Employee Share Schemes Bill

HC Deb 18 January 2002 vol 378 cc523-82

Order for Second Reading read.

9.33 am

Mr. Mark Lazarowicz (Edinburgh, North and Leith)

I beg to move, That the Bill be now read a Second time

I am delighted to speak in support of the Bill. In so doing, I pay tribute to the support that it has received from many Members and from many organisations and bodies outside the House, including the co-operative movement, which first suggested its subject matter, and the employee ownership movement. I declare as an interest the assistance that I received in developing the Bill from the Co-operative party and Job Ownership Ltd.

The purpose of the Bill is to encourage greater employee ownership by extending the taxation benefits available for employee share schemes to companies that encourage widespread employee ownership. In particular, the Bill would encourage those forms of employee ownership where employee shares are held collectively in an employee trust.

The measure would also make it easier for employee trusts that hold shares to elect employees as trustees of the shareholding, thus giving employees a direct voice in the management of the business in which they work. Finally, the measure would facilitate the transfer of shares by companies to an employee trust. In some circumstances that cannot be done at present, as it would incur expensive taxation consequences.

As many hon. Members know, neither employee share schemes nor employee ownership are new ideas in this country. Several schemes designed to promote employee shareholding have been introduced by Labour and Conservative Governments, with support from minority parties. The 1974–79 Labour Government—with strong support from the Liberals—introduced the all-employee profit-sharing share scheme, which was excellent in many respects. After 1979, the Conservative Government introduced the executive share option scheme, which faced some criticism. They also introduced the save-as-you-earn option scheme and, in 1989, the qualifying employee share trust—the QUEST scheme—which was widely supported in the House.

In 1994, the right hon. and learned Member for Rushcliffe (Mr. Clarke), when he was Chancellor of the Exchequer, made significant improvements to the QUEST scheme, designed to encourage owners of private companies to sell their business, or substantial interests in the business, to their employees. The scheme was especially useful in promoting wider employee share ownership.

Most recently, under the Labour Government, the all-employee share ownership plan—now the share incentive plan—has further extended the taxation advantages available to encourage employee share ownership and the flexibility with which such schemes can be introduced.

Employee share schemes have been given cross-party encouragement under the tax system for almost 30 years. Employee ownership itself has a much longer history in the UK. Many Members are aware of the long-established employee-owned business, Scott Bader Commonwealth Ltd., founded in 1920 and employee owned from 1951; 90 per cent. of its employees are members of Scott Bader Ltd., the charitable trust that holds the shares of Scott Bader Company Ltd. In the words of that organisation, membership brings "advantages but also responsibilities", with many employees also serving on the community council that deals with day-to-day problems in the company. The company believes that involvement in decision making encourages commitment from its employees. Scott Bader also undertakes much charity work; that is typical of many companies with high employee involvement and ownership.

Members will be aware that there are many other successful employee-owned businesses in this country: the John Lewis Partnership and the Arup group are two well-known examples. There are many successful worker co-operatives. All the evidence shows that employee control—whether through employee share ownership or other methods, such as the traditional worker co-operative—brings real benefits to the businesses that introduce them and to their employees.

Employee-owned companies perform better than average. An investment of £100 in the FTSE all-share index in 1992 would be worth only £186 today. The same investment in a company in the employee ownership index, where more than 10 per cent. of the capital is held by employees other than directors, would be worth £370 today—more than twice as much.

Other evidence shows that the wider the degree of employee share ownership and employee control the better the results for both businesses and employees. A recent study by Conyon and Freeman shows that UK companies that give shares only to their senior managers experience a significant increase in productivity. However, companies that go further and spread share ownership to all employees achieve a productivity boost of nearly 50 per cent. more than companies that restrict share distribution only to directors or senior managers.

Evidence shows that wider employee ownership and employee control bring much wider benefits to society. One recent study of worker co-ops in northern Italy showed that towns with higher levels of employee ownership did better in terms of education, health, crime, social participation and perceptions of the social environment—even mortality was significantly lower.

It is dangerous to generalise too much from one case study, but I know from my experience in Scotland that some of the most successful examples of community regeneration may be found where community owned and controlled businesses have played an important role in building a strong and stable community. There is certainly an indication that wider worker ownership helps in creating successful societies.

As the legislation stands, however, there is an anomaly in the operation of the taxation advantages available to employee share schemes. Ironically, the very businesses that provide for a high degree of employee ownership and involvement, and are totally or partially employee controlled, are often unable to distribute shares to employees on a tax-effective basis because of their employee-based structure. That anomaly acts as a deterrent to a wider extension of employee ownership, and the Bill seeks to address it. To show how that will be done, I shall now outline the detailed provisions of the Bill.

I shall first mention clause 1(2), (3) and (4). The current legislation does not allow the introduction of a share incentive plan by some of the United Kingdom's successful and established companies that have long been owned, controlled and run on behalf of all their employees. Typically, many employee-owned companies are owned and controlled by an employee benefit trust, a charitable trust or, in some cases, a mixture of both. The holding of shares in a trust can be an effective way of encouraging a collective employee voice in the management of a business, and of preventing shares from being taken out of employee control—both very laudable objectives. However, the shares of such companies do not qualify under the requirements of the SIP legislation, because the tax benefits of the SIP for the company and its employees are available only if the shares are distributed to individual employees.

The clause seeks to eliminate that anomaly, which prevents some of the UK's most successful and longest-standing employee-owned businesses from delivering to their employees the tax-efficient benefits of individual share ownership that are now available to most other types of company under the SIP.

It is difficult for companies in that group, such as the ones that I mentioned earlier, to explain to their employees, who work in a culture of employee ownership, that they are not entitled to the tax incentives now offered for share ownership to employees of their competitors.

In addition, a collective trust-based scheme of ownership is often a route preferred by transferring business owners who want to pass on their companies, or a significant part of their interests in their companies, to their employees. That may be because the owners may wish to relinquish control gradually, for perfectly good reasons, or because the scheme may require financial contributions from employees over a period. The subsections that I mentioned will therefore allow a SIP to be available in such circumstances.

I turn now to the second group of provisions contained in the Bill—those set out in clause 1(5). The effect of that subsection will be to make it clear that employee-controlled companies will be able to benefit from a taxation concession available to employee share schemes if the trustees are selected or elected by the employees of the company. The view of the bodies in this country that promote employee ownership is that at present there is considerable uncertainty about whether such provisions are acceptable under the current legislation, and I understand that those who have sought to include what I would term "employee democracy" provisions—the election of trustees by employees—in employee share ownership schemes have had some difficulty in obtaining approval.

I understand that the view from within the Inland Revenue is that the subsection is not strictly necessary, because the legislation as currently worded does not prevent the appointment of employee trustees. I believe that the Revenue intends to clarify the position in due course by providing information on its website and making available model documents, which are to be drafted.

Notwithstanding that view, the bodies that make up the movement that supports wider employee share ownership consider the subsection to be very important. They consider that it will remove any doubt that such arrangements are possible and, moreover, place a clear pointer in legislation that employees can indeed become elected trustees of a trust that is set up under a share incentive plan.

Such specific provision allowing appointment of employee trustees will give employees and their representatives, such as trade unions, the confidence to request employee representation on the trustee body without the fear that they will be told that it is impossible or too difficult under the legislation. Case studies have shown that the most successful results arise from employee share ownership where employees have real involvement and participation in the non-financial—and particularly the decision-making—aspects as well as the financial aspects of share ownership, and that if employees have that greater degree of involvement they will have a greater sense of ownership.

I take as an example the John Lewis Partnership. A study of results over 17 years showed that, of all UK retailers, it had the highest marginal productivity gain for every new person employed and for every pound invested, and the highest capital and labour productivity in the industry. Studies by the Centre for Tomorrow's Company in the UK and a recent big European study point in the same direction. The more employee share schemes provide for what has been traditionally termed "industrial democracy", the greater the benefits for employees and businesses alike.

Mr. Mark Prisk (Hertford and Stortford)

I believe that it is an excellent principle to encourage greater share ownership and involvement in one's company wherever possible. My constituent, Mrs. Jennifer Parry, who works for the John Lewis Partnership, shares my support for the principle of what the hon. Gentleman is trying to achieve, but she is uncertain whether part-time employees might be able to benefit, because of the rule that shares must be held for a minimum of five years to gain tax benefit. Will the hon. Gentleman perhaps enlighten the House on that matter?

Mr. Lazarowicz

I am not sure whether I can answer the hon. Gentleman's query in detail. The Bill is designed to facilitate as wide a range of schemes as possible. Every employee whom one would want to benefit might not benefit immediately, but I hope that the Bill will put down a marker for future legislation and point in the direction in which the House wants to go.

Appointing employee-elected trustees is an extremely effective way to achieve a form of industrial democracy. It is good not only for Britain's employees but for the whole country because the evidence is that such an increase in employee ownership increases productivity—a key Government objective. The more that employees are involved in the ownership and the direction of their business, the better the productivity and the better the results for the country as a whole.

I emphasise that this provision in the Bill enables employee trustees to be elected by employees. It is an optional provision; it does not force it on any unwilling company or employees, but it is important that such employee ownership be encouraged. Employee ownership is clearly not suitable for all businesses. No one is suggesting that the traditional form of share ownership is not appropriate for very many companies, and in many cases public ownership is the way forward. However, the Bill would move forward the idea that employee ownership is also a valid way—perhaps even the third way—that needs to be encouraged and supported by the Government and the House.

Mrs. Cheryl Gillan (Chesham and Amersham)

I am very interested in the Bill and in no way want to put a damper on it, but I should like to pursue the point made by my hon. Friend the Member for Hertford and Stortford (Mr. Prisk), especially on the John Lewis issues. What advice has the hon. Gentleman received? I understand that John Lewis employees are particularly concerned about two main points. First, can the company maintain and provide liquidity to an internal share market, which would have to be created to allow employees to trade their shares?

Secondly, because of their low-paid and part-time nature, many of the partners in John Lewis may not be able to wait the minimum of five years that they are required to hold the shares before any gain on disposal becomes tax free. Although I understand that the hon. Gentleman may not be able to go into great detail, I and the wider audience outside the House would appreciate it if he would share with the House the advice that he has received and tell us whether he hopes that the Paymaster General will shine light on the problem or whether he has any solutions to those two thorny issues.

Mr. Lazarowicz

I thank the hon. Lady for her intervention. I cannot offer any detailed advice at this stage. Clearly, as she will appreciate, today's debate is on the Bill's broad principles. No doubt, if the hon. Lady or her hon. Friends wished to pursue those points in detail, they could do so in Committee. However, I have no doubt that my hon. Friend the Paymaster General will be able to outline the Government's position. [Interruption.] I am sure that she will be able to do so. As I suggested to the hon. Member for Hertford and Stortford (Mr. Prisk), the Bill is intended to facilitate a range of options. Indeed, if my hon. Friend made any suggestion that fits the broader intent of the Bill, I am sure that it could be pursued at a later date.

The provisions in subsection (5) would seek to achieve the objective of facilitating employee representation on trusts. The final set of provisions are set out in subsection (6), which would support the position of companies, especially business owners who want to make a significant move towards employee ownership. Corporation tax relief would be granted up front where a significant block of shares—10 per cent. or more—were transferred to an employee trust.

Under the SIP provisions, such corporation tax relief is available only when shares are transferred to individual employees under the scheme, but that might take a very long time where a large part of the company is transferred at the outset for the benefit of employees, thus making that route expensive—often prohibitively so—for the company. Such up-front corporation tax relief was available under the previous QUEST legislation. The provisions in subsection (6) would encourage the establishment of employee ownership where businesses are owned wholly on behalf of their employees, largely through trusts.

The Bill would, if passed, be a modest but significant measure to promote active employee ownership. However, it represents something wider. As I said in my opening remarks, it was originally suggested to me by the co-operative movement. It did so because, as some Members will know, in recent years, the co-operative movement has been working closely with a wide range of organisations that do not have traditional links with the movement.

Those organisations include, of course, employee-owned businesses—what I term the employee ownership movement and many mutual businesses not only in the financial sector, but in other sectors. They include community businesses and many providers of community and social housing and community leisure facilities. Indeed, they include companies limited by guarantee—a topic of some interest at the moment. They include the exciting and innovative scheme to promote a voice for football supporters in the management and ownership of their football clubs—the supporters direct initiative. [HON. MEMBERS: "Hear, hear."' As the hon. Members can hear, that initiative has considerable support among Labour Members. All those organisations and sectors are now working much more closely than ever before on a common agenda. In effect, a new co-operative and mutual sector is developing.

Rosemary McKenna (Cumbernauld and Kilsyth)

Does my hon. Friend agree that wonderful opportunities now exist in central Scotland, with the development of the Forth and Clyde canal, which has had an impact on many communities throughout the central belt, and that that represents an ideal opportunity for such companies to develop because they will be successful if they have real support from the community?

Mr. Lazarowicz

Indeed As my hon. Friend may well know, I, as a member of the Select Committee on Scottish Affairs, recently paid a visit, along with a number of Members present in the House today, to the Forth and Clyde canal and saw the wonderful opportunities that it presents to community business in my hon. Friend's constituency and elsewhere. That opportunity indicates the way in which the new co-operative and mutual sector is developing.

The new sector includes, of course, traditional forms of co-operative activity. It includes new and successful forms of co-operative enterprise, such as the highly successful Co-operative bank, as well as long-established companies, such as the John Lewis Partnership, which has

been discussed at some length already. However, lest anyone thinks that such a model of business ownership is valid only for century-old businesses, let me assure him or her that the involvement of employees in their business is as valid and important to what has been called the new economy.

For example, Poptel—a worker co-operative set up in the mid-1980s—now offers internet services. It has 60 staff based in London and Manchester and a turnover of £6 million. It is the inventor and registry operator of Dot Coop—the new co-operative internet identity. If worker co-ops are not to the taste of every Member, let me refer to Xansa—the consulting information technology and outsourcing group, with a turnover of almost £500 million. It has been quoted on the stock exchange for some six years now, but it is still controlled to a major extent by its staff, who have a 30 per cent. stake in it.

Mr. Iain Luke (Dundee, East)

My hon. Friend is listing a series of options for different types of companies, but does he agree that if we could somehow build worker share ownership into some of the larger companies—indeed, the multinational companies—it may reduce their tendency to be foot loose and to take decisions outwith a country that have an impact on the employees in the country in which they operate?

Mr. Lazarowicz

My hon. Friend makes a very valuable point. I know, from his experience in Dundee, that the problems of foot-loose companies have caused great difficulties in his constituency.

As I have said already, employee ownership offers real advantages to employees and the businesses that employ them. As we have heard again in the House today, the concept seems to have all-party support. The Government strongly recognise the value of employee share ownership and the contribution that it can make to raising productivity. Support in the House is broad and, outside the House, the Bill is backed by the co-operative movement, Job Ownership Ltd., and many successful employee-owned companies, such as those that I have mentioned. It is backed by the Trades Union Congress, the Industrial Society and many mutual companies, including Nationwide and Standard Life—one of the major employers in my constituency.

Many hon. Members will have received letters from members of the public or employees of employee-owned companies in support of the Bill. In the fullness of time, some of those individuals and the businesses may well gain some direct benefit from the Bill. Most will not—but they support this measure because they recognise that, as well as its direct impact, the Bill can be an important symbolic expression of the House's wish to support the growth of active employee ownership.

I urge the House and the Government to give a positive response to that wide coalition of support for the Bill. I hope that the House will show its support for wide employee ownership by supporting the Bill's Second Reading today.

9.59 am

Mr. David Lidington (Aylesbury)

It is a pleasant duty to congratulate the hon. Member for Edinburgh, North and Leith (Mr. Lazarowicz) on his speech, which showed that he had immersed himself in the detail of his chosen subject and that he came to it out of a deep belief in the ideas to which the Bill gives expression, and on his success in the ballot. From my experience in my first Parliament, I recall the mixture of delight and terror that one feels when one is successful in the private Members' Bill ballot. He has chosen an important subject that is worthy of debate, and I congratulate him on that.

It is important to state on behalf of Conservative Members that we fully support the principle that we should encourage and make it easier wherever possible for employees to own shares in the company for which they work. One of the great achievements in British life since the second world war has been the creation of a property-owning democracy. Conservative Members take particular pride in the achievements of the Governments led by my noble Friend Baroness Thatcher of Kesteven in helping to bring that about.

One of the next steps forward from the achievement of a property-owning democracy must be to search for measures that will build a capital-owning democracy, in which not just those who are fortunate enough to inherit wealth but people from all backgrounds and all parts of the nation will have the opportunity to own and to take responsibility for the sums of capital that can provide them with the security which only a small number of our fellow citizens in previous generations had the fortune to hold. As the hon. Gentleman said, employee share schemes are an important means of seeking to achieve the objective of a capital-owning democracy.

A profile of British shareholders conducted by MORI on behalf of ProShare, the share ownership promoter, showed that approximately 14 per cent. of all shareholders in this country first became involved in the ownership of shares through an employee share scheme of some sort or another. I do not mean this in a partisan spirit, but a larger percentage—30 per cent. of all shareholders—first became involved in the ownership of shares through the benefits of privatisation schemes. It is important to accept that there is more than one route to more widespread capital ownership. The particular method embodied in the Bill is certainly important and deserves further debate and encouragement.

Mr. Andrew Love (Edmonton)

The hon. Gentleman refers to wider capital ownership, so does he accept that the figures for the United Kingdom have been disappointing, especially compared with the United States, where there is much wider share ownership? Should we not look to the United States for examples of how we could do better in this country?

Mr. Lidington

I agree very much with the hon. Gentleman. He makes a perfectly valid point. A lesson for those of us on the centre right of British politics is that we should not be afraid to encourage greater employee share ownership. Across the Atlantic, that method of spreading capital more widely is accepted to a greater extent than it has traditionally been in the United Kingdom.

Shona Mclsaac (Cleethorpes)

If we are to learn from the United States, we must of course avoid scandals such as Enron. We should not accept everything that the United States has done for share ownership.

Mr. Lidington

I look forward to the continuing debate between the hon. Members for Cleethorpes (Shona McIsaac) and for Edmonton (Mr. Love) about the merits of the United States model. We should never take the methods applied in any other country as a blueprint that necessarily can be applied directly to our circumstances in the United Kingdom. However, since his election to the leadership of the Conservative party, my right hon. Friend the Leader of the Opposition has made a point of stressing that we need actively to consider examples of policy success across the Atlantic and across the channel; and should examine whether some lessons can be applied fruitfully in this country.

It is good for employees to have a material stake in the success of their employer. That is an important way in which to shape a corporate culture within a firm so that employees feel that they are valued by the enterprise for which they work and that their contributions are taken seriously by its management and directors. As the hon. Member for Edinburgh, North and Leith said, companies benefit when they are able to unlock the enthusiasm, the creativity and the ideas of their work force and can enhance those to the advantage of the enterprise as a whole. Employee share schemes offer one important way of bringing the interests of employer and employee together.

As the hon. Gentleman pointed out, under Governments of both political colours, there has been a history of initiatives to encourage employee share ownership. He mentioned the save-as-you-earn scheme and the company share option schemes introduced by Conservative Administrations. Those schemes are still in being and currently benefit 1.75 million workers in about 1,200 firms. He also referred to the approved profit sharing schemes and the qualifying employee share trusts—QUESTs—that were introduced by Conservative Governments in the 1980s and that have been replaced by this Government's share incentive plan, the so-called SIP.

At the time of the introduction of SIP in the Finance Acts of 2000 and 2001, we took the view that the Government's measures were in some ways an improvement but in others worse than the schemes that they replaced. However, we were prepared to give the new schemes broad support. I hope that, when the Paymaster General responds to the debate, she will be able to bring us up to date with the Government's assessment of the success of the SIP scheme so far.

A press release from ProShare dated earlier this month said that 220 schemes had now been approved and that more than half the firms involved had fewer than 250 employees. That shows that smaller firms are becoming involved to a greater extent than before. That is clearly good news, but the Chancellor's stated aim is to have 1.750 schemes, which is the figure that was produced in the Government's impact assessment when they brought the legislation before Parliament. I would therefore be interested in the Paymaster General's assessment of how long it will be before that target is met. She will know that there have been criticisms from the financial services industry about the new schemes' complexity and the bureaucratic obstacles in the way of operating them. Some fears have been expressed that that might deter firms that might otherwise be attracted to this method of encouraging employee participation.

We welcome the hon. Gentleman's Bill as an opportunity to debate the issue further and to explore the merit of specific proposals for reform. I hope that I do not disappoint him too much if I say that I cannot promise to adopt his Bill lock, stock and barrel as official Conservative party policy. We take his points seriously, and they are embodied in the Bill. A number of detailed matters need to be debated, however. We do not oppose the Bill's Second Reading and I hope that it will proceed to a Standing Committee and beyond so that it receives the close scrutiny that it deserves and we can resolve some of my questions about its detail.

As the hon. Member for Edinburgh, North and Leith said, the Bill's measures can be divided into three. The first is the proposal to broaden the opportunity to participate in a SIP to include employee-owned companies. He mentioned some of those, including the John Lewis Partnership and the Arup group, and demonstrated that there is a gap in existing arrangements. Perhaps that can best be illustrated by referring to the John Lewis Partnership. I am grateful to its representatives, whom I met, for briefing me on the Bill.

Paragraph 61 of schedule 8 of the Finance Act 2000 defines those shares that are eligible for inclusion in a SIP. First, they have to be listed on a stock exchange. The trouble is that the only class of John Lewis shares so listed are preference shares, which the legislation specifically excludes from eligibility. Secondly, shares are eligible if they are in a company that is not under the control of another company. The structure of the John Lewis Partnership means that the shares in the plc are controlled by a corporate trustee and are treated in law as the shares of a subsidiary, which therefore makes them ineligible.

The third criterion for eligibility might get John Lewis out of its hole. Shares are eligible for a SIP if they are in a company that is a subsidiary, other than a closed company, and listed on a stock exchange. The trouble is that the Inland Revenue ruled that the John Lewis Partnership counts as a closed company. It is ineligible for the SIP arrangements because it has fewer than five shareholders, which is a result of its particular corporate structure and the involvement of the corporate trustee. Although it looks like the Bill might fill a gap in the arrangements, I wonder whether it would deliver the benefits that the hon. Gentleman and the Bill's sponsors wish to see.

John Lewis told me that it supports the Bill, but it also explained that it would not be a panacea. My hon. Friend the Member for Chesham and Amersham (Mrs. Gillan) alluded to some of the possible difficulties. It might be hard for such a company to create a class of ordinary shares that meets legislative requirements and complies with the obligations in the partnership's trust settlements. It might be awkward in practice to establish an internal share market, which would have to be created if we were to allow employees in such a company to trade in shares. In addition, as my hon. Friend the Member for Hertford and Stortford (Mr. Prisk) said, many retail workers are part-time or low-paid employees. We have to wonder whether an SIP is the right savings vehicle for such people. Is the five-year period during which planned shares have to be held before tax benefits accrue realistic for them? Again, I have to wonder whether that aspect of the Bill will be as beneficial as the hon. Gentleman hopes it will be.

The second broad proposal is to allow employees who are elected by the work force to sit as trustees. I have no objection to that in principle. If it makes workers more involved with the decisions of a trust and gives them a sense of ownership and a greater stake—in the wider sense of the word—in the fortunes of their company, then that is welcome. Questions again arise, however. Would it be wise to allow, as the Bill does, the majority of trustees to be non-professional, given the considerable obligations that fall on trustees to look after the assets of their co-workers? Should there be a definition in legislation of the way in which such employee trustees are to be chosen?

The hon. Gentleman and some of the commentary in support of his proposals suggest that the Bill would provide for elected employee representatives to sit as trustees, but the Bill does not lay down a method of election, nor does it say that that election should take place. There is not even an enabling power for the Chancellor of the Exchequer to make regulations to define a method of election. The Bill does not specify that there has to be a secret ballot, nor does it stipulate the period of trusteeship before a worker trustee has to seek re-election.

Mr. Ken Purchase (Wolverhampton, North-East)

The hon. Gentleman raises important matters of detail. Would it not be sensible, however, to deal with elections in the framework of the memorandum and articles rather than including them in the Bill and having to sort them out now?

Lidington

That is a reasonable point, but I would want to explore in Committee and on Report whether that is the best approach. It might be better to stipulate it in law or, more probably, secondary legislation through regulations, which would receive parliamentary scrutiny.

The third proposal is to change the arrangements for corporation tax relief. I am sure that the hon. Gentleman will not mind my being amused at the irony of ditching tax relief arrangements for some schemes which were introduced by the Government in favour of those introduced by my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) in QUESTs. That also gives rise to some questions. I have not formed a final view on the matter and think that there should be wide consultation with interested parties and the business community in general. Is it right to limit those corporation tax relief advantages to some employee share schemes rather than giving them to all such schemes? Is 10 per cent. the right threshold if we are to distinguish between schemes? How do the corporation tax arrangements set out in the Bill interact with those set out in paragraph 106 of schedule 8 of the 2000 Act?

That leads me to two questions about the Bill as a whole. One is about the possible cost to the Government of the Bill's changes to corporation tax relief. Inevitably, if the Bill provides for more generous corporation tax relief than is covered in present legislation, there is bound to be some cost to the public purse in terms of revenues forgone. Clearly, before Parliament agrees to let the Bill proceed to the statute book, it would be right to know the best estimate of the revenue which will be forgone.

I do not blame the hon. Member for Edinburgh, North and Leith for this, but he has not been able so far in the debate to provide such an estimate. I am sure that the Treasury and Inland Revenue have been doing some number crunching, and I hope that the Minister will be able to come up with an estimate when she speaks—if she catches your eye, Mr. Deputy Speaker.

The House needs to bear in mind not just the immediate cost of the Bill. After all, the reason why the Government decided to change the corporation tax relief arrangements that they inherited was the way in which, they argued, those arrangements were increasingly used by companies to avoid considerable amounts of tax, thus offering scope for growth in legal tax avoidance. In the words of a commentary from ProShare that was distributed at least to some hon. Members this morning: in 1997 clever tax advisers spotted the generosity of the legislation—the upfront Corporation Tax relief for the company—and began to market the use of QUESTs to FTSE companies. Of course, the clever officials in the Treasury realised what was going on. Changes to legislation were introduced, but comparable things have happened and will continue to happen in various aspects of tax legislation. The House will want to hear from the Minister how the Government assess both the likely immediate cost, were the Bill to become law, and whether the Bill as drafted would allow scope for growth in legitimate avoidance of tax as people latched on to the corporation tax advantages that the arrangement would bring. We need to be aware of that risk.

We also need to ask about the compliance costs of the legislation. Again, as the hon. Member for Edinburgh, North and Leith will know, any Government Bill must be accompanied by a compliance cost assessment of what it will mean to industry. It is a private Member's Bill, so I do not expect him to come up with the sort of audit that Whitehall is capable of providing, but the Government's view on that matter would be welcome.

The Government's regulatory impact assessment for the SIP legislation suggested that a large company would face start-up costs of between £200,000 and £750,000 when it first established an SIP, plus annual running costs of between £100,000 and £200,000. The estimates for smaller companies, by which the Government meant companies employing about 50 people, were start-up costs of between £20,000 and £40,000 and annual running costs of between £15,000 and £30,000, possibly capable of being reduced to about £10,000 in some circumstances.

We therefore need to take seriously the possible costs of these measures both to the Treasury in terms of revenue forgone and to businesses themselves in terms of possible burdens. If those administrative costs are excessive, the Bill will not have the beneficial impact that its sponsors wish. We need to consider in Committee and on Report whether it is right to amend the law in that way.

Mr. David Drew (Stroud)

I hear what the hon. Gentleman says and am pleased to hear that the Opposition Front-Bench team supports the Bill in principle; but does he agree that there is prevailing unfairness about the way in which we treat mutuals? There is greater complexity than there needs to be. Often, they are exempted from what other public and sometimes private businesses can gain access to. This Bill is about putting right those wrongs.

Mr. Lidington

The Bill is about trying to encourage both employee share ownership in companies that at present cannot take part in the SIP arrangements and worker ownership—greater mutuality, or however the hon. Gentleman wishes to describe it. There are certainly advantages to mutuality. As the hon. Member for Edmonton said, we should consider carefully why such arrangements appear to be more successful and more widespread in the United States than they are here, and the benefits that they undoubtedly bring, but we do not want to pretend that mutuality is an answer to everything. There are merits in the orthodox idea of a firm with shareholders who hold a board of directors to account. The largest private sector employer in my constituency is what used to be Equitable Life, so mutuality is no guarantee that the right decisions will be taken.

Mr. Love

In the Finance Act 2000, the Government in their great wisdom extended SIPs to redeemable shares of industrial and provident societies. The Bill will extend SIPs to employee trusts. As yet we have not been able to find a mechanism to extend it to mutually owned businesses such as building societies. Will the Opposition parties join the Government in trying to give the benefits of employee share ownership to mutual organisations?

Mr. Lidington

I am happy to say that we are very willing to explore ways in which that may be done, subject to what I have said about costs both to Government and to the business sector, but the principles set out by the hon. Member for Edinburgh, North and Leith are good. It is right to seek to expand the opportunities for employee share ownership and to look for ways in which to make workers feel that they have a real stake in the company by which they are employed. If we can devise the right arrangements in which to embody those principles, I agree that the economy will be more productive and the prosperity of all our citizens will be enhanced. It is in that spirit that Conservative Members will be happy to see the Bill gain a Second Reading and continue to be given the detailed consideration that it merits.

10.28 am

Mr. Adrian Bailey (West Bromwich, West)

I support the Bill and congratulate my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz) on the slot that he drew in the private Members' ballot. I thank him for choosing this subject as the basis of the Bill.

I should make it clear that I have been a lifelong supporter of co-operative principles and of the co-operative movement. Indeed, I was an employee of the co-operative movement for 18 enjoyable and rewarding years. I am proud to stand in the Chamber and say that I am a Labour and co-operative Member of the House.

Although the Bill does not directly promote co-operatives, it reinforces the principle of democratic participation in companies by employees, and gives staff the right to share in the appreciating value of their company, which their labour has helped to build. Both are values and principles held most dear by the co-operative movement. As my hon. Friend the Member for Edinburgh, North and Leith and the hon. Member for Aylesbury (Mr. Lidington) said, the Bill is the latest in a sequence of measures; it would tidy up anomalies that have arisen out of legislation introduced by both Labour and Conservative Governments to provide a corporate legislative framework that will enable capital and labour to work together for the benefit of both.

Historically, Britain's industrial performance has been dogged by tensions between capital and labour. Reading the Bill brought to my mind a book and film that many hon. Members will remember: "I'm All Right, Jack". Starring the late Peter Sellers, the film caricatured the bitterness of industrial relations under the old-style capitalist management prevalent in the immediate post-war years. I do not claim that the attitudes portrayed in the film were typical of all companies, but there is no doubt that the tensions it portrayed were reflected in our industries for many years following the war.

The Bill is the product of a new era. The old tensions led to strikes, the consequences of which were sometimes devastating to our economy, staff employed and companies themselves. Even when companies survived without such tensions, the corporate framework in which they worked meant that they were unable to harness the collective talents of employees or stimulate their collective initiative in a way that added value to the companies' managerial strategy.

There is a world of difference between the contribution of an employee who goes to work, clocks on or signs in, does a conscientious day's work for his day's pay and then goes home, forgetting about his work, and an employee of a company in which employees have a share and participate. He goes into work feeling part of that company, wanting to contribute, looking for ways to increase efficiency; he works with colleagues who are in the same position to promote new ideas and more effective working arrangements. The Bill promotes the sort of corporate framework in which the latter can thrive.

Employees who are confident that their ideas will be listened to and respected, and who know that if those ideas are implemented and are successful they will benefit from the additional productivity generated, are far more likely to be positively committed to their work than those who are not. The Bill is one of those rare pieces of legislation from which everyone is a potential winner.

The economy should gain from increased productivity. As my hon. Friend the Member for Edinburgh, North and Leith said, the latest research in the United States demonstrates the gains made in productivity in companies in which there is wider share ownership and participation. From my perspective as a lifelong supporter of co-operation and the principles that lie behind it, it is good to know that there is now a body of statistical evidence that demonstrates the principle—the instinctive feeling—that the system set out in the Bill embodies the right way forward. No wonder the model is more advanced in the United States than in this country.

The Bill will assist the development of a new enterprise culture, wherein people are encouraged to invest responsibly and develop confidence in doing so. The hon. Member for Aylesbury highlighted the contribution that Conservative Governments made in creating a property-owning democracy—although tempted to intervene, I resisted the urge to point out that for many it subsequently became a property-owing democracy. The hon. Gentleman rightly spoke about the steps taken to increase the number of people who owned shares and became used to handling them. The great virtue of the Bill, as opposed to the Conservatives' privatisation measures, is that it promotes responsible long-term use of shares, rather than their purchase for quick short-term profit. It would be interesting to carry out research into the relative duration of ownership of shares by those who purchase them via the Bill's mechanism, compared to those who purchased shares in the privatisations, but I shall not divert the debate by speculating on that point.

Individual companies are clearly likely to gain from having better motivated staff with lower rates of absenteeism and unpunctuality. Participation in decisions by employee representatives leads to greater understanding of company business and acts as a unifying force among staff. The employees gain from the wealth created by the improved working environment and the confidence created by decision making and being able to take greater control of their lives.

The Bill would correct some of the deficiencies in legislation made under previous Governments. Hon. Members on both sides of the House recognise the merits of its approach. I am pleased to commend the Opposition on following the logic of legislation introduced by Conservative Governments and supporting the Bill in principle. I especially welcome the provisions that widen the range of companies eligible for tax relief on employee share holding. My hon. Friend the Member for Edinburgh, North and Leith spoke eloquently about the irony of a company such as John Lewis Partnership, which is regarded as a model of employee participation, being excluded by previous legislation. The Bill would correct that anomaly.

The Bill also makes provision for companies that set up share trusts, facilitating the process whereby democratic elections can be held to place employee representatives on the trust. Everyone welcomes the reinforcement of such rights of representation. I applaud the changes that remove tax barriers to enlightened company owners who want to hand over their company to employees, or to make a substantial donation to existing employee trust funds. Hitherto, the obligation to pay corporation tax up front when transferring companies has been a major disincentive, especially when the company is experiencing difficulty and the prospect of a transferred company under employee control surviving is made slimmer by the additional costs incurred under existing legislation.

The Bill gives new hope and new scope to a new generation of entrepreneurs—the example of Poptel was quoted. It gives new entrepreneurs, working in new areas, looking for new methods and pioneering new ways of working, new scope to set up corporate models that will maximise the talents of their work force.

When I first looked at the Bill, I could not help but reflect that company law and tax law are probably the driest and most arcane areas of the law. This Bill is a combination of both. However, we must recognise that, despite that, the forces that the Bill seeks to liberate are potentially revolutionary. It seeks wealth creation by recognising and rewarding innovation; wealth distribution by spreading the benefits of wider share ownership; and education and confidence building by including people in vital corporate decision making, which hitherto has been denied them. Despite the Bill's dryness, those are vital parts of a developing new economy, and I hope that everyone who shares the aspirations reflected in the Bill will join me in supporting the measure.

10.41 am

Mr. Edward Davey (Kingston and Surbiton)

I congratulate the hon. Member for Edinburgh, North and Leith (Mr. Lazarowicz) not just on the Bill but on the way in which, having done so well in the ballot, he made his choice and formed the proposals. He consulted widely inside and outside the House, which is a model approach to producing proposals for hon. Members who want to ensure that their legislation achieves a consensus. He deserves congratulations from hon. Members on both sides of the House.

The hon. Gentleman and the hon. Member for West Bromwich, West (Mr. Bailey) talked about the history of industrial relations and some of the obstacles that have prevented employee share ownership becoming more widespread in Britain in the past, and about some of the past battles between unions and management. It is good to see that, in many respects, those days are behind us. Proposals such as this have helped to bridge the gap between what used to be seen as the two sides of industry.

As the hon. Member for Edinburgh, North and Leith said in his short historical analysis of the development of employee share ownership, in the '60s and '70s, the Liberals were great advocates of employee share ownership schemes and, in the Lib-Lab pact in the late '70s, they were extremely successful in persuading the then Labour Government to implement in their Finance Acts some of the first schemes in that area. That set the ball rolling and was important in ensuring that Britain went down that route.

In recent decades under the previous Conservative Administration, we saw some developments, which in many respects were welcome but which in general tended to suffer from two particular problems. First, not enough of the schemes were all-employee schemes. I well remember that, in my back room days when I was advising my right hon. Friend the Member for Berwick-upon-Tweed (Mr. Beith) when he was the Liberal spokesman in Committees considering Conservative Government Finance Bills, we tabled amendments to try to persuade the then Government to make more of their employee share ownership schemes all-employee schemes, but there was a lot of opposition to that from the Conservative Government. That was one of their major failings in this area and one reason why we did not make the progress that could have been made from the arrangements in the late '70s.

That is why 1 start my remarks by praising the Government. In their consultation in the previous Parliament and their proposals for what have turned out to be share-incentive plans, the Government have ensured that all-employee involvement in tax-favoured schemes is a bedrock principle, which we should keep to, maintain and develop. The Government are to be congratulated on dealing with that huge omission from the proposals of previous Conservative Governments.

Mr. Love

I agree strongly about the principle of all-employee share ownership, but is it not also a practicality in that the research shows that when all employees are part of a scheme it delivers the benefits of performance and productivity?

Mr. Davey

The hon. Gentleman is exactly right and he slightly anticipates my next remark. The nature of all-employee schemes is that they provide the benefits that have been suggested today: namely, improved productivity.

The good thing about the Bill, and why it is less modest than the hon. Member for Edinburgh, North and Leith suggested and is a radical step forward, is that it deals with the second problem that the previous Conservative Administration never dealt with: namely, the fact that employee share ownership schemes work best when they involve and encourage employee participation.

Far too often, employee share ownership schemes are about a new form of remuneration. That is important to employees because remuneration is one reason why people go to work, but, as the hon. Member for Edinburgh, North and Leith said in quoting some of the research, if we are to benefit fully we must move from just a remuneration relationship between employee and employer to a co-ownership of the future of the company, so that the employees or their elected representatives participate in thinking, strategy setting and decision making. If employee share ownership schemes are developed in such a way, we shall see some of the long heralded but yet to be fully achieved benefits of employee share ownership.

I hope that the Government will not only support the Bill, as I and my Liberal Democrat colleagues will do today, but will listen to the reasons why so many hon. Members support the measure. It is not just about the old forms of employee share ownership; it is about something more. It is about trying to get employees more involved, and giving companies incentives to involve employees more in real control and participation.

The economic benefits have long been heralded, as I know from my studies of labour market economics at university, about which I read rather too much because I was studying the mid-1980s when there was a flurry of economic articles and books promoting employee share ownership. In particular, I well remember "The Share Economy" by Martin Weitzman, which was one of the seminal works in the early to mid-1980s. He drew on the experience of the Japanese economy and tried to argue that profit-related pay, which may in some cases take the form of employee share ownership, was the answer to stagflation and the reason why the Japanese economy had not suffered from the problems of the British economy.

Judging from the smiles on hon. Members' faces, they share my scepticism about such claims by Mr. Weitzman and others. It is important that we understand why some of the claims for such schemes are wrong while others are right. People such as Mr. Weitzman argued that moving towards profit-related pay was a way out of the wage inflexibility problem; the fact that nominal and sometimes even real wages are downwardly inflexible, so the labour market fails to clear and there is unemployment when there are demand shocks. They tried to suggest that to get out of that, risks should be transferred from the owners of the company to the workers. That model assumed that people were prepared to take quite a sizeable risk as part of their remuneration. Of course, in reality, that is not so. While employees will take some risk, they will not take the amount required to make practical or real the theoretical models advocated by some. The problem with those models is that they took a top-down view of the benefits of such schemes. They looked at a macro-economy and asked how we could try to get rid of inflation and unemployment; they proposed trying to change the whole labour market macro-economically.

The real benefits come from a bottom-up or bubbling-up approach, which looks at enterprise at a shop-floor level. If one looks at the relationships between employees and managers—the ways in which they work best and how they can be improved—we see that they are not about risk sharing or risk transfer from the owners to the workers. They are more about a shared vision of where the company is going. It is through a shared vision that one gets productivity improvements; genuine incentives; shared or pooled ideas of how to do things better and improve processes in a company to make sure that the output, whether a service or a good, is produced at a lower unit cost; and improved relationships and morale. It is also the way to achieve better communication, which is one of the genuine benefits of proper all-employee share ownerships schemes that involve extra participation. If one is going to make such schemes a reality, one inevitably gets better communication and, through that, greater understanding, which often ensures that difficulties faced daily or weekly by companies can be tackled by everyone involved in the company.

Those shop-floor business-based advantages are the theoretical underpinning of the benefits claimed for that type of scheme. They might not reduce stagflation, as Mr. Weitzman suggested some schemes might, but over time they will significantly increase productivity. The Government rightly regard the schemes as being crucial to what they claim is their top economic objective in this Parliament of improving the productivity of the British economy. They should therefore pay particular attention to the Bill introduced by the hon. Member for Edinburgh, North and Leith to see whether they can harness those productivity benefits even more. It is through active ownership that we will secure those benefits.

The Government are looking at other benefits of share incentive plans. They have tried to suggest that when companies take up SIPs they have the option of introducing performance-related share schemes. Indeed, they have set out proposals with conditions on forfeiture if staff leave early and so on, and particular rules on holding periods for shares. They may have two other objectives in introducing those conditions. The evidence that performance-related pay improves productivity is much less than the evidence for employee participation. That is worth looking at, but the complexity of the arrangements proposed by the Government suggests that some of the benefits may not be as easily obtained as some people have argued.

The points on forfeiture and holding periods in the Government's SIP schemes are interesting because they may address some companies' problems with staff turnover. For example, sometimes staff leave their company far too quickly, and it loses the benefits of training and building up relationships. Some people may say that the forfeiture and holding period conditions are rigid, but they may be key to the benefits that we are trying to get from the Bill and the Government's proposals. If one wants improved productivity, it is common sense to retain staff a little longer to get the benefits of the training and investment that the company puts into them. I certainly recognise that in paying staff in my own office. I try to encourage them to stay a bit longer by paying them a little bit better, as I believe that that is the way to get more out of one's staff; it is a productivity gain as it reduces staff turnover. Some of the additional objectives in the Government's approach to SIPs are therefore to be welcomed.

I now turn to the detail of the Bill. As the hon. Member for Aylesbury (Mr. Lidington) said, it tries to widen the application of available tax reliefs, which is to be welcomed. Figures obtained by the hon. Member for Edmonton (Mr. Love) in a parliamentary question to the Treasury show that, in the first instance, more than 100,000 employees might be eligible as a direct result of the Bill's implementation. Over time, eligibility could further increase. Creating the incentive for companies to adopt the model favoured by the hon. Member for Edinburgh, North and Leith would enable us to experience its key benefits.

In discussing that part of the Bill, the hon. Member for Aylesbury and some of his colleagues made points also made by John Lewis Partnership. They wonder whether the Bill will achieve its intentions because of problems involving part-time employees and possible liquidity in organisations' internal share markets. The House and the Committee considering the Bill should try to explore those valid concerns with John Lewis Partnership, the Government and others. It is not beyond the wit of Members to deal with those problems.

It is important to put on record the fact that John Lewis Partnership is one of the organisations that really values its part-time employees. There are two large John Lewis Partnership stores in my constituency—the John Lewis store in Kingston and Waitrose in Surbiton—and I know some of the people who work in them. Indeed, they have written to me, as I shall explain later. They extol the way in which John Lewis Partnership implements its principles and core values to make sure that all employees are valued, whether they are full-time or part-time. Indeed, up to 30 per cent. of John Lewis Partnership employees are part-time and are integral to the company's strategy. It should be noted on the record that it treats them well.

It is possible to get round the two problems mentioned by the hon. Member for Aylesbury. The partnership could undertake innovative work on liquidity to see whether it is possible to introduce a new concept of an internal capital market, and we should look at that. It is possible that in the past we did not spend enough time looking at how to improve the performance of mutuals and not-for-profit organisations. It is for Members of Parliament, given the public service reform ideas that are knocking around, which would involve greater use of the not-for-profit and mutual sector, to try to see how we can ensure that staff involved in such organisations can share in their prosperity and control.

We may look to the external capital markets to see whether shares held by employees in such organisations can realise their value. External capital providers may be prepared to lend against the value of such shares. Clearly, they would have to take risk issues into account, but it may be possible to get round the problems that have been identified. We should certainly look at that in Committee.

On the involvement of part-time employees, the hon. Member for Aylesbury expressed concern about the five-year period. We must remember that the Bill's key micro-economic purpose is to raise productivity. As such organisations will often value part-time employees and regard them as part of their longer-term strategy, we should not get rid of the five-year period. The productivity of part-time employees is just as important as the productivity of full-time employees. We must remember that the Bill is not about giving a quick profit to employees or their making a fast buck; that is not the objective of tax relief. The objective of the Bill is to make sure that the interests and the vision of employees and employers come together, for the future benefit of the company and therefore of the economy.

Mr. Love

I thank the hon. Gentleman for being so generous with his time. Surely one of the other reasons for maintaining the five-year time limit is to ensure that employee share ownership is not abused, as it was in the past, and converted to profit-related pay, which was discredited?

Mr. Davey

I agree. The Bill is an anti-abuse measure, but it is more than that. It is important to remember that, in case there is a future lobby for the Government to get rid of the five-year period. We must ensure that the objectives of the tax relief are achieved. I do not think that the interests can be fused or productivity benefits such as reduced staff turnover can be achieved in a shorter period than five years. We may want to consider the time scale, but we should do so with great care.

Mr. Lazarowicz

Does the hon. Gentleman agree that it is typical of many employee-owned companies that part-timers may stay for longer periods? That is traditional in many businesses that employ part-time workers.

Mr. Davey

I am grateful to the hon. Gentleman for making that point. He is right. It is important that we do not set up false divides within the work force. We must remember that part-time employees play a crucial part in the economy. They should not be seen as necessarily moving in and out of the work force. They are permanent features of the work force.

The second major provision clarifies the option of employee participation. As I said in my opening remarks, that is the key radical aspect of the Bill. The hon. Member for Edinburgh, North and Leith said that the Inland Revenue would provide guidance, and that in its view, the measure was not needed, as the current legislation was adequate. I suggest to the hon. Gentleman that he should stand fast in his belief that measures such as the Bill are needed.

I am sure that the Inland Revenue will provide guidance and that its analysis is right, but it is important to provide greater clarity, transparency and awareness of the option. We need legislation that clearly encourages employer participation. In Committee, we can listen to the opinion of the Inland Revenue and consider other ways of providing clarity and ensuring that the current legislation and the options available are better known.

If there are to be non-professional trustees, as the Bill suggests, it is important that companies give them proper training. The role of trustee carries significant responsibilities for the wealth of others. When companies go down that route, they should ensure that the trustees elected by their employees are suitably trained.

The hon. Member for Aylesbury rightly mentioned the nature of the election, which is not specified in the Bill. I understand why the hon. Member for Edinburgh, North and Leith has chosen not to do so, as we could get involved in a huge argument. It is often better if legislation is not over-specific. [Interruption.] The hon. Member for Edmonton, from a sedentary position, speaks of proportional representation. He is tempting me, but I shall not go down that avenue, as I could be here all night.

Although I agree with the hon. Member for Edinburgh, North and Leith that the primary legislation should not be over-specific, I believe that in Committee we should explore the issues, as the hon. Member for Aylesbury suggested, because public money is involved. Also at issue is the reputation of the employee share ownership movement, and of the fairly radical measure proposed by the hon. Member for Edinburgh, North and Leith to get more active employee participation. It is such an important social and economic objective that we must get it right. We may need to be more specific than we would like, but that is no reason for objecting to Second Reading. It is a matter for full debate in Committee. As the hon. Member for Aylesbury observed, it is possible that it could be dealt with through secondary legislation.

The third detailed measure in the Bill removes financial obstacles facing companies and provides financial relief if they choose to go down the route of employee share ownership. I welcome that. I do not know whether it originates with the right hon. and learned Member for Rushcliffe (Mr. Clarke). I am not familiar with the exact provision that he introduced. If it was introduced by him, that is not necessarily a poor source. The right hon. and learned Gentleman was responsible for some good measures.

In the March 2001 Budget and in the 2001 pre-Budget report, the Government expressed interest in the matter. I shall be interested to hear from the Paymaster General when she sums up the debate tonight—[Interruption.] I meant this afternoon, as the Paymaster General reminds me. I am having a problem with timing. I hope that when she responds to the debate, she will say whether the measure is in line with the Government's thinking as it has developed since the 2001 Budget.

I shall speak briefly about the John Lewis Partnership, primarily because, as I said earlier, it has two retail branches in my constituency. I have received letters from three constituents about the Bill. [Interruption.] The Paymaster General implores from a sedentary position that I do not read out the full letters. I will not, but I will read extracts. The support shown by constituents for the measure is one of the reasons that I will support it today.

Mrs. G. Coleman of New Malden wrote, asking me to support the Bill. She made it clear that she wants the Government to go further. It is interesting that this letter and one or two others that I received are from employees of the John Lewis Partnership, who are not yet sure whether the legislation will apply to the company. If such doubts exist, we may need to ensure in Committee that the measure will apply to such firms.

Mrs. Coleman wrote: Long term as a partner in a business, I, as would my colleagues, want to see the Government take action to allow the staff of companies like the John Lewis Partnership to reap some of the benefits of ownership free of tax, in the same way as the staff of other major retail companies such as Tesco and Asda". That puts the point clearly. Successful companies such as the John Lewis Partnership, which are set up to encourage employee participation, should have the same tax benefits as others.

Mr. Will Sayer of Surbiton stated in his letter: While I understand that there may be no direct benefit to my company or myself"— that illustrates the point that I made a moment ago— I think this cause is worth championing as it recognises the values and principles of our kind of business and will help to give it a more public voice, which cannot be a bad thing. That is interesting. The employees of the John Lewis Partnership are very attached to the values and principles underlying that trust.

Finally, Richard Bonner of Kingston, who is a councillor on the local John Lewis Partnership branch council, wrote: I would like to see the Government take action to allow the staff of companies like mine to reap some of the benefits in the same way as employees of other retailers". Many people employed in that partnership are looking to the Government to support the idea and take it forward.

In conclusion, I shall examine one or two of the alleged problems with the Bill and with the Government's plans. I dealt earlier with the five-year period and the matter of liquidity. Some people have argued that we are trying to get employees involved in risky investments. There is not a huge exposure in that regard, although there is, of course, a degree of risk. If people borrow against the assets or put some of their savings into buying them, a degree of risk will be involved, but it is not of the order of that which is associated with many other investments, especially as the Government have limits on the tax advantages of particular degrees of shareholding. The risks are reduced and are of a different order.

Some people have complained about complexity and have suggested that we are using the tax system to promote particular types of behaviour. As somebody who believes that the tax system is massively over-complicated, I am concerned about making over-complicated tax legislation. The hon. Member for Aylesbury rightly referred to the compliance costs. We in this House are not good at introducing simple tax legislation that minimises such costs. When Whitehall writes its regulatory impact assessments, it is not very good at considering the compliance costs of tax, as it uses a questionable methodology in doing its sums. It always considers marginal change, but companies already have a set of accountants and tax advisers to consider that. Indeed, to the company, the change will be marginal, but we never stand back and consider the overall effects of the increasing complexity. Adding all the marginal changes together can demonstrate a huge increase in compliance costs.

That is a serious issue. My approach to measures that add yet further complexity is to ask whether the benefits that will be achieved are really worth the costs. In respect of many of the Government's proposals, I do not think that such increases are worth the cost. The Government have tinkered with the tax system and have not justified the extra complexity to the House by demonstrating that it is worth the benefits that they maintain are achieved. However, as my previous remarks show, I do believe that there are such benefits in the type of legislation that is before us. I am completely convinced that the long-term growth, productivity and performance of UK plc will be significantly enhanced over time if we make the proposed improvement. In this case, I think that the extra complexity is justified, although perhaps complexity in the administrative arrangements could be reduced. I am not sure whether we should lay that matter on the shoulders of the hon. Member for Edinburgh, North and Leith, but I think that the Paymaster General and her colleagues should consider how to reduce such complexity.

I have not seen any of the commentary on the Bill, but I believe that we should mark up another issue as a potential concern. It relates to what the hon. Member for Aylesbury said about the overall costs of the measure, which I think will be relatively minimal in the early periods. The Paymaster General shakes her head. I hope that that does not mean that the Government are going to oppose the Bill, and that she will persuade us that we can, at least through negotiation, ensure that the costs are not preventive. Indeed, it is some of the Government's other measures—not only in respect of the proposed scheme, but elsewhere—that might mean that the costs become a problem later.

Mr. Tom Harris (Glasgow, Cathcart)

Will the hon. Gentleman comment on whether putting an extra 1p on income tax might be an appropriate way of meeting the costs?

Mr. Davey

There have been some helpful interventions, but that was not one of them. For the record—Conservative Members are already getting in a bit of a tizz—I should say that the matter under discussion has nothing to do with that pledge, as the hon. Gentleman well knows.

I was referring to the capital gains tax reforms that the Government have cack-handedly implemented over the past few years. They introduced 10-year, five-year and now two-year taper relief, which has implications. People who are remunerated in capital in relation to shares may be able to get capital gains tax benefit fairly quickly. The overall income tax base may well be reduced as changes are made to the way in which people are remunerated. Some people—I do not necessarily exclude myself from them—welcome some of the changes that the Government have made to capital gains tax, and especially those that tidy up some of the original mess. However, we need to take cognisance of these matters in the way in which we estimate the potential cost of the measures and try to find a way of taking the proposed route without undermining the health of the income tax system in the longer term.

I should like to raise another issue that is relatively small, but is important to achieving the benefits that the hon. Member for Edinburgh, North and Leith seeks. The hon. Member for Arundel and South Downs (Mr. Flight) raised the issue with a Treasury Minister in relation to Government proposals that were originally made in the Finance Act 2000. He asked whether low-paid employees who were getting holidays or exemptions from national insurance contributions would lose the benefits because they were not paying the contributions. In an answer given on 19 July 2000 at column 399 of Hansard, a former Treasury Minister said that it would be up to individual employees to decide whether they got the benefits from the contributions, and whether or not to get national insurance relief but buy the shares, or to opt for the shares and tax exemption. That Minister was leaving it to individual employees and suggesting that they had the information on which to base that choice.

Will the Paymaster General go a bit further? Could there be some protection with regard to the contributory benefits? We have seen similar protection in other reforms that the Government have introduced in the national insurance system, so perhaps it could be provided in addition to the relief that is given to make the share purchase.

It has been clear in this debate that there are some matters with which we shall need to deal in Committee. The hon. Member for Edinburgh, North and Leith is raising some tricky and complex issues. However, as we do that work, we must not lose sight of the fact that we should support the core of the proposals. I hope that the Government will indicate their support and that they will take a constructive attitude to the way in which we negotiate and amend the Bill in Committee.

11.17 am

Linda Gilroy (Plymouth, Sutton)

I take great pleasure in congratulating my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz), a fellow Labour and Co-operative Member, on his luck in the ballot and on his choice of this Bill, which sits very well with the range of issues in which we take a special interest as co-operators.

My hon. Friend's Bill both widens and deepens existing provision for employee share ownership schemes. As has been shown in all parts of the House, there has been support for such change for many years and under Governments of all colours. Thankfully, the Bill apparently has cross-party support in principle, so I look forward to some of this morning's discussions being explored in more detail later.

The Bill widens existing provisions by making more companies eligible for tax reliefs in relation to any move that they may be considering to distribute shares to employees. It thereby makes that distribution more likely to happen and stands a strong chance of extending employee share ownership to many more people. It also widens existing provisions, enabling companies that are controlled by employees to benefit from tax advantages by setting up share incentive plans. It also deepens the provisions, especially through clause 1(5). I noted that my hon. Friend the Member for Edinburgh, North and Leith said in his opening remarks that people had asked whether the provision was necessary. I believe that it encourages companies to provide for the appointment of employee-elected trustees when drawing up a trust instrument. That should be welcome, for several reasons that I shall outline.

The Bill ensures that employee share ownership schemes will progressively be for the many, not the few, to use a well known phrase. My hon. Friend cited some significant figures to show what employee share ownership means for the prosperity of companies as measured through growth in share value.

The measure builds on the Budget provisions of 2000 and 2001 and should increase the number of employees that have access to such schemes. It contributes to the quality and the added value that arise from employee share ownership schemes. It also builds on what Paul Burden, communications director of the John Lewis Partnership, described to me as increasing the economic biodiversity of ownership. It also introduces greater choice in forms of ownership.

It is generally agreed that employee share ownership schemes are good for companies, employees and the economy. They are good for companies in many ways. For example, employee share ownership can improve retention; some argue that it also improves recruitment. Through reducing staff turnover, it can lower the company's costs and lead to the productivity that other hon. Members have mentioned this morning. That is an important goal, which creates competitiveness.

Employee share ownership is also good for companies because it allows them to draw directly on employees' special experience. That is especially beneficial to companies that need to progress through research and development and get their choices right in the first instance.

Employee share ownership leads to more commitment, which is especially important when, from time to time, the going gets tough for companies. Employees who are share owners tend to become more aware of any difficulties that face companies earlier, and contribute to heading off problems and tackling them constructively.

The financial stake rewards the employees if the company is doing well. Employee share ownership therefore builds a virtuous circle of commitment. Employees often feel put upon if others benefit from their hard work. When the going gets tough, such schemes give employees a greater sense of influence and control. There is nothing worse than feeling that one has no say or control when things are going wrong, especially when one can contribute skills that make it more likely that a company will pull through.

Employee share ownership is also good for the country. I am sure that many hon. Members agree that we need to encourage long-termism. Such schemes are a way of doing that. "Employees Direct" is a document that comes from a new publishing stable, Mutuo, which belongs to Communicate Mutuality. It is a partnership between organisations that wish to show the value and potential of the mutual sector to a Modern society. In the foreword to the document, John Monks states: the shareholder voice of employees could prove a powerful counterweight to the short-term horizons of other investors and create the conditions necessary for stable workplace partnerships to flourish. The document explores some methods of achieving that. I recommend it to the many hon. Members who are interested in the subject.

Employee share ownership encourages growth. Some argue that it has even wider benefits, such as social cohesion and regeneration. Earlier, some hon. Members suggested that it might anchor footloose companies. I am not sure whether those claims stand up to scrutiny, but research in Italy shows that full employee ownership has wider social effects in the towns where it exist. The benefits include improvements to education and health, reduced crime and greater social participation. The schemes have also affected people's perceptions of their social environment.

Earlier exchanges between my hon. Friends the Members for Cleethorpes (Shona McIsaac) and for Edmonton (Mr. Love) and the hon. Member for Aylesbury (Mr. Lidington) dwelt on the importance of employee share ownership in the United States. Much of the research has been carried out there because the schemes are better developed. Recent research shows that employee share ownership in the United States spreads wealth and enables employees to weather periods of unemployment. It thus makes a wider contribution to preventing poverty, including child poverty. Recent research has also shown that companies in which all employees have shares enjoy 50 per cent. more productivity than companies in which only senior employees have shares.

The Bill will open up more opportunities for employee share ownership. It will add to eligibility a small but important sector of employees and encourage owners to transfer to employees. It will help to obtain maximum added value, which arises from such schemes by providing for employees to be more involved in managing trusts that hold shares for their benefit, and by giving employees a significant say in the company's development.

In the best tradition of private Members' Bills, the measure is a win-win Bill, as my hon. Friend the Member for West Bromwich, West (Mr. Bailey) said. The employees, the companies and the country will win. Companies will win when the going is good and a winning outcome is more likely to result when the going gets tough. I support the Bill, wish it a fair wind and hope that it returns to the Chamber in its final form.

11.28 am

Mr. Richard Bacon (South Norfolk)

I shall be brief. I want to make two or three points, if I can remove the frog from my throat. It has become fashionable in my party to have a frog in the throat, and I am trying to adopt the style of the Front Bench. I shall also try to make myself understood.

Many constituents have written to me about employee share ownership, including eight partners in the John Lewis Partnership. I am delighted to support the Bill. The John Lewis Partnership has several excellent stores in my area, including Bonds, a department store in Norwich, and two branches of Waitrose, one of which is in my constituency. They provide a superb service to local people in Norfolk as well as employment for several hundred people.

Mr. Joe Mooney, one of my constituents who is a partner in the John Lewis Partnership, wrote: I believe the John Lewis Partnership is a successful retailer because it is owned by its employees, who care about the development of their business today and for future generations. The Bill"— which he has asked me to support— is seeking not only to make it easier for companies to become employee-owned, but also to improve the position of existing employee-owned companies. These improvements will include tax exemptions on shares given to employees by their company.

It seems odd that companies such as Asda and Tesco-competitors of the John Lewis Partnership—are able to take advantage of those tax exemptions in helping their employees, while good firms such as the John Lewis Partnership are not. Hon. Members on both sides of the House have referred to the John Lewis brief, and asked whether it would be possible in practice for the company to provide liquidity to an internal market for the shares. I think that, with 55,000 employees across the country, that ought to be possible.

The hon. Member for Kingston and Surbiton (Mr. Davey), who is no longer in his place—I dare say he has gone off to write his press release, or to find another use for the 1p—made the point that part-time employees can play a long-term role in a company. I think that that is right, and there is no reason why these problems should not be sorted out in Committee. We ought all to unite in supporting the principle in the Bill of wider employee share ownership.

I confess to having a lot of sympathy with the criticisms made of the actions of my party in the 1980s in introducing schemes that benefited only some, rather than all, employees. Manifestly, something that is introduced because it is of benefit to certain classes of employee ought, by its very nature, to be available to all employees. The former head of the Prime Minister's policy unit looks as though he wishes to intervene. I give way to him.

Mr. David Miliband (South Shields)

Does the hon. Gentleman share my pleasure in an example of a change of attitude in South Shields? It exemplifies the shift that he has talked about, from rewarding only those at the top of the company to rewarding everyone throughout. For 11 weeks last autumn, a major employer in my constituency was in receivership. During that time, a management buy-out team was brought together and I am delighted to say that in December a new company, Circatex, was launched. The first thing that the new management did was to introduce a 30 per cent. employee share ownership scheme for the new company, as a way of showing their commitment to the employees and saying that they were there for the long term. They wanted to reward the employees, many of whom had been with the company for 10 or 20 years, and make them part of the company's future. Does the hon. Gentleman hope, as I do, that that represents a change of attitude for significant parts of British management, as well as for those in the House?

Mr. Bacon

I agree with the hon. Gentleman that that is representative of the change in attitude. In fact, there has been a sea change in attitudes generally. I enjoyed what I might almost call the Thatcherite speech by the hon. Member for West Bromwich, West (Mr. Bailey). I used to go to West Bromwich as a small boy to watch its football team; it did not seem to be a bastion of Thatcherism in the late 70s. In fact, I joined the Conservative party because of Red Robbo, whom I am sure the hon. Gentleman remembers well.

There has been a change in attitudes, and that is most welcome. It is extraordinary that anyone should suppose that these incentives would not be sought by all kinds of employees, and I am very pleased to support the principle of the Bill. We have nothing to fear from diverse forms of capital ownership. That could mean ordinary shareholding in the traditional western capitalist sense. I am delighted to see my hon. Friend the Member for Cities of London and Westminster (Mr. Field) here in full battle dress.

Mr. Mark Field (Cities of London and Westminster)

I think the full battle dress will appear after lunch. My hon. Friend will be glad to know that my luncheon activities are being catered for. May I also say that I very much agree with the Bill? It seems that the John Lewis Partnership's employees around the country have been lobbying us all furiously, because I, too, have had at least half a dozen letters from a similar source.

Mr. Bacon

I have noticed that, any time after about 4 o'clock, the likelihood is that I shall find my hon. Friend in a dinner jacket, limbering up for his evening activities, usually with the King of Jordan or somebody like that. The rest of us have to slum it in the Terrace caff.

We have nothing to fear from diverse forms of capital ownership. That could mean ordinary share owning, co-operatives, employee trusts or mutuals. I acted for a mutual building society for some months; I was seconded to it three days a week. Hon. Members may remember when the Britannia building society faced a most unwelcome challenge from a demutualisation campaign. If anyone doubts the benefits of what is sometimes described as the nebulous trade known as public relations, I would refer them to the photographs that occasionally appeared in the tabloid newspapers of that mad butler, Mr. Michael Hardern, wearing a dress, under the rather suggestive headline: This is the nutter who wants to run your savings. That alone justifies the existence of the public relations industry, because that campaign helped to ensure that the Britannia, now the nation's second largest building society, thrives to this day as a conscientious local employer in regions across the country, and one that takes great pride in being involved in the community.

Reference was made earlier to the business of profit-related pay, and to its being discredited. I have not examined the issue in detail, but it would not surprise me if it had not worked as well as it was supposed to because, in a funny sort of way, this question is not mainly about money. Money is obviously important, but this is mainly about people having control over their own lives. The hon. Member for South Shields (Mr. Miliband) referred to the company in his constituency. In a previous incarnation, I used to write about management buy-outs and management consultants helping companies that were on the brink to climb out of that position. Nearly always, the solution involved drawing in the entire work force and making them work with one purpose towards success.

Mr. Love

Does the hon. Gentleman agree that we will really have seen the revolution that people have been talking about today when companies that are not on the brink of bankruptcy or in financial difficulties involve their employees, without the spur that bankruptcy provides?

Mr. Bacon

I could not agree more with the hon. Gentleman. I find it difficult to understand why managers would ever think of introducing an executive share option scheme that would be available only to them and those close to them, and not to everyone else. The Government should seriously consider ways of making it more beneficial for companies to have schemes that involve everyone, rather than involving only some employees. I would be strongly in favour of that. The principle of employee share ownership deserves the widest support on both sides of the House, and the Bill definitely deserves a Second Reading.

11.37 am

Dr. Doug Naysmith (Bristol, North-West)

I congratulate my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz) on his success in the private Members' ballot, and on choosing such a worthwhile and achievable topic for his Bill, which he introduced so clearly today.

We have already heard a lot about partnership—not just the John Lewis Partnership—sometimes from unusual sources, which is to be welcomed. I want to expand on the principle of partnership between the work force in general, through employee trusts and shareholder trusts, and board members of the company. Partnership clearly pays. Companies that tap into the skills, knowledge, commitment and enthusiasm of their work force are the better for it. We have heard examples of that already. Innovation and productivity are positively related to a partnership approach, in which the work force can influence strategic decisions and individuals have more control over the immediate decisions in the company that affect them.

That is increasingly true as our economy becomes ever more knowledge-based and skills-driven. Companies that fail fully to harness their work force's potential will lose out in the future. Those that forge successful workplace partnerships will gain an important competitive advantage. For a partnership to deliver, however, it must be genuine; anything less will lead to disillusionment and resentment. Structures are required to ensure that such partnerships are demonstrably real and equal. Although we have heard discussions today about what that should mean, and whether the detail should be spelled out now, that area can be fruitfully explored when the Bill gets into Committee, as I believe it will.

Collective ownership stakes for employees could play an important role in the achievement of that. Collective shareholder trusts could signify a shared interest in the long-term success of organisations, while providing a collective voice at boardroom level for members of such trusts—the employees who generate companies' wealth. The shareholder voice of employees could provide a powerful counterweight to the short-term horizons of other investors, and create the conditions that are necessary for stable workplace partnerships to flourish.

It is widely acknowledged that business in Britain faces two major challenges. The first is this. Successive commissions and reports have sought to improve the structure of corporate governance—the way in which boards of directors operate and conduct their business, the way in which they respond to wider concerns including the environmental impact of their companies' operations, their responsibilities to the communities in which their companies operate, and so forth. The combined code on corporate governance that resulted from those deliberations is useful, although many of us would like the standards to be given a statutory basis.

One of the main problems identified by the inquiries is the inadequate involvement of the chief shareholders, the financial institutions. It is important for shareholders to take a long-term interest in their investments. Employee shareholder trusts could achieve precisely that, and could encourage institutional shareholders to do the same. Creating employee shareholder trusts, and encouraging employee shareholders to play an active role in their companies, could go a long way towards improving the corporate governance of United Kingdom firms.

This is the second challenge. The Government have stressed the importance of boosting productivity in UK firms. They have rightly recognised that the key to that will be the commitment and participation of the work force, and they have accepted the view that, developed in the context of partnership, employee share ownership can produce significant productivity gains. The task now is to push at the margins of Government policy and to encourage workers, through their representatives, to use the power of their equity stakes to influence corporate decisions.

I welcome the proposals, although encouraging employee shareholders to play an active role will not be an easy task. Advice and training will be needed for those who will take positions of responsibility in trust organisations. I understand that the Trades Union Congress has established a working party to deal with the details: it will include representatives of the TUC and the Confederation of British Industry, as well as the chief executive of the Co-operative Union, leading academics and others. The results, along with the outcome of the Government's company law reform review, could lay the foundations for a transformation of corporate governance. Such an achievement would be a landmark for Labour's second term.

The major proposals in the Bill fit into this ferment of ideas well, which is my reason for supporting it.

11.43 am

Mr. Jonathan Djanogly (Huntingdon)

Like my hon. Friends who have spoken, I broadly support the Bill's intentions. My hon. Friend the Member for Aylesbury (Mr. Lidington) analysed the proposals carefully, and I agreed with what he said. I shall therefore try to put the Bill's aims into the wider context of share incentivisation rather than pursuing my hon. Friend's remarks.

The Bill tweaks existing legislation, rather than requiring us to take a good look at existing incentivisation law. It merely skims the surface: while it is not harmful in any way, it is not adequate. We need to look more closely at the underlying share incentivisation legislation, and at its current limitations.

Many of the issues are very technical, but we should realise that the underlying assumptions are not. Giving employees shares in their companies is a desirable objective. It is good for employees to have an increasing say in the running of their companies, and for them to see a direct link between their own increases in productivity and the companies' success—a link which, as was noted by the hon. Member for Kingston and Surbiton (Mr. Davey), breaks down the "them and us" culture that has plagued our business sector in past years.

The increased productivity of workers, and even the increased profitability of companies, may not increase the value of shares; but that is simply the reality of the market mechanism. Employees should recognise that the value of their shares can be affected by outside events: the impact of the disastrous events of 11 September on the tourism industry is a good example. Such a recognition is useful in bringing together management and employees in a better realisation of the overall market position of their companies.

Having said that, I must add that the hon. Member for Edinburgh, North and Leith (Mr. Lazarowicz) assumes that the widening of share ownership is best achieved by a company's issuing shares to employees rather than granting share options. That may be right in certain circumstances, but not in others. It depends on the type of incentivisation required, the level of the employees, and the expectations relating to comparable incentivisation schemes in similar sectors. In high-tech companies, for instance, there will almost invariably be a high use of share options, because that is what employees in such industries will expect. Problems would arise if they were told that they should have something else.

Members have referred to what should be deemed an acceptable time for shares to be held before tax advantages are gained. That, I think, will depend on the circumstances. In certain industries a large investment will be made in a company, and employees will be expected to work at least 20 hours a day over a short period. Their vision of when they will produce their product, and of the benefits that will result in their pay packets or incentivisation schemes, must be moulded accordingly. The key to understanding incentivisation is realising that there is no such thing as "one size fits all"; the situation can be much more complicated.

Share options are often more popular with employees who, with relatively limited resources, find the gearing effect relatively attractive. Having exercised their options most people sell immediately, thus incurring no capital outlay. That greatly reduces the risks that they would otherwise incur from buying shares and then having their capital locked in an asset for five years, subject to the possibility of a fall in value.

For a company, the advantage of an immediate purchase of shares is that it will receive the additional share capital on the spot. Most companies, however, are started by entrepreneurs with perhaps one original investor—up to six, but rarely more. In practice, those individuals will certainly take up tax breaks offered by Government, but they will seldom wish to hand out cheap equity to low-paid staff from day one. Most entrepreneurs will see the low investment cost as the benefit of their having taken the risk of setting up the company and running it in the early days.

I understand from my hon. Friend the Member for Aylesbury that some 200 SIP schemes have now been approved, and that half of them were established in firms with fewer than 250 employees. It would be interesting, however, to find out how many of the schemes were set up within a year of a company's incorporation, and how many companies had issued SIP shares to people other than the founding shareholders.

Mr. Mark Field

I congratulate my hon. Friend on a thoughtful speech. As he rightly pointed out, the matter is technical, and he has succeeded in putting it in straightforward and simple terms. Does he think that certain share schemes may prevent the setting up of new companies? If a strong scheme is already in place, it may act as a powerful disincentive to would-be entrepreneurs employed in small companies, thus preventing them from breaking out on their own.

Mr. Djanogly

I thank my hon. Friend for his intervention. He is developing an argument that I was about to make. If he cares to intervene later, I shall be happy to hear what he has to say. In reality, few start-up companies would want such a scheme. The SIP concept is likely to be attractive to established smaller companies and also to larger companies that often do not want to administer large numbers of small share options.

SIPs may have an additional advantage for listed companies, especially when we consider the alternative investment market. Such companies are often larger—although by no means always. The Association of British Insurers has published guidelines on the issue of share options. The guidelines are many and complicated but, put simply, companies cannot hold more than 10 per cent. of their issued share capital subject to option. That means that companies have a limited number of options to issue. In general, the smaller the company, the less its headroom as regards the number of options.

Companies may use SIPs to incentivise lower-paid employees, rather than use up their precious packages of share options. They may want to retain those options to incentivise higher-paid employees, and in practice they often do so. However, that does not necessarily mean that the company is doing the right thing. While SIPs may to some degree increase share ownership, because they offer companies a further route through the maze of tax laws and other regulations and guidelines, none the less they are not necessarily the most appropriate form of incentivisation, from the perspective of either the company or the employee.

Profit-related pay has been mentioned. Bonuses are an important part of the armoury of incentivisation, but it is not always appropriate to hand out equity. I fully support that practice, but in certain circumstances it may be more appropriate to use bonuses. I am sure that all hon. Members appreciate that workers in many industries, especially the low paid, would prefer cash bonuses rather than the choice of receiving shares. In certain circumstances, that may be appropriate. I still fail to see why the Government abolished the PRP scheme because—

The Paymaster General (Dawn Primarolo)

I am listening carefully to the hon. Gentleman's speech, but I must correct him on one point. It was the Conservative Government who abolished profit-related pay. PRP was phased out over a number of years, after the election of the Labour Government in 1997; but it was actually abolished by the Conservatives because of the huge problems in the scheme—not least its cost, which rose to £1.5 billion.

Mr. Djanogly

The scheme was phased out, and that was contentious at the time. One important arm in the ability of companies to decide how to remunerate their employees was taken away. Cost may indeed have been highly relevant to Her Majesty's Treasury at the time, but that does not mean that the principle was wrong and that the Government should not be encouraged to reconsider such measures as a means of incentivisation.

The measure will open up the SIP regime to a wider base, such as trust-based companies. That is certainly to be commended. However, the measure will not improve the underlying weaknesses of the SIP regime. As I have tried to argue, the regime is unlikely to help starting-up companies, or indeed middle-ranking companies.

The briefing notes for the Bill state that many firms, especially small family-owned ones, are eventually handed over to their employees, and that the changes to corporation tax under the Bill will make it possible for more businesses to be transferred into employee ownership. That may be true in certain cases, especially for extremely small companies, but normally the company purchases are carried out by a small number of managers rather than the staff as a whole—so-called management buy-outs. In such circumstances, the £7,500-worth of shares that have the benefit of SIP status are likely to be negligible in the context of the transaction as a whole.

I very much doubt whether the impact of the Bill will enable employee buy-outs—one of its intended effects—other than for tiny companies or, occasionally, large transfers where enormous administrative problems would have to be overcome.

Mr. Edward Davey

I do not understand the point that the hon. Gentleman is making. The management buy-outs that he describes happen anyway. The point of giving tax relief is to encourage behaviour that would not otherwise happen. My understanding of the Government SIP scheme and the Bill is that they would encourage something that would not happen otherwise.

Mr. Djanogly

The hon. Gentleman makes an interesting point. The rationale for the Bill can be considered at various levels. On the one hand, it is a straightforward attempt to encourage employees to become interested in their company, but as we can see from the briefing notes the measure would also provide that SIPs could be used as a another mechanism to promote activities such as employee buy-outs. I am simply saying that that is unlikely to be the case, and that the real benefits of the Bill are likely to be more modest than several hon. Members have implied. Of course, that does not mean that the Bill is worthless.

Mr. Gareth R. Thomas (Harrow, West)

The hon. Gentleman is making a distinctive contribution, focusing on many of the technical issues that form a background to the Bill. He spoke about the rationale for introducing the Bill and said that there were several different levels. Has he been influenced by the most basic form of rationale for legislation: the fact that his constituents want the Bill? Would he join me and other Members of Parliament who have been lobbied by employees of the John Lewis organisation in congratulating them on the effectiveness of their lobbying operation?

Mr. Djanogly

I certainly would congratulate John Lewis on that lobbying operation. John Lewis does not have a base in my constituency, but it does close by. As I said, the larger organisations such as John Lewis could enjoy real benefits from legislation such as the Bill because it would give them another way of incentivising their employees. To that extent, I welcome the principle of the Bill.

However, it is important to appreciate that—probably because of the limitations of the underlying legislation—the Government wisely decided not to abolish previous share incentivisation plans, such as the save-as-you-earn share option scheme and the company share option plans. Although they were by no means perfect, they at least—together with the Government's new enterprise management incentive scheme—make available a wider package for tax-advantageous share ownership and incentivisation. However, there remain significant problems with all those schemes, which we need to get right. There is still much to do.

The business of a company may not qualify to be included. The company may not be independent—I appreciate that, in a limited context, the Bill identifies that as an issue to be dealt with for certain companies—or its assets may be too great. In practice, there will be many occasions on which, and many different reasons why, a company cannot tick all the boxes that it needs to tick to set up a particular incentivisation plan.

In such situations, the company will need to fall back on the so-called unapproved issue of shares or unapproved grant of options—in other words, schemes that do not have tax benefits. In such circumstances, once the top layer of the schemes is removed, the picture changes somewhat to reveal a system that is extremely complicated and often unfair to company and employees, and in which the tax payable has been substantially increased by the Labour Government.

If the Bill is truly to improve share ownership and encourage the setting up of new companies and the incentivisation of employees who wish to purchase their own company, I would suggest that three issues in particular need to be covered. The first concerns listed companies whose shares have fallen substantially. Many, if not all of their share options will be "under water"—the exercise price of the shares will be greater than the price at which they are currently quoted. Many such companies, which are particularly predominant in the technology sector, will have issued share options up to the maximum permitted level of 10 per cent. of their issued share capital. As a result, many dozens of companies are negatively incentivised. I would suggest that, in such circumstances, it be made easier for companies to terminate existing options and re-issue at the lower current market price.

Mr. Davey

The hon. Gentleman has just put forward an interesting idea. What does he think the impact of his proposal would be on the nature of risk-taking associated with employee share ownership?

Mr. Djanogly

The nature of risk-taking is not relevant because the individual can decide not to exercise those options, so there is no risk for the employee; there is simply no incentivisation in so far as he will not exercise those options. If one wished to incentivise employees who are in that position, one would need to cancel the existing options and re-issue new ones. If a company has had a very high share price and the market collapses, as the technology market did, employees may well have share options at a strike price that is so far ahead of the market price that they are negatively incentivised rather than incentivised by having those share options.

Mr. Davey

Will the hon. Gentleman give way?

Mr. Djanogly

I feel that that issue needs to be addressed, but I shall move on if the hon. Gentleman does not mind.

I have a second suggestion for improving the Bill. Since April 1999, national insurance has been charged to companies on gains arising from the exercise of unapproved options. That has been nothing more than a staff tax. In practice, companies have been amending their documentation to say that they can get the employees to pay the extra tax on their behalf, but it is conceptually wrong that a company has to pay national insurance on the open-ended growth of the value of its own shares. Finally, where a company agrees to deliver shares and those shares are forfeitable due to performance conditions—resembling an SIP but without the tax breaks—the gain becomes taxed on the value of those shares at the point when they become non-forfeitable. As with the options, the gain would be unascertainable on grant, but worse than with options, the company could not recover national insurance from its employees. Clearly, the position should be aligned with share options or, better still, national insurance on the growth in value should be abolished.

The reference to the United States by the hon. Member for Edmonton (Mr. Love) reminds me that employees there have the opportunity to choose whether to pay up front or later, and we could do much by adopting the same position. I conclude by repeating that the measures that we are debating today will do no bad at all and some good, but they will tinker at the edges of the issue and fail to get to the heart of the problem.

12.5 pm

Ms Meg Munn (Sheffield, Heeley)

I am delighted that the House is giving such serious consideration to the Bill and that it has received support from hon. Members on both sides of the House. As a member of the Labour and Co-operative parties, and as a representative of those parties in Parliament, it is interesting to hear the issues and values that my hon. Friends and I stand for being discussed.

The Bill would make three significant changes to the law to encourage wider employee share ownership, by improving representation for employees with shares and changing corporation tax and tax reliefs. My hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz) explained those aspects of the Bill in detail, and in supporting it I wish to focus more on the positive aspects of employee shareholding and to say why I believe that it is particularly positive for individuals, companies and societies.

In doing so, I hope to provide a balance to the speech made by hon. Friend the Member for Huntingdon (Mr. Djanogly). Although he went into a great deal of technicality, he seems to have considered this issue as merely a matter of money, bonuses and incentives, whereas I believe that it is much more fundamental to the way in which we run companies and people operate in this society.

Employee share ownership is about enriching the experience of working life. After all, people spend a lot of time at work—some of us more than others. One of the key factors in having a positive experience of work is how much we feel in control of our own lives. The people who suffer the most stress in their working lives are often those at the bottom of the pile—those who do the jobs that keep the rest of us going, but who have very little say in what goes on.

When I became a Member of Parliament I noticed that there was something a little different from my previous occupations and the other workplaces of which I am aware. It is certainly not unusual elsewhere for people to look for opportunities to take early retirement. Interestingly enough, that does not seem to be true of Members of Parliament. Many Members continue to make valuable contributions and to enjoy this job long beyond the usual age of retirement. I pondered why that is so and wondered whether it is because of the convenient working hours and the fact that we are often so close to home and that we have our own place on the Benches and never have to fight to sit down, or because of the supportive and friendly atmosphere in which no one ever criticises us, looks for our mistakes or writes to the papers about the worst way in which we have put our foot in it recently—which I am probably doing at the moment.

Many people get so much job satisfaction from being a Member of Parliament because they can largely control what they do with their time; they are self-directed—Whips permitting, obviously. They can decide to concentrate on various subjects and to pursue particular interests. They feel that they are making a contribution and doing something worth while. That sense of job satisfaction and having control and a stake in what happens is crucial to employee share ownership.

The first benefit of employee share ownership is that it encourages an active participation in decision making. Employees are not always on the receiving end of decisions that other people have made and that seem to have no relevance to the employees or to the company for which they work. That taps into the motivation of employees and gets back from them a level of commitment.

Employee share ownership also helps to enable work to be designed to encourage the fullest contribution from employees. If they want their companies to do well, they are more committed to using all their skills and abilities and to becoming more fully involved in what the company is trying to do. That also ensures and enhances the competence of the employees, as they become committed to taking up training opportunities and to pooling their knowledge and abilities for the best of all concerned.

The Bill is welcome because it would improve the current situation. Importantly, it would seek to democratise share owning in UK companies. It is about introducing mechanisms to translate individual employee shareholding stakes into a collective voice, making sure that those interests are represented and convincing employees that their shareholdings can give them a stake in the whole enterprise.

I particularly welcomed the contribution of the hon. Member for Aylesbury (Mr. Lidington), who recognised that employee share ownership enables individuals to build up capital. This country has a problem with savings and we know that sectors of the population have no capital to provide for their families in the long run. Although the Bill might make only a minor contribution to solving that problem and might affect only a few people, the issue should not be ignored.

Other Members have made it clear that employees who feel that they have a stake in their workplace are more likely to be committed to their jobs, to stay longer in the company and to become valuable members of a team. That will lead to a company's longer-term prosperity and, as other Members have eloquently pointed out, research shows that employee share ownership often boosts productivity.

Companies face difficult issues of corporate governance and in ensuring that things are done properly. When stakeholders take a long-term interest in their investments, that is more likely to lead to good corporate governance and to good outcomes for companies. Employee shareholder trusts are an excellent way of encouraging just that. The employees involved have a long-term interest in the company and in their own future. It is a win-win situation.

If employees can participate in decisions and are not merely the recipients of shares, share options or bonuses in the way that the hon. Member for Huntingdon suggested, that will help to generate and sustain company loyalty and commitment to the organisation. It helps to combat the long-term British disease of short termism. We need companies that will be successful in the long term and, in a rapidly changing world, innovation is important. Employees who are involved in their companies are able to contribute to decisions about what is produced and about the processes used in production.

As my hon. Friend the Member for Edinburgh, North and Leith said, the Bill would broaden the definitions involved to cover more employee participation companies. It must be right that the tax benefits available to companies under existing schemes should be spread to those organisations whose fundamental purpose is to include employees in their running. They include worker co-operatives, in particular, and the Bill represents a step forward in recognising that companies, such as the John Lewis Partnership, about which we have heard a great deal, should receive the same benefits and opportunities as other employee shareholding arrangements receive.

Employee share schemes also raise issues for society in general. Does it matter who owns companies? My hon. Friend the Member for West Bromwich, West (Mr. Bailey) talked about the distinct views that were expressed on that a few decades ago, and employee share schemes might be a different approach—a third way, perhaps. However, it is a case not of public or private ownership, but of recognising that our society benefits from different ownership structures. There are different ways to produce profits and to reward employees. Those different structures add to the richness of our society and the proposals will help us to consider new ways to operate that will also improve efficiency, which we all want.

Hon. Members mentioned what happened a few years ago when many financial mutuals converted to plcs, which was resisted by those of us with a strong interest in mutuality. Anything that encourages people to become involved in companies again is welcome because it allows us to have a more balanced society. Such an approach allows us to recognise the contributions of individuals and the fact that people who work together often achieve more than people who work against each other.

Unfortunately, with private ownership shareholders' interests often come first. The benefits of being responsive to the interests of employees, consumers and local communities is often forgotten. There is the opportunity, in companies in which employees have a much greater involvement, to raise such issues and put them higher on the agenda, ensuring that the long-term interests of the enterprise are promoted, but not at the expense of the interests of those other important stakeholders.

Society is changing and the economy is much more skills driven and knowledge based. We know that those attributes come from employees and that it is not possible to go out and buy those skills as part of a mechanistic process. It must be a good thing if we ensure that people who have that knowledge and those skills are involved in a company and committed to it.

We must welcome the fact that the Government have promoted employee share ownership, as reflected in previous Budgets. However, the Bill would tidy up some of those provisions and take us significantly further forward. Hon. Members demonstrated how extending employee share ownership can benefit individuals, companies and the wider society. We have discussed whether the Bill would bring about huge changes in society. Are the proposals radical or just minor tinkerings that will not do what people expect? We need to make it clear that the model is optional. People can choose it and it is important that the Government encourage them to do so. For those who see the potential of encouraging active employee participation, the Bill will be an improvement. It will clear up anomalies that penalise those organisations that are at the forefront of involving their employees.

I conclude by congratulating my hon. Friend the Member for Edinburgh, North and Leith on introducing the Bill. I am especially delighted, as I am sure he is, with the cross-party support that it has received.

12.19 pm

John Barrett (Edinburgh, West)

I start where the hon. Member for Sheffield, Heeley (Ms Munn) left off by congratulating the hon. Member for Edinburgh, North and Leith (Mr. Lazarowicz) on giving us the opportunity to debate the subject. The Bill is a move in the right direction and, as my hon. Friend the Member for Kingston and Surbiton (Mr. Davey) said when he set out in detail our approach, we welcome it.

Involvement in a company is a key that can open the door to a new way of working—a door that should be open to as many people as possible. For many people, the weekly pay packet or monthly salary is what work is all about. They have no involvement, no commitment and no responsibility for the future growth of the company, never feeling part of its decision making, which affects a large part of everyday life.

One of the facts of business life is that productivity must constantly be improved in order to survive. More efficient methods must be implemented or competitors will win the day. Often, innovation, team working and efficiency were driven by a very small team from the top down—by those who thought they knew best. That is no longer good enough. Companies must maintain the involvement of all employees.

Employees who have a shareholding in their company are more likely to want to develop an understanding of how the company works and to be involved in its progress and success. They are less likely to leave it to someone else to act when problems are identified that affect the company's strength. Hon. Members have mentioned unjustified absenteeism. When employees are involved strongly with their company, that is less likely to be a problem.

For 20 years, before being elected to this place, I was fortunate to have a stake in my place of work. I have worked with many who have owned all or part of a company, held shares in companies, or wanted to have a stake in a company but have had no stake in it. There is a clear correlation between increased involvement in a company and the drive needed to make the company succeed.

Anything that moves legislation in that direction must be welcomed. It will affect the lives of many people in a number of ways. The hon. Member for Plymouth, Sutton (Linda Gilroy) mentioned an Italian study that showed that increased company involvement resulted in improved health, education, lower crime rates and social participation. I look forward to studies of whether such involvement has the same results here.

When morale is declining in any company, the disfranchised feel that there is little they can do. Many lose interest and spend more time looking for another job than considering the well-being of their company. Work problems lead to health problems and health problems have an educational impact.

In recent years, the detachment of many employees from their companies has increased with the use of short-term employment contracts. In the past, often the assumption was that the job would last unless something unexpected happened. Nowadays, often the assumption is that the contract will end unless something unexpected happens. The result is reduced company loyalty, a work force on the move, and less commitment to a company. There is a short-term outlook in many companies and among employees, which is a major problem for British industry. If, as I believe it will, the Bill facilitates more involvement by more employees in more companies, people will be inclined to look long term. As many hon. Members have said, it is a win-win situation.

Share ownership is not suitable for all, as was mentioned earlier in comparing it with house ownership. Many who have bought homes have done very well. Indeed, in Edinburgh today, many people could not afford to move into their own homes at current prices, but buying a home brings costs and responsibilities for which people may not be prepared. The value of any investment can go down as well as up. There will always be people who want no more from their employer than a weekly pay packet. However, those who do want to play a part should be encouraged and enabled to do so. The Bill enables something that is not possible at present. There was possibly one negative contribution, but I was glad to hear positive speeches and interventions from hon. Members on both sides of the House. I hope that the Bill will go to Committee and be a great success.

Mr. Love

Does the hon. Gentleman accept that a significant number of employees who may be sceptical at the start of such a share ownership scheme become mobilised by the increase in their influence and the return that they receive from share ownership?

John Barrett

I could not agree more. Many employees think that share ownership is for other people, not for the likes of them. People will have to embark on a learning curve: once they discover the benefits that they, their company and their family can gain, the system will gain momentum. I wish the Bill success and look forward to Committee.

12.25 pm

Mr. Iain Luke (Dundee, East)

I am glad to be able to make a contribution to this worthy debate on the private Member's Bill promoted by my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz). I congratulate him on his success in the ballot.

I am well placed to pay tribute to my hon. Friend's commitment, having known him for 20 years. We first met at Edinburgh university, where I was studying for a post-graduate qualification in business administration, majoring in industrial relations. My first chance to enter an electoral contest was in the regional division of the then Lothian region, in Newtown-Stockbridge. I believe that it was my strong showing in that election that turned the corner for Labour in what had been an extremely Conservative part of Edinburgh, resulting in my hon. Friend's being returned as Labour MP at the last election and so getting the chance to introduce this Bill. We both served as leader of our respective city administrations, and we share an office in Millbank. In the light of all that, I am in a good position to comment on his collaborative and co-operative efforts.

Throughout that time, my hon. Friend has shown a strong commitment to the co-operative movement, which has strong roots in Scotland. I remember as a boy in 1950s Dundee queuing up at the local co-op to put in my book so that I got my messages delivered by the co-op, which was often the only retail outlet in the area. Sadly, such practices, as well as the dividend the co-op used to pay, have in many cases been lost, but we must give credit to the co-operative movement for coming up with new and innovative ideas, pressing them on Governments through elected Co-operative Members of Parliament, and furthering the ideals and spirit of the movement.

If successful, the Bill will further the progressive action taken or encouraged by Governments for the past 20 years and in recent Budgets. The positive comments of hon. Members on both sides of the House, including the hon. Members for Aylesbury (Mr. Lidington), for Kingston and Surbiton (Mr. Davey) and for South Norfolk (Mr. Bacon), testify to our commitment to stop indulging in "yah-boo" politics. Such positive views will help to lay to rest the conflicts that long beset the world of industrial relations.

We have lived through tumultuous times. I well recall the debates on "In Place of Strife". The Donovan report and the report of the royal commission on industrial democracy set some of the context of today's debate. We all remember the industrial relations courts at the start of the 1970s, as well as the three-day working weeks, social contracts 1 and 2, and the miners' disputes. The heavy-handed legislative approach of the 1980s and 1990s divided Britain right down the middle.

By way of contrast, I remember part of my first experience of teaching in further education. I had to explain concepts of business structure to new apprentices drawn from a wide range of trades; we discussed how they could set up business in an "enterprise" fashion, or using an alternative model. Teaching them for their city and guilds general studies exam involved a video that reviewed the development and workings of the Mondragon co-operative—an industrial complex in north-east Spain.

We are a long way from creating that sort of enterprise in terms of size, integration and contribution to the economy. However, the Bill's objectives are welcome, marking a rejection of the battle and conflict of old-style industrial relations and taking us a small step away from the old idea of "them and us". Through its three main objectives, it would extend the idea of co-operative productive activity.

First, the Bill extends the tax relief benefits already on offer to more companies and employees. That is obviously welcome because it gives more companies and more people the chance to be involved. There has been much discussion of the John Lewis Partnership and how, up to now, that has not been able to benefit from such a scheme. I hope that, in Committee, that advantage will be extended to that company, which has done so well in its endeavours for its work force.

The Bill makes it easier for companies to become full employee-owned co-operatives, but we have a long way to go. We should be doing all that we can to encourage such activity. But most importantly, the Bill encourages, enables and involves employee shareholders, on a collective basis, to play a greater role in the management of their shares held in trust and in the direction of the company that employs them; and thereby, however indirectly, to become more involved in the management and direction of the company which provides them with their livelihood and which often supports the livelihood of many in the neighbourhood in which the company is located. That will ensure that the business survives and makes a profit, which is important.

From the research done by my hon. Friend the Member for Edinburgh, North and Leith, it is evident that experience shows that where such schemes are in place, productivity, profits and worker satisfaction are greatly improved. In the cut-throat, competitive economic world of today, those are essential elements in the survival of many companies throughout Britain.

In my intervention I referred to the footloose attitude of multinationals. In the recent announcement by Levi Strauss in Scotland of the loss of more than 450 jobs in Dundee and 150 jobs elsewhere, productivity was one of the major reasons for the shell-shock proposals that have put so many jobs at risk after 30 years of successful production and profit making in Dundee. No one wants to wake up to discover that a company in one's locale is, in a matter of days and without real notice, in crisis. The first notice that I had in this case was a letter delivered here to the House of Commons on Thursday. That is something that hon. Members and their constituents do not wish to see and hope to avoid.

Not that Levi Strauss is a bad employer; on the contrary, it was a model employer, heavily involved, through the community development responsibility fund, in many worthwhile projects in Dundee and elsewhere. However the company's structure and the way in which it takes decisions, without any real input from its employees, creates the feeling of helplessness that I hope the Bill will help to counter; along with the helplessness felt by elected Members at our inability to influence corporate decisions in such company structures where employees are disfranchised because of the multinational nature of the operation. The disillusion in management and the productive process is something that we should be trying to avoid. We should be trying to encourage more participation by employees in good decision making for the benefit of the company. That is the crux of the Bill.

I send my best wishes to the Secretary of State for Northern Ireland, my right hon. Friend the Member for Hamilton, North and Bellshill (Dr. Reid), who, with my hon. Friend the Member for Dundee, West (Mr. Ross) will be meeting the management of Levi Strauss this afternoon in Scotland because the plants are located in their constituencies. They will put the case for a lifeline based on the real improvement in productivity that the company has seen over a long period and the commitment of its work force. Hopefully, as I tried to stress earlier, in future we could look at ways in which to promote employee share schemes in multinational enterprises, thereby curbing their often footloose tendencies. However, that is for another day and another debate.

To conclude my brief contribution, I pay tribute to the commitment of my hon. Friend the Member for Edinburgh, North and Leith, a member of the Labour and Co-operative party, to the principles and ideas of the co-operative movement. The Bill may be small but, if successful, it will have an impact well in excess of its brevity. Its softly-softly approach, without the push for legislative requirements, is in the spirit of the co-operative movement. It certainly helps to close the gaps in employee share ownership between us, our European neighbours and the United States. Most significantly, it continues to build on the all-important bridges that establish links between employees and employers, between the managed and the management, and between capital and labour which, historically, has often been beset by struggle and conflict in this country. If the Bill achieves that goal, it will be to the benefit of all concerned.

I wish my hon. Friend all the best in his endeavours to get the Bill into Committee and on to the statute book. Like other Members, I think that there will be a lot of discussion and argument about its final details. I would be happy to help my hon. Friend in any way that I can, although I am not a great expert on tax or fiscal measures.

Reference has been made to the political slogan of the Conservative Government of the 1980s and 1990s to do with trying to create a small shareholder democracy, under which council houses were sold off up and down the country. Much of the privatisation programme was sold to the public under that banner. The Bill tries to create a shareholder work force—a point strongly made by the hon. Member for Aylesbury (Mr. Lidington)—with a genuine share in business decisions and business. That is a commendable and hopefully achievable aim.

The Government are keen to promote the creation of a true stakeholder economy. We could look at models for such activity, as has been said, including models for allowing football fans to have much more involvement in the shares of club companies. One of my own city teams has been racked by a share problem; the old directors were sacked by new directors, and the fans had no real say in what happened. We could also allow tenants with a long-term involvement in housing a greater say in the direction and control of the organisations that provide their accommodation; there has not been a great deal of work on housing trusts.

I hope that the Government support the measure, and shall be glad if the Paymaster General says that she and the Government do so in her summing-up. Finally, I thank you, Mr. Deputy Speaker, for allowing me to make a brief contribution to the debate.

12.38 pm

Mrs. Cheryl Gillan (Chesham and Amersham)

I am pleased to have caught your eye, Mr. Deputy Speaker, as I want to join other contributors to our debate in congratulating the hon. Member for Edinburgh, North and Leith (Mr. Lazarowicz) on his success in getting a high position in the ballot and introducing the Bill. There is an unusual consensus across the Floor of the House that it has merit and deserves further examination in Committee. I hope that the Minister will allow it to make progress and be examined in more detail in Committee.

I do not want to delay the House long, but having intervened earlier, I wish to make a brief contribution to echo concerns already expressed about the Bill as drafted. I do not need to reiterate the points that my colleagues and I have made about the John Lewis issues; the Minister has taken them on board and I am sure that she will address them later. Like other contributors, I am concerned about red tape and the cost of the proposal. I hope that there will be an opportunity to address those issues.

For understandable reasons, a regulatory impact assessment has not yet been carried out for the Bill. I should like to be sure that a company which chose to take part in the schemes introduced by the Bill would not be subject to onerous red tape requirements. Although I am in favour of employee share schemes, I believe that we should do all we can to reduce the red tape associated with them. After all, there is no point in implementing worthy employee share schemes in the interests of raising productivity, for example, if the amount of red tape created in other areas overwhelms businesses and ends up reducing productivity.

Real examples support the concern about red tape. For example, let us consider the problem of tapers. When the 2000 Budget was introduced, all shareholders in an unquoted trading company became eligible to qualify for a higher rate of capital gains taper relief for the benefit of start-up companies. Although welcome, the relaxation in the definition of business assets in itself created complications. Gains may be subject to different rates of taper, depending on the relative periods of ownership, as a business or a non-business asset.

The apportionment is on a strict time basis and does not take account of the asset's value at any given point in time. There are pitfalls, and it is easy to trigger anti-avoidance provisions inadvertently—for example, giving employees shares that carry conversion rights could result in any gain on the ultimate sale of the shares being taxed as income, not capital. Depriving the employee of all taper relief may also produce a national insurance charge for the Chancellor.

Overall, schemes can sound great in principle, but as soon as the complex tax rules or the compliance rules come into play, there can be unfortunate side effects, as we all know, which result in extra red tape or unnecessary complexity.

Finally, I am concerned about the possible costs of the measures to the taxpayer. As I understand it, the intention of the tax measures is to address the problem whereby many firms, especially the small family-owned ones, are eventually handed over to their employees, with expensive corporation tax liabilities incurred on the transfer of a block of shares to an employee trust. The Bill would remove that legal technicality, making it possible for more businesses to be transferred into employee ownership. That seems a perfectly acceptable proposal, but I should like to know the cost to the Exchequer of this aspect of the Bill.

I am pleased to have had the opportunity to make a brief contribution. Overall, I support the measures, which spread the benefits of employee share ownership. However, as with many Bills, the devil is in the detail. I look forward to hearing the Minister's response.

12.42 pm

Mr. Tom Harris (Glasgow, Cathcart)

I am grateful to be offered the chance to speak in the debate. Like most other speakers, I begin by congratulating my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz) on coming near the top of the private Members' ballot. I entered Parliament at the same time as my hon. Friend and chose not to submit my name for the ballot—a decision that I have not regretted. As was said earlier, I cannot imagine a worse feeling of panic than being in the House for a week and discovering that one is near the top of the private Members' ballot. I congratulate my hon. Friend on his staying power and self-control.

I declare an interest as a member of the Co-operative party, although I am not a Labour and Co-op Member. The Co-operative party supports the Bill, as do I personally. I would have supported it, whether or not I was a member of the Co-operative party.

I should have liked to welcome the presence of representatives of the Scottish National party here at Westminster. I find it incredibly discouraging that a party that claims to stand for Scotland does not see the need to come to the House on a Friday to represent its constituents' interests and to discuss a measure that will have an effect throughout the United Kingdom, including on many thousands of workers in Scotland. It is a disgrace that SNP Members are not present. They are showing their contempt for this Parliament by showing their contempt for the interest of their own constituents. I hope that that will be noted by hon. Members in all parts of the House.

It would be useful to put this debate into context. As a Labour party member of 18 years standing, it is difficult for me to think about the debate on share ownership without remembering some of the debates that have taken place in the Labour party, the House and the country as a whole in the past 20 years and even before that. I am delighted that we are having this debate and that the Bill's promoter is a Labour Member. We should be very proud of that. However, the Labour party has not always been as far-sighted and open-minded on share ownership. For example, when I joined the party in 1984, if any Labour candidate or, even worse, Member of Parliament, was discovered to own shares in a private company, especially on the eve of an election, it was something of an embarrassment and certainly a cause for media concern. At that time, Lord Healey had to admit publicly on television that he had used the private health service to carry out an operation on his wife, and similarly, that was considered to be a huge embarrassment for the party. I am extremely grateful that we have moved on leaps and bounds since those times, not least because we have moved from opposition and into government as a direct result of having done so.

Ms Claire Ward (Watford)

Will my hon. Friend confirm that some of our Labour party colleagues have sometimes misunderstood the concept of holding shares in the Co-operative party? When one admitted that one was a co-operator and held shares in that organisation, some people began to worry in just the way that he describes in relation to the private sector.

Mr. Harris

My hon. Friend is correct. I shall add that to the very long list of deliberate misinterpretations of various actions that hon. Members in all parts of the House have had to put up with, whichever party we belong to.

The hon. Member for Aylesbury (Mr. Lidington) mentioned the profound impact of the Thatcher Government on the country's attitude to share ownership. It would be churlish to deny the impact that Baroness Thatcher and her Government had in that regard. I do not agree, however, with his suggestion that all of the innovations that the Conservative Government introduced in this area were entirely positive. Even that statement would not have been couched in such moderate terms 20 years ago, but I shall leave it at that, and say that their actions were not entirely positive. For example, in 1985, The Observer reported that, within two years—coincidentally, this was to happen in the run-up to the 1987 general election—the Conservative Government would have contrived to create 5,000 new shareholders in previously nationalised companies in every marginal seat in the United Kingdom.

It is appropriate to suggest that, although it was part of the Government's agenda at that time to create a property-owning and share-owning democracy, there was a very large element of cynical manipulation of the electorate. I am happy to take any interventions on that point. Perhaps credit is due to the Government of the time, as the strategy was very clever. However, it was also balanced. It was intended to promote share ownership and an understanding of how the economy works, and to encourage people to have a financial interest in the economy, but it was also an attempt to ensure that the Conservative Government were re-elected. It was a successful attempt, so I cannot bang on about it for too long, but we should acknowledge the cynicism.

Mr. Luke

Does my hon. Friend accept that the 5,000 new shareholders that the Conservative Government said they had created in constituencies throughout the United Kingdom still believed in the welfare state and free health care for all? Despite the change in capital ownership, people have remained true to core values.

Mr. Harris

My hon. Friend is right, and I do not want to be interpreted as saying that we lost the 1987 election because of share ownership. People who perhaps continue to own shares in the private companies to which I referred have largely voted Labour in the past two general elections. I congratulate them on their judgment.

Employee ownership is different from what is commonly known as share ownership. One of the problems with the Conservative experiment in the 1980s was that it was based on short-termism. People with no interest in British Telecommunications, British Gas or British Nuclear Fuels were encouraged to buy shares in them.

Linda Gilroy

My hon. Friend recalled the 1997 election. Does he remember that a strong theme of the campaign was that social justice and economic efficiency went hand in hand? Does he agree that the measure would extend employee share ownership along those lines?

Mr. Harris

My hon. Friend makes a good point and the Bill chimes well with the general view that has existed since before the 1997 election.

The Government of the 1980s did not encourage private individuals to buy shares in former nationalised companies in order to promote an interest in their expansion and development. The experiment was specifically marketed as, "Give us your money and we'll double it in a short time. You can sell your shares quickly and walk away with a far bigger profit than you would have made with a building society."

Ann McKechin (Glasgow, Maryhill)

My hon. Friend makes an excellent point about investment. Does he agree that increased employee participation should tackle the lack of investment in training and in research and development that has bedevilled British industry, especially the manufacturing and construction industries, for many years?

Mr. Harris

My hon. Friend makes a good point, which is annoying, because I was about to make it. However, I am grateful to her.

When considering the Thatcherite reforms of the 1980s, economists say that short-termism has been the long-term problem of the British economy. When individuals are encouraged to make short-term investments in industry, we cannot hope to generate the investment that my hon. Friend mentioned. There has been a sea change in attitude, and the Government are pursuing a longer-term strategy. However, such a strategy was rarely pursued by the Conservative party when it was in government.

Ms Munn

Does my hon. Friend agree that, although the contribution of the hon. Member for Huntingdon (Mr. Djanogly) was interesting in its detail and complexity, he missed the point of the Bill? He spoke at length about share options and people selling shares, and asked whether that was a risk, and whether they would get their money back, instead of considering the benefits of longer-term investment in not only money but skills, ability and commitment to an enterprise.

Mr. Harris

I absolutely agree, and I look forward to seeing whether the hon. Member for Huntingdon—who, unfortunately, is not in the Chamber at the moment—intends to support the Bill when it is in Committee.

Participation is the key factor in all employee share ownership schemes. Sadly, perhaps because of the structure of the British economy, most of the research into this has been carried out in the United States. It was mentioned earlier that there is much wider participation in these schemes across the Atlantic than here. The largest survey of which I am aware was carried out between 1983 and 1986 among 3,700 employees in 45 companies in the United States.

In its conclusions, the survey identified the three most important factors in the success of any employee share ownership scheme. The first is how much stock is transferred to employees each year. It found that contributions under 3 or 4 per cent. a year simply did not get employees interested enough. That would not get their attention, unless, of course, the value of the stock was increasing at a spectacular rate.

The second important factor is the employees' involvement and participation in decision making. My very first job was as a reporter on a local newspaper, the East Kilbride News, and one of the biggest employers in the area was Motorola. Motorola had an interesting and innovative strategy on employee relations. It did not recognise trade unions, which I still believe was a major mistake. Thanks to legislation introduced by this Government, that is no longer an insurmountable problem for the trade unions.

Motorola did, however, have employee councils, and it was noticeable, on visiting the factory, that the employees were much happier and more content when they were actively encouraged to take decisions or at least consulted by the management before major decisions were taken. There was also a much lower turnover in the work force. One of the features of the Bill relates to participation. It is crucial that employees have a practical role in running the company in which they are employed.

The third factor in the American survey is how often a company communicates with employees about the decisions that it is taking, which relates to the second point about participation. Interestingly, many of these surveys have found that other factors are far less important. For example, factors such as whether a company is unionised, the size of the company, the type of business it pursues, or even the demographics of the work force do not have as much impact on the success of an employee share ownership scheme as those three main factors.

I hope that the Government will support the Bill. We shall find out when my hon. Friend Paymaster General addresses the House. Incidentally, I think that, in Committee, it should probably be re-titled the Employee Share Ownership (John Lewis Partnership) Bill. I congratulate the John Lewis Partnership on its extremely effective lobbying. When I was lobbying, in a previous incarnation, I wish that I had been half as effective as the John Lewis Partnership. Of course, I had nowhere near the resources that it has.

The Government have a long-term strategy for industry, and the Bill chimes well with that general philosophy. I hope, therefore, that when my hon. Friend comes to the Dispatch Box, she will tell us that the Government support the measure, which is essentially an amendment to existing legislation, rather than a brand new measure.

An eloquent Conservative speaker—I think it was the hon. Member for South Norfolk (Mr. Bacon)—spoke of the difficulty of rewarding part-time and low-paid workers, precisely the ones who often feel left out of share ownership schemes. I understand that the industries with the lowest-paid workers and with part-time workers have failed to motivate them by means of short-term measures such as one-off bonus payments. There has been a much more positive response to longer-term commitment on the part of companies. I hope that that philosophy will encourage low-paid and part-time workers to have a vested interest in their companies—although, thanks to the national minimum wage introduced by this Government, far fewer people than ever before now receive very low wages.

Turnover is a huge problem, especially—paradoxically—at times of low unemployment. The worst companies will have the highest turnovers at such times. It is difficult for a company to have a long-term healthy outlook when 20, 25 or 30 per cent. of its workers are constantly leaving and being replaced by people with, in many cases, no knowledge of or interest in the company. American surveys have shown that share ownership schemes can contribute hugely to reducing turnover.

Ms Ward

Research shows that not just turnover but absenteeism is reduced. People who want to be involved in a company in which they have a stake do not want to take time off sick as an excuse, because they have a real interest in maintaining the company's profitability.

Mr. Harris

That is an excellent point. Although we must not automatically describe all absentees as people who are not committed to their employers, it is true that those who feel they have a personal vested interest in the long-term health of their companies will be inclined to take far fewer days off sick. That will inevitably have an impact on productivity in the long run. Surveys have also shown that increases in sales and employment are much higher in companies with share ownership schemes.

Employee share ownership also gets rid of the notion of "workers against employers", mentioned earlier by my hon. Friend the Member for West Bromwich, West (Mr. Bailey). It puts workers and employers on the same side, where they should have been in the first place. It thus helps to end industrial strife in which trade union shop stewards feel that they must win concessions from the "enemy", and employers feel that they must not give an inch to the "enemy" on the other side of the table. That division has crippled British industry for a huge part of the 60 years that have elapsed since the end of the second world war.

The more that we extend share ownership schemes, the more I hope that we shall see positive industrial relations. Trade unions and employers will see the benefits of everyone working together to ensure that the owners of the shares—that is, the employees—gain from the productivity of the company.

The United States General Accounting Office, in an ongoing series of reports, shows that productivity in companies that run share ownership schemes for employees is 52 per cent. better than in comparable firms. That alone should convince us of the value of such schemes.

It has also been suggested that employee share ownership schemes can make privatisation programmes more politically acceptable—I am of course offering no advice to the Government as to future privatisation projects. However, employee share ownership can help to overcome the resistance of work forces to any new status or structure that results from privatisation. Furthermore, such schemes may encourage investors; they may be more likely to invest if they feel that there will be no conflict between the work force of a formerly nationalised company and its new private owners.

I am delighted to speak on behalf of my hon. Friend's Bill. He has put a great deal of work into it and consulted many organisations about it. The Bill has only four pages but—if the House accepts it—it will have a major and positive impact on thousands of workers, not only in Scotland but throughout the United Kingdom. I wish it well.

1.7 pm

Mrs. Patsy Calton (Cheadle)

I am delighted to be able to make a short speech. I must first declare an interest. I may have received more effective lobbying about the Bill than any Member in the Chamber, as my son works at John Lewis. He is employed at one of the most successful branches in the country—which happens to be in my constituency.

John Lewis's workers are motivated. They are called partners and they are indeed regarded as partners. The company's principles and values have already been mentioned. Every week, the Cheadle store issues a staff magazine. I shall quote from an interview with a member of the work force. He was asked: Which aspect of your job are you passionate about? He replied: The wellbeing of my team and the integrity of the Partnership. We're a unique business. We have high standards of conduct with each other and our customers. I feel very strongly for what we have achieved and I know that our enthusiasm for constant improvement stems from the fact that we are part of the Partnership and everything it stands for. That was the positive side. He was then asked: "What's your pet hate?" He answered: Stock inaccuracies. In an ideal world we would all have the correct information the moment we needed. We're all still working on this. We need that kind of attitude in this country. We need managers and work forces to share a common aim and to be jointly informed.

Earlier, my hon. Friend the Member for Kingston and Surbiton noted that John Lewis attaches great importance to part-time workers. We need to explore in Committee the effects of the Bill on part-time workers. I should support that, as would John Lewis.

The hon. Member for Sheffield, Heeley (Ms Munn) said that we could avoid stress by exercising control on our lives. In my earlier life I was a teacher. One sees a great many more stressed people in teaching than one does on these Benches. The hon. Lady accurately identified what makes the life of a Member of Parliament less stressful than that of a teacher: we work just as many hours as teachers do, but we control our lives. We are the ones who decide when and how we put those hours in, and we have much greater freedom in that regard than teachers do. The issue of control and of being able to play an equal partnership role in one's life is important.

This country's future lies in the work force, its leaders and the managers and owners of companies realising that their long-term interests are shared. Work is more than earning money. It takes up more than time. A work force who own their company and are truly involved in decision making and sharing in its success will be happier, healthier and more committed. The managers and work force of the future, and those who are successful now, recognise that their partnership is key. They respect each other's contribution.

I applaud the Bill's aims and very much hope that it will meet with success.

1.11 pm

Mr. Andrew Love (Edmonton)

I seem to have been left out in that I am the only hon. Member who has not been circulated with information by the John Lewis Partnership; I shall write to draw the matter to its attention.

I join other hon. Members in offering my congratulations to my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz)—I am sure that when he is in Leith, that title would change to "the hon. Member for Leith and Edinburgh, North". I congratulate him not only on his luck as a new Member in being drawn sixth in the first ballot that he entered—I could see the frustration on the faces of colleagues who have been in this place considerably longer and have never been drawn in the ballot—but, more important, on his choice of subject for his Bill.

Inevitably, as a private Member's Bill it will be only a limited measure, but employee participation is an extremely important issue, for two reasons. First, as has been said, it is crucial to the efficiency of the economy. Productivity, which is central, can be improved by employee participation. The performance of our companies—their ability to compete—is at stake. The measure also chimes in well with the direction that the Government have been taking.

Why is employee participation important? First, it engages with all the employees of a company—with their skills, their special knowledge and particularly their commitment to the company. If it is conducted properly, it can improve employees' motivation and drive innovation from the shop floor, which is where most of the best ideas in good companies come from.

At its best, employee participation provides a genuine workplace partnership between the owners and those who represent them and the management and workers of a company. That has very important benefits for the company. First, as many hon. Members have said, it reduces employee turnover. Not only are workers retained for longer, but the effectiveness of their training increases. They do not go off and work for someone else as soon as they have completed their training. Therefore, investment in staff can pay dividends if one can keep hold of those staff.

Secondly, and perhaps most important, employee participation fosters a more co-operative ethos. When we discuss the workplace in this country, we continually talk about confrontation. The Bill will help to develop a more co-operative ethos.

Employee share ownership can assist employee participation in several ways. First and most obviously, it incentivises employees. In doing so it also, if properly structured, aligns the interests of both sides of industry in the same direction. To return to an aspect that has been central to the debate, it also increases performance and productivity.

We normally have long discussions about productivity at the time of the Finance Bill and the pre-Budget report. The Treasury is on record as saying that we are not doing as well with productivity as we should and could be. The economy is going well, but we need to improve productivity. Even though it is a small measure, the Bill will go some way to achieving that.

Share ownership and, in particular, some of the aspects of the Bill can have a beneficial impact on several issues that have been discussed today. First, short-termism plagues the British economy. Our competitors all take a much longer look at what is best for their companies. Shareholding by employees, who have a longer-term interest in their companies, will have a beneficial impact on the short-term outlook of many in power in this country.

Secondly, such share ownership will help company investment decisions. We all know about the dearth of research and development and about the need to ensure that we have adequate capital, especially behind our manufacturing industry. Every time that we compare the capital used per employee in Britain with that used in Germany or the United States, we see that we are failing in this country. The Bill would bring home that fact in boardrooms throughout the country.

Thirdly, corporate governance is an extremely important facet of the future of the company sector in this country. A wider stakeholder voice—whether for employees, or for customers and others—is very important.

All that will assist company performance, but I do not want to give the impression that it will revolutionise things overnight. We ought not to overstate the benefits, but there is a lot of evidence—such as that cited by hon. Members on both sides of the House today and that from the United States, where significant numbers of employees are involved in such plans—to show the benefits that employee share ownership can bring.

Many hon. Members have said that such schemes have been with us for a very long time. They go back to the early 1980s—a fact that Opposition Members have drawn to our attention. Indeed, three different schemes operated in this country when the Labour party came to power in 1997: the approved profit-sharing scheme, which has been placed in abeyance, the save-as-you-earn scheme and the company share option plan. About 2.5 million employees enjoy the benefits of those three schemes. That is to be commended, but the shortcomings of those schemes was the theme of the consultation document on extending share ownership that the Government issued in 1998.

Several facets of those schemes were considered in that document. The first issue is providing a greater reward for the long-term commitment of employees to their companies. Many hon. Members have mentioned that issue and explained how it is reflected in new legislation. The second issue is creating an enterprise culture, which we talk about a lot. Often—certainly in the past—our debates have been about creating an enterprise culture in the boardroom, but we need to create that culture on the shop floor, and the schemes, as currently structured, go some way to doing that.

Perhaps the most important issue that the Government highlighted was the need to extend such schemes to a much wider range of companies in our economy. We often talk about the importance of small and medium-sized companies to the United Kingdom economy, yet the existing schemes did not really involve them, and the schemes introduced in 1999 and 2000 represented an attempt to do so.

Experience in the United States shows the benefits that can be produced. A report on research into those results states: The key conclusion … is that employee share ownership, especially when combined with other means of active employee participation, does have a positive impact on employee motivation, productivity and corporate performance. I shall return to that point later, because the Bill refers specifically to active employee participation.

There are other facets of the Government's concerns about the schemes that existed before 1997, the first of which relates to fairness. We cannot have fairness if only a limited number of senior managers are allowed to participate in a scheme. The only fair and proper mechanism is to have all-employee share schemes. Inevitably, they will be different for different employees, but they need to include everyone if they are to be fair.

I am a little surprised by some of the comments of Conservative Members, because the new SIPs were an attempt to reduce complexity and to reduce the cost to companies of share ownership schemes so that they could be extended to the smaller companies that were obviously concerned about such issues. It was to recognise the concerns expressed in the consultation exercise that the new scheme was developed. It has several features that were not in any of the previous schemes.

I wish to highlight some of the new features, and the first is that share awards can be performance related. I am sure that everyone will join me when I say that I am a little disappointed that many of the companies that have taken up the new schemes have not related awards to performance. The Government may wish to look at that in the future. Secondly, the new scheme gives companies the freedom to design schemes to suit their particular circumstances. One of the great difficulties with previous schemes was their rigidity, but companies now have much greater freedom.

Forfeiture and the need for employees to stay in a scheme are an important aspect of the new scheme, and it is one that I strongly support. The new scheme provides flexibility for the employer and employee and, perhaps most important for the employees, it allows them to buy shares out of gross income.

The Bill considers some of ways in which the 1999 and 2000 legislation can be improved. It talks about extending SIPs and the opportunity to take up a SIP for companies owned by employee trusts. That is important. We need to extend the schemes to a wider range of models of corporate ownership. We should not think that the share ownership company is the only corporate entity or that it is the most competitive, efficient or productive. There is plenty of evidence to suggest that there are other models, and the Bill will allow employee trusts to take part in employee share ownership. According to a parliamentary answer that I received in November last year, that could extend to as many as 60,000 employers. I shall return to that important consideration later.

I referred to United States research about active employee participation. Extensive research has also taken place in the United Kingdom and I wish to quote from the research carried out by Birkbeck college, which appears in the mutual pamphlet from Employees Direct. It states: Two important conclusions have emerged. though. The first is that employees do respond positively to what might be termed 'high commitment' human resource practices such as promoting participation and involvement. The second is to confirm the sort of causal links suggested above, from human resource practices such as participation and involvement through to the attitudes and behaviour of employees and from there on to performance outcomes such as productivity. That is an academic way of saying that we need to involve employees and give them a meaningful voice in their company. Only if they have a role and some influence—each company will have to structure how it provides that—will they commit to the company.

The hon. Member for Aylesbury (Mr. Lidington) spoke—I believe that he thought eloquently—about the distribution of shares through privatisations. The vast majority of employees sold their shares at the earliest opportunity, which does not benefit companies and is clearly not in their interests. Electing employee representative is one way to foster a commitment that will achieve the objective of getting employees to hold on to their shares. As democrats, we should be in favour of that.

My hon. Friend the Member for Edinburgh, North and Leith is right not to be prescriptive about that. No doubt there will be many views, as there are in the Chamber today, on what would be an appropriate election. We need flexibility, which is at the core of any development in this matter and needs to be maintained. The important principle is employee representation. Experience suggests that until now management has represented employee interests on a trust. The Bill would give employees a voice.

Mr. Edward Davey

The hon. Gentleman raises the issue of elections. It has cropped up several times and, as hon. Members said, we could consider it in Committee without being too prescriptive. Perhaps he can set out criteria or principles that would determine how a group of workers in a company would elect representatives. For example, perhaps we could state in the Bill that every employee should have a vote of equal value, without being too prescriptive about electoral systems.

Mr. Love

Let me state here and now that I shall not be a member of that Standing Committee and will not be able to enter into that debate. However, if the share ownership plan is for all employees, everyone who is involved must be able to take part in electing those who want to represent them. I suspect that all hon. Members would uphold that principle. No doubt principles will be laid down for such elections, but it will be important to allow some flexibility; otherwise, the Bill will be as rigid as other legislation, which will not help to persuade companies to take up the scheme.

The Bill also deals with the discrimination that those people who want to make a significant move towards employee ownership experience as a result of paying corporation tax up front and of the considerable time that it takes to distribute shares. Opposition Members are having a rather good time. I think that the right hon. and learned Member for Rushcliffe (Mr. Clarke) was on the sensible wing of the Conservative party, and this may well be a case in point. The arrangements for corporation tax discriminate against small family-run businesses in particular. Rather than selling out to a major larger competitor, they might prefer to reward their employees for many years of long service, but that option is not open to them. The current tax regime puts them at a disadvantage and no owner would choose to put himself in that situation, so it is sensible to make the change.

The 10 per cent. threshold is a safeguard. It would at least make companies pause for thought before using the measure as a tax-saving mechanism, because they would be creating a significant employee shareholding. That might want to do that, but I suspect not in the circumstances. No doubt that could be discussed at length in Committee.

Finally, I want the Minister to have a flexible approach to the extension of employee share ownership. In the Finance Act 2000, the Government extended the SIP scheme to industrial and provident societies, in particular to redeemable shares. Such shares do not require the same involvement in the company as ordinary share capital, but the Government thought that that would benefit employees. I supported that policy and the impetus behind it. However, I mentioned earlier that mutual organisations have considerable difficulty. As a result of discussions that I had, I wrote to the previous Financial Secretary to the Treasury, whose response was illuminating: so far no arrangement has been identified that would replicate the effect of share ownership in incentivising employees, aligning their interests with those of other shareholders and encouraging improved productivity. However, discussions were on-going. I asked my hon. Friend the Economic Secretary to the Treasury a parliamentary question and received the response: We have not yet been able to devise a way in which the link between share ownership and company performance might be reflected in such corporate structures."—[Official Report, 13 November 2001; Vol. 374, c. 608W.] Building societies and other mutuals do not issue shares. Therefore, it is very difficult to have a share ownership scheme. I understand the problem, but employees of commercially successful businesses are being disadvantaged because they are not allowed to take part. Even more important, mutuals are not operating on a level playing field. They are suffering a disadvantage, and there are many other disadvantages, so I hope that the Minister will look at the issue.

The Bill allows the Government to extend employee share ownership to employee trusts. I hope that over the next few months the Minister will look constructively at the matter to see whether a similar extension could be made for mutual organisations. The scheme has dramatic benefits for companies and for employees. It should be available as widely as possible.

The Paymaster General (Dawn Primarolo)

I congratulate my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz) Leith on introducing the Bill. Like all hon. Members who have spoken, I recognise—dare I say it?—his bravery in taking such an issue through the House under the private Member's Bill structure. It is a difficult task and will give him a great deal of work over the next few months. I thank him and his team for working so constructively with me and my officials on the Bill.

Hon. Members on both sides of the House have contributed to what has been an excellent debate on this important issue. Increasingly, employee share ownership is at the heart of the Government's productivity agenda. All Members recognise the importance of the style of company ownership and the structures of a company, as well as of rewarding employees.

I am pleased that we are agreed on the general thrust of the Bill. However, there are elements of the Bill that I would not be able to support. I will come to those. My comments will follow many of the points that were made by the hon. Member for Aylesbury (Mr. Lidington) in his thoughtful speech.

As another caveat, I say to all hon. Members that the tax system is a very important part of our democratic system, but it is not easily amended or dealt with. It does not always produce the effect that hon. Members believed it was going to produce when they drafted legislation. The House will forgive my caution, but after five years as a Treasury Minister, I understand that things do not always work precisely as one intended them to.

First, I shall focus on the Government's record. There is a wealth of evidence to support employee share ownership. In July 2000, the Government introduced the share incentive plan and enterprise management incentives. The two schemes are very different, but both are aimed at encouraging enterprise and productivity, and both offer generous tax reliefs.

At the end of October, I launched a nationwide roadshow on the share incentive plan, with my right hon. Friend the Chancellor of the Exchequer. The launch was supported by Digby Jones of the Confederation of British Industry, John Monks of the Trades Union Congress, and George Cox, all of whom expressed unreserved support for the plan. That demonstrates that all hon. Members who have spoken are right to say that there has been a sea change in attitudes toward participation in employee share ownership schemes.

The aim of the roadshow, run jointly with ProShare, was to tell companies directly about the benefits of SIP and how to go about introducing a plan. Comments have been made about complexity; in fact, after extensive consultation on SIP, the options available to companies are as simple or as complex as they feel necessary in their circumstances. I do not want the House to think that there is a "one size fits all" approach.

Since enterprise management incentives were introduced in July 2000, we have made improvements. Already, almost 2,000 companies have notified us that they have granted more than 16,000 options. This month, we doubled the gross assets limit to £30 million, allowing 6,000 more small and growing companies to qualify. There are other tax approved schemes—the ones I have described are not the only ones that give employee share schemes access to tax advantages.

No one can doubt the Government's commitment to employee share ownership. A sound basis for our commitment is provided by research that clearly shows that companies with widespread employee ownership and participation outperform their rivals. Some of the most powerful support is found in a survey carried out by ProShare. It found that 83 per cent. of employers who had introduced a share plan said that it met or exceeded their expectations. There are also interesting results from shareholding employees: 34 per cent. said that they were now more interested in the company and its activities, and 25 per cent. said that share ownership made them more likely to stay with their employer. Similar views were expressed by everyone who has spoken in the debate. Results like those can translate into a significant effect on business success.

The Government are justifiably proud of SIP, which is the most tax-advantaged share plan ever introduced by a United Kingdom Government. Our aim in introducing the plan was to encourage employees to take a long-term stake in the company for which they work. We want to align employees' interests with those of other shareholders, and give them access to the rewards that flow from the success that they help to create. That is crucial to fulfilling the principles underlying the plan.

The plan was developed in partnership with industry, which wanted a framework that would appeal to smaller and unquoted companies. SIP was therefore designed to meet the needs of a range of companies. It has already proved successful. To date, 260 companies have had share plans approved and well over 250 plans are awaiting implementation by the company or are in the process of being approved by the Inland Revenue. The plan is being taken up by companies both large and small, listed and unlisted.

The hon. Member for Aylesbury asked for details and I can tell him that, of the 260 plans so far approved, 150 are in companies that never previously had an all-employee share scheme, and 71 companies are replacing their old profit sharing schemes with a share incentive plan, and that is what we hoped for. In addition, another 250 or more plans are in the process of being set up by companies. The hon. Gentleman asked how we would meet our target. No time limit was placed on the target of doubling, but given the present pace of change, we can be reasonably confident that in the next few years we shall be close to our target.

Several hon. Members asked about the involvement of low-paid and part-time workers in share incentive plans, and it seemed to be the view that, particularly in the retail sector, the plan was not being taken up. Hon. Members should be aware that a number of the large supermarket chains already operate, or are bringing in, a share incentive plan. Employees must be properly advised about the most appropriate way in which to use their funds. All hon. Members will appreciate that shares are not a one-way street and there is a risk—a point that the hon. Member for Kingston and Surbiton (Mr. Davey) sought to make in an intervention.

As the Bill seeks to extend the share incentive plan, it is important that I should spend a little time describing how it works. The share incentive plan allows a company to bring its employees into direct share ownership in several different ways. Up to £3,000 worth of free shares can be given annually to participants tax free. In addition, employees can contribute up to £1,500 a year out of pay before tax and national insurance to buy what are called partnership shares. Employers can then reward the commitment by awarding up to two matching shares for each partnership share bought.

Employees pay no tax or national insurance on the shares that they are awarded under the plan as long as they are held in the plan for at least five years. I shall not go through the reasons for that, because they have been adequately dealt with today. There are capital gains tax benefits and links to pensions and individual savings accounts. There are also tax breaks for companies, which are allowed deductions against corporation tax for the costs of awarding shares and for their costs in setting up a plan. Employers make substantial savings on employers' national insurance contributions on the salary that employees use to buy partnership shares and on shares given to employees through the plan. It is fair to say that all parties gain from the share incentive plan, whether from direct tax breaks or greater productivity.

Having set out the Government's commitment to employee share ownership schemes, I shall deal with the Bill, which sets out to change the rules of share incentive plans and has three major objectives. First, it seeks to extend the share incentive plan to companies whose shares are held for charitable purposes or in an employee benefit trust. A number of changes are needed to allow that, including allowing the award of share types not currently allowed in the plan. Secondly, the Bill provides for elected employee representatives to act as trustees of a company's share incentive plan. Thirdly, the Bill aims to encourage the transfer of shares into employee ownership through early corporation tax deduction on money given by the company to a plan trust for buying shares from an individual on behalf of the company's employees.

I shall deal with each of those aims in turn. Clause 1(2) seeks to extend the share incentive plan to trust-controlled or employee-controlled companies. Because of their structure, those companies are currently excluded from the approved employee share arrangements. They cannot use the arrangements because their constitution prevents them from awarding shares to employees.

A number of Members asked about the cost of the Bill, including the hon. Members for Chesham and Amersham (Mrs. Gillan) and for Aylesbury. The cost of extending the share incentive plan to trust or employee-controlled companies would be about £25 to £30 million a year, assuming that there is high participation. Corporation tax costs, if the Bill is amended as I seek and as I hope my hon. Friend the Member for Edinburgh, North and Leith will accept, would be about £5 million to £10 million a year. However, as a Minister, I have a problem with that part of the Bill, which is not drafted tightly enough to ensure against abuse. The John Lewis Partnership has been mentioned a great deal; I am not suggesting for a minute that such organisations would be involved. However, as we saw in high costs to the taxpayer of the profit-related pay experience, there are people who seek to use elements in the tax system to reduce their tax, even though they were not designed for that.

Awarding different classes of shares is a problem. To allow employee-controlled companies to use the share incentive plan without changing their share structure, clause 1(4) seeks both to extend the class of share that can be accepted under a plan and to place restrictions on it. It seeks to enable ordinary share capital held in trust or for charitable purposes to remain untouched, by allowing companies to use another class of ordinary share for the plan; that class may have restricted rights which may affect their value.

The share incentive plan does not allow companies to use anything for the plan other than the company's ordinary share capital, to ensure that employees are not being awarded shares inferior to the shares of other shareholders. I appreciate the point about the John Lewis Partnership. Under the 1929 settlement, the company established a profit-related scheme, under which all distributed profits to the employees as partners, in the form of an annual profit-related bonus, were paid pro rata to the salary. Because the company could not take part in employee share ownership schemes, in 1990 it converted its existing bonus schemes into a tax-relieved profit-related pay scheme. I do not want to go over again the problems with the profit-related scheme, which was designed to help companies like John Lewis, but had an astronomic cost for the taxpayer. Experience teaches us to be careful in that area.

I am aware that employee and trust-controlled companies feel that they are at a disadvantage compared with other companies which can use approved employee share schemes, particularly now that profit-related pay has been phased out.

This is an extremely complicated area, to which many of my hon. Friends referred. We have struggled in the past and we continue to struggle to see how we might help such companies. I know that my hon. Friend the Member for Edinburgh, North and Leith and his team have encountered the same difficulties in devising a practical approach for the Bill. That, in part, is why I hope that he will agree that these provisions should be removed from the Bill. I cannot consider an arrangement that moves away from ordinary shareholdings, or one which breaks or weakens the link with improved productivity, or reintroduces profit-related pay by some other means.

I am, of course, conscious that flagship employee-controlled enterprises have successful arrangements for achieving and rewarding employee participation and involvement. Various such structures were discussed today. It is unclear how they would want to use the share incentive plan, and in what ways it would add to the incentives already available to their employees.

We have, however, already provided for co-operatives to participate in the share incentive plan by allowing them to use redeemable shares in the plan, which conventional companies using the plan cannot do. That was because redeemable shareholding is the vehicle for co-operative membership. Allowing redeemable shares meant that employees would be issued with the same shares as other members.

Having asked for the provision to be removed from the Bill, I will continue actively to consider whether there are other ways of extending the share incentive plan to trust and employee-owned companies that wish to use the plan as conventional companies do, in ways that preserve the aims of improved productivity and do not allow scope for abuse. I hope that my hon. Friend the Member for Edinburgh, North and Leith will accept that.

On elected employee representatives as trustees of a company's share incentive plan, I share my hon. Friend's aim of encouraging greater employee participation. The proposal in subsection (5) is that the deed of a share incentive plan trust should allow companies to have at least one elected employee to act as a trustee. I am happy to support the election of employees as trustees. Strictly speaking, that can already be done, but if hon. Members want it to be beyond doubt and written into the Bill, we have no problem in supporting that.

I am happy for Inland Revenue officials to work with my hon. Friend and his team on a trust deed that would provide for elected employee trustees. That could be offered alongside the existing model trust deed on the Inland Revenue website.

Finally, I shall deal with early corporation tax deduction on money given by a company to a plan trust to buy shares from an individual. Subsection (6) provides for a corporation tax deduction to be given when a company contributes money to a share incentive plan trust to buy shares from one or more individuals. The figures of £5 million and £10 million that I gave are calculated on the basis that what I am about to say will be accepted, not on what is in the Bill. That would be more expensive.

Again, I support my hon. Friend's aim of encouraging individuals such as family owners to sell their shares into employee share ownership. I am mindful, however, that the early corporation tax deduction that is currently available through qualifying employee share ownership trusts—sometimes called QUESTs—has been used very little by the individuals such as family owners for whom it was originally designed. The Government have already gone a long way to facilitate the transfer of shares from individuals such as family owners into the share incentive plan.

My particular concern with the provision is that the corporation tax deduction would no longer be linked to the distribution of shares to employees, which is crucial to the relationship between productivity and employee benefits. The shares acquired by the plan trust could remain indefinitely in the trust. As I said, that would be contrary to the fundamental aim of the share incentive plan. I know that my hon. Friend the Member for Edinburgh, North and Leith is aware of those concerns and I hope that he accepts that the provision is drafted a little too widely, in terms of missing that crucial link. I would be prepared to accept an early corporation tax deduction where that is clearly linked to the aims of the share incentive plan legislation. That would mean that shares would need to be distributed to employees through the share incentive plan over a defined period. If he can accept those amendments as well, the Government can be satisfied that his proposals fit squarely with and support the actions that we have already taken.

I share my hon. Friend's aim of encouraging employee participation and share ownership. None the less, I have had to conclude that, in some respects, the Bill as it stands would work against the purposes and design of the current share incentive plan. I do not believe that the plan is the right vehicle for achieving collective employee share ownership, because its purpose is to increase productivity through direct individual employee shareholding. Nevertheless, I would be prepared to support an amended Bill along the lines that I have set out.

First, I would support a Bill in which clause 1(2) to (4) and clause 1(7) were dropped. As I explained, those provisions seek to extend the share incentive plan to company structures that cannot currently use it. Secondly, clause 1(6) would need to be amended so that the shares acquired with up-front corporation tax relief were distributed to employees within a defined limit.

I am satisfied, having taken advice, that no human rights, European Community or devolution issues would be raised by the amended Bill that I propose. We believe that the impact on the regulatory burden, which was mentioned by the hon. Member for Chesham and Amersham is negligible. None the less, officials will do further work on the shape of the Bill and on assessment.

I hope that my hon. Friend will accept the amendments that I propose so that I can accept the progress of the Bill into Committee, where the issues can be sorted out. Again, I congratulate all hon. Members who participated in the debate, which was an excellent example of how Government policy can be probed in the House—and, indeed, improved a little—in a spirit of co-operation.

1.57 pm

Mr. Lazarowicz

I thank the Paymaster General for her support of significant elements of the Bill and welcome her commitment to continue considering ways of trying to reach what I think is an agreed objective on giving some advantages to employee trusts, which is one of its aims. I accept the validity of the concerns that she expressed, and not just because it is sometimes wise for Back Benchers to accept the Government's concerns on matters of this nature. Even with the assistance that I have had in drafting the Bill, I do not claim that it is a model of ultimate perfection. The tax system is a complex area. I fully accept the concerns that she and other hon. Members have raised. For that reason, I accept that amendments will have to be made in Committee to give effect to the changes that she outlined. On that basis, I hope that the House will give the Bill its Second Reading. Like the Minister, I thank hon. Members throughout the Chamber for the support that they have shown today.

Question put and agreed to.

Bill accordingly read a Second time, and committed to a Standing Committee, pursuant to Standing Order No. 63 (Committal of Bills).