RELIEF FROM TAX (Hansard, 14 July 1987)

§ Mr. Blair
I beg to move amendment No. 31, in page 2, line 39, leave out '£3,000' and insert '£1,500'.
The amendment is drafted to probe the Government for more information on their profit-related pay schemes. 1004 When we debated clause 1, the Minister said that the tax relief would allow those on higher earnings to claim tax relief off the top of their incomes. I should be obliged if he would confirm that. Those on higher rates of tax would gain more from profit-related pay than those on the basic rate of tax.
The Minister also said, rightly, that only half the amount of profit-related pay would be eligible for tax relief. If the maximum amount of profit-related pay was £3,000, the maximum level for tax relief would be £1,500. We agreed that, at the top rate, that could give about £20 a week tax-free to those on higher pay, which is a considerable sum. We quizzed the Minister on this, and he dealt in some detail with the Government's estimate of the cost of the profit-related pay scheme.
Various figures were bandied about. I quoted figures from the Treasury, which started at £50 million, and from various columnists and academics, who took the level much higher. I should like to probe a little on this matter. The Paymaster General thought that £3 million would be about the top amount that could be claimed under the schemes. I should be obliged if he will tell us whether the Treasury has made a precise study of the costs and what empirical evidence it has adduced so that we know exactly what sums we are considering. This is important when considering the amount of tax relief.
5.30 pm
When the proposals were first promulgated, the maximum relief for profit-related pay was £1,000, and it has increased considerably since then. I should be obliged if the Paymaster General will tell us why the Government felt it necessary to raise the amount. The hon. Gentleman may say that the reason was the many representations by employers to the effect that they did not want to engage in those schemes unless the relief was much higher, so it was obviously parti pris. It is very much in the interests of those who engage in profit-related pay schemes to have the highest maximum tax relief available. The Treasury has to be satisfied about what maximum limit will encourage the maximum number of people to take up profit-related pay. Plainly, there must be a balance between meeting the interests of the taxpayer and encouraging the PRP schemes. I am not sure that the balance is right. There has ben a considerable uplift in the schemes' limits. At the very least, we are owed an explanation before we let this pass without comment.

§ Mr. Brooke
The hon. Member for Sedgefield (Mr. Blair) has returned to an issue to which he alluded in the debate on clause 1 stand part. It may be helpful if I specifically answer his question, because he has said that amendment No. 31 is a probing amendment. On £900 per annum, which would be 60 per cent. of the £1,500 proposed, we would be talking about £17.30 a week rather than the £20 mentioned by the hon. Gentleman. Nevertheless, the figures are obviously of the same magnitude.
The hon. Gentleman said that those on high incomes would gain more. That is, of course, a function of a progressive taxation system, but taxation rates will have their effect.

§ Mr. Blair
Is it not right that if people pay the higher tax rates they will obtain these higher amounts without doing any additional work for them? Without any greater productivity or extra work, they will get more than those on the basic rate.

§ Mr. Brooke
I took that point when the hon. Gentleman made it in the debate on clause I stand part. I said that we were looking at a community of interest, with everyone working within a particular company. Of course. the income is a function of contribution. As the hon. Gentleman knows, there is a cut-off at £15,000. Although it is possible for a company to have more profit-related pay than the £3,000 limit, there would be no tax relief on it.
I should like to avoid any misunderstanding. I did not say that £300 million was our likely long-term figure. I said that it would be perfectly reasonable to have a certain cost in 1988–89, as stated in the projections, yet have the scheme running by the end of that period at a level that, in the fullness of time—obviously it is phased—would produce a full annual cost of £300 million. That simply extends our £50 million figure to a long-term basis. Any take-up beyond the immediate projections will be speculative, just as were any projections made in the context of the 1978 share scheme introduced by the Labour Administration. I have not looked at the forecasts made by that Administration when the scheme was introduced, but it would have been difficult to predict precisely the figures expected over the 10-year period.

§ Mr. Alex Salmond (Banff and Buchan)
Does the right hon. Gentleman accept the argument that those who will benefit to the maximum extent from the £900 possible profit-related pay, because they are likely to be near the top of the companies concerned, have less need of this general scheme to provide some incentive and some community of interest? It seems a little peverse that the Minister did not restrict the taxation benefit to the standard rate of tax.

§ Mr. Brooke
The hon. Member for Sedgefield asked me why we had extended the relief in our proposals in this year's Budget as against those in last year's Green Paper. We decided on the basis of our wide-ranging consultation, which embraced organisations such as the Institute of Personnel Management and the British Institute of Management, which were not wholly favourable to the scheme. I think that the hon. Member for Banff and Buchan (Mr. Salmond) makes a slightly over-cynical suggestion. The Government's judgment in terms of the proposals arising from the Green Paper and the consultation exercise was that it was a balanced package, with the intention of securing certain objectives.

§ Sir Peter Emery (Honiton)
Obviously, there are Conservative Members who are very much in favour of this scheme. We think that it is an excellent addition to the incentives which are necessary within taxation generally. Is my right hon. Friend able to tell the House whether there has been any prognostication about the number of people who might be affected in 1988–89 or 1989–90? This is obviously important in terms of the effects.

§ Mr. Brooke
I am grateful to my hon. Friend, just as I was to the hon. Member for Banff and Buchan, for kindly ascribing right honourable status.

§ Sir Peter Emery
It will come in time.

§ Mr. Brooke
In the debate on clause I stand part, I said that, if 2 million employees with 10 per cent. of their pay as profit-related pay were covered by registered schemes by the end of 1988–89, the full annual tax cost would be about £300 million, but the cost that would fall in 1988–89 1006 in terms of relief would be about £50 million, because many of the schemes would not make payments until the following year or later. I referred to 2 million employees.

§ Sir Peter Emery
As I said, right honourable status will come in time. I am sorry to press the point. I heard my hon. Friend make that statement. But is that the estimate of take-up that the Treasury believes will come about, or does my hon. Friend think that it is likely to be much less? I am afraid that it may be much less. I hope that my hon. Friend will tell us what he believes the actual take-up will be.

§ Mr. Brooke
We needed a figure to put into the forecast, and that was the one we took. There was a degree of underlying arithmetical logic to it, but I acknowledge that it was speculative. There are 20,000 employers who have said that when the Inland Revenue produces its guidance notes shortly, assuming this legislation is passed. they would like to receive a copy. That is an index of the fairly widespread interest among employers.

§ Mr. Blair
The hon. Gentleman raised an important point. I do not wish to rehearse the arguments that were put earlier, but there is bound to be an element of speculation in deciding what the take-up is. If we are talking about 2 million people with 10 per cent. of their pay—that is, about £300 million—it is important to be sure of the basis upon which we are working and to ensure that there is evidence to support our view. As I made clear earlier, I have my doubts about how successful this will be in any event. It is absolutely clear from the figures that we have been given that we are talking about substantial sums of money.
I asked the Minister for an explanation of why, when the Government first put forward this scheme, there was a maximum of £1,000 as the top amount that is able to come within the profit-related pay. It is now £3,000. He indicated that the reason was the representations that were made. I still say that that is a significant mark-up to have occurred as a result of such representations. In the initial term, profit-related pay schemes will be introduced and people will get an immediate tax-free benefit in their hand for not producing or doing anything more at all. That is why, when profit-related pay was introduced, some people suggested that it should ensure that people will not get any more money in their hands as a result of the introduction of the tax incentive. I still think that the figure is extremely high. However, we have made our position clear in the vote on clause I, so it is not necessary to divide the Committee on the amendment.

§ Mr. Brooke
To avoid misunderstanding, I would say that the £1,000 to which the hon. Member for Sedgefield (Mr. Blair) referred, in terms of the original proposals, was the total available tax relief. I agree that there was a difference in the manner in which it was expressed. Therefore, half of the £3,000, which is inherent in the legislation now, is a 50 per cent. improvement and not a case of tripling.

§ Mr. Blair
I beg to ask leave to withdraw the amendment.