Lord Christopher
Main Page: Lord Christopher (Labour - Life peer)Growth and Infrastructure Bill
Lord Christopher Excerpts
Baroness Brinton
My Lords, I was going to leave the issue of tax loopholes until the end of my contribution, but given the preceding debate I remind the House that at an earlier stage I reminded the House of the business expansion schemes that were set up by the then Government in the late 1980s and early 1990s and targeted at new small high-tech companies that were looking for investors and considerable tax benefits to investors and shareholders in those companies. They progressed reasonably well over the subsequent two or three years, but then the accountants and lawyers found the loophole that enabled at the very least the university sector to entirely rebuild its student accommodation using those schemes. I confess, as bursar of a Cambridge college, that my college and all the other colleges used them in exactly the same way.
An interesting point to note, which the Chancellor might want to consider himself, is that the Treasury immediately closed the schemes down. I suspect that if the noble Lord, Lord Myners, is right, the Treasury would have no option but to close this down immediately, and I think that would signal the death knell of this entire clause. I apologise; that was going to be my peroration at the end but, given the debate that we have just had, I have started with it. Given the debate that we have had, the experience of the business expansion schemes is one that I hope this House and indeed the other place will take note of.
To go back to the beginning, I thank the Minister for negotiating the concessions, which have been vital. At all stages of the Bill on all sides of this House we have insisted that employees and prospective employees must have truly independent legal advice. To repeat the comments of the noble Lord, Lord Forsyth of Drumlean, I, too, went through this with a fine-toothed comb to see where the lacunae were but could not find any. It is extremely helpful that the clause echoes the compromise agreement legislation with regard to the necessary independence of the legal advice that the payment for reasonable advice must come from the employer. By the way, I think that will completely put off the Gradgrinds, who we talked about at some length on Monday, who want to use this as a quick and easy route.
There has been some discussion today about the value of shares. I am less concerned about the value of shares when the shares are first purchased, because we keep being told that this is for brand new companies when their shares are virtually at par value. There is a much bigger issue when an employee leaves if they have to sell the shares back, or at a point at which the company might be sold on and an employee may want to disagree with an arrangement that the company directors have come to with a prospective buyer. Unfortunately, I absolutely cannot think of a way of legislating against that. Let us hope that, should that happen, the increasing value of the shares would be such that the employees found it beneficial. However, my experience of working with high-tech companies throughout the 1980s and early 1990s was that the vast majority of small high-tech companies, which we are told this would be useful for, never make the sort of glorious gains where capital gains tax is a real benefit. There may be a very minor benefit, and that is wonderful, but not for most. The Cambridge silicon technology companies are the stellar ones; they account for less than 5% of such companies.
I wonder whether the Minister could assist the House by sending around the revised draft guidance notes for employers, companies, employees and Jobcentre Plus staff, given the concessions that we have seen during the past two or three days. Having reread them before today’s debate, I realise that they are substantially out of date. It would be extremely helpful to those of us who have been following this in detail.
I am in the same position as the noble Lord, Lord Pannick, in that I do not like this clause. I do not think it is workable. Even fewer companies are now likely to take it up because of the safety net of the independent legal advice, for which I am grateful. I have yet to meet an employer who thinks that it is appropriate to reduce employment rights in return for sharing in growth in the future. That remains my fundamental position. Perhaps unwittingly, though, the Government have made it so unpalatable that most employers will just ditch that and go for the traditional route of offering employees a future share through a straightforward shareholding where everyone shares the gain and there is no disbenefit.
Lord Christopher
I support the noble Lord, Lord Pannick. Although they have moved, with this Bill the Government have solved one problem only to create others. I begin by confirming what my noble friend Lord Myners said. I was campaigning for an anti-avoidance, broad-brush approach for 30 years as an official of the Inland Revenue Staff Federation. I agree with my noble friend Lord Myners that this will not work. Over those 30 years, Chancellor after Chancellor said precisely that in relation to the arguments from the union that there should be such a thing. We will await events to see whether it happens.
The only point on which I disagree a little with the noble Lord, Lord Pannick, is the question of independent advice. The press picked it up and said that people will be entitled to go to a lawyer but if you go back to the Employment Rights Act 1996, which is from where this proposal came, you find a weird list of people who are legitimate to give advice in the context of the Bill that we are discussing. An independent adviser can be a qualified lawyer, which is defined in the terms that you would expect, or an officer or official of a trade union who is qualified to value companies. The trade union movement has swarms of people qualified to do that at the moment.
Then we come to the issue of reasonable costs. If this is to happen, we must define “reasonable costs” as probably something that employers are expecting. If we were talking about going to a lawyer and this were a different forum, I would say that if lawyers were present, those who felt they were qualified to do it should put their hands up. Very few would be qualified. I do not know what it has now but the Inland Revenue used to have a specialist section in Hinchley Wood to deal with the valuation of companies. This morning I asked two company chairmen whether they could tell me what the value of their company was and the answer was no. They would have to pay qualified people to value those companies. While it may be initially a case of shares at par, Lord knows what it would be in two, three, four or five years’ time.
As for the advice that is being given, he or she who gives advice has to confirm that they are adequately insured to ensure that there is compensation payable if the advice turns out to be wrong. Why on earth are we debating this? This is a proposition that, prima facie, employers do not want to lessen on the terms that my noble friend Lord Myners has expressed. It will be a considerable disservice not just to working people, because the potential of this is dreadful. I would not need any arguments at all to vote against it on that basis. It is also a disservice to employers. They will read this as saying that they have to pay only a few hundred pounds for the reasonable costs of advice. It will not be that sort of figure. If I had to do this today, I am not certain where I would go if I went to the City of London. Fees there are not cheap.
This is a little explosion that is set to go off the first time that anybody gets serious advice. My advice to the TUC would be to say to every union that has asked: seek and provide them with a list of people who may be capable of giving advice. We are talking about thousands of pounds an hour.
Viscount Younger of Leckie
Once again, I thank all noble Lords who have spoken. I can only reiterate that the Government would like to give individuals and companies more choice in how they structure their workforce. That is the aim of the employee shareholder employment status—to provide this additional choice. It remains correct that the employee shareholder status will be likely to be taken up largely by new small companies, which my noble friends Lord Flight and Lord King acknowledged. A large number of points were raised during the debate and I would like to address as many as possible.
The first was a very important point raised by the noble Lord, Lord Pannick, and my noble friend Lord Forsyth and concerns the question of the cost of legal advice to the employee shareholder. I just make it clear that the issue is whether they are charged in terms of having a benefit in kind. I can confirm that the Government will introduce an exemption within the benefits-in-kind legislation to ensure that the requirement to provide legal advice will not lead to a tax cost on individuals looking to take up the employee shareholder status, regardless of whether they choose to take up the status. This should be addressed in the Finance Bill.
The second point is a point of clarification and concerns the definition or description of drag-along and tag-along rights. Perhaps at this stage I should defer to the superior knowledge of my noble friend Lord Forsyth. The answer, for the education of the House, is that these rights are sometimes found in a company’s articles of association or shareholder agreements. Drag-along rights refer to the rights of a majority shareholder to require minority shareholders to sell their shares if the majority shareholder sells theirs on the same terms, and tag-along rights, which are more active, are the rights of minority shareholders to procure an offer for their shares on the same terms as the majority shareholders are selling theirs.
The noble Lord, Lord Bilimoria, in a passionate speech, raised the issue of consultation. I should like to clarify that we consulted on how to implement the option, not on whether we should proceed in principle. Therefore, it is not true to say that no one supported the measure, although he did not say exactly that. The consultation responses included some positive responses. As organisations said, businesses of all sizes might be able to benefit because the changes suit the dynamic way that their business operates. Therefore, the Government believe that it is a good additional option for companies and individuals. It adds to the existing status of employee and worker, which has been much covered in previous debates, and it provides those taking it up with the flexibility as well as the opportunity to share the reward and the risk that comes with having an interest in a growing company. As I have said in the past, we recognise that not all companies will wish to take up this new status, and that is fine. What is important is giving those companies that wish to take on people in this different way the opportunity to award share equity.
The noble Baroness, Lady Turner of Camden, raised the issue of withdrawal of employment rights, which I believe she raised in previous debates and which I understand. The argument is that we believe it is wrong to focus on just one aspect. Forgive me if I am repeating myself, but the employee shareholder status must be seen as a package. It is a package of employment rights, mandatory shares and tax incentives. It is the interaction of all three aspects that will motivate staff.
This new status confers a number of benefits for both the employer and the employee shareholder. From an employer’s perspective, the employee shareholder is more likely to generate ideas, as I remember mentioning in the past, for bettering the company, and to have a greater incentive to contribute to the organisation. Indeed, the hope is that they will stay longer than they otherwise might in their particular organisation.
Changing tack, the noble Lord, Lord Myners, raised the issue of multiple use of connected companies. Employee shareholder status is intended to be part of a flexible and efficient labour market in which people can move from job to job if opportunities arise—a point which may not surprise the noble Lord. However, where a person takes up an employee shareholder status in a number of companies which are associated with one another, such as banks and subsidiaries, income tax will be payable on any shares received from whatever company beyond the first £2,000 in value. Likewise, any shares beyond the first £50,000 in value will not enjoy the exemption from capital gains tax. This will prevent multiple use of the scheme for tax advantages, because the relevant limits for the tax exemption will apply to all employee shareholder contracts with connected companies.
I finish on this note. I outlined extensively in my opening remarks the points that have been raised in past debates about the share status. I reiterate that the Finance Bill will be used to sweep up any issues. We will be looking at this extremely carefully.
My noble friend Lady Brinton asked a relevant question as to whether I will be sending around revised guidance to the House. Of course, we will be sending guidance around once we have incorporated all the changes which have come from the various concessions which we have outlined today, made by Parliament and stakeholders. However, consultation continues, and I would not at this stage wish to commit myself to any particular date for passing that on.
The noble Lord, Lord Myners, raised a point about a general anti-avoidance rule. Forgive me if I am repeating myself, but the Finance Bill also introduces a general anti-avoidance rule which will tackle abusive avoidance schemes or contrived arrangements designed to avoid tax. This rather neatly rounds up a quite interesting debate that we have had this afternoon, including from my noble friend Lord Flight and the noble Lord, Lord Myners, on this issue.
The key point about tax abuse which has not been made is that the Finance Bill is an annual process. This issue can therefore be tackled at least on an annual basis if necessary. I confirm, too, that HM Treasury and HMRC will be keeping the scope for tax abuse under constant review.
The noble Lord, Lord Christopher, asked what happens if the legal advice given to putative employee shareholders is erroneous or negligent. Legal advisers are likely, of course, to have professional indemnity insurance which covers negligent advice and its consequences, so there will be safeguards there.
Lord Christopher
The noble Viscount has been very coy about what “reasonable” means. I sought to demonstrate that it could be much more expensive than it might appear at first sight. I do not know of any trade union lawyer, for example, who would do other than say, “Go to the City for advice”. Equally, it may well be more difficult to be satisfied by a valuation on the sale or disposal of those shares. Will there still be available to workers the opportunity to get advice on that?
Viscount Younger of Leckie
I believe that I have spelt out the comprehensive and extensive advice that will be on offer to employees. The noble Lord, Lord Christopher, has brought up the issue of what can be defined as “reasonable costs”. We recognise that the cost of legal advice will depend on individual circumstances. I remind the House that employee shareholder status and its ramifications will entirely depend on the type of company, type of employee and the wishes of the employee shareholder. Those discussions will go on outside any control from government. The costs involved will vary depending on the type of contract or job offered and the level of knowledge of the individual seeking that advice. What is reasonable in one particular instance may not be reasonable in another. Very deliberately, we are not stipulating a minimum or maximum price which would come under the definition of “reasonable costs”. It relates to other areas and sectors in entirely different circumstances. The concept of “reasonable costs”, as I am sure the noble Lord will be aware, is not an unusual matter.
Lord Christopher
Who is to determine the result if there is a dispute about the costs involved?
Viscount Younger of Leckie
There is deliberately no determining factor. This is a matter which has to be part of a discussion between the employer and the employee shareholder. The issue remains that the employer has to decide whether the costs are reasonable. If, for example, the costs are not reasonable, the employee shareholder has the right to complain and raise an issue. The ultimate sanction, of course, is that he may decide not to take up the job at all. That of course remains a matter for him.
The noble Lord, Lord Christopher, raised the question of valuation, which I earlier covered to some extent. He also raised the expense for companies in terms of valuing the shares. We acknowledge that it is not easy for private companies to value shares, a matter which I covered in some depth earlier. As I said, if the company is issuing new shares as part of an employee shareholder scheme, it is likely to take advice from their accountant, who will use standard methods to value the company. Again, I covered that earlier.
The House will be aware that the other place has now voted to retain this clause three times, a point made by my noble friend Lord King. I acknowledge the important role of this House, too. I believe that we have more than fulfilled that role. This House has carefully considered and improved the clause, which is evident from the package of amendments that we have discussed today. With your Lordships’ assistance, we have ensured that this clause now contains important protections for individuals. It is now for companies and individuals to use it if it is right for them.