§ The Temporary Chairman (Mr. Michael Shersby)
With this is will be convenient to discuss the following amendments: No. 45, in page 17, line 9, leave out 'subsection (4).'.
§ No. 46, in page 17, line 37, leave out 'subsection (7).'
§ Mr. Beith
It is no secret that my party has been committed to employee share ownership schemes since long before I was old enough to be a member of it. It has campaigned on the issue time and again over the years. It made progress during the Lib-Lab pact, during which new legislation was introduced on share ownership. I am pleased to say that that ownership is widening. My party continues the campaign, it is glad that the Government show a significant interest in employee share ownership plans and other forms of wider share ownership, and it will continue to urge them on, year by year, to do more.
The Bill is helpful but my colleagues and I wish to suggest some ways in which employee share ownership schemes can be taken further. We believe that the concept is good in principle. It gives the employee a stake in the firm for which he works, a greater involvement in its affairs and an opportunity to share in its prosperity, not merely through the wages paid for work but through the direct fruit of the dividend on the company's profits. Wider share ownership often has a transforming effect in the workplace as more and more of a company's employees become committed by their share ownership, as well as by their work, to the success of the company. We therefore want to give this form of share ownership as much encouragement as possible.
I hope that that feeling has spread widely, even into areas of the Labour and trade union movement which 959 were initially hostile to wider share ownership. In the old days, it seemed to them—it may still seem so to some of them—to be an unfortunate breaking down of the traditional distinctions between labour and capital. I am in favour of that, and that is why I am so committed to wider share ownership schemes.
The amendments necessarily take us into a technical area. Under common law, a company can claim a tax deduction for the regular payments that it makes to an employee share ownership trust, provided that it can be shown that the payments are of revenue and not of capital. Whether the payments are revenue in nature is not always clear. Last year's Finance Bill, as it then was, created the qualifying employee share ownership trust. Payments made by a company to a qualifying trust could be guaranteed a tax deduction whether the payments were capital or revenue in nature. The relief provided by the relevant sections was so restrictive, however, that so far as I know the provisions have not been used. The efforts made by the Government in last year's Finance Bill therefore seem not to have borne fruit, unless the Minister has come across an example that I have not yet found.
In practice, trusts continue to prefer the relative uncertainty of the common law provisions to which I have referred. There are two principal reasons for that. First, the structure of a qualifying trust means that it does not fall within the exemptions to the Financial Services Act 1988. The trustees must register and comply with the rules of an appropriate FSA self-regulatory organisation. That costs money and is a rather bureaucratic complication for trustees who are not really interested in providing an investment service. They are there to distribute shares to employees and to obtain funds from the company for that purpose, and having to go through the mechanism of the Financial Services Act 1988 is not something that they anticipated. Secondly, all the employees of a company must participate as beneficiaries of the trust on similar terms. That means that there can be no discrimination between employees. That, too, has proved to be a restriction.
To make the qualifying trusts more popular, clauses 25 to 32 propose to give roll-over relief to gifts of shares made to a qualifying trust. Thus, a person selling shares to such a trust need not suffer capital gains tax on the sale, provided that the proceeds are reinvested in acquiring capital assets. That in itself is good but the existing restrictions and the additional restrictions in the Bill make it unlikely that the provision will make any contribution to the trusts taking off in a big way.
We have suggested a series of amendments designed to relax some of the existing restrictions and to remove the restrictions in the Bill, some of which are contained in parts of the Bill that we shall discuss in Standing Committee. I hope that the Minister will accept our general objective, which is to try to make the provisions usable—indeed, attractive—so as to help to create further trusts. We do not want the creation of trusts to continue to rely mainly on common law provisions which existed before this legislation.
Amendment No. 44 is intended to allow the trusts to be established in advance. That is especially necessary where a new shelf company is being used as a vehicle for a 960 management buy-out. Amendment No. 45 would delete a subsection which requires at least 10 per cent. of the ordinary share capital of a company to be in the hands of the trust. In a management buy-out, 60 to 80 per cent. of the equity is provided by institutions, with 20 to 40 per cent. being in the hands of managers and employees. In that context, a 10 per cent. threshold is unrealistically high. I do not understand why it is necessary, and I hope that the Minister will reconsider.
Amendment No. 46 would remove another subsection which denies relief to a vendor if the trustees of the trust make an offside transaction. That is unfair, because the vendor will have no control over the actions of the trustees. There are three areas where there are yet more restrictions which could lead to the continued inappropriateness, in the minds of potential trustees, of the whole Finance Act mechanism in launching employee share ownership plans. I shall discuss that further in Standing Committee.
Our intention is to make the Finance Bill provisions helpful and suitable in encouraging the creation of further employee share ownership plans. I hope that the Minister realises that something must be done if that objective is to be achieved.
§ Mr. Lilley
To the shock, horror, and consternation of the Committee, I accept amendment No. 44. The matter could be dealt with in either of the two suggested ways, but the way suggested by the hon. Gentleman has, on balance, at least as many advantages as the way it is dealt with in the Bill. As I am in a good mood, I accept the amendment and urge my hon. Friends to support it in the unlikely event of a Division.
On amendment No. 45, given the valuable nature of the new capital gains relief, there are certain conditions which the Bill requires to be met if it is to be obtained. One of those is that within a certain period the ESOP must have a 10 per cent. stake in the company to which the sale relates. Unlike some other employee share arrangements recognised in the tax system, ESOPs will often be concerned with large stakes in companies.
The new relief proposed in the Bill is very valuable and it is right that it should be confined to cases where employees are being given a significant stake in the company. The level of what should count as significant is inevitably a matter of judgment. We think that 10 per cent. strikes the right balance, representing as it does a stake large enough to ensure the employees a degree of involvement in the company's affairs, while not being so large as to make the new relief unattractive. It was also the lowest figure suggested in representations made by the main ESOP proponents.
To remove the test altogether would mean that the new relief would be available if only a tiny proportion of the company's shares were to pass to the ESOP trust. That would mean that relief could be claimed where the employees were being given no effective stake in the company, and the proprietors maintained total effective control. We do not think that giving relief in such circumstances could be justified, and I urge the Committee to reject the amendment.
Clause 25(7) denies the capital gains relief for share disposals to ESOPs if the ESOP breaks the conditions for qualifying ESOPs in the period running from the year in which the share disposal takes place to the year in which replacement assets are acquired. Amendment No. 46 would allow relief to be claimed in those circumstances.
961 The main effect of the amendment would be extra compliance and administrative work. In the absence of clause 25(7), relief would be allowed and then clawed back under clauses 28 to 30, which recover the relief where, at any time after the sale of shares, the ESOP breaks the rules. In the cases covered by clause 25(7), it will usually be known when the claim is made that the ESOP has broken the rules, and in those circumstances it saves everyone work to deny the relief from the outset, as clause 25(7) does. For that reason, I cannot commend the amendment to the Committee, but I appreciate the manner in which the amendments were proposed.
§ Mr. Beith
I am grateful to the Minister for accepting amendment No. 44. I hope that it is a good sign and that we can further tidy up these parts of the Bill in Standing Committee. I hope that many other Liberal Democrat amendments will be accepted.
I fully appreciate and accept the reasoning behind the 10 per cent. threshold in general. However, I wonder whether the management buy-out aspect has been properly considered. To achieve a management buy-out, it is necessary for there to be a large institutional stake. If the managers are to be fully committed, they also require a significant stake. I shall take further advice on whether there is any other way to deal with that. I hope that the Minister's officials will also give it further thought. I am at one with the Minister in thinking that at least a 10 per cent. stake is usually desirable, but I should not want a management buy-out to be frustrated by that.
I shall reflect on the Minister's response to amendment No. 46. His key point was that in most cases relief will not be claimed until it is clear whether the trust has behaved as it should. My anxiety is that the person who will be denied the relief is the vendor, who has no control over the actions of those who could cause him to lose it. I appreciate the Minister's acceptance of amendment No. 44.
§ Amendment agreed to.
§ Question proposed, That the clause, as amended, stand part of the Bill.
§ Mr. Nicholas Brown
The clause is welcome and we do not wish to divide the House on this or subsequent clauses that deal with ESOPs. We wish only to explore technical matters of detail. I am sure that the clauses will go through Committee in a reasonably speedy and workmanlike way. That is in keeping with our approach during the past two years. This is the third year that we have discussed employee share ownership plans—or employee share ownership trusts, depending on which nomenclature people prefer.
The schemes appear to have drawn support from both sides of the House. We have arrived at a peculiar bipartisan approach, but for different reasons. Conservative Members view ESOPs as a form of popular capitalism, whereas we realise that they are an appropriate vehicle for workers' control, as our policy review makes clear.
§ Mr. Brown
It is all the better for being spontaneous.
The approach of the House to these issues was set during the passage of the Finance Bill last year by that opinion former, the man we thought of—just for a few minutes, no longer—as Red Norman. He said:In a free enterprise economy, there is room for many different forms of ownership, which can include a number of companies where a majority of shares are owned by the labour force. If the increasing awareness of and interest in ESOPs results in more worker-owned companies, I should not regret that…Anything that could encourage more membership by the work force in the unquoted sector is to be welcomed."—[Official Report, Standing Committee G, 6 June 1989; columns 304–5.]That ringing incitement to the work force to take over their companies made my hon. Friends and myself draw breath. Indeed, given his previous disappointments in the appointments to the Cabinet, we thought that the right hon. Gentleman was making a bid for election to the shadow Cabinet instead. For those few moments one or two of us might even have considered supporting him. Of course, events moved on, and we are pleased that the right hon. Gentleman has found his rightful place in the appropriate Cabinet and has not resiled from his views on employee share ownership trusts.
It is only fair to point out that all the trusts so far relate to private companies. That is the way in which the law to date has affected the transfer of shares in public companies. The hon. Member for Esher (Mr. Taylor) has spoken on the point on a number of occasions and may take justifiable pride in the clause that is before us. For the first time the measure will give an advantage to Finance Bill schemes over case law ESOPs, which many of us felt were hitherto in a more privileged position.
The clause, and those subsequent upon it, will provide roll-over tax relief if the shares are sold into an ESOP. That relief was not available before. The requirements for democratic distribution of the shares remain, as do the requirements for worker trustees. All that is on the right lines, but there are remaining problems, and the clause is wide enough for us to discuss them.
The overriding problem relates particularly to private companies. Although I mention it, it does not detract from my overall support for the clause. If a company is doing badly, there is not a great temptation to the work force to purchase it; naturally it would be reluctant to do so. If a company is doing well, unfortunately it is the case in British industry that those who run it want to retain it. There are still more tax-efficient methods of rewarding executives for the contribution that they make to the company. Indeed, it is widely felt in British board rooms that executives need incentives. The same view does not seem to have been transferred to the approach to the rest of the work force. Far too many British board rooms still seem to think that their work force needs to be competitive and priced down rather than given incentives and further involvement.
There are other difficulties that pertain particularly to the ESOT structure. It is still the case that a majority of the trustees of the ESOT have to be employees. I hope that the Financial Secretary will consider the matter again, perhaps not now but for future Finance Bills. I am sure that the commitment given by his predecessor to review the issue year by year continues. In the larger ESOTs, the need for professional, financial and other expert advice is not just 963 necessary but of overwhelming importance. No doubt some of the larger ESOTs could not function unless such professional advice was available.
In issues that are fairly complex, the existing employee trustees not only have to form a majority, and therefore take responsibility ultimately—if they are all voting the same way—for decisions, but they are also completely exposed to personal liability. I understand the reasons for it, but those two burdens are heavy ones to place on people who ideally should be shop floor workers. To mix their involvement with the involvement of professional advisers, experts in their own spheres, seems to be desirable. The burden of complete personal liability is very heavy and is not an inducement to an ordinary working person to seek election.
I want to take the opportunity to praise members of the different work forces in the road transport industry in particular and in other industries for having taken an adventurous step in coming forward to undertake a burdensome office on behalf of their fellow workers. It is a heavy responsibility to shoulder. The individuals to whom I have spoken are very conscious of that.
I also want to take the opportunity to praise the Unity Trust bank which, as hon. Members who follow the matter know, is the main financial backer of employee share ownership trusts. Without the encouragement that the bank has given to such schemes, many of them would not have got under way.
The Financial Secretary should consider for future Financial Bills the inclusion in ESOTs of regular part-time workers as well as full-time employees. I am not talking about people on short-term contracts. I see the difficulties there, but it should be possible for people who are permanently employed, but for a smaller number of weeks, to be involved in the ESOT, even on a pro rata basis, although ideally they should have full-time involvement.
The new relief is designed to be limited to sales of shares in qualifying ESOPs. It will provide a boost for them at the expense of the case law ESOPs. As the Financial Secretary said in answer to the hon. Member for Berwick-upon-Tweed (Mr. Beith), the relief is limited by a number of tests. It is limited particularly to ESOPs set up by trading companies or trading groups. The Finance Act 1989 allowed investment companies to set up ESOPs. Indeed, no reason was put forward at the time as to why investment companies should not set up ESOPs.
Of course, it gave them the corporation tax deductions consequent upon that. However, clause 25 and the subsequent clauses will not allow an investment company ESOP the roll-over tax relief. I understand that tax avoidance issues may be involved. Given everything that I have said on tax avoidance in the past, it would be wrong for me not to be conscious of the potential. If the Financial Secretary says that that is his defence, I shall certainly understand his motivation. However, it is right to explore it further and that is what I hope to do.
I understand the position to be that a qualifying ESOP can be set up by a non-trading investment company—that was common ground on last year's Finance Act—and that the new roll-over relief cannot be claimed for the sale of shares in such a company to its ESOP. That is what we are deciding this year. I accept that it is in line with the general 964 view of the Inland Revenue that trading companies or groups are more commercial and less easy to manipulate for tax purposes. That is probably right.
However, we have to ask whether the Government's approach is wholly consistent. If investment companies are intrinsically undesirable, why should we have allowed them to establish qualifying ESOPs in the first place? If clause 25 and the succeeding clauses are intended to encourage shareholders to sell to ESOPs rather than to creditors or others, how does the restriction help? I do not put those questions to the Financial Secretary in a spirit of animosity, because I realise that tax avoidance issues may sit alongside my remarks. Nevertheless, I shall welcome a response from him in his summation of the debate.
The hon. Member for Berwick-upon-Tweed referred to the 10 per cent. test contained in clause 25(4). As a test, it is arbitrary, and I was much taken with the Financial Secretary's statement that it represented the lowest test of all the representations that the Government received from interested groups.
Why is such a test needed? Although I followed what the Financial Secretary said to the hon. Member for Berwick-upon-Tweed, that question still merits an answer, because, although the 10 per cent. test is less strict than the 25 per cent. test used at one stage in the Capital Gains Tax Act 1979, it is stricter than the section 85 rule, for general offers, which has no threshold.
If an ESOP currently holds 2 per cent. of the founding company's shares, why should relief be available if Peter sells 8 per cent. of his 29 per cent. shareholding, but not be available to Nick if he sells all of his 7 per cent. shareholding? Why should relief become available to Nick only if Peter later decides to sell 2 per cent. of his shareholding to the ESOP? The threshold sets up those ambiguities. Has the Financial Secretary thought of a way through, or does he believe that such ambiguities are consequent upon the setting of any threshold? I suspect that that is the answer.
I must raise a number of drafting issues with the Financial Secretary. Clause 25(5) states that the claimant must obtain consideration. That would be difficult to interpret and I am not sure that it is right. Can the Financial Secretary justify inclusion of that phrase in the clause? Similarly, in clause 25(7), am I to understand—I may have got it wrong—that a small chargeable event could mean that roll-over relief would be completely denied? I am sure that that is not the Government's intention, but the clause could be interpreted in such a way. Could the Financial Secretary respond a little more fully than simply to say that that is not his intention, and that it could not be interpreted in such a way?
Clause 25(5) states that all the consideration must be used to purchase replacement assets. Surely that is contradicted by clause 27(2), which we shall discuss further in Standing Committee. At this stage, I merely want to draw the Financial Secretary's attention to the fact that clause 27(2) and clause 27(3) enable partial roll-over relief. If that is enabled by clause 27, why should clause 25(5) say that it is not?
In principle, the relief given in clause 25 is much wider than existing roll-over relief. It extends to the acquisition of almost any type of chargeable asset and to assets the eventual sale of which is unlikely in practice to cause capital gains tax to be paid.
965 I must return to the issue of tax avoidance, where my sympathies are entirely with the Inland Revenue. The clause may provide substantial possibilities for avoidance, and I should like the Financial Secretary to tell us how much consideration the Government have given to that issue and precisely what steps they have taken to minimise avoidance, which is implicit in the clause.
Relief is aimed principally at sales of shares to an ESOP at full market value. How will the clause cope with what I should have thought were socially desirable steps—I should have thought that they were desirable to the Government, too—for example, when shares are gifted to an ESOP or sold at a lower or nominal value? I am sure that the Government will have considered that matter in general, but how does the clause affect it in particular? I am sure that we would all agree that the sort of thing to be encountered is when the owner of a small or medium-sized company, which is not asset-rich, is retiring or seeking to leave for other reasons and the company can be given over to the work force. The tax system should positively encourage such an idea. As the hon. Member for Esher has said in previous debates, at least the system should not provide a positive disincentive.
As I am sure hon. Members will appreciate, these are technical matters and they are difficult to popularise. Nevertheless, the events that lie behind the drier points that we are discussing today are serious, and have had a profound effect on the lives of a number of working people, whose companies have been transformed from municipally owned undertakings or companies that traded in the public sector into employee share ownership trusts.
Many trade union branches have been involved in such transfers. The bus industry is the prime example. Unions had to think long and hard before encouraging their members to enter into such undertakings. I note on the latest list of such groups that the Buswise group on Tyne and Wear, with some 18,000 employees, is by far the largest existing ESOP.
My constituents ask me whether they should enter into such an undertaking. They also ask, as well they might, given my current duties on the Opposition Front Bench, what will happen when the Government change. Will their investment in the ESOP be for naught? Will the risk that they have taken come to nothing if the municipal bus trust is taken back into public ownership'? It is not our intention to take such trusts back into public ownership. Our commitment to an integrated passenger transport network in the metropolitan areas can be carried out without renationalising enterprises which we regret have been put into such difficult positions.
I applaud the endeavours of employees of ESOPs to take the best possible option available to them in the most intractable circumstances. They were placed in such circumstances by the Government and not due to economic circumstances or anything else. They have taken a brave step and next year, or the year after, we may well be discussing the affairs of people working in community care who are also considering whether, given the changes that the Government are making, ESOPs are the vehicle for them. People in that walk of life are looking carefully at what has happened in the bus industry.
ESOPs have a much wider future than merely providing a refuge of last resort for municipal undertakings that are being privatised. I regret that debate has sometimes been too narrowly focused on privatisation. There are many good things about ESOPs and I hope that, with continued 966 encouragement from the Opposition and, in fairness, with the good will that has come from the Government as well, albeit for different reasons, we shall eventually arrive at the point where ESOPs are not only desirable in theory but positively attractive in practice.
§ 9 pm
§ Mr. Ian Taylor
It is an annual pleasure to follow the jovial hon. Member for Newcastle upon Tyne, East (Mr. Brown) in debates on employee share ownership, and today is no exception. I will pass on to him a message given to me by the managing director of another bus company, who said that, when the shares passed into the hands of the workers in that bus company, for the first time the buses stopped for passengers, so there is hope for the hon. Gentleman if he is late for a meeting in Tyne and Wear.
This is one of the remarkable subjects that seems to unite the House. It unites the supporters of Karl Marx and Adam Smith and, in deference to the hon. Member for Berwick-upon-Tweed (Mr. Beith), probably Lloyd George —I do not know the latest guru of the Liberal Democrats.
Just to show that I am a good party man at heart, I should say that, although the hon. Member for Newcastle upon Tyne, East said that he saw ESOPs as a means of workers' control, it is important that he should explain to some of his colleagues that workers may end up in control through a progressive transfer of shares into their hands which, if it happens, is a good thing, but that workers' control, in some sort of socialist sense, should not be the sole justification for employee ownership. It is better to start at 1, 2 or 3 per cent. if that is all that is possible, than to hold out for 51 per cent. I have often found on platforms that that understanding has not spread completely through the Labour party, but I am sure that the hon. Gentleman will continue to spread the gospel of popular capitalism, even if he calls it something else.
I welcome clause 25. It represents satisfaction of one of the most important of the submissions that were made to the Treasury last year when we were considering some of the implications of the introduction of the qualifying ESOP in the Finance Act 1989. I also particularly welcome the 10 per cent. criterion. The Americans have a 30 per cent. criterion, so the Treasury has been excessively generous. I withdraw the word "excessively" as it might set a precedent, but the Treasury has certainly been generous in bringing in the 10 per cent. criterion.
My only worry would be that 10 per cent. is still a substantial number of shares if they all come in one go. One thing that we shall be looking at in Standing Committee is whether it is possible, using only the 1978 Act scheme, for 10 per cent. of a company to pass out to shareholders during the seven-year period, which is one of the qualifying conditions. That is in no way a criticism —it is merely an attempt to ensure that there is a possibility of understanding whether the seven-year rule is sufficient.
Sadly, during the past year there has been difficulty in persuading companies to use the qualifying employee share ownership trust set up in last year's Finance Act. Trusts have been set up under the case law, as the hon. Member for Newcastle upon Tyne, East said, but those of us who believe that this should become a proper system, widely understood, with clear tax provisions, welcome the fact that it is proposed that, under clause 25, the roll-over relief will apply only to transfers of shares into a qualifying 967 share option trust. That seems to make the qualifying route much more popular and is certainly a boost to it in comparison with the case law version.
I want briefly to draw attention to two other points which could transform some of the attitudes of potential appliers of ESOPs because they were not available until recently. The first is the fact that the Companies Act 1989 came into force on 1 April 1990. That was an important provision, giving companies the ability to guarantee the borrowings of an employee benefit trust. That is something which many of us wanted early on, and now that it has come in, I think that it will attract the attention of practitioners.
I was delighted when my hon. Friend the Financial Secretary announced in a written answer on 9 May—at column 123 of Hansard—that a clearance procedure was to be introduced, and was under discussion by the Inland Revenue. Tax advisers are used to telephoning the Inland Revenue and obtaining clearance procedures for other financial purposes. Given the complexities of employee share ownership schemes, and the similarity of terms provisions, they felt that such procedures were necessary here.
In many instances, lack of clearance procedure made the case law version more desirable. The matter needed to be tidied up, and I thank my hon. Friend the Financial Secretary for doing that.
I believe that the Treasury could make further gestures to remove some of the cotton wool around the employee share ownership plan. All the hon. Members who have spoken tonight want the ESOP scheme to expand. If it is to expand, companies and their advisers must regard it as a vehicle that is not only a sensible way to spread capital to workers, but something that will not cause horrendous corporate problems. It must be something that firms see as meeting their objectives.
Although I have always favoured the similarity of terms provisions, I have a slight doubt as to whether we should always insist upon it, as it seems to be a disincentive for many firms which cannot decide whether to introduce the schemes. Some firms seem not to believe that running an ESOP with similarity of terms provisions in parallel with the 1984 executive share option scheme is sufficient. To date I have always thought that it was, but there is an increasing volume of evidence to the contrary.
The hon. Member for Newcastle upon Tyne, East raised some good points about part-time workers. Increasingly, they will be an essential part of any labour force, and part-time workers who have a proper contract should be beneficiaries under an employee share ownership plan.
In Committee last year I raised the question of capital gains tax liability within a trust if the trust disburses shares at a higher price than that at which it first bought them that would involve double taxation.
It is interesting that many of the people who advise companies on whether to adopt a qualifying employee share trust—especially those from the Unity Trust bank —are concerned about the trustee clauses, not only in regard to personal liability but because of the complexity of an election among the workers. My hon. Friend the Financial Secretary should consider whether there should be an alternative system. Appointing as trustees one 968 representative each from the work force and management, plus an independent adviser, would simplify matters. That is not an anti-union suggestion—I think that it would find widespread support among Opposition Members.
As for the seven-year period during which shares must be distributed to the individual beneficiaries, I support the requirement to get shares into the hands of individuals as soon as possible. That is an essential part of individual share ownership, which is inherent in the employee share ownership trust principle. We are not moving into an institutional shareholding area. The problem emerges when a substantial number of shares could be obtained by the employee trust. It is then difficult to get them out within the seven-year period if only the 1978 Act is used, particularly if a company wanted to make available one 1978 Act share plus one other share, difficulties would be involved. We may need to consider either extending the period or altering the point at which tax arises when a share is distributed to an employee outside a 1978 Act scheme. Perhaps employees could get some roll-over relief so that they pay tax when they realise a share as opposed to when they receive it.
There is not time to discuss technical matters this evening, but in fairness to the Standing Committee, it was worth while flagging them. The Government have done an excellent job. Industry and practitioners have been flabby and slightly weak-willed about introducing the scheme. I hope that we can now toughen them up. The giving of taxation reliefs only to a qualifying trust should make that much more attractive, and I hope that in the coming months we shall see a fairly rapid and wide rise of employees becoming shareholders through that system. That would be extremely welcome. One of the great objectives of the next 10 years is spreading capital through share ownership. This is one measure in which the Government can justifiably take pride.
§ Mr. Lilley
We have had an excellent debate with knowledgeable speeches by the hon. Member for Newcastle upon Tyne, East (Mr. Brown) and my hon. Friend the Member for Esher (Mr. Taylor), both of whom have acquired expertise outside the House and, I suspect, from paying more attention to finance debates than I did previously. I have had to make up for lost time in studying this important subject.
It is useful to know that, having said a few words in favour of co-operatives, if I now advocate ESOPs as a vehicle for worker control I can hope to pick up some votes in the Labour party national executive elections, should I be so inclined. I was a little surprised by some of the inquiries of the hon. Member for Newcastle upon Tyne, East, who did not feel it was necessary to have a majority of worker trustees or to transfer a minimum amount to employees. I thought that he might have been making a bid for membership of our Cabinet, so that he and I could pass en route.
The Government have consistently supported and encouraged employee share ownership. Privatisations have always included valuable and widely seized opportunities for employees to obtain shares on very favourable terms and, more generally, we have introduced and extended a wide range of tax relief in 10 out of the last 11 annual Budgets. We estimate that up to March last year, the latest date for which figures are available, 969 all-employee share schemes resulted in 2 million employees receiving shares or options over shares with an intitial market value of some £5 billion.
Against that background, we introduced our legislation on ESOPs last year. My right hon. Friend explained then the difference between approved employee share schemes and ESOPs, and acknowledged that ESOPs have a particular role to play in the unquoted company sector.
The clauses provide a futher tax relief to encourage the establishment of statutory ESOPs. The relief takes the form of a capital gains tax deferral for sales of shares to ESOPs. The clauses set out the conditions to be met if relief is to be obtained, the nature of the relief and provide for its recovery if the statutory ESOP subsequently ceases to meet the qualifying conditions.
ESOPs involve trusts, set up for the benefit of a company's employees, which invest in the company's shares and then distribute them to its work force.
Following discussions with the main proponents of ESOPs, sections 67 to 74 and schedule 5 of last year's Finance Act provided relief from corporation tax for company contributions to ESOP trusts. Relief is due provided certain conditions are met. They are designed to secure the Government's objectives for ESOPs. First, individual employee share ownership in the companies in which they work should be extended. Secondly, it should be on an all-employee, similar-terms basis. That is valuable, despite the slight wavering of my hon. Friend the Member for Esher. Such ownership should he provided as promptly as possible, and it should be under arrangements that do not lend themselves to the sort of criticism that we have heard of ESOPs abroad, where they can be used for poison pill operations and the like.
In line with the commitment given by my predecessor during last year's Standing Committee debates, we have kept a close watch on developments, and I have had meetings with those most closely concerned with promoting ESOPs.
The case for giving a further incentive to ESOPs has been strongly put to us, and, consistent with our underlying aim of ensuring individual employee ownership on reasonable terms and within a reasonable time, we have decided to demonstrate our continued commitment to ESOPs by introducing this further relief. We hope that this up-front capital gains tax relief will make the difference in some cases between a company deciding to set up an ESOP or not. We hope that the existence of the relief will persuade owners of shares in unquoted companies to sell them to an ESOP. Comments made since the Budget strengthen our hope that that will be so.
I am grateful to my hon. Friend the Member for Esher and the hon. Member for Newcastle upon Tyne, East for the broad support that they have given to the relief, and I welcome their contributions. My hon. Friend the Member for Esher, who has established a position as probably the leading exponent of ESOPs in the House, welcomed our 10 per cent. rule and remarked that it was more generous than the 30 per cent. rule that obtains in the United States of America. None the less, he wondered whether it might prove higher than necessary. ESOPs will often be concerned with large stakes in the company concerned. They may often rely on borrowings and individual contributions; distributions may, in consequence, take 970 some time. Up to seven years is allowed under the 1989 legislation; a 1.4 per cent. per annum transfer does not seem excessive.
My hon. Friend the Member for Esher correctly remarked that the changes under the Companies Act 1989 have only just come into effect and that they will provide greater stimulus to statutory ESOPs, along with the new incentive. The fact that Companies Act changes have only recently come into force may be why we have not seen much sign of activity in statutory ESOPs. We would not expect to know about them because it takes some time before they come to the notice of the authorities.
My hon. Friend welcomed the clearance procedure that I recently announced. He said that it was under consideration, but it is established and available to those setting up trusts.
My hon. Friend reinforced the inquiry made by the hon. Member for Newcastle upon Tyne, East about the position of part-time workers. ESOPs can distribute to part-time workers as long as they are distributed through an approved all-employee arrangement.
The last point that my hon. Friend the Member for Esher made was about capital gains tax if shares are sold at a higher price than that for which they were acquired. We have received some interest, but not much. Given the freedom of operation available to ESOPs, unlike approved employee share schemes, large amounts could be involved and there would be the risk, if these reliefs were given, of ESOPs being used solely as tax shelters. We are determined that that should not happen. ESOPs should serve only as a means of furthering individual employee share ownership and as a means of producing it without unnecessary delay. To exempt their income and gains would encourage ESOPs to delay for as long as possible the distribution of shares to employees.
The hon. Member for Newcastle upon Tyne, East made constructively comments. He said that, if a company was doing badly, employees would not wish to take up shares via an ESOP and that, if it was doing well, they would not be able to afford to do so. In fact, quite a number of ESOPs are the result of shares being gifted to employees. I am happy to say that all the schemes of which I am aware are in successful companies. They seem to have overcome the obstacles foreseen by the hon. Gentleman.
Perhaps I can spell out a little more clearly the position of part-time employees. The benefits for an ESOP trust could be substantial and, although distributions must be on an all-employee similar terms basis, there is scope for variation, depending on length of service and level of remuneration. It seems right to restrict those benefits to those who make the most substantial contributions to the success of their company. If, however, the ESOP trust operates in conjunction with a profit-sharing scheme trust, where the tax relief is more narrowly confined, part-time employees may still be allowed to benefit, as they frequently are under these schemes.
§ Mr. Lilley
The answers are more or less the same. If the hon. Gentleman studies the text, he will find that one answer was more condensed than the other.
The hon. Member for Newcastle upon Tyne, East said that shop floor workers who are trustees bear full liability and that this is a burdensome responsibility. In fact, 971 companies are able to indemnify them against the responsibility. That would ease the burden and help employee trustees to play a full part, which is what we want to happen.
Exclusion of relief for investment companies was tentatively queried by the hon. Member for Newcastle upon Tyne, East. He was right in his suspicion that this restriction has been introduced to prevent tax avoidance. Our contacts with proponents of ESOPs suggest that interest in the new relief is likely to be related essentially to trading companies. If the relief were extended to investment companies, there would be a risk of it being abused for what are really sales and transfers of investments to third parties. I know that the hon. Gentleman would not wish that to happen any more than I do.
The hon. Gentleman made a number of inquiries about drafting matters. Clause 25(5) deals with whether the claimant must obtain consideration—CGT jargon for a sale. Normally gifts already attract CGT deferral under last year's rules for gifts. The hon. Gentleman asked whether under clause 25(7) even a small chargeable event would deny relief. I am afraid that that is the case. Substantial scope for abuse would be opened up if we differentiated between small and large-scale chargeable events. Again, this measure was introduced to prevent tax avoidance.
The hon. Gentleman asked whether relief was confined to all cases where all proceeds were reinvested. No; clause 27(3) extends relief to cases where part is reinvested. I was asked how the provisions would cope in terms of shares gifted to ESOPs. In most cases, gift holdover relief will be available where shares are given to ESOPs and, where it is not, the new relief will be available.
I hope that I have dealt with most of the points raised by the hon. Member for Newcastle upon Tyne, East. If on studying the Official Report I find that questions have not been answered or have been inadequately answered, I shall either write to him or take the opportunity in the pleasurable meetings which we are scheduled to hold on Tuesdays and Thursdays henceforth to respond more fully to his points. I am grateful for hon. Members' constructive and knowledgeable contributions to the debate.
§ Question put and agreed to.
§ Clause 25, as amended, ordered to stand part of the Bill.
§ Bill (Clauses 3, 9, 10, 20, 23, 25 and 68), reported, with amendments; to lie upon the Table.