§ 3.12 p.m.
§ Lord BYERS rose to move, That this House welcomes the Government's declared intention to include in this year's Finance Bill provisions to encourage 165 profit sharing. The noble Lord said: My Lords, I beg leave to move the Motion standing in my name on the Order Paper, and I should like to begin by saying that Liberals are naturally delighted that the Prime Minister and the Chancellor of the Exchequer have agreed to incorporate in this year's Budget and Finance Bill incentives to encourage profit sharing. These were contained in the consultative document and in the reply to a Question put by Mr. John Pardoe in another place on 2nd February.
§ As a Party, we have been campaigning for the adoption of such a policy since 1928, when it was included as a major feature of the Liberal Yellow Book or, to give it its proper title, Britain's Industrial Future. Many of your Lordships will have read that book: I do not suppose there have ever been brought together, as authors of a detailed political and economic testament, so many distinguished thinkers as were assembled by Lloyd George to compile that particular book. It was compulsory reading at the universities in the 1930s, and had a profound effect on political thought, not least upon members of the Labour Government of 1945. Unfortunately, that was too shortlived. Among its contributors framing these policies were Walter Layton, H. D. Henderson, John Maynard Keynes, Ramsay Muir, Seebohm Rowntree, Sir Herbert Samuel, Sir John Simon and many others.
Oddly enough, the section dealing with profit sharing never attracted the support of the Labour Party and the trade unions. I say "oddly enough", because profit sharing was specifically not dealt with in isolation; nor do we believe that it should be. The recommendation was:
The real purpose of profit sharing is to show that the worker is treated as a partner and that the division of the proceeds of industry is not a mystery concealed from him but is based on known and established rules to which he is a party and must be regarded, together with the system of organised consultation, to form the basis for a satisfactory industrial relations policy".
When one looks at the detailed policy laid down in that Liberal Yellow Book, as compared with the amateur nonsense contained in the Bullock Report, one wonders why we have been wasting these last 50 years. Perhaps 50 years is now regarded as a short time in British politics; and I must say that I would have welcomed
as many trade union Lords taking part in this debate today, a debate which will do something to help their members in the field of profit sharing, as took part in the Bullock debate, which was merely to give more power to the trade union movement.
§ Looking back, one can appreciate the relative simplicity of those early Liberal proposals—an approach which could have made a lot of difference to our economic growth had it been adopted, based as it was on the concept of a standard wage, extra reward for extra effort and the recognition of the worker's interest in the concern for which he works by providing that he receives a share in its prosperity to which he contributes.
§ The authors of the Liberal policy also stressed other principles—and these principles are just as true today. The first was that the amount of the bonus must not depend on the will of the employer but should be determined by a scheme settled beforehand and clearly understood. Secondly, workers entitled to benefit under any scheme should be given access to such financial data as would show that it has been carried out. That was 50 years ago. This disclosure of financial data is vital even if there are no profits to divide, because it explains what is happening in the business and gives the worker a real interest in the prosperity, or lack of it, of the concern.
§ Having expressed our general welcome for the adoption of incentives for profit sharing or, I believe more correctly, schemes for profit equity sharing, I should like to spend a moment or two on the three proposals contained in the consultative document. Of these, our preference would be for Method III, in which a company can make an allocation from profits each year which can be used to buy shares at full value. The shares would be apportioned between the employees but retained by a special trust for a period of five years, during which the employee would not be permitted to sell the shares. When he did sell the shares there would be a charge to income tax on a reduced scale, depending on how long the shares would have been held and, subject to the sum realised being within the exemption limits, there would be no charge to capital gains tax.167
§ So far so good; but three main points arise from this scheme on which I would ask the Government to comment. First, why is the tax relief obtainable only if the shares are held for a minimum of five years? I had personally hoped it would be possible to persuade employees to hold on to their shares for a very long time, but if the policy is to adopt a fixed term of, say, five years—and I would love to see them holding shares for a minimum period of five years, though not compulsorily—there will inevitably he a tendency for a very substantial number of shares to come on to the market at a particular time, with a resultant unnatural depression of the price. Even if the number of shares sold is not substantial, the market anticipation will inevitably adversely affect the price. I think it would be better to leave the employee free to dispose of the shares when he wanted to do so.
§ Secondly, the consultative document states that it would be necessary for the trust which is holding the shares to arrange for the employing company to apply PAYE to the appropriate part of the sales proceeds. I do not believe that the authors of the document have appreciated what a tremendous administrative burden that could pose, even to the point of deterring companies from adopting profit-sharing schemes. In my view, this reinforces the argument that the shares should be allocated directly to employees, who should deal with them as any other shareholders do.
§ Thirdly, I do not follow the thinking behind the insistence that there should be an upper limit of £500 worth of shares per annum per employee. I do not think we can continue to subject our middle and upper management to much more leveling down and egalitarianism. If it is the Government's intention to restore the real standard of living of middle management by very substantial tax cuts, there could, of course, he a case for some upper limit. But I will believe these tax cuts when I see them, and not before. In the meantime, the imposition of an upper limit of £500 makes the scheme derisory above certain salary levels.
§ There are already two limitations at work; namely, the amount of shares a company is prepared to make available for 168 its scheme—that is quite a serious limitation—and the incidence of high taxation which erodes the net gain to the higher paid individual, and that, certainly, is a limitation. I think that this aspect should be re-examined, if substantial tax cuts are not forthcoming in the upper income brackets. In this connection, I think that we should look carefully at the possibility of resurrecting share option schemes for senior and middle management, such as we had before 1974. This was a system by which profit from the sale of shares was subject to capital gains, but not to income tax.
§ The political objection to this was that it discriminated strongly in favour of the very highest salary earners. But I believe that the situation changes when a profit-sharing scheme is introduced to cover the whole business. Those with lower salaries and low taxable incomes will find profit-sharing proposals very attractive—at least, I hope so. But the higher salary earners, because of the upper limit and the very high incidence of income tax, need something like a share option scheme to give them an equivalent incentive. I believe that this is worth Government consideration, and that it could help to provide the industrial stimulus which we need in this country for economic growth. It is interesting to note that British Airways staff have come out overwhelmingly in favour of a scheme to allow them to buy shares in their own airline.
§ If the Government do adopt Method III unamended, I would ask them whether there will be any liability to tax when the trust hands over his shares to the employee at the end of the five-year period, or is tax to be chargeable only when the employee sells his shares? I must say that I do not feel attracted to Methods I and II, but I should like to take this opportunity of asking the Government whether they could elaborate on the discount which it is permitted to make in arriving at the cost of employee shares by virtue of any restrictions placed upon them. In other words—and I have given the Government notice of this question, because it is puzzling a lot of people—what restrictions will be regarded as equivalent to the maximum 30 per cent. discount referred to in the consultative paper?
§ There is, I think, a strong parallel in these proposals to the way in which some 169 of us, in all Parties, were able, with good will, give and take and patience, to get across-the-board agreement on the 1975 Social Security Pensions Act. I would plead that we should get something like that political consensus in this matter, because I want to make it clear that, although I may have certain criticisms and reservations, I and my colleagues wholeheartedly support the giving of incentives to encourage profit sharing. Without the incentives, I am afraid that such schemes will inevitably be limited to the few really enlightened employers. I want to see them more widely spread.
§ But if this is to happen and we are to turn—as I hope we will—our few hundred schemes in this country into several thousands, I believe that we need to examine certain aspects with great care. We must not make the administrative burden on employers too great; otherwise, we will deter them from going ahead. We must aim for flexibility which avoids the imposition of one standard scheme for the many different companies and the many different circumstances which exist in British economic life. And, as I say, we should try to obtain all-Party consensus on the schemes and the structure which are finally adopted, because this is something which ought to be with us for a very long time as part of our economic system.
§ I referred to the consensus and goodwill which we managed to bring about on the Social Security Pensions Act, and I hope that all Parties will now approach this field of profit sharing in a similar spirit, and build up together acceptable structures which will not be dismantled at every change of Government. I believe that we could be witnessing a new era in industrial relations, a new era in the mixed economy and the beginning of really enlightened capitalism. I welcome the Government's intentions. My Lords, I beg to move.
§ Moved, That this House welcomes the Government's declared intention to include in this year's Finance Bill provisions to encourage profit sharing.—(Lord Byers.)
§ 3.26 p.m.
§ Lord CULLEN of ASHBOURNE
My Lords, the whole House will be grateful to the noble Lord, Lord Byers, for initiating this debate today. He seems to me to 170 have made a Conservative speech, because so many of the things that I was going to say he has already said much better. It is indeed appropriate that the noble Lord should have introduced this debate today, because, as he said, the Liberal Party has campaigned for profit sharing for half a century or more. Also, as is well known, we on these Benches are in favour of this principle and now it seems that the Government, for whatever reason, also favour the principle. That, for this Government, is a really remarkable development. Up until yesteryear they appeared to have a distaste for the profit motive, so this is an astonishing transformation. If the Liberal Party has done nothing else, to have succeeded in effecting a consensus on this concept, which, if we get it right, has enormous potential for improving both productivity and industrial relations, is no mean achievement.
But, my Lords, have they? We should be wise to ponder on the announcement in the recent consultative document, which reads as follows:The Government has agreed to consider ways of encouraging the creation of schemes for profit sharing in private industry with a view to legislation".This, of course, is no commitment to embark on legislation; just an agreement with the Liberal Party to consider. But even this is remarkable, so let us not be too cynical or grudging in our welcome of this change of heart.
Many policies of the Government have altered dramatically since the bad old pre-IMF days, and greatly for the better so long as they are not transitory. So that, however tentative the Government's intentions may be, let us try to establish a real all-Party consensus to the principle of profit sharing, and to undertaking an exhaustive study of the subject, so that we get the legislation right, so far as is humanly possible, first time.
Fortunately, there is a great deal of experience on which we can draw. There are only some 100 profit sharing schemes for general employees in this country, so that we shall also have to look elsewhere. In France and West Germany, many millions of employees benefit from such schemes. But by far the most fruitful area is the United States where nearly 200,000 companies operate voluntary schemes, all enjoying fiscal encouragement 171 and predominantly based on deferred share ownership. Many of these schemes have been going on for a long time, and their value is revealed by a study over 18 years, from 1952 to 1969, which shows that companies with significant employee shareholdings grew faster than those without them, their share prices grew twice as fast, earnings per share 1.9 times, net worth per share 1½ times and sales revenue 1⅓ times. Is it not possible that profit sharing could be the key to the radical improvement in productivity that we so desperately need?
Having given a warm welcome to the Government's conversion, I should like to make a plea that we should, in future, seriously consider the term "productivity sharing", rather than "profit sharing". There are, I believe, still areas where the word "profit" is regarded with suspicion, but no sensible person thinks other than that the continuing improvement of productivity and efficiency should be the goal of any enterprise.
It could very well be that a value added system would be preferable to one based on profits. This is the system now used by ICI after more than 20 years' experience. If we keep on referring to the word "profit" we may be muddying the water and making it harder for employees to understand how their bonuses are calculated. There is another reason why profit may not be the best yardstick. What would happen in a loss-making company which the management is straining to make profitable? Are the employees, however hard they work, to wait for their bonuses until some particular figure of profit has been reached at some indeterminate time in the future?
Several aspects of the consultative document concern me. First, in paragraph 5 it is admitted that the three methods of fiscal encouragement are to apply only to employees in the corporate sector. But looking at paragraph 6 the term "market value" of shares is used. This suggests that unquoted companies are to be excluded. I hope that this is not the intention because there are many unquoted companies, such as Habitat, who have adopted such schemes and I see no reason why they should be excluded. I should be grateful to the noble Lord, Lord Oram, if, when he comes to wind up, 172 he would clarify this point. I imagine that the reason why the Inland Revenue have limited their proposals to the corporate sector is that this is much the easiest way to start. Unless it is made clear that this is just a start and that it is intended, with the light of experience, to cover other sectors as quickly as possible, are not the Government asking for trouble? Millions of workers would be excluded—those in the nationalised industries, those in partnerships and so on. There is of course the argument that those who enjoy indexed linked pensions require no further incentives, but I think we must be careful.
Incidentally, on the subject of the nationalised industries we should study the Renault scheme in France. As regards nationalised industries I think it would be better to use the term "productivity"—and hopefully get some—rather than profits. I appreciate that to incorporate all employees is a colossal and perhaps impossible project and I agree that the first priority, as expressed in the Conservative Green Paper of last year, is:to make work in the wealth-creating sector relatively more attractive again".So I hope that the Inland Revenue proposals will be warmly welcomed as a spearhead to a wider application in future to such sectors as it proves practicable to include.
Secondly, returning to paragraph 5, I understand the view that to allow tax relief for profit sharing in the form of cash would be tantamount to payment of wages free of tax. But I suggest that there should be a cash alternative. It will take time for employees to realise the advantages of holding shares with tax benefits and much education will be necessary. There will often be occasions when cash in hand will be more beneficial to the employee than a more valuable stake several years later. Interest in share ownership is likely to build up gradually as employees become aware of the capital which has been accumulated by their more prudent colleagues. As I see it and I am speaking only for myself—I do not think that it should be compulsory to take the bonus in the form of shares. The fiscal inducement should apply only to shares but the cash alternative should be taxable.
Thirdly, I wonder whether, as the noble Lord, Lord Byers, mentioned, the egalitarian approach is necessarily correct. 173 One of the main problems today is the narrowing of differentials, and though tax reliefs on £415 or £500 per annum may well prove to be an incentive to the lower paid, it would be insignificant for skilled workers and middle management. Again I speak only for myself and I am open to persuasion that any two-tier arrangement or one based on a percentage of salary would not be practical. I hope not, as I personally believe that it is from those who hold responsible positions that the leadership and the drive to greater productivity and efficiency should come.
Fourthly, I doubt whether participation should in all cases be restricted to employees of five years' standing. Though this would no doubt be appropriate in some industries, a shorter period, say two years, could be appropriate in others. I also wonder whether part-time employees would be eligible. Fifthly, I am more attracted to the tax reliefs outlined in the Conservative Green Paper. Under the Inland Revenue schemes no tax relief would be available, except in compassionate or special cases, unless shares had been held for a minimum of five years. Conservative proposals envisaged a tapered deferred tax with a minimum holding period of two years during which any compassionate disposals would be subject to tax at the standard rate. In the third year disposals would be taxed at 20 per cent., in the fourth year at 15 per cent., in the fifth year at 10 per cent., and after five years tax free. At this point the shares could either be sold and the proceeds reinvested or retained and the then share price would be the base value for capital gains tax for a future disposal.
I now come to the oft repeated argument about eggs in baskets. I do not think this argument can simply be brushed aside. There are many thriving companies in which employees will have no inhibitions on this score—IBM is a very good example. But what would be the position of an employee in a well run company in an industry which was going through a particularly difficult time? Not only would he be likely to have qualms about the security of his job but he would see little incentive in having a stake in the company. I think it would be worth considering the idea that an employee could, if he wished, be offered the alternative of applying his bonus to 174 the purchase of authorised unit trust or investment trust securities. I fully appreciate that this departs from the basic conception of involvement by participation by an employee in the enterprise in which he works, but I think that there should be some provision for circumstances in which the incentive is negligible or non-existent.
My last question about the proposals is the assertion that profit sharing is quite distinct from industrial democracy. I disagree, but I think that this provides an opportunity for the noble Lord, Lord Oram, to explain to the House what, in the opinion of the Government, industrial democracy really is. Are not involvement and participation essential ingredients of what most people think industrial democracy is all about, whether it be in decision-making or having a personal stake in the enterprise concerned? It is almost as bad as the different interpretations of the world "détente". We really should clear up this point or all sorts of actions that are taken by one Government or another in the name of industrial democracy will be tangential. Perhaps we should first have debated industrial democracy before today's debate. Moreover, it would have been better if it had been debated before the Bullock Report.
I have made inquiries with several publicly quoted and private companies who have profit-sharing schemes. Naturally there is a general welcome for tax reliefs of any kind. Method III seems to be preferred to I and II, but what is thought to be vital, as the noble Lord, Lord Byers, said, is flexibility so that companies can design schemes which suit their particular circumstances. For example, some companies regard eligibility after five years' service as suitable, but others find that to be too long a period. There are different views as to whether shares should be immediately encashable or have to be held for a period, and as to whether a five-year period may be too long for many employees to contemplate. When discussing Method III, one company put forward the suggestion that when the shareholding period was completed the shares should be transferred out of the trust into the name of the employee. Another company operates a system whereby the bonus is proportional to salary or wages, quite contrary to the 175 Inland Revenue proposals. So it all boils down to the need for flexibility.
In conclusion—and I feel that I have spoken for rather too long—I commend to your Lordships the Conservative proposal that new shares should be issued rather than buying in existing shares on the market, up to a limit of 10 per cent. of pre-tax profits if we are working on a profit basis. This not only would be a safeguard against excessive cost but would prevent disturbance of company cash flow. Having touched on some of the many points that we need to consider, I should like to repeat my welcome to the Government's change of heart. I hope that their heart will beat strongly. Converts are often the greatest enthusiasts and I am hoping to hear from the noble Lord, Lord Oram, that the Government are truly converted. If that should be the situation, the Government will need to pursue policies which positively encourage the creation of wealth so that there is some wealth to share.
§ 3.42 p.m.
§ Lord DARLING of HILLSBOROUGH
My Lords, I hope that no noble Lord will read too much into the fact that I am going to begin by agreeing quite considerably with the views which have been expressed, on both the Liberal and the Conservative Benches, but I promise to be duly controversial before I sit down. I am glad that the noble Lord, Lord Byers, did not give an unqualified welcome to these proposals. I agree with him that even Method III, which is far less complicated than Methods I and II, is so complicated that it will deter companies which might otherwise wish to adopt the proposals from doing so. The proposals are far too restrictive. Certainly they are not attractive to employees. This is a point which it is necessary to get over if it is the intention of the Government to go ahead with the proposals contained in the Finance Bill.
All that the proposals mean, taking Method III as the example, is that the equivalent of a few weeks' wages of an employee would be tied up for five years without much chance of that investment increasing greatly in value, unless the shares are in a company where the share values increase enormously over that 176 period. Clearly that is a risk that I am not sure the employee should be called upon to take. Most employees would prefer to take a cash bonus rather than to have this complicated arrangement of shares being handed to them, whether they like it or not.
Assuming that this proposal is accepted, no doubt the noble Lord, Lord Byers, would go on to say that the employee should have complete freedom to sell the shares. I should prefer to put it the other way round: that whatever incentive bonuses we may agree on for an incentive scheme such as that to which the noble Lord, Lord Cullen of Ashbourne, referred, of which I am in favour, the payment to the individual workman for taking part in these schemes should be in the pay packet. This is the trade union point of view and I thoroughly support it. The workman should be allowed to decide for himself what he is going to do with the cash which the company has now agreed he has earned. It is part of the incentive arrangements for the benefit of the company. The workman should be allowed to have the cash and to spend it, or to put it into savings schemes, of which there are plenty, or, if he wishes to do so, to buy shares in the company under the share option schemes or any other schemes for the favourable purchase of shares. A great matter of principle is involved. I disagree entirely that even in this beneficial way we should return to any form of the truck system, by saying to workers, "You'll get the pay in the form that the employer determines". To lose the freedom of the workman to decide for himself what he is going to do with the cash is reprehensible.
I am dubious about the wisdom of inviting the employee to put both his job and his savings into the same basket. That is why I want savings schemes to be developed. As I have said, if the employee wants to buy shares in the company he should be allowed to do so, but there should be no compulsion about it. I do not care for some of the proposals contained in the document. I want there to be what I call fair and honest incentive schemes. I do not agree with the suggestion contained in the document that it would be impossible to work out fair tax relief on cash bonuses. I do not believe that is the case. We ought to examine the possibility of obtaining tax relief on genuine incentive schemes.
177 Then there is the further drawback, which I have already mentioned, of the five-year period during which, according to these proposals, the employee has to hold the shares. If the purpose of incentive schemes, or profit-sharing, or whatever you care to call it, is to obtain from the employees a greater degree of loyalty to the company, may I suggest that the encouragement should not be a reward for past loyalty but should start right away and be given, if that is the right word to use, to the newest and the youngest employees in the business. This is how loyalty is encouraged.
Many noble Lords, if not all, will know of my connection and association with the co-operative movement where there is partnership in practice on a very large scale. I should like to stress the view now that in this country there are many enterprises that would benefit greatly from changing their status from public companies and registering under the Industrial and Provident Societies Acts. However, I agree right away that there is very little chance of that happening on any scale. I want there to be more workers' co-operatives. Certainly this would be beneficial, but I do not think that it is a very practical idea. However, we need a new type of company that incorporates some of the virtues of the industrial and provident societies as well as some of the virtues of the company system. I believe that we can now make a start. I have been trying to pursue this idea and have advocated it for the last 25 years.
The noble Lord, Lord Byers, said that the Yellow Book made very little impact on anybody outside the Liberal Party. So far my ideas have made no impact on anybody, but that will not deter me from putting them forward again. The reason why I do so is that I think that in this country there is an area of enterprise which greatly needs a new type of company for entirely different reasons from those that we are discussing now. Those are the close companies, the partnerships, the unquoted companies. Their legal status is, to say the least, ambiguous and their fiscal position is deplorable. The small family business—although many of them are not small—is far too heavily taxed.
If we want partnership in industry, which I gather is being advocated by the 178 noble Lord, Lord Byers, and apparently it has not been turned down by the noble Lord, Lord Cullen of Ashbourne, surely the way to get it is to have a company that is a real partnership right from the beginning. I do not think you can attach to the ordinary public company these ideas of partnership that are now being canvassed, because the employees' position is always going to be a small one; he is not going to have control of the company. Even with wide profit-sharing schemes and shareholding schemes, he is not going to have a great deal of influence on management, as a shareholder, as an employee or whatever. Therefore, if we really mean that we want to develop a partnership the thing to do in a new type of company is to have fixed value and fixed interest shares which are non-transferable; in other words, get them out of Stock Exchange gambling.
Many of these companies are afraid to go public because the family does not want to lose control, and they do not want to get into the greedy paws of the take-over people and the asset strippers. So they do not go public, and they suffer all the disabilities of the very high taxation that is levied upon them. So get rid of that by having fixed value fixed interest shares. When all the other arrangements have been made for the disposal of the surplus of the company, every six months or every year, reserves, depreciation and so on, whatever is left, let the partners decide how to divide it up, bonus on wages, bonus on shares or whatever. This is the way to do it, so that all the partners are completely and deeply involved in the business and take part in the management of the business.
I know very well that there is very little chance of ideas like those I am putting forward being accepted unless you can put in a financial inducement; and, of course, the financial inducement is that if you establish the legal basis, the legal status for this kind of company, a close company that takes advantage of this idea and registers as a new kind of company, what I would call a partnership, would get the tax relief that it now should have as a close company. I think a great deal could be done in that direction if we set our minds to it.
As for the proposals in this document, they are too restrictive. I do not know 179 whether it will be possible for the criticisms and suggestions that have been offered so far to persuade the Government to make changes, to widen the scope, to make the proposals less restrictive. We shall have to see when the Finance Bill comes along. But even when that is done, they are so complicated; I do not think you can get rid of the complications if you are going to have this form of tax relief, because I doubt very much whether more than a handful of companies in this country will take advantage of the proposals.
§ 3.53 p.m.
§ Lord DRUMALBYN
My Lords, we have had three splendid speeches to lead off this debate. I thought the noble Lord, Lord Byers, if I may say so, made a model speech to kick off a debate of this kind, and I am sure all noble Lords appreciated the thoughtful and very well researched speech of my noble friend Lord Cullen. The noble Lord, Lord Darling, made the classical opposition to profit-sharing investment schemes, and put forward suggestions which I am afraid he himself admitted are going to be rather difficult to realise. We are really dealing in this debate, as I see it, with the particular proposals that the Government have put forward to encourage share holding by way of concessions on employees' share holdings.
The debate, on the face of it, is on profit sharing, and one could say very broadly that there are two forms of profit sharing; first of all, the annual cash bonus, and, secondly, the annual allocation of cash out of profits for the purchase of shares. I did not interpret the Government's consultative document as indicating any opposition to a straight cash profit bonus. What they were talking about was the kind of tax concessions which you could give in certain cases. It seems to me, taking all into account, that it is reasonable that cash bonuses should be chargeable to income tax. It is, if I may put it this way, a reward for collective effort in the past. But profit-sharing investment schemes are quite different in that they involve allocation of profits in the past year for purchases of shares the value of which in future will reflect collective effort over the years to come. They represent a combination of reward for past effort and encouragement to effort in the future. 180 What is perhaps more important still is that, properly devised and with general support in the company, they can engender a sense of common purposes and an industrial commitment to the interests of the company as an entity, to its wellbeing and to the advancement of the services it provides for the community.
It will not do so if the scheme is in any way divisive. I agree with the White Paper in that. I agree, too, that the scheme should be open to all employees who have qualifying service prescribed in the scheme. I agree that this should be left flexible, whether it is one year's service or many years' service. I am afraid I do not agree with the noble Lord, Lord Darling of Hillsborough, that it should run from the start. I think there are very few such schemes in being that do run from the moment a person becomes an employee of the company.
The social usefulness of employee share investment will be small if share investment in general is discouraged, as it is at present, notably by the enormous surcharge of 15 per cent. on investment income and by the very large chunk of any appreciation in value of shares which the Government take on realisation. This is a severe deterrent, particularly in times of high inflation. This is particularly disadvantageous to the employee who holds shares only in his own company, since he would not be able to set any fall in the value of shares in his company against gains in any other investment. The first priority should, therefore, be to reduce taxes on savings in general.
I shall confine my remarks to profit sharing by way of employee acquisition of shares in the employee's company. I share the view expressed by the noble Lord, Lord Byers, and by my noble friend Lord Cullen, that Method II in the consultative document is not a satisfactory alternative within the confines of the Government's consultative document. I do not myself regard Method II in the consultative document as coming into the category of profit sharing by way of employees acquisition of shares in their company; it is a different animal altogether, as it would simply enable individual employees to acquire shares on favourable terms. It could be described, perhaps, as dividend and appreciation in value sharing, rather than profit sharing. It 181 seems to me that it would be divisive as between employees who availed themselves of the offer and employees who did not. Nor am I attracted to the idea of encouraging a company to lend money, or arrange for money to be lent, to employees to purchase shares in the company for which they work.
With regard to Method I, that involves investment of profit bonuses in shares of the company after deduction of PAYE on the bonuses, subject to a condition that the shares would not be sold for five years. I am not clear about this, but it appears that, under this scheme, the employee would have the option of either keeping the bonus as a cash bonus and paying income tax on it, or investing it in shares in his company. If he chose to invest the bonus, it seems that he could buy shares at up to nearly 5 per cent. more than the full value of the bonus at a preferential rate, which would, in effect, give him shares free of income tax at the basic rate.
I should like to ask, because it is not very clear from the somewhat schematic explanations of how the release would work, whether all these are to be charged at the basic rate of income tax, or whether the rate of income tax that would apply would be in accordance with the whole range of income tax on the higher incomes? I am not at all clear what is meant and I hope that when the noble Lord replies he will bear that point in mind. No doubt, a trust would have to be set up to hold the shares for at least the restriction period of five years, to receive the dividends and to pay them to the individual holders, less income tax at the basic rate. The extent of the preference—that is the discount on the current market price—would apparently be left to the company to decide.
Under Method III, the shares would be purchased by trustees at full market value and would be held by them for the restriction period of five years. There would thus be no complications in cases where the employee died during the period, because his representatives would, as I understand it, simply receive the current market value, less tax. After the end of the restriction period, he would be encouraged to hang on to the shares for a period of up to 10 years by a tax concession of either half the original cost 182 on realisation after five years, or one quarter after 10 years. Alternatively, as my noble friend Lord Cullen of Ashbourne suggested, there could be a tapering scale, which I agree, would be more desirable. The proposal would result in an annual rate of tax of 17 per cent. over five years at the current basic rate of 34 per cent., or 8½ per cent. after 10 years. I hope that I am right about that.
In both methods, any appreciation in the value of shares over their full purchase price would be chargeable to capital gains tax. I suggest that the shares should be free from capital gains tax during the restriction period. Of course, the market value of the shares could go either up or down during the restriction period. If it went down, the employee who wanted to realise his shares would receive less than the amount he might have expected. I suggest that that is as it should be. It is all part of the collective responsibility of the employees for the fortunes of their company.
However, I suggest that, because of its relative simplicity, Method III is much to be preferred to Method I. From the start, the employee would know the value of his shareholding at any point in time. It is, of course, possible that the market value might fall so heavily that, after five years, the realisation price would be less than the preferential price he had paid for the shares, but that is, as they say, "one of those things"—it is inherent in this kind of system.
I should like to ask the Minister a few questions. First, am I right in thinking that the Government intend the sums allocated for profit sharing to be deductible from the pre-tax profits and not post-tax profits in the hands of the company? Secondly, would it be open to companies to issue new shares under Methods I and III rather than to purchase—or, rather, get trustees to purchase—existing shares on the open market?
I entirely agree that the tax advantages should not be allowed to a range of shares reserved for employees only. However, provided that the new shares issued each year for employees ranked equally with the category of shares already issued and could be sold pail passu with them on the open market, new shares would have advantages over the purchase of existing shares. 183 For instance, the annual purchase of existing shares could tend to distort the market just as, as the noble Lord, Lord Byers, said, the sale of the shares after five years, once the restriction period was over, would tend to distort the market.
Moreover, the purchase of existing shares would, in much the same way as the distribution or profits to shareholders reduce the resources of the company that were available for internal financing, whereas the issue of new shares would have much the same effect as profits retained in the business. It would represent new capital resources available to the company. The employee would be contributing, in effect, to the capacity of the company to modernise and expand. I am sure that the Government must have considered this matter and I look forward to hearing their view.
Thirdly, is there any reason why trustees used by one company should not also be used by other companies? So long as the trustees were not in the public sector, that would seem a reasonable proposition. If companies could get the expertise, a single block of trustees or a corporation of that kind could handle the trusts.
My fourth question is slightly curious. What happens if a multinational board, based in Britain, runs similar schemes for its subsidiaries in other countries? The Government's proposals are limited to employees in the United Kingdom, no doubt because they are considering United Kingdom tax concessions. However, would it be right—I merely pose this question—in principle for United Kingdom employees to share in the profits of an overseas subsidiary which had its own profit-sharing investment scheme and which, indeed, might be obliged by the law of the host country to have such a scheme? I merely pose that question for consideration. I do not expect an answer today, but I hope the Government will think about the matter.
I do not know what the Government have estimated would be the cost of the three methods outlined in the consultative document. However, I would hope and expect that, if the schemes proved successful and if the economic climate was right, the Government would stand to gain much more in increased revenue than the amount that the tax 184 concessions would cost. Even if that proved an over-estimate, the intangible gain in wider understanding of what the company was trying to do and in greater confidence and co-operation would be considerable indeed.
I am glad that the Government have made it clear that profit sharing is quite distinct from industrial democracy. Of course, we have been waiting a long time to hear exactly what is meant by "industrial democracy". However, if it means what we have come to understand the Government to mean by it, then I think that it is absolutely right. Nothing could be more divisive than getting the two confused or making the share of profits a subject for the kind of negotiation that take place on wages and conditions of work. That does not mean that there should be no democratic element in this matter. I entirely agree with what I gathered from the remarks of the noble Lord, Lord Byers—that is, that there should be the fullest consultation with all the workers in whatever body it might be—a works' council, a company's council, or something of that sort—before such a scheme was instituted.
Not very much has been said about small businesses. The noble Lord, Lord Darling of Hillsborough, referred to this matter, but clearly the Government's present proposals are limited to quoted companies and for my part, can understand why, although I hope that the categories of companies to which they apply can be extended. I do not want to develop this matter as time is limited. However, there seems to be no reason why comparable, though not identical, schemes should not be devised for small businesses, and I hope that that will be the next step which will soon be taken.
To conclude, I support the encouragement of profit-sharing investment schemes by tax incentives and in any other possible way, though I suggest that they do not go far enough. I believe that all of us are seeking—or at least most of us—ways in which to raise the level of productivity, which has fallen so far behind that of other comparable countries in too many sectors of our industry. The more employees can feel themselves involved in the interests of their company and the stronger becomes the sense of common purpose, the more chance there will be of us catching 185 up and even overtaking our competitors abroad. In some instances groups of employees can be stimulated towards more efficient production by productivity deals or stimulated to more efficient marketing by bonuses of one kind or another. But there are many activities where the collective efforts of an enterprise can only really receive tangible recognition through bonuses in the form of profit-sharing, varying from year to year with the financial success of the company.
I am no new convert to the idea that profit-sharing investment can play an important part in improving the collective efficiency of a company and, above all, in enhancing the sense of common purpose within the enterprise. Obviously, this is not a panacea; but neither is it a placebo; nor is it merely an attempt to placate the Liberal Party, important as that may be to the Government. It is something that has a useful contribution to make towards stimulating the ability of the British quoted company to compete successfully in a highly competitive world as an efficient and mature team. It is for that reason that I support what the Government are trying to do, and hope that between now and the Finance Bill the scheme itself will be improved.
§ 4.12 p.m.
§ Baroness ROBSON of KIDDINGTON
My Lords, I am, of course, delighted that my noble friend Lord Byers should have raised this subject for discussion here today. I have been tremendously impressed by the contributions made by noble Lords on both sides of the House, much of which I fully endorse. But at the risk of being repetitive, I should like to state what I believe the basic objectives of schemes designed to encourage share ownership through profit sharing in the corporate sector should include or should achieve.
First, such a scheme must be aimed at achieving greater company loyalty. It must be aimed at better industrial relations; it must be aimed at greater productivity and it must be aimed at more effective employee participation in the managerial process. Above all, it must be aimed at creating a property-owning democracy in this country. I agree with my noble friend Lord Byers and everyone else who has spoken that Method III is preferable. If 186 we look at the proposals emanating from the Treasury on Method III and measure them against these criteria, I, personally, do not believe that they go far enough in creating a property-owning democracy.
Like my noble friend, I am delighted that the Government should have listened to Liberal proposals for profit-sharing. I am sad that the suggestions put forward in the Liberal Yellow Book in 1928 have had to wait 50 years because, although I agree with my noble friend that they are still perfectly relevant today, our economy has changed to such an extent that many more things are needed today in order to create a property-owning democracy. Perhaps I may return to one of those later in my remarks.
As I have said, I agree with many of the contributions already made as regards Method III and, although I agree with the suggestion that to qualify for membership of a profit-sharing scheme one should have had to work for the company for some time, I think that five years is much too long; because if we superimpose upon that the fact that one would have to wait another five years before one could obtain a tax benefit, that would mean that it would take a person 10 years to achieve a share in the company for which he works. Not only is that not enough of an incentive at this time—because I think people are more impatient than that—but also it can be a dangerously long period, because it can add to the already difficult problem of the immobility of labour.
The other aspect of Method III about which I am a little concerned concerns the conditions under which an employee can withdraw his shareholdings prior to the five years. The conditions include injury, ill-health and death. But I think they lack one reason which should also be included. Some kind of phased tax relief should be given depending on the number of years the person has had the holding if he withdraws it for the purpose of purchasing a house for himself and his family. Again, I believe that the basis of a property-owning democracy is the capability of owning one's own house. If, having contributed to the scheme for two or three years, he has the opportunity to purchase a house, I believe that that should be one of the conditions under which he could withdraw his shareholdings from the trust.
187 I am also very much in agreement with the remarks made by the noble Lord, Lord Cullen of Ashbourne, about the problems of the loss-making companies. I am enamoured of the idea mentioned by him of using the value added principle in order to encourage workers in companies such as British Leyland to become involved in a productivity drive for this country.
Other problems that have been raised by various noble Lords include the problem of subsidiary and close companies. I should like to ask the Government, in conjunction with the Institute of Chartered Accountants, to see whether it would be possible to include the close companies under this particular method of profit sharing. I do not believe that it is beyond the wit of man to design a system whereby we could include those companies that are at present not viable under the scheme.
Those are some of the remarks I wanted to make about the scheme itself. But I said earlier that our nation's economy has changed enormously in the last 50 years and there are large sections of the community that work in the large nationalised industries—the service industries—that are not included in the scheme. I should like to ask the Government to think in wider terms and to devise a tax incentive designed to encourage wider share ownership by all salary and wage earners. In one sense all of them are engaged in the production process, including those employed in the public services and in the private sector.
Few Members of this or the other House in the 1930s envisaged the scale of the pension fund and insurance savings that would flow from allowing, as a charge for tax purposes, company contributions to superannuation funds and the personal income tax relief for savings by insurance methods. Pension funds for the benefit of large sections of our national workforce, including employees in our nationalised industries and public services, now total £26 billion and insurance funds are estimated at £30 billion; that is, £56 billion in all. We therefore live in a society where large sectors of industry are owned directly, or indirectly, by employees in both the public and corporate sectors of our society. Why should not we, as a 188 nation, build on this success by taking more ambitious steps towards a property-owning democracy by the provision of attractive taxation incentives designed to encourage share ownership by all members of the nation's workforce? Such incentives can be designed to play an important role in the wage and salary structure.
Other nations' economies, including those of Germany and Japan, have for many years adopted these policies which have been an important strengthening factor and have resulted in much higher capital investment in their industries. The total payroll of the nation is £80 billion. Personal savings schemes encouraging savings of 5 per cent. would produce £4 billion of extra savings per annum. The Chancellor, I believe, has the opportunity in this coming Budget to encourage savings rather than consumption, and savings are badly needed if we are going to conquer unemployment and if we are going to get additional investment in British industry. I know that this is not exactly the subject of the Government's proposals on profit sharing, but it is related because we have to get a system which brings the whole nation together to work for a better future.
§ 4.22 p.m.
§ Viscount HAMPDEN
My Lords, the noble Lord, Lord Byers, when introducing this Motion quoted from the Liberal Yellow Book of 1928. I should like to go back a little earlier than that, with the following quotation:We shall not have a satisfactory settlement of the wages question until a labourer receives, in some way or other, a share, however small, in the profits of the business in which he is engaged".Those words were spoken by my great, great grandfather in 1872, when introducing a profit sharing scheme to his own agricultural employees in Sussex. As he was for about eight years Chief Whip of the Liberal Party in another place, I am sure he would be delighted that what he practised in the 1870s is now being preached in the 1970s.
While I welcome the general tenor of the Motion which the noble Lord, Lord Byers, has introduced, I have certain reservations about it. I think what we are trying to do is to improve the general profitability of industry by creating a 189 better atmosphere through having employees more involved in industry by owning shares. But we have a problem here. I am a director of a small public company which has two subsidiaries doing totally different things. The morale and the esprit de corps in both those subsidiaries is very high, but the morale is to the different subsidiaries and not to the head office or to the group as a whole. I am sure that if I went to our employees and asked whether they would like an investment in their own jam-making factory, or whatever, they might be quite interested in the idea; but actually to buy shares in a publicly listed company which they know very little about, I think would cause them not a great deal of interest at all.
There are a number of big companies which are one product companies in which a share incentive scheme is a natural. I noticed that Lloyds Bank introduced one last week. That is perfectly natural because employees of Lloyds Bank, whether they are the cashiers in a small branch office or in the head office, can feel associated with such a bank. But a large part of our industry is spread over a number of very large companies which are very diversified, and one wonders really whether employees are very interested in having shares in the large holding companies.
The noble Lord, Lord Cullen, mentioned ICI and said it had had a very successful scheme for the last 20 years. I say, Yes, but there is a slight query over that because I remember in the days when I worked in the City, that people dealing in ICI shares were always anxious to know when the company was sending out the stock certificates because they knew that the following day there would be a large number of ICI shares being sold by the employees. Now a nice cash bonus for the employees is what I think the noble Lord, Lord Darling, was talking about, and I think that is perfectly satisfactory. But I do not think it is what we are really trying to do. There are problems about the attractiveness of these private profit sharing schemes.
The other point which I should like to make concerns the question of share price. Noble Lords who follow the stock market will know there has been a great deal of volatility in stock markets over 190 the last five or six years. A high was reached in May 1972 when the Index reached 550. By December 1974 it was down to below 150, and again in September last year it went up to 560. I can foresee a great deal of disappointment, indeed bitterness, among employees who get offered shares when the market is at the top against those who get offered shares when the market is at the bottom. Some make a lot of money and some do not make any at all.
A little more concrete example of what looked an attractive way of getting employees involved in a company but which backfired rather badly occurred some 10 years ago, when a very well known private company, with a fine product and a fine profit record, decided to make an issue of its shares to the public, becoming in fact a publicly listed company. Under the Stock Exchange rules applying at the time—and they are still the same now—10 per cent. of any public issue can be applied for and allotted in full in a preferential way to employees and executives. This company announced that it was going public. There was a great deal of excitement among the employees, and they applied for these shares allotted in the pool. Unfortunately, the public took a slightly different view of the pricing of the issue and did not subscribe for that share in the way in which it was hoped they would do so. The result was that two days later, when the dealings started in that company, the employees suddenly realised they had made nearly a 10 per cent. loss on their initial investment. That caused a great deal of not exactly unrest, but disappointment. Therefore, while I welcome the general tenor of Lord Byers' Motion, I should like to make the appeal that any scheme that is put forward does not do exactly the opposite of what is intended; and if we are going to have a share in democracy, do not let us have that share in democracy with a number of very bitter shareholders.
§ 4.27 p.m.
§ Lord HANKEY
My Lords, I agree warmly with the noble Lord, Lord Byers, and the noble Lord, Lord Cullen, not only on their technical comments but on their anxiety that this problem of profit sharing should be the subject of an all-Party consensus. It ought not to be subject to 191 constant change, as the kaleidoscope of our Party structure changes, if that can be avoided. I agree that a measure of profit sharing, very flexibly framed, would be a good thing in principle. I think it would encourage workers to take an interest in the profitability of the enterprise they work for, and would encourage sensible productivity agreements, though I do not think that the Inland Revenue proposals are very generous.
We have to face the fact that now we are in the Common Market we must, over the years allow our levels of salaries and wages, and our productivity, both artificially held down by the Government and the trade unions and workers respectively, to rise to more or less European levels. They must, incidentally, be got to move together, and that is pretty difficult to ensure. If profit sharing would help, that would be an excellent thing in principle.
I also agree with the noble Lord, Lord Byers, that this ought not to be dealt with in isolation. In practice—and I repeat "in practice"—we have to look at profit sharing against the general background of the muddle in our economy and in our industrial relations. I suggest that profit sharing should be brought in as part of a general reform of taxation, social security and industrial relations, which really is essential for our long term survival. All these things have got terribly complicated. They really need simplifying. It is because there are hardly any profits by the time the Government have taken a huge slice of them and after the workers have so often refused to make proper use of new machines and production methods that we have so little investment in Britain.
The return on ordinary shares is in general much less than the current rate of inflation, even the present rate of inflation, especially when income tax is deducted, and this reduces the incentive effect which workers would be given when they got the shares. This has been recognised by some noble Lords who have suggested with considerable point that there should be a cash bonus. I believe the object should be to get workers to take the shares in the company in which they work because that would increase to some degree their interest in making the firm work profitably.
Will the Government tax profits less highly to change this situation and will 192 the workers then agree to make a proper use of profitable machinery? The history of the last years is littered with almost inexcusable absurdities to raise one's doubts on this. The magnificent new steel works at Llanwern costing many millions of pounds were idle for 18 months or even two years before they were put into proper use. Skelmersdale, full of top quality textile machinery used profitably elsewhere in the United Kingdom, is now bankrupt and closed with many people unemployed. The first-class motor factory at Speke is now to be closed. Halewood, also a motorcar factory, is teetering on the brink of disaster. The list is long and I will not bore the House by reminding noble Lords of it.
I wonder whether a measure of profit sharing would be liable to start another round of strikes and stoppages to raise the workers' share? Under the Government's legislation the workers can break any collective agreement more or less at will. If so-called collective wage bargains are not kept they become rather an organised swindle. The system which has been imposed on this country by the Left Wing is exactly that which the Swedish Communists wanted to have in Sweden but which the Swedish TUC would not allow them to have. The result is what we see at British Leyland, in British Steel, at Swan Hunters and elsewhere.
Where do profits go when, after the ridiculously short-sighted disruptions by the outfitters and then the boilermakers at Swan Hunters, those who have to be dismissed to avert bankruptcy of one of our best shipyards have to be rewarded with up to £10,000 each in redundancy payments? Is this not completely quixotic? Where do profits go in those circumstances? And how can we expect workers to work well or even obey their own trade unions if we distribute public money to them when they strike in breach of agreements? What, I wonder, will be the cost of closing Speke? It must be at the expense of profits in British Leyland. All this money is paid out without any condition about retraining for another industry which is short of skilled labour. Our retraining programmes are still inadequate anyway and, as a matter of fact, they are not adequately used.
193 If it were not for the oil money I think the whole country would be much more nearly bankrupt than it was before the oil money began to come in. We shall find that in the long run this country must depend on commerce and industry and competitive exports for the imports we require to live on. The oil money is a valuable addition but is small by comparison, and if we have more industrial disasters like Swan Hunter, Speke and Skelmersdale, and do not correct the scandalous abuses which cause them, the oil money will be wasted like most of our investments which earn such meagre profits, if they earn any profits at all.
Profit sharing, yes, very good in principle, but there must be sensible profits to distribute. It is high time for the Government and Parliament to examine why there are so few profits, where the tax money goes and what in the last resort is being done with it. When they have set flatters right we can usefully discuss profit sharing in practice, and I hope that the most careful consideration will be given to it.
§ 4.36 p.m.
§ Viscount MASSEREENE and FERRARD
My Lords, it is very cheering to hear all this talk of profits, but, personally, profits are something that I have always found it very hard to come by. So many people think profits fall from the sky without much effort, but many of your Lordships will know that, as I say, they are very hard to come by. I have always been keen on some form of profit-sharing basis in companies and, as the House will be aware, many companies today indulge in various schemes of profit sharing and bonuses. My noble friend Lord Cullen of Ashbourne mentioned ICI in this connection. That excellent firm Marks and Spencer I believe indulges in all sorts of such schemes. Going further down the scale, even private employers give bonuses. Yet, for instance, in agriculture—I have had a factory but I also employ people in agriculture so I can speak about both sides—bonuses are paid to shepherds for the number of lambs produced over a certain percentage.
Profit sharing is, therefore, no new idea, and I agree it is a very nice idea. However, it is a difficult one to put into law. The 64,000-dollar question is this: If all 194 employees are to share in profits, will they also share in making up any losses which their firms suffer? The answer, of course, is, No; in any event, it would be quite impracticable to have such an arrangement. To put it another way, is it morally right that a man who is assured of a wage from a firm with no risk to himself should share in the profits when he is under no obligation to pay his share of any losses, and when of course he has the protection of the Employment Protection Act and the Welfare State to give him complete security?
On the other hand, the poor employer with enterprise and energy who builds up a company, together with the aid of shareholders who have invested their money, can be completely destroyed financially if things go wrong. However, having said that, I am still not against profit sharing; I wanted to make the point that profits do not fall from heaven, though many people think they do. Profits are extremely hard to come by unless one is a pop star—something which I have never aspired to; I do not think I would be very good at it, anyway. Suffice to repeat that profits are very hard to come by.
I thank the noble Lord, Lord Byers, for initiating this debate and I agreed with him about Method III of the proposals. I agreed also with much of what was said by the noble Lord, Lord Darling of Hillsborough. I am all for the share bonus idea. I, too, question the period of five years in this respect because, if it is a matter of giving encouragement to employees to work harder—I do not want to appear smug about this—or making them more responsible to and having a greater interest in the firms, for which they work, I should personally prefer the share bonus idea; but I do not think the average employee would prefer it, and certainly not if he had to wait five years. Could we not have a bit of both? Could we not have some shares (that is, if the company has had a good year, of course) and some cash? I think that might perhaps be possible.
This profit-sharing idea could work very unfairly for some employees. If you take the employees of a number of the nationalised industries, which make no profits but enormous losses, they would be very badly off, and I think they would 195 look with envy at their colleagues in some highly-profitable private enterprises. I do not want to go from the sublime to the ridiculous, but if you are also including unquoted companies—and I think it ought also to apply to unquoted companies—there could be two theatre companies, say, one of which puts on a play of pornographic filth and makes a fortune and the other which goes in for Shakespeare and very highbrow performances. If you take the stagehands, the scene-shifters, of those two companies, the ones who are working for the company which puts on pornographic filth and which makes a vast profit will do very well out of a profit-sharing scheme, but those working for the highbrow company—Covent Garden, for instance, which I think makes a loss, as do, I believe, the Royal Shakespeare Company, too—will fare very badly. That may seem a rather ridiculous example to your Lordships, but it is a factor which will lead to unfairness in many instances.
I have very little to say on this, but I have made a few notes to try to answer one or two other speakers. I favour share bonus profit-sharing, because, if it is all given in cash, you may think that the individual will go and buy shares in his company, and some of them probably will. They might also put the money into savings; but I am afraid that a great many of them will spend it in the betting shops and in the pubs, or perhaps on trashy consumer goods which will be of very little use to them. There is also the tax angle. Unless the Government give tax benefits to employees who have cash or shares in some profit-sharing scheme, I think it will fall rather flat.
I should like to say that owning shares ought to bring responsibility, but that what the public—the working man—would really like—and I do not think the present Government are really keen on it—is to own his own house. I think that comes before profit-sharing schemes, and I should like to see every help given to home ownership. I am for profit-sharing, but I am just a little worried about the firms which do not make a profit. The employees in such firms would come off badly; and, if you apply to the Registrar of Companies, I believe you will find that far more companies have "gone down the drain" than have succeeded. I think that 196 it is a valid point that profit sharing might work unfairly as between employees in different firms. But, as I say, I support the noble Lord, Lord Byers, in his Motion, and I am very glad that he brought it forward.
§ 4.44 p.m.
§ Baroness SEEAR
My Lords, neither the authors of the Liberal Yellow Book 50 years ago nor my noble friend Lord Byers today suggested for one moment that profit-sharing schemes are a panacea for all our ills, or will do more than take a small step in the direction in which we all want to go. I think both the proposal and today's debate, interesting and valuable though it has been, have to be put in that perspective. It is, however, a step in the direction in which we wish to go: the direction of a much wider diffusion of wealth and, therefore, because of a wider diffusion of wealth, a wider diffusion of power. The over-concentration of both power and wealth is probably the basic ill from which this country suffers today.
Having said that, we on these Benches of course welcome very greatly the Government's conversion and commitment—and I would say to the noble Lord, Lord Cullen, that it is a commitment. If he reads the reply given in another place to my honourable friend Mr. John Pardoe by Mr. Joel Barnett, he will see that the Financial Secretary said:It is the Government's intention to include in this year's Finance Bill provisions to encourage profit sharing".It is their intention: they have it there in writing, and there is no harm in repeating it in your Lordships' House today to get it on the record once again. It is a commitment of the Government, and it is a commitment which we very greatly welcome.
My Lords, not only is profit sharing a small step in the direction in which we want to go, a small instalment of Liberal policy for which we have been pressing for a very long time, a small achievement out of the pact which all the world will recognise for what it is—for they do not always recognise the achievements of the pact for what they are—it is also a peculiarly appropriate step to be taken at this time. The nature of Method III is also particularly appropriate to the needs of the present time. A great many speakers 197 today have said that employees would much rather have some money in their pocket than a share which they cannot get hold of for a period of five years. This may well be true. I would agree that it is a pity that the shares should be tied up for five years. Of course, they are not absolutely tied up, even in Method III. It is possible for the employee, at a sacrifice of tax advantages, to get hold of the money. I would suggest to the Government that it should be made somewhat easier to do so. I think it should be possible for the person who has received the share, if he wishes to forgo the tax advantage, to be able to get hold of the money; because there are reasons—very good reasons; some of those put forward by my noble friend Lady Robson, such as the desire to purchase a house—which might make it sensible for him to get hold of that money. So I would ask the Government to look again to see whether it could not be made slightly easier, with slightly less discouragement, for the employee with the share to get hold of the money without too much discouragement before the period of five years is up.
Having said that, my Lords, of course it is desirable, in present circumstances, that the money should, as far as possible, be retained in industry; just because we want, on the one hand, a much higher degree of investment and encouragement for investment, and, on the other hand, because we do not want additional money going into circulation over and above what is being paid out as pay. This is the answer, I think, to the noble Lord, Lord Darling, who was arguing that really this money belongs directly to the employee and that it is being held back from him, as it were, by encouraging him to hold it in shares rather than in cash in his pocket.
All Liberal schemes, from the days of the Yellow Book onwards, have said that profit sharing must be something which is paid out over and above what is paid as a result of a trade union agreement. Any idea that this is in substitution for the proper, paid wage, the result of a proper trade union agreement, is against the whole principle of profit sharing. It is essentially something extra which they get, and to that extent it cannot possibly be seen as being something which they are entitled to have immediately because they have earned it but which is being withheld from them. 198 If one can say, in the much-used phrase, that the employee will have "all his eggs in one basket", he will have the company's egg in his basket. That is something quite different. His egg is his wages. This is an additional egg laid by the company that he is then able to put into, normally, his nest. So do not let us get too confused with the egg-in-the-basket analogy which is used too easily in this case. It must be seen as an extra. In the particular context of today, it is desirable that as much as possible should be retained in the company. For my part, I see this only as one form of encouraging employees to develop the habit of investment because I should like to see the encouragement extended way and beyond the company in which the employee is employed.
But I think probably we will have to start the investing habit in the company in which the employee is employed. It is not a habit which has been acquired widely by wage earners in this country in comparison with those in the United States, for example, where shareholding is very common. The habit goes against the tradition, perhaps, in this country. A break with that attitude has to be made and encouragement in share holding in one's own company is a step towards wider share owning which, I think, should be the next phase to receive encouragement by means of tax concessions of one kind or another.
I should like also to pick up a point which has been made, and is often made, about the risk, the fact that sometimes people will not get the additional payment because the company has not done well. There are two things I would say about this. First, I agree—and I think it was the noble Lord, Lord Cullen, who said this—that it would be a good thing to talk not so much about profits as about value added: about payments being related to value added, that value added being the value added by the people who have been employed in the company. Profits are subject to variation for matters which are quite beyond the power to influence of the individual employees: a change in raw material prices, for example, may have a considerable effect on the profits. But value added is more closely related to the contribution made by the employee. It is also a term—and this is, perhaps, really in the nature of a trick; but one has to indulge in these things— 199 that gets away from the term "profits". That term is so misunderstood and so abused that we want to get on with the idea of encouraging people to recognise that if there is to be any real increase in wealth and in standards of living, there must be value added.
The term "value added" has not been denigrated in the way in which the term "profits" has been denigrated. So, both the real meaning of the term is better in this context for what we are trying to do; and also the word itself gives the scheme a better chance than the use of the word "profits". But that is, to some extent, beside the point.
If we are going to do this, I think the fact that sometimes there will be a good return and sometimes there will not, so far from being a disadvantage, is a positive advantage; because industry, by its very nature, is risky. Sometimes it does well and sometimes it does not. One of the things we suffer from is that people apparently find it difficult to understand that there is no automatic increase in wealth, no automatic rise in value, which justifies a continuously rising level of expectations, which is always being referred to. If, by the experience of participating in value added schemes, employees come to realise—and the country as a whole comes to realise—in quite a different way from the present state of affairs, that there is no way in which standards of living are going to be improved unless there is genuine value added, then the overall educational effect of this and the opportunity it gives for real improvement in living standards are of very great value.
That is learnt only when people experience both the benefits which come when an enterprise is successful and the falling away of benefits when the enterprise is not successful. I believe that just because schemes of this sort could bring home to people this simple truth, which is not understood and accepted, this is, in itself, a great and strong reason why we ought to proceed along these lines. I would ask the Government, while thanking them for the progress which is being made, and while recognising that it is only a small improvement which is being undertaken, whether they will look again at the opportunity for people to withdraw 200 shares more easily; to think about the incentives to share owning outside one's own company; to begin and to look beyond to what might be possible inside the nationalised industries. It is not beyond the realms of possibility that value can be added in the nationalised industries. I believe that there is room for a committee to consider ways in which some of the same kind of ideas might be applied inside the public sector. With those comments, I should like to give the greatest welcome to the Government's intention regarding the Finance Bill.
§ Viscount MASSEREENE and FERRARD
My Lords, I agree that it is a good idea to change the name "profits" to something else; but does not the noble Baroness think that "value added" might be a dangerous term? Some people might get it mixed up with value added tax, which is not popular in many quarters. It is rather near to that term.
§ 4.56 p.m.
My Lords, I should like to join those who have thanked the noble Lord, Lord Byers, for having introduced this debate this afternoon. From the Government's point of view, I am sure that it has been a most useful exchange that has ensued. For me, personally, to take part in a debate on profit sharing has a considerable element of nostalgia; for in the distant past, now, alas! nearly a quarter of a century ago, I made my maiden speech in another place on this subject of profit sharing. I do not think that the great-great-grandfather of the noble Viscount, Lord Hampden, was Chief Whip at the time; but sometimes I feel as though that might have been the case.
I mention this; but far be it from me to suggest that that particular copy of Hansard should be "required reading" for anyone beginning to study this subject now. However, I recall that my first nervous efforts on that occasion long ago were directed to a comparison between the profit sharing schemes in companies such as we have mainly been discussing today and what is to me, and to my noble friend Lord Darling, the more adequate involvement of workers in economic enterprises through the methods used in workers' co-operatives. In co-operative societies, 201 which I have sought to serve throughout my life, workers are the owners; and profit sharing is complete. Indeed, that is very heart and driving force of the co-operative method.
In companies, on the other hand, profit sharing, however successful, is only a secondary part of the financial operation. But I can assure your Lordships that my personal preference for co-operatives does not make me less appreciative of the points of view that have been put forward in today's debate. I know that the Liberal Party, which, as we have been reminded, has espoused this cause of profit sharing, also favours the development of co-operatives. Indeed, as I understand it, they espouse the concept of the Co-operative Development Agency to which this Government are committed. So there is nothing between us, or little between us, in respect of the two methods.
As I have said, the co-operative method is, to me, the best; but the best should not be the enemy of the good and I agree that the proposals for profit sharing put forward in the consultative document are good. As we were reminded, they are a good and fruitful outcome of the discussions which took place some time ago between my right honourable friend the Chancellor of the Exchequer and Mr. John Pardoe on behalf of the Liberal Party and other interested parties.
We have heard, largely from Liberal spokesmen, many of the more general arguments for profit sharing. First and foremost is the argument that when employees enjoy a share of the company's profits, they will show a greater personal interest in the company's well-being. From this increased involvement in the company, it is argued that various other advantages will spring. These include an increase in efficiency, an improvement in industrial relations and a reduction in labour turnover. Other benefits claimed for profit sharing are that it will help promote social justice by redistributing wealth and income more fairly, and that it will encourage savings and so lead to an overall increase in investment. A number of these points were made recently by the noble Baroness, Lady Seear.
They are perhaps rather bold claims, though I was glad to hear the noble Baroness say that this is only one step towards fuller objectives. But it would 202 not be unreasonable to hope that some at least of these objectives will be achieved. But just how great an impact profit sharing will have on the economy is perhaps debatable. I sound this note of caution for a number of reasons. First, firms are already free to introduce profit-sharing schemes, but not many have done so. Some half million employees currently benefit from profit-sharing schemes, and there are indeed some quite notable schemes such as that mentioned by several speakers, run by ICI. But the half million employees represent only some 2 to 3 per cent. of the total workforce.
Secondly, profit sharing will not encourage employees to identify their own interests with those of the company unless the profit sharing is on a sufficient scale to make the employee feel he has a real stake in the company; and some schemes have not been generous enough to achieve this. Thirdly, profit sharing could foster income inequalities because it favours employees in buoyant parts of the economy to the disadvantage of employees whose companies fail to make good profits for whatever reason. There must be some doubt, therefore, about how great an impact profit sharing will have on the economy. As I have suggested, it would be wrong to be swayed too much by the claims for it which have been made. On the other hand, if companies and their employees wish to introduce such schemes, it does not seem unreasonable that some encouragement should be provided through the tax system.
I now turn more specifically to the consultative document on tax incentives for profit sharing which has been the main subject of today's debate. I should like again to pay tribute to the constructive outcome of the talks between Mr. Pardoe and the Chancellor and other interested parties. I think the suggestions contained in the consultative document form an extremely useful basis for comment and discussion on how we might legislate on profit sharing. Having said this, however, I think it is important to stress that the suggestions set out in the consultative document are not firm proposals—we have not been dealing with a Parliamentary Bill—but are intended to serve as a basis for comment and discussion, which is why I welcome the debate today. There is nothing sacrosanct at this stage about any 203 of the schemes set out in the document. The Government have made it clear that in drawing up the legislation which they intend to include in this year's Finance Bill—and I therefore repeat what the noble Baroness repeated—they will take full account of any comments which are made on the document. It follows that the views expressed by noble Lords and noble Baronesses in the course of this debate will be drawn to the attention of those concerned, and I hope your Lordships' will agree that because it is at that stage of discussion it would not be appropriate for me to pretend to give a final view on most of the points that have been made.
As I have said, nothing in the document should be regarded as sacrosanct at this stage, and it will be clear to noble Lords that the degree of fiscal generosity to be provided in any scheme which may finally be selected for legislation must be a matter for decision in the context of the Budget as a whole. But the limits on the value of the shares which might be taken up by an employee in any one year—£415 in two cases or £500 in the other case—are intended to ensure that any scheme which might be introduced would not be exploited by companies by making large parcels of shares available to higher paid employees. This was one of the points which the noble Lord, Lord Byers, had in mind. He may not agree, but that is the reason for the Government's suggesting these limits.
The Conservative Party's latest scheme, to which the noble Lord, Lord Cullen of Ashbourne, referred, is conceptually somewhat similar to the third method set out in the consultative document. But these Conservative proposals are in the Government's view over-generous. As I understand them, they envisage a scheme under which companies would allocate shares to employees up to a maximum of £1,000 a year—as distinct from the figures in the consultative document of £415 or £500—and while the shares would, as under Method III in the document, be held by trustees for a five-year period, participants would be free to sell them after two years and would escape income tax altogether if they sold them after five. I hope I have summarised the new proposals which I have characterised as having been overgenerous.
204 Under Method III in the consultative document there would be an income-tax charge—though on a reduced basis—whenever employees sold their shares after five years. This was a point again which the noble Lord, Lord Byers, raised about the disposal of the shares after five years. I would say to him that the £500 or the £415 ceiling is an annual ceiling and would permit employees to acquire quite substantial holdings of shares over a period. As I have said, the Government are concerned that any scheme introduced should not be open to exploitation as a tax saving device for higher paid employees and directors. With this in mind, we believe—although I can see that it is a matter of dispute—that a limit of £500 or £415 seems about right.
§ Lord DRUMALBYN
My Lords, I do not know whether the noble Lord is going to answer the question that I put. It may be convenient to answer it at this moment. Does the income-tax payment that is envisaged in the consultative document vary with the totality of the income or is this a fixed amount proposed under the scheme?
I was proposing to try to answer the many questions asked by the noble Lord, Lord Drumalbyn, and perhaps I can do that by means of a sort of package deal. There has been some speculation about how the sorts of profit sharing schemes contained in the consultative document would relate to incomes policy. The essential feature of sucessive incomes policies has been the restraint of the growth of earnings. No attempt has ever been made to restrict money income from the selling of capital assets, and it seems unlikely that such an attempt would be made in the foreseeable future. The schemes put forward in the consultative document are all schemes for the acquisition of capital by workers and are prevented from being turned into devices to avoid any current incomes policy by the "locking-in" period of five years. As regards existing profit sharing schemes, provided the scheme was in force before the beginning of the present pay policy it is considered to be allowable outside the guidelines. For schemes which have been introduced since then it depends on the details: any cash pay-out, as distinct from capital 205 acquisition, would have to be set against the guidelines currently in force.
The noble Lord, Lord Cullen of Ashbourne, queried a point made in the consultative document about profit sharing being distinct from industrial democracy. Perhaps "distinct" is too strong a word because there are obvious links; but noble Lords will be aware that the Government plan to publish a White Paper on industrial democracy, and their profit-sharing proposals in no way preempt the discussions on industrial democracy which are still proceeding with the TUC and the CBI. As I have said, the Government intend to put forward proposals on industrial democracy as soon as the discussions are complete.
I am grateful to the noble Lord, Lord Byers, for having given me notice of one point that he raised; namely, concerning the restrictions which would reduce the value of shares by 30 per cent. under Method I. The extent to which any particular restrictions would reduce the value would be a question of fact, and the actual restrictions to be attached to shares would be for determination in a particular scheme. One restriction, which is a necessary part of the scheme envisaged under Method I, is the restriction on disposal within five years of acquisition. Another restriction might be a limitation on the right to receive dividends. It is that kind of restriction that we have in mind, but the facts would have to be determined case by case.
The noble Lord, Lord Byers, then went on to raise two or three other points, including the question of shares needing to be held for five years. If the shares could be disposed of forthwith, we should have the situation that giving tax relief for shares allocated to employees would be tantamount to the payment of wages without tax; it is to avoid that situation that we are suggesting the five-year restriction.
The noble Lord, Lord Byers, also raised the point about companies operating the PAYE scheme in relation to these proposals. It is not thought that there would be a heavy burden on companies, and it was thought better to do it that way than to have an additional burden placed on the Inland Revenue, because they are pretty burdened at the moment, as is well known. But I recognise that the 206 noble Lord has raised a point which needs to be given further thought, as is the case with many other points that have been raised today. I have already dealt with the point about the upper limit of £500.
I should like to reply to one other point which was raised by the noble Lord, Lord Cullen of Ashbourne, concerning unquoted companies. It is for companies themselves, of whatever kind, to decide whether to introduce profit-sharing schemes, and there is no reason in principle why tax relief for profit sharing should not apply to the unquoted sector—I see that the noble Lord nods approval at this point.
The noble Lord, Lord Drumalbyn, was very interrogative: I do not blame him for that, and I hope he will not blame me if this afternoon I cannot answer all his points, but I will do my best. He made a most helpful point in reply to certain other speakers when he said that he assumed the Government were not opposed to cash bonuses, as had perhaps been implied by other speakers, provided that the bonus is subject to tax. The schemes in the consultative document apply to shareholdings and it is in relation to those schemes that tax incentives are proposed, and so it is not a matter of opposition to cash bonuses as such but rather making sure that tax incentives apply only to the kind of scheme that we have in mind. Perhaps I should make an additional point concerning any cash pay-out from profit sharing schemes: as I said before, those schemes introduced since the beginning of the present pay policy must be within the incomes policy guidelines.
Then the noble Lord, Lord Drumalbyn, asked about the rate at which the tax would be charged. That would be according to the individual's own tax position and the rate would vary in accordance with the person's income from this and other sources. The noble Lord then asked rather rapidly for information on interesting but perhaps intricate points. I will just indicate the position in outline and, if necessary, write to him with further details. First, it is envisaged that the amounts expended by a company on profit sharing would be deductible in measuring its profits in much the same way as amounts expended 207 on wages. With regard to the second point, newly-issued shares could be used if the company so wished. As regards whether a body of trustees could act in several schemes, and the tricky point about multi-national companies, these are certainly points which would need consideration and I will undertake to see that they are considered.
I hope that in one way or another I have answered the specific questions put to me, though perhaps not all of them. However, I will check through the record and write to any noble Lord who may feel I have passed him by. We have been examining in this debate a particular proposal as an incentive for economic growth and I think that many of the speakers indicated that was their approach.
May I now ask that we step back for a moment and look not at the particular proposals but at the whole economic scene in a wilder panaorama. Let us confess—all of us, whether we sit on these Benches, on the Liberal Benches, on the Conservative Benches or on those where the noble Lord, Lord Hankey, sits—that whatever our political philosophy, if we look at the economic system in which we are involved we all see problems for which we do not have a complete answer. I believe that that is true, whatever we may say at the hustings, in Ilford or elsewhere.
Surely, the most ardent advocate of nationalisation must recognise that there are great unsolved problems in the State sector of industry. Surely, the most naive advocate of private enterprise must have doubts in his or her heart, from time to time. What we should all be seeking to do is to establish a third sector of the economy, which is socially responsible—indeed, I would say socially-owned—but not cast in the mould of the Morrisonian nationalisation sector. It is within this third sector of the economy that, clearly, my own co-operative philosophy very well fits. I suggest, too, that it is within such a third sector of the economy that these profit-sharing schemes that we have been discussing also fit. I think that there must be forthcoming other contributions to this debate, the suggestion put forward by my noble friend Lord Darling among them. There must be other experiments in this whole area of what I have called the socially responsible and socially-owned sector.
208 I suggest that it is not only the philosophy of Chairman Mao which can proclaim "Let a thousand blossoms bloom." Dare I suggest that it can be part of the Liberal philosophy, too? It is certainly basic to my own social democratic way of thought. Whether it can be embraced on the Conservative Benches, I am not too sure: that is for them to judge. But in this garden with its thousand blossoms, the flower which we have been admiring today is labelled "profit sharing". Time alone will tell whether it is to be a glorious rose or a modest violet. But we recognise that, for many, it is a worthy flower, and your Lordships have agreed that in the consultative document we have a valuable help and guide to any company that wants to set about cultivating this particular flower of profit sharing. In conclusion, I should like to thank all those who have taken part in the debate, and I reiterate my assurance that all points of view will be most helpful to the Government in reaching their conclusions as to the best way to proceed.
§ 5.24 p.m.
§ Lord BYERS
My Lords, it only remains for me to thank all those who have contributed to the debate, which I do most sincerely, and also to thank in particular the noble Lord, Lord Oram, for answering our questions in his usual courteous manner. I was interested in his final remarks about welcoming the possibility of a land of a thousand blooms. It certainly would be a change from Governments of a thousand bloomers. I should like to feel that profit sharing could help a little towards the avoidance of bloomers in the future.
I quite appreciate the noble Lord's preference for co-operatives. We favour the development of them as part of the sector, as he said. I see nothing which in any way inhibits co-operatives, side by side with enlightened capitalism, in applying profit sharing for the benefit not only of the employees and the people working there but of the country as a whole. And I think that a third sector could be developed along the lines which the noble Lord suggested. I say to him that I think there will be a lot more argument on the question of the upper limit. It may be that there should be an upper limit, but I suspect that if the marginal tax rates remain anywhere near what they are now, 209 this will not give us the incentives right through the business that we need. While there may be a case for some upper limit, I believe that it is a matter about which there will be argument and discussion, and I think that that is right.
I must apologise, on her behalf, for the absence of my noble friend Lady Seear, who had to go to a very important trust meeting. But I welcome the assurance from the noble Lord, Lord Oram, that nothing is sacrosanct, and that discussion will take place on this consultative document. I understand that contributions, comments, amendments and suggestions will be welcomed by the Treasury up to 23rd March. I only hope that the noble Lord will feel, as I think he has already implied, that this is our contribution from your Lordships' House. I also hope that your Lordships will feel that we have devoted a Liberal day to some good effect. Since the proposals have been received, in principle at least, with widespread approval in your Lordships' House, I ask the House to agree to the Motion.
§ On Question, Motion agreed to.