will be reached.

Mr. Blair

Let me explain our position straight away. I do not believe that there is any inconsistency. Indeed, it is in the best tradition of constructive opposition that, having lost the vote on clause I stand part, with the result that profit-related pay schemes will come into existence if the Bill is carried, the Opposition should try to make the scheme work as effectively as possible. It was in that spirit that I moved the amendment. I believe that it is important that we should be given a good reason why, if the scheme is to be generally available, it should not be made available on the widest possible basis.

Mr. Brooke

The disadvantage in the proposal of the hon. Member for Sedgefield is that if the scheme were required to cover only 50 per cent. of employees to secure tax relief, the scheme would be much more selective and would not embrace the totality of the work force. I suspect that if it were the other way around, if we had come up with the figure of 50 per cent., the hon. Member for Sedgefield would have proposed 80 per cent. on the basis that the 50 per cent. could lead to artificially structured schemes.

Essentially, I believe that the proof of the pudding is in the eating. We put the figure of 80 per cent. in the Green Paper. The hon. Member for Sedgefield will be aware that we had a wide variety of comment on all aspects of the Green Paper, but few respondents saw any difficulty with the 80 per cent. requirement.

I agree with my hon. Friend the Member for Beaconsfield that a blocking minority of 20.1 per cent. would be a complication. However, the Government believe that that complication would apply whatever the figure as there would still be a problem regarding what would happen on either side of the line.

The Government believe that 80 per cent. is a sensible figure to get the global advantages of the scheme within the employment unit. We did not receive significant objections to that figure during the consultation period. For that reason, we stand by that figure.

Mr. Blair

I believe that it is unfair to say that, had the Government suggested 50 per cent., I would have moved an amendment to the effect that we should make it 80 per cent. I moved this amendment on the basis that, if it were thought that profit-related pay was a good idea, it would be positively beneficial for those who were not working on profit-related pay to see how well those on profit-related pay were doing. Perhaps there would be an element of contagion. I accept the Minister's arguments. It is fairly clear that the figure of 80 per cent. has been plucked out of the air. However, as that figure was not objected to extremely strongly, other than in the terms mentioned by the hon. Member for Beaconsfield (Mr. Smith), I am content to let the amendment fall.

Mr. Brooke

I failed to answer one other question that was raised in the course of the debate regarding employees to whom the scheme relates". That is defined in clause 1(2) which states: References in this Chapter to the employees to whom a profit-related pay scheme relates are references to the employees who will receive any payments of profit-related pay under the scheme.

Mr. Blair

I am grateful to the Minister for his reply. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

6.45 pm
Mr. Blair

I beg to move amendment No. 34 in, page 73, line 28, after 'must', insert 'in the view of the Board'. I entirely accept that, given all the comments made about the powers of the Inland Revenue in an earlier amendment, this should demonstrate the degree of objectivity I have towards the Inland Revenue. This amendment would, if anything, give the Inland Revenue greater powers than it would otherwise possess.

The purpose of this amendment is to ask the Minister whether he is satisfied with the Government's anti-avoidance provisions. The Institute of Personnel Management and others have recognised that one of the difficulties with the profit-related pay scheme is the potential for tax avoidance.

I vaguely recall in my dim and distant youth—long before I got to the House of Commons—that there were debates on incomes policy and how the pay that people received could effectively be related to productivity. There were all sorts of arguments about how people could get round the rules that related to wage structures.

With profit-related pay there is a clear potential for avoidance unless the Inland Revenue is extremely careful that the profit and loss accounts give a fair and true view. I know that there are a myriad of different arguments advanced in relation to proper auditing and accounting procedures. The hon. Member for Beaconsfield (Mr. Smith) will know more about that than I do. However, it is the case that when one is computing pay on the basis of profit and when tax relief is given, there is clear scope for avoidance.

The purpose of this probing amendment is to ask the Minister for his assurance that the rules are drawn as tight as possible to minimise the risk of avoidance.

Mr. Brooke

Obviously, the hon. Member for Sedgefield (Mr. Blair) has drawn attention to a central issue and I shall therefore reply at some length.

Paragraph 19 of the schedule deals with how the measure of profit for profit-related pay purposes is to be ascertained. Essentially, a profit and loss account must be produced that follows the rules and requirements of schedule 4 to the Companies Act 1985, which governs the production of a profit and loss account by a company. This provision ensures a standard approach to the production of such accounts using widely accepted rules,. The Companies Act 1985 also requires a profit and loss account to show a "true and fair" view of the profit. That is broadly understood as an accounting concept and it is central to a qualified accountant's duty that he establishes that the accounts meet that requirement.

There is no requirement in the 1985 Act that any Government body should confirm that the account produced under that legislation meets the "true and fair" criterion. To insert such a requirement in the profit-related pay legislation would have the effect of supplanting the approach adopted in these proposals for ensuring a minimum of official intervention in the day-to-day operation of registeredschemes and relying on independent accountants to verify the adequacy of profit-related pay accounts and the operation of profit-related pay schemes. It would place a major burden on the Inland Revenue and increase substantially the administrative complexity of the scheme for the employer as well as for the Revenue. In any event, the Revenue will have the power to call for a check on profit-related pay accounts under clause 13, which the hon. Member for Sedgefield will recall vividly, whenever it believes that to be necessary.

The amendment would leave the provisions for an independent accountant's audit in place. We see the provisions as adequte. The statement that a profit is or is not "true and fair" will be made by the independent accountant, not by the employer, as such a statement cannot be made authoritatively by a person unqualified in audit matters. Who may act as independent accountant is closely constrained by clause 17. The individual must be properly qualified and must not be closely connected with the scheme. The statement of a "true and fair" view is one that we have taken pains to make independent cit. the employer concerned. The employer is responsible for all profit-related pay matters, and he must obtain and submit to the Revenue a report by an independent and properly qualified accountant.

If the hon. Member for Sedgefield is concerned that the employer is the person who decides what is or is not "true and fair", I trust that this explanation of objective and external reference allays his fears. The Government feel that there is no point in introducing another level of checking by the Inland Revenue, which could only adopt the same principles of accountancy and audit as those that would be adopted under this proposed legislation by the independent accountant.

Mr. Tim Smith

I wanted to hear what my hon. Friend the Paymaster General had to say about the amendment before commenting briefly upon it. I like the novel idea that is incorporated in it, that the Inland Revenue would offer its own view on whether the accounts showed a "true and fair view". Even if we were to give the Revenue that power, we would not strengthen its hand. Pretty high standards of accounting are required and the accounts will have to comply in all respects with company law.

There will have to be an independent auditors' certificate that will state whether the auditors consider that the accounts show a "true and fair view". That happens a great deal now and I have no doubt that the Revenue takes a view on the firm of accountants concerned. Firms of accountants, like other undertakings, vary in quality and the Revenue will not rely on the accounts that are presented. It can always demand further information, and we know from a previous debate that it has substantial powers to do so. It will not accept unchallenged the statement that the accounts give a "true and fair view" and conclude from that that there are no further questions to be asked. It will always have the opportunity to go behind that statement, and I think that that will happen in practice. Although the amendment contains an interesting and novel idea, it probably is not necessary.

Mr. Blair

I largely accept the statement of the Paymaster General and the comments of the hon. Member for Beaconsfield (Mr. Smith). I thought it right—this is still my view—that we should not leave our consideration of profit-related pay, and especially the schedule that deals with its implementation, without making it clear that every measure that can reasonably be taken is taken to ensure that there is not tax avoidance. It is clear that there are opportunities for tax avoidance when a scheme such as that proposed by the Government is introduced. I hope that the rules that appear in schedule 3 balance adequately the rights of individuals with the rights of the Revenue to act successfully and adequately on behalf of the taxpayer. In view of what the Minister has said, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That this schedule be the first schedule to the Bill.

Mr. Tim Smith

The firm to which I referred in an earlier debate has three further concerns about the schedule. We have passed over paragraphs 13 and 14, which deal with the two profit-sharing formulae, and anyone who considers the text of those paragraphs will agree, I am sure, that they are extremely complex. Surely it is desirable that the formulae for determining profits should be as simple as possible. It is obviously desirable that participants should be able to understand them easily. The firm that is concerned about these matters considers paragraph 14 to be almost unintelligible. I wonder why it is necessary for the formulae to be so complex.

Secondly, the firm says that the 80 per cent. rule that we discussed earlier effectively precludes the 750 or more companies that have already implemented equity-linked profit-sharing plans under the Finance Act 1978 from offering employees participation either in that plan or in the new profit-linked pay arrangements. I am not sure whether that is exactly what the firm means, and it may be that it is trying to say that if a compny participates already in the 1978 arrangements it cannot participate in these arrangements. I do not know whether that is true and I hope that my hon. Friend the Minister will be able to deal with the matter. The firm may have it completely wrong. It is alleging that there are two mutually contradictory profit-related plans on offer.

Thirdly, the firm says that it must be appreciated that lower-paid employees who have previously participated in a trust-related profit-sharing plan under which no national insurance deductions were made will receive less cash under the new arrangement than under the old scheme. The firm contends that while a fellow of All Souls may be able to make the distinction between a national insurance deduction and an income tax liability—there may be a few others who are able to do so—the majority will not. I hope that my hon. Friend the Minister will be able to deal with these three issues.

Mr. Blair

First, I wish, like the hon. Member for Beaconsfield (Mr. Smith), to draw attention to the complexity of the two formulae for determining the distributable pool of profits. I found them to verge on the incomprehensible.

I think that I understand the basic principles in method A and method B. It appears that under method A the pool is equal to a fixed percentage of the profits of the employment unit in the profit period. Method B is based on the first profit period to which the scheme relates, or the distributable pool for the previous profit period. In other words, that method fixes a base year by which the distributable pool is to be computed.

I should like to know what steps the Treasury intends to take to make the schemes more understandable to those who will be called upon to use them. If profit-related pay is to be encouraged, I hope that it will not be a privilege that is confined to those employed by large companies. It must be open to small companies as well. There are many small companies with 10 or 15 employees that will read schedule 3, and whatever greater productivity arises through profit-related pay will be negated immediately by the time that the firm has to spend discovering how to administer the scheme.

I do not fully take on board the points made by the hon. Member for Beaconsfield about the employee share ownership plan. I cannot see any inconsistency, although there may be one, but that is obviously something to which it is right for us to address our minds.

I should be grateful if the Minister could inform us of the steps that he will take to ensure that people can understand and administer the schemes easily. We may have the greatest theories and plans, but if they are difficult to implement in practice, they will be of little practical use.

7 pm

Mr. Brooke

My hon. Friend the Member for Beaconsfield (Mr. Smith) asked me several questions relating to correspondence that I too have had the pleasure of seeing, and I shall respond to his questions. The hon. Member for Sedgefield (Mr. Blair) asked me some specific questions in reinforcement of the profit sharing formulae.

I shall respond first to the questions raised by my hon. Friend the Member for Beaconsfield about the overlap of the schemes and their potential complications. The Committee knows that tax incentives for share schemes already exist, but the new tax relief is for cash. For it to be effective in terms of pay flexibility, the relief must be targeted on employees in business units in which the great majority of employees participate in a PRP scheme. We discussed this point a moment or two ago. There is, of course, nothing to stop a separate share scheme from running at the same time and in that case the benefits would be complementary. However, it would be quite wrong to try to combine into a single scheme the different tax incentives for share schemes with those that are proposed for profit-related pay. The result would be a muddle and it is, and would be, unnecessary to try to do that.

My hon. Friend the Member for Beaconsfield raised the subject of method A and method B, which are described in the correspondence as the complex profit-sharing formulae. The hon. Member for Sedgefield also alluded to that. There is a paradox in that the simpler and more flexible one seeks to make the arrangements, the relatively more complicated is the legislation. However, when employers have had some time to grow to know and to love this legislation, I am sure that they will acknowledge that under its umbrella, a fundamental flexibility and simplicity exists.

The hon. Member for Sedgefield raised the question of the ways in which we could make the schemes simpler, although I do not know whether he acknowledges the paradox that I have just explained. However, we shall pay attention to that. I referred earlier to the guidance notes that the Inland Revenue is to send out. We shall seek to explore whether there is a way in which we can provide a child's guide element.

My hon. Friend the Member for Beaconsfield returned to the issue of national insurance contribution and said that some employees would be worse off as a result of the changes. However, that is a separate issue. The decision to withdraw certain concessions that relate to trusts, which flow out of what has happened since the 1985 changes to the upper earnings limit, is unrelated to the propositions that we are now considering. Some of the literature and some of the representations that have been made have missed some of the fundamental points about the schemes in quoting the sums of money that would be at risk or that would he involved in terms of the changes that we are making. That is an unrelated issue. I hope that those companies that have a tradition of profit-related pay will feel able to embrace the arrangements that are contained in this legislation for the generality of their employees and assuming that they take the fullest advantage of the profit-related pay arrangements, they should be able to do very satisfactorily.

Question put and agreed to.

Schedule I agreed to.

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