Employee Share Ownership Schemes

James Cartlidge Excerpts

Tuesday 6th September 2022 Westminster Hall

[Sir George Howarth]

My hon. Friend must have read my mind. I will come on to that very point shortly.

As I was saying, the number of employees granted a new SAYE option in 2021 was 380,000, which was a bump up, but the last time take-up was that low was in 2011-12. In 2020-21, employees in 480 companies were either awarded or purchased shares, a figure that has fallen steadily over the past decade. For example, in 2011-12, there were 570 such firms. There are several reasons for that, but the problem is that SIP and SAYE, which were developed 22 and 42 years ago respectively, have barely changed in all that time and no longer reflect the modern workplace. The period that employees typically spend at a company has markedly reduced. Indeed, young people are often encouraged to move jobs more frequently to secure career advancement.

[James Cartlidge (South Suffolk) (Con)]

I have long cared about employee share ownership schemes. I recently had the privilege that the company that I set up before I became an MP awarded shares to staff that it has had for many years—the first time that the company has done so. My experience is that all such schemes are terribly complicated. Companies have to spend a lot on accountants to get them to work, especially if they are small or medium-sized enterprises. In the submissions the right hon. Gentleman received from external groups, were there any proposals to simplify the schemes? That may help to increase uptake.

[Sir George Howarth]

I am grateful to the hon. Gentleman for intervening. Simplicity is always the key to the success of any scheme, particularly in complicated financial matters. He makes a good point.

As I said, young people are encouraged to move jobs more frequently to secure career advancement. Expecting staff to make a long-term commitment to investing in share plans when they do not expect to stay at a firm for that long—the SIP, for example, requires a five-year minimum investment period to ensure maximum tax efficiency—is no longer realistic.

Employee share ownership plans operate particularly well when a significant number of employees at a company participate. Research demonstrates that where levels of participation are relatively high companies enjoy positive returns, including increased staff engagement and loyalty, enhanced financial resilience for participants and increased productivity. The fact that the Government offer tax advantages to employee share ownership plans is, of course, welcome. However, the risk, which grows greater by the year, is that without reform the plans could become increasingly obsolete.

I worry about being too prescriptive about which changes are required to stimulate an increase in interest and participation, but some relatively simple changes could be made. For example, reducing the commitment required from SIP participants from five years to three years to achieve maximum tax efficiency. ProShare, which is the body that represents the ESO sector, has proposed such a change. Its research shows that many people are put off by having to make a five-year commitment, but would be prepared to make a three-year investment. Employers say the same: more companies would offer the SIP to staff if it was three years not five. Those that offer SIPs say that participation levels would increase.

Employee share ownership has been more widely supported by diverse organisations such as the CBI, the Social Market Foundation, the TUC and the Co-operative party. The CBI states:

“The moral case for financial inclusion is a compelling one—people have a right to their dignity and financial exclusion denies them that right. But the business case also speaks for itself—with people living in the poverty zone producing five to six times lower quality work than their colleagues.”

The Social Market Foundation suggests:

“As the UK economy emerges from the Coronavirus pandemic, now is a good time for government to push for higher rates of employee share ownership. With productivity growth in the UK lagging, a shift towards ownership structures which bolster innovation, employee effort and corporate long-termism should form a key part of the economic recovery plan.”

The TUC said that it

“supports employee share ownership, subject to conditions”.

I will quote three of those conditions. First,

“shares or share revenues should be allocated free of charge and equitably to all staff to avoid share ownership reinforcing existing pay differentials and excluding the low paid (the principles expressed a preference for collective schemes)”.

Secondly,

“employee share ownership schemes are not a substitute for decent pay or collective bargaining”.

Thirdly,

“workers and their unions should be involved in the running of the scheme, which should go hand in hand with the involvement of the workforce in company decision-making”.

As we face a cost of living crisis and higher levels of inflation, we should be looking at creative solutions to support people in work. Why not free companies to support lower-income employees by allowing offers of free shares to this group only, which would relieve legitimate financial concerns?

Coming back to the point my hon. Friend the Member for Leeds North West (Alex Sobel) made earlier, why not create a one-off SAYE that lasts for just one year, instead of the current three or five years? That would enable people to make regular savings but allow them to take their savings back if they struggle to pay the bills. At the same time, it offers a potential return at the end of the year in the form of either interest or a share price increase.

There is a conversation to be had about how we can develop a new type of scheme that would allow the more than 4 million people who operate in the so-called gig economy to join a share plan and own a stake in the organisation they work for. As the Minister will know, the current plans are exclusively for those on PAYE but, as our workforce changes, we need to design new plans that do not depend on regular monthly contributions and are accessible to those in less regular forms of work. I therefore urge the Government to consider undertaking their own consultation on these plans.

As the Minister will be aware, the Treasury is already consulting about reforming two other discretionary share plans: enterprise management incentives, or EMIs, and company share options, or CSOPs. These plans are typically offered only to a relatively small group of people, usually in managerial positions. It seems the Government are looking at these plans to help increase participation and benefits to participants. “About time too,” some might say. The CSOP has not changed or been updated in any way since the 1990s but, at the very time as we are facing a cost of living crisis, the Government seem to be choosing to reform plans that are already popular and typically benefit only those on high incomes. SIP and SAYE, which benefit some of the poorest paid workers, must surely be a higher priority for reform.

I hope the Minister will address that point. It has been made repeatedly to the Treasury over recent months, so far without any satisfactory answer. There are many examples of people participating in share plans and achieving significant gains on their savings and investments. Employees of Pets at Home, mainly shop-floor staff working in retail, who participated in the company SAYE recently made an average gain of £21,000 each, which represents a healthy return on their investment and achieving the financial resilience that is going to be so necessary in the months and years ahead.

As for the SIP, the recently issued annual survey from ProShare shows that the average value of a participant’s SIP holding at the end of 2021 was £10,294, a vital financial lifeline that can be drawn on when times are tough. These stories of millions of ordinary people making regular contributions, getting into the habit of putting something aside each month, building up a nest egg to help support their families, which millions of people up and down the country have done over the last 40 years, must not be lost by becoming obsolete.

If these plans are to operate successfully in future, now is the time for the Treasury to act and to identify what is needed to ensure that they remain relevant and compelling, and to guard against them disappearing. It cannot do that alone; it must consult far and wide, speaking to experts such as ProShare and the CBI, yes, but also to people who participate, in order to understand why they do so. After all, those are the people the plans are intended to benefit, and I would like to see millions more do so.

Finally, in what I hope would be a Treasury-led consultation, I urge it to update the excellent 2007 research by Oxera, commissioned by Her Majesty’s Revenue and Customs, which demonstrates the productivity benefits of the plans. I know from my conversations with those in the industry that, when they make suggestions for the share plans reform, such as the reduction in the SIP-holding period from five to three years, they are asked to provide evidence of the impact on productivity. May I constructively suggest that the Treasury is best placed to make that assessment? I would like to know whether it intends to do so in the near future.

The Minister might not know her fate over the next 24 hours, and I wish her well. If she remains in this position, I hope she will give this matter serious consideration, or otherwise draw it to the attention of whoever succeeds her. I look forward to hearing from her.

--- Later in debate ---

[Lucy Frazer]

I appreciate the points that the right hon. Member has made. Stakeholders and employees may not otherwise intend to remain with their current employer for five years, which is why the tax relief is designed to encourage a long-term commitment, but I appreciate the suggestion of a one-year SAYE and less regular contributions.

[James Cartlidge]

On that point, what the right hon. Member for Knowsley (Sir George Howarth) said is very compelling, because the labour market has changed and there is more churn. I was persuaded that a shorter qualifying period, perhaps with other conditions, would be reasonable, given that the employee may have the best intentions of staying longer but the labour market has changed.

[Lucy Frazer]

I thank both my hon. Friend and the right hon. Member for Knowsley for their interventions. I was going to say that if evidence could be presented of the impact of that on people taking up the scheme, I know that the Treasury would be very interested in looking at that. As my hon. Friend said, it is important that the schemes are as simple as possible, and I would welcome any suggestions on that point.

With its current restrictions, SIP remains popular. We see people making use of the greatly beneficial tax treatment, with a total value of £780 million in shares purchased or awarded under a SIP scheme in the financial year 2020-2021. We continue to evaluate the schemes to make sure that they are incentivising the behaviours that I have outlined. We keep these important and advantageous schemes under review to make sure that they provide value for money for the taxpayer, support the wider aims of the economy and help employers to drive commercial success.

We launched a review at Budget 2020 to ensure that the EMI provides support for high-growth companies to recruit and retain the best talent so that they can scale up effectively, and to examine whether more companies should be able to access the scheme. At the spring statement, the Government concluded that the current EMI scheme remains effective and appropriately targeted. None the less, the scope of the review was expanded to consider whether the company share option plan should be reformed to support companies as they grow beyond the scope of the specifically targeted EMI. I know that these companies might want to make use of other discretionary schemes, such as the CSOP. While our inclination is to support those companies in doing so, Members will understand that we want to build the evidence base before committing resources, which is why we have expanded our review to include CSOP.

As part of the Government’s duties to evaluate tax reliefs and their value for money on an ongoing basis, we are currently reviewing the broader share scheme landscape. We will keep these important and advantageous schemes under review.