Viscount Younger of Leckie
Main Page: Viscount Younger of Leckie (Conservative - Excepted Hereditary)Growth and Infrastructure Bill
Viscount Younger of Leckie Excerpts
Lord Adonis
My Lords, I am sorry to disagree with the noble Lord, Lord Stewartby, but to my mind when you have a totally mad idea like the one before us the best thing is not to test it out but to kill it at birth, and I hope that is what we are going to do in the debate that is to follow.
In response to this amendment I should say that never in my life, at least knowingly, have I been in such agreement with the noble Lord, Lord Forsyth—and we look forward to his contribution in the debate that follows. As he says, Clause 27 is ill thought through, confused and muddled. The amendment proposed by the noble Lord, Lord Flight, achieves the remarkable feat of making it even worse, on which I congratulate him. However, I think that the mood of the House is that we should get on to the substance as soon as possible, and I hope that we can now do so.
The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Viscount Younger of Leckie)
My Lords, I thank my noble friend Lord Flight for raising this matter, and for his general support for the principle of the clause.
I would now like to speak to Amendment 49C. As noble Lords have said, we will have a chance to debate the fuller aspects of the clause under the next amendment. In effect, this amendment calls for up to £25,000 of share value received by employee shareholders to be free of income tax and national insurance contributions. I note my noble friend’s considerable knowledge of this area from his time shadowing Treasury Ministers and from his chairmanship of the Enterprise Investment Scheme Association, but on this occasion his proposals are not in tune with the underlying aims of the policy. The employee shareholder status is not a new tax-advantaged employee share scheme or an investment incentive, although it may be used alongside existing reliefs in these areas.
In practical terms, the cost to the Exchequer of pursuing this amendment would be prohibitive. A tax relief of that sort of magnitude would make it necessary to attach a great many prescriptive rules to ensure that benefits were targeted and to prevent abuse: for example, by businesses using it as a means of transferring taxable income into employee shareholder shares. I acknowledge that my noble friend Lord Forsyth of Drumlean made these points rather eloquently. This would have the effect of introducing considerable complexity to the new status, working against our stated aim of offering a new option that is flexible and accessible to a wide range of companies.
Of course, tax policy has a part to play in this new employment status. We have listened carefully to concerns that the income tax position could be a significant disincentive for some individuals. We recognise that this could be an issue for a very few and have addressed it. It is a long-established fact, and certainly not unique to employee shareholders, that when a person receives shares as part of their employment, they may be liable for income tax and national insurance contributions on those shares. This is a consequence of the normal tax rules and the way in which income gained from employment is taxed. We must also remember that when an employee shareholder sells their shares, gains from the first £50,000 of shares given to an employee shareholder will be free from capital gains tax, which is part of the wider aspects of the scheme.
I informed the House that the Government were considering an option which would allow the first £2,000 of shares to be given to employee shareholders without incurring income tax or national insurance liabilities. The Chancellor announced in his Budget earlier today the decision to proceed with that option. This means that, typically, if an employee shareholder were to receive shares worth £2,000, no income tax or national insurance contributions would be chargeable when they received them. If they received £2,500 worth of shares, any tax would be due on the £500 excess.
The Finance Act contains several measures that will prevent misuse of the employee shareholder employment status.
Lord Forsyth of Drumlean
Will my noble friend give way? I apologise for interrupting.
Viscount Younger of Leckie
If I may, I am about to address some points that my noble friend made concerning the tax status.
For example, we do not want directors to manipulate the new status by making fake jobs for family members, which may have been in the mind of my noble friend Lord Forsyth when he made his earlier comments. We want this employment status to be attractive to a whole range of people. If we allow that no income tax or national insurance contributions are payable on the first £25,000 of shares, we think this will create only a disproportionate tax benefit for higher earners. This is about a new employment status that is open and attractive to a range of prospective users.
My noble friend Lord Forsyth asked a number of questions relating to how different types of shares would be treated and what this meant in tax terms for individuals in employment. When a person agrees to become an employee shareholder, the employer should be able to tell them what type of shares they will receive. The types of shares an employee shareholder receives may vary, as I think my noble friend indicated. First, they could be non-restricted shares. These are shares awarded without any ongoing conditions, limitations or requirements that affect their market value. If an employee shareholder holds non-restricted shares, they are usually in the same position as an external investor in the company.
Secondly, restricted shares are shares awarded with conditions, limitations or requirements attached that reduce their value. For example, an employee shareholder may not be able to sell their shares for a certain period or, if they leave the company, they may not be able to retain their shares. The employer may agree to buy the shares back from the employee shareholder.
Thirdly, forfeitable shares are restricted shares awarded on the basis that within a certain period of time, or on the occurrence of certain events, the employee shareholder may have to forfeit them and in return will receive less than their market value. When the tax is payable on these shares will depend on the type of shares that are offered. As my noble friend Lord Stewartby said, this is a voluntary arrangement, under which the individual will go into an agreement with the employer, and the type and status of the shares will be decided with their agreement. That will then lead, by agreement, to the point when the tax will be payable.
Baroness Brinton
Does the Minister accept that the flexibility for employees to negotiate the terms of any restrictions in shares will itself be restricted if a number of employees are being offered shares, because the capacity within the company to vary terms will be extremely difficult? In practice, the employee will have no flexibility at all to negotiate.
Viscount Younger of Leckie
My noble friend is taking rather a negative view. We need to look at the opportunities that the whole scheme offers. The employee shareholder could decide not to accept any shares or such a role if the situation that my noble friend mentioned applied. It may not suit them; they need to get advice and go into this scheme with their eyes open.
Lord Forsyth of Drumlean
Is my noble friend saying that the scheme will work for restricted stock that is subject to conditions? He seems to be saying that restricted stock will be treated in the same way as tradable shares, to the extent that they can be tradable. Perhaps I should declare an interest in that I have been given shares in the form of restricted stock on the condition that if I left the company or was dismissed the shares would be forfeited. Could conditions that effectively took away people’s employment rights be applied to restricted shares? How would that be defined? If it is just something to be negotiated between the employer and the employee, could an employee not find that he gives away his employment rights for some shares that he would lose if he was sacked?
Viscount Younger of Leckie
The discussions will take place before the employee shareholder goes into an agreement. If they are at all unsure, they have the right not to do so. Different types of shares and share schemes beyond those that I have highlighted today may be applicable. That, as my noble friend said, will remain a matter for discussion between the employer and the employee shareholder.
Lord Forsyth of Drumlean
That is precisely what I am doing. I am seeking clarification on an important point. If someone comes to work for a company that has a scheme involving restricted shares that you would lose if, for example, you were dismissed, how can that person negotiate when they are told, “This is the job and these are the terms”? What is their negotiating position if 100 people have already signed up? If the Minister is correct, does that not drive a coach and horses through the benefit, limited as it is, that applies to the employee?
Viscount Younger of Leckie
That takes me back to the question raised by my noble friend Lady Brinton. If there are too many employee shareholders to make this work, there may indeed be no room for another employee shareholder. I say again: the opportunity is voluntary and the terms are to be agreed between the employer and the employee. That is all that needs to be said. It is exactly why we are not being too prescriptive with this system. We are providing an opportunity for employers to take up this scheme and for employees to share in its risks and rewards.
Lord Flight
My noble friend Lord Forsyth makes a fair point. If tax is to apply, it is difficult to determine how the value of the shares in question is to be assessed, given that they may have certain characteristics. However, I will turn that point on its head, in that it is an argument for there being no tax bill at all because the problem goes away if there is none. My basic point is that common sense states that no one will be much interested in a deal whereby you give up your employment rights for just £2,500 of equity. There should be potential for much greater gain. Something like seven out of 10 smaller businesses in this country tend to fail as a result of taxation being too high and the public sector too large. The situation is not like that in Hong Kong, which is much more successful.
The equity element would be of high risk for people in SMEs. I repeat my point: it is not a question of the Government losing revenue; they will not get any revenue under the clause as it stands because not many people will take advantage of it. Therefore, the Government will not lose any revenue. If they believe in the principle, which I believe in very strongly, there has to be an attractive risk/reward ratio. To my mind, one way or the other, that requires the value of shares on which there is no tax charge to be more than £2,500, although my figures are essentially for illustration.
Viscount Younger of Leckie
My Lords, we have discussed the employee shareholder clause at length, and some Members of this House in Committee questioned the merits of establishing a new employment status. Several noble Lords raised concerns about who will use the new status, the quality of the guidance, to whom it would apply and when it would be available. Concerns were also raised about income tax and jobseeker’s allowance as it applies to those who are seeking employee shareholder status. I am grateful to noble Lords from all sides of the House for their contribution to the debate, and I want to take some time to address some of the main concerns about the new status—and it is a new status. I acknowledge the negative comments that have arisen today, but it is the Government’s belief that there is demand for a new employment status of employee shareholder, that it will be used, that it will benefit employers and individuals, and that, in turn, it will help the economy to grow.
We believe that the two existing employment statuses of worker and employee do not offer enough flexibility to employers or offer real opportunities for individuals who want to share the rewards of a growing business. There is support for this new employment status, and we have evidence of that from the Institute of Directors, the British Venture Capital Association, the Federation of Small Businesses, Stuart Rose and, at the other end of the scale, from the heads of many small businesses, including Will Butler-Adams, the chief executive of Brompton Bicycle Ltd, and Jamie Murray Wells from Glasses Direct. I could go on.
By creating a new employment status with fewer rights than employees have but more rights than workers have, we are providing a new contract type to give employers more flexibility and options in how they structure their workforce. This new employment status will support this Government’s ambition of securing a strong UK labour market where individuals can have greater and potentially more rewarding access to the work they want. Employers can secure the labour that they need at the right time in order to capture new markets and sell their products in an increasingly competitive global environment.
This new status is most likely to be attractive to young and growing companies, which will be able to share potential future growth with their staff. The employee shareholder status may tip the balance in favour of these types of companies as they seek to attract high-calibre people. This is because companies will be able to offer shares that will not be subject to capital gains tax, as we have heard today, and it is a radically new approach to taking people on.
We should be developing and supporting innovative ideas that give employers new tools to manage their workforce effectively and to succeed. This new employment status is one such tool and we should give employers the option of using it. Indeed, with the interest expressed, it would be an opportunity missed to deny them the use of this novel tool.
When we think of people working, we automatically have in mind employees with substantial employment rights. However, we must not make such assumptions. Not all individuals in the labour market are employees. Some are sole traders, others are self-employed and some are defined as workers. These individuals do not have a whole host of employment rights, as I outlined clearly in Committee.
Employee shareholders will have more employment rights than workers and they will own thousands of pounds-worth of shares in the company or parent company for which they work. Because these shares are exempt from capital gains tax, employee shareholders may be in an advantageous position. Of course, the risk remains that the shares held may decrease in value, emphasising the greater risk and reward-sharing that this employment status represents. I think that those points on the negative side have been made pretty clearly today.
I now turn to how the new status will work. We must all remember that before an individual can be considered to be an employee shareholder, paragraphs (a), (b) and (c) of new Section 205A(1) introduced in Clause 27 stipulate that three criteria must be fulfilled. This means that if an individual does not agree to be an employee shareholder, they cannot become one; it means that if an individual does not receive at least £2,000-worth of shares, they will not be an employee shareholder; and it means that if the company tries to charge for the shares or does not give fully paid up shares again, the individual will not be an employee shareholder. If the individual signs what looks like an employee shareholder contract without all three qualifying criteria being fulfilled and still works for the company, that person is likely to be an employee and will be entitled to all the employment rights associated with that status.
The new status confers more advantages than beneficial tax treatment alone. I intend to give a much more positive picture than that given by several noble Lords today, including my noble friend Lord Forsyth. Let us consider what this means for the employer of an employee shareholder. An employee shareholder is more likely to generate ideas for growing the company and will have a greater incentive constantly to strive to improve a product, effect a sale or streamline a system. Because the employer knows that the employee shareholder is an owner, the employee shareholder is more likely to be listened to. The employee shareholder status is more likely to encourage co-operation and cohesion between the employer and employee shareholder as their personal goals are more aligned. I listened carefully to my noble friend Lord King and was pleased that he conceded that this could suit certain companies and certain employees, which is precisely what we are saying.
Our companies are competing in a global race to increase their competitiveness and market share, and to create wealth. In turn, this will create new job opportunities. Employee shareholder status presents our companies with an additional option to employ people who will invest in the long-term success of the company, lowering labour turnover and associated costs.
Let me turn now to guidance. During our debate in Committee, guidance for employee shareholders was discussed at length. As promised, a full pack of draft guidance was laid in the Library of the House on 14 March. This has given your Lordships the opportunity to see what the employee shareholder guidance for individuals, companies, DWP jobcentre advisers and decision-makers will look like. It is something that we promised. It is in draft form. It will continue to be drafted. The plan is that in September it will be in its final form. I welcome comments to improve the guidance on all fronts.
We have designed the guidance in collaboration with other government departments, such as HMRC and DWP, and have worked hard to keep it as simple as possible so that it is easily understood by its target audience. Noble Lords will remember that in Committee I referred to a much larger document of 3,000 pages. This has produced a much more simple approach. The guidance is not final. We have tested the guidance with jobcentre advisers and are continuing to test it with the Employment Law Review Business Challenge Panel. Where needed, we will refine the guidance before the new status is used in September this year.
The draft guidance comprises three parts. The first part is guidance for individuals that will make it clear for people considering employee shareholder jobs what employment rights are associated with these jobs, the risks and rewards of being a shareholder and other factors that they may wish to consider before accepting, or otherwise, an employee shareholder role. Secondly, guidance for companies will help them understand the employee shareholder status, what it means for them and how they can use the status within their workforce. The third part is guidance for DWP Jobcentre Plus advisers and decision-makers to ensure that they understand the new employment status.
People in receipt of jobseeker’s allowance will be expected to consider employee shareholder jobs if they match the criteria agreed in their jobseeker’s agreement. This agreement would have been discussed and agreed with a Jobcentre Plus adviser on first attending a jobcentre and would set out the jobseeker’s job goals, availability for work, any agreed restrictions and what steps they will take to look for work. I will return to that in a moment.
I should like to pick up on a number of questions. There were quite a few and I may not be able to answer them all. The noble Lord, Lord Pannick, stated that no evidence was provided about the number of companies that might be interested. I believe he will know that last year the Government published an impact assessment. The background to how we came to the figure of 6,000 businesses is that there are a large number of businesses within the UK. In 2012 figures, it is estimated that there are about 4.8 million, not all of which will be able to use the employee shareholder status, as only companies can issue or allot shares. That is essential for the employee shareholder status to operate.
Just over 55% of all businesses in the UK are registered companies: that is, around 2.7 million. However, not all are estimated to have employees beyond the self-employed owner-manager of the company or a single employee director. This figure is probably less than 1 million. In 2010-11, around 9,000 companies were operating any form of approved tax-advantage share scheme in the UK. There will be more than this operating non-tax-advantage share schemes. Our approximate estimate, therefore, is that around 6,000 companies, as I said in Committee, may use the employee shareholder status, although I acknowledge that it could be more or less. Employee shareholders are a new option for companies, which they can choose to use when it suits their circumstances. It is not so much about whether the figure is 6,000, 4,000 or 7,000; the point is that the opportunity is there for companies to pick this up, or not, as is their wish.
Baroness Brinton
The guidance notes that we saw were quite explicit that the prospective employee shareholder applicant should be treated exactly the same as any other applicant, with the one exception of their financial resources being such that they could not pay the tax bill right at the start. If that is the case, the argument made by the noble Lord, Lord Pannick, myself and others is that, first, that penalises those who are concerned about losing their rights. Secondly—and this is the core question—is it voluntary? The Minister has emphasised right the way through the debates on the Bill that the scheme is utterly voluntary.
Viscount Younger of Leckie
It is indeed voluntary, but I would like to clarify that when it comes to a jobseeker seeking a job, they are treated in exactly the same way as other statuses. That is because we believe it is important to move jobseekers into work as quickly as possible, just like other statuses. Periods of unemployment, as we know, can have a most damaging effect on individuals’ long-term employment prospects and indeed earnings. That is why the jobseeker allowance regime focuses on moving claimants into any work as quickly as possible. This remains the case for the employee shareholder should they be mandated and reach the point when they are offered this particular position. We think it is right that they should not be treated any differently in this particular respect.
Lord Adonis
I am having some difficulty following the Minister's argument. He says that the acceptance of these posts is indeed voluntary, even though the individual in question stands to lose a substantial part or the entirety of their income if they do not accept the post. Could he explain to the House in what meaningful sense that is voluntary?
Viscount Younger of Leckie
It is voluntary in that the individual can decide whether he or she wants to take this particular role. If it has got to the point where they are mandated and there is an issue as to whether they take it or not, there are processes in place to work out how to go forward. That is the process that the noble Lord, Lord Adonis, will know is set as part of the guidance. The decision makers and the jobcentres know how to deal with it on a case-by-case basis.
Lord Adonis
This is a really crucial point in our deliberations. The guidance that the Minister circulated to your Lordships says:
“Employee Shareholder vacancies should be treated in the same way as any other vacancy. If a claimant … fails to apply for or accept if offered an Employee Shareholder vacancy … the DM”—
the decision maker—
“will consider a higher-level sanction in the normal way”.
It could not be clearer that those not accepting these posts will be subject to sanctions. Therefore, in any meaningful sense, their decision is not a voluntary one.
Viscount Younger of Leckie
I can only reiterate that employee shareholder status is being treated in the same way, and that if in a specific case an issue arises, that is down to the discussions and decisions made at the local level in the jobcentres and with the employees who are seeking work. It is not just work for an employee shareholder as it may be that they are looking at a number of other positions at the same time.
The noble Lord, Lord Pannick, asked why we do not compel legal advice such as compromise agreements. Again, in the same bracket, we would say that this is to do with individuals looking at and accepting employment; it is not to do with departure from employment. We do not wish to treat the entry into employment in a different way. That is where we are.
The right reverend Prelate the Bishop of Bristol raised a number of points concerning whether this scheme is morally wrong. I think he used the expression “the thin end of the wedge” and that it was the beginning of the end for employment rights. I would reiterate that this is a new employment status which offers a different set of rights and mandatory share ownership. The status is not compulsory for companies to use and it will be suitable only for those companies that want to share ownership with their workforce. We must remember that employee shareholders will retain the majority of employment rights, including, for example, automatic unfair dismissal rights and the right to be paid the national minimum wage. As I said earlier, we have been consistent that the new status will not suit all people or all companies, but for those who choose to use it, the employee shareholder status offers more flexibility and allows greater risk and reward sharing between people and companies.
The right reverend Prelate also asked about flexible working. The statutory right to request flexible working creates a structure for conversations between employees and employers about changes to the ways of working that will be mutually beneficial. Employee shareholders will have a greater interest in the performance of their employer as it is linked to the value of their shares. We consider that employee shareholders are more likely to request flexible working if they think it will help them and the company, and do not need the statutory right to request. Further, employee shareholders can still make non-statutory requests for flexible working.
The Government want a labour market that works for employers and individuals. We want flexibility so that it is easy for people to find work that suits them and we want to help employers manage their staff more effectively so that they can focus on running and growing their businesses. We want to give individuals more chances to share in the growth agenda and to own shares in their employer. It is the Government’s belief that with this new status we are offering companies more choice and more flexibility. It is a new way of attracting high-calibre talent to growing companies. It may provide a boon to companies and improve UK competitiveness. This status offers individuals something new: employment with favourable tax treatment.
We all recognise that this may not suit everyone, and I have listened carefully to all the comments this afternoon. However, we should not deny people the opportunity to use this status or deny companies in the UK that are striving to grow and are looking for innovative and modern ways of taking people on. We want the House to embrace the opportunity and flexibility that this new status presents, and I would therefore ask the noble Lords, Lord Pannick and Lord Adonis, my noble friend Lady Brinton and the right reverend Prelate the Bishop of Bristol to withdraw the amendment.
Lord Pannick
My Lords, I thank the Minister for his comprehensive reply. I sympathise with him because I am sure it was not in his bathtub that this foolish idea was dreamt up. I am very sorry that the Government have not listened in particular to the noble Lords, Lord King of Bridgwater, Lord Forsyth of Drumlean and Lord Vinson, and to the noble Baroness, Lady Wheatcroft. Between them they have years of experience as employment Ministers and in business. Their views echo those expressed in Committee by the noble Lord, Lord Deben, with his business experience, and by many others. They are views that reflect the opinions around the House, not just on the Government Benches but on all sides, on the implications of this unwise proposal.
As your Lordships have heard, concern about Clause 27 is not a partisan issue. It is a question of the damaging effect that this clause will have on employment relationships, on industrial harmony and through the power it will confer on bad employers. Since the Government have declined to listen, it is time for noble Lords to put Clause 27 out of its misery. I wish to test the opinion of the House.