Growth and Infrastructure Bill

Lord Forsyth of Drumlean Excerpts

Wednesday 24th April 2013 Lords Chamber

Finally, I suspect that Clause 27 will be remembered by future historians of this coalition Government for one striking feature of it. Many policies which have been pursued by this Government have troubled one or other of the coalition partners but, as the debate on Monday demonstrated and as the Division lists confirmed, the Government have achieved by Clause 27 the quite remarkable feat of persisting with a proposal which is widely opposed in both coalition parties, as well as on all other sides of the House. I therefore regret that the Government wish to persist with Clause 27 but I very much welcome the positive move of this amendment. I will listen with particular care to the debate but, for the moment, I beg to move.

[Lord Forsyth of Drumlean]

My Lords, I pay tribute to my noble friend Lord Younger and to the Chancellor of the Exchequer. We have had some pretty robust debates around this. We started with the proposition that it was wrong that someone who was sent from a jobcentre to take a job but who declined to accept an employee shareholder contract could be found to be intentionally not taking work and therefore be subject to sanctions on their benefits. That was dealt with. On the fundamental point, I do not wish to repeat the arguments which the noble Lord, Lord Pannick, has made, although I will observe that it is a relief to me to discover that there is something that he does not know about and which I do: the drag-along rights. It strikes me that drag-along rights are quite a good way of describing the process of this Bill in respect of the Government.

However, we have eventually got there, and the most important thing, as the speech of the noble Lord, Lord Pannick, indicated, is that this can be an extremely complex and difficult area and that we are making a fundamental change of principle here in that people can negotiate away certain employment rights. The need for independent advice is therefore crucial, and I am delighted by the amendment which my noble friend has brought before us. I pay tribute to the long-suffering officials in the Treasury and BIS for the way in which they have produced an amendment that covers the ground completely. My first instinct when I heard that the Chancellor had decided to accept our arguments was to rush to the Public Bill Office to get the draft of it, thinking that it would be full of holes or weasel words. Actually, it is comprehensive and the Government have been as good as their word. They deserve credit for that.

The last remaining area of concern was that this would be used by my friends in the British Venture Capital Association and others as a way of limiting their capital gains tax on shares which they would otherwise have got, and on which they would have to pay capital gains tax, by changing their employment status to that of shareholder employee. The loss of statutory redundancy pay would not be a major factor in their minds. I very much welcome what my noble friend said about the determination to look at this.

The noble Lord, Lord Pannick, made the key point that the advice provided to someone who is considering an employee shareholder contract should be paid for by the employer but that the tax liability that would normally arise from that would not apply. I guess that the Finance Bill currently before the other place will need to be amended. It already makes provision for the £2,000 of shares not to be subject to tax and national insurance. I assume that it will be amended to provide for the money that is paid for advice by the employer for the employee not to be a taxable benefit. I hope in the time that remains that in considering the various wheezes that might be used to avoid tax the Finance Bill will be amended to close off any possible loopholes.

I entirely support what my right honourable friend the Chancellor of the Exchequer was trying to do with this clause. He was trying to encourage more people to take stakes in their business and therefore to have an interest in the success of the business and an understanding of the risks being taken by it. He was also trying to encourage new emerging businesses, which may or may not have a future and may or may not have very much cash, to take on employees who share in the risks of that business. That is a noble and good intention. Equally, on the other side, there is a desire to limit the costs that fall on employers because of employment protection legislation, and there is a fair balance to be had there.

The combination of the two in this particular recipe produced a dish that was hard to digest, which is why we have sent the legislation back to the Commons on two occasions. On that latter point, although we may have reservations about the applicability of the clause and whether it is the best way forward, we should recognise that this House has done its job in asking the Commons, the Government, to reconsider. At the end of the day it is for the elected House, the other place, to decide on the general drift of policy that is being pursued by the Government.

I thank my noble friend and will have no difficulty whatever in supporting the passage of this Bill with the clause as amended. I look forward to seeing the measures that will be brought forward to avoid a measure that has good intentions being used for another purpose that might very well damage the credibility not just of this clause but of the Government, who deserve credit for what they have been trying to do even if this House had some difficulties with the practical execution of the proposed policy.

[Baroness Turner of Camden]

My Lords, I also agree that substantial concessions have been made, which have been spelt out by the noble Lord. On the other hand, the basic problem still exists in my mind. There are already co-partnership schemes through which employees can have shares and can participate in their companies. However, they can do so in many instances without surrendering important employment rights. That is the important thing. Why do you have to surrender employment rights, which have been in existence for many years and have been struggled for by previous generations, to participate in a shareholding scheme? I do not understand that unless this really is, as I originally believed, one of the moves that the Government are making, as they do not like employment rights all that much, to ensure that employment rights are surrendered without appearing to remove them. Employees can be persuaded, under these arrangements, to give up employment rights voluntarily in return for a shareholding scheme.

I still feel very unhappy about this. Unions will not be happy about it either. The basic point here is the surrender of rights in return for shareholding. I still do not think it is appropriate. Shareholding schemes can exist without that and do exist in many places. For those reasons, I express great concern, although I understand that quite substantial concessions have been made. The core problem, as far as I can see, is the surrender of employment rights for something that may be quite worthless when it really comes to it.

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When we pass legislation, we should always be alert to the possibilities of unintended consequences, and I nominate this proposal as the single piece of legislation proposed by this Government that is most likely to have unintended consequences. This provision will be implemented broadly across the investment banking sector. In fact, we will find employees in the investment banking sector with multiple contracts, and subsidiaries in new companies formed beneath teams and groups within an investment bank where they contract themselves to a specific desk or function. The tax leakage from this proposal will exceed by enormous multiples any possible benefit to the economy, but presumably at least the Minister feels a little more comfortable today than he did two days ago when he was called on to defend the indefensible. I appreciate that the Government have moved, but I will not be supporting this proposal.

[Lord Forsyth of Drumlean]

I defer to the noble Lord’s expertise in tax avoidance and the ways of investment bankers and investment management people in the City, but will he not give some credit to my noble friend who said that the Treasury will look at this and consider whether further measures are needed to avoid this? Some of the obvious possibilities, such as multiple contracts or changing contracts for the purposes of gaining the capital gains tax exemption, are matters that could be looked at. Surely the noble Lord should give some credit to my noble friend for taking that on board.

[Lord Myners]

The question is whether we give credit to the noble Lord’s noble friend or to your Lordships’ House. I think it is the latter that deserves credit for the improvement in this provision. We will see the statute book and regulations getting thicker and thicker as the Government try to head off all the strategies that will be developed to seek to take advantage of this provision. We have come up with something that is of infinitesimal consequence to the economy but that will nevertheless lead to huge red tape. I am afraid that the experience of previous Governments, including the Government of which I was a member, and of this Government is that tax avoidance continues to be sharper and more effective than HMRC and others will ever be in stopping it.

I am happy acknowledge that the Government have said that they will seek to address this issue—they need to—but it will be a nigh-on impossible task.

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[Lord Flight]

I thought that what the OBR was effectively saying was that if capital gains tax on these arrangements were payable, that is the sort of revenue it would generate and the extent of the capital gains tax revenue that will be lost is because capital gains tax will not be payable. I am not clear that the OBR was citing fancy and wrong tax avoidance schemes for which it picked up intentions that they would be used. I stand to be corrected.

[Lord Forsyth of Drumlean]

With all due respect to my noble friend, the tax provisions within the Bill provide for the taxable gains on up to £50,000 shares not to apply, so if it were possible for people who would in the normal course of their employment receive shares to change their employment status, then £50,000-worth of shares that they received would no longer be subject to capital gains tax, which would apply if they had normal employed status. That is the kind of loophole that I hope my noble friend and the Treasury will deal with and which would cause a loss of revenue. While my noble friend and I may think that capital gains tax is too high, it would clearly discredit the scheme if the only people using it were people who would otherwise have had to pay tax in the normal way and who benefited by changing their employment status. That is the argument that we raised at an earlier stage, and I am content to take my noble friend’s assurances that this will be looked at and will not happen.

[Lord Flight]

I had indeed understood that that was the point, but if an individual chooses to invest in a fairly high-risk new venture via an EIS scheme, he does not pay capital gains tax. If he invests and it does not qualify for that scheme, he does. Self-evidently, new companies will as far as possible qualify for the EIS scheme because it gives that incentive to investors. The position here is not so dramatically different. People may well have equity in new start-ups that does not qualify for this scheme, but in terms of the overall package, as we are well aware, they will have to pay income tax up front, there is a limit to the amount of equity they can have and it is of cash-flow benefit to the company in terms of the potential costs that it removes. I do not see it as a vehicle of fancy tax avoidance. There is a perfectly fair debate about whether it is a good idea, but I do not believe it is useable as a vehicle for the sort of tax avoidance that we are trying to get rid of.

Nearly everything that there is to be said about this has been said in this House.