Growth and Infrastructure Bill

Lord Deben Excerpts

Wednesday 6th February 2013 Lords Chamber

[Lord Strasburger]

My Lords, when I spoke to the first group of amendments I declared my interests as an entrepreneur. I forgot also to declare that in a former life I used to play cricket with Mr Adrian Beecroft, who is a very charming man and a very fine opening bat and cover fielder. However, to my knowledge he has no personal experience of starting or running a business. It strikes me that the authors of this clause have about the same amount of experience as Mr Beecroft in that area but are probably not as good batsmen.

I have two specific questions to address to the Minister. First, which of the rights that this clause requires employees to forfeit is going to enhance their business’s chances of success? Secondly, which of those forfeited rights do the Government think will improve the motivation and commitment of these second-class employees?

[Lord Deben]

First, I apologise for the fact that I have been abroad and therefore not able to follow that part of the Bill that has gone through since I last spent time on it.

On these amendments, I also declare an interest as the founder of a successful small business and as having worked in other successful small businesses. I have to say to my noble friend that I cannot imagine any circumstances whatever in which this would be of any use to any business that I have ever come across in my entire life. One of the problems with government is that not many people who run businesses are in it. I can genuinely say that in 16 years as a Minister, I was one of the few people who had run a big business. Since ceasing to be a Minister, I have run a number of small businesses which are happily getting larger. That is the right way round.

I hope that the Government will take this opportunity to explain in detail why these changes, which are now open to businesses, will be of help. I have not found any businesses that thought that they would be of help. Having explained that, perhaps my noble friend would be kind enough to explain why, if the changes are good in these circumstances, they are not done for everybody. If there really is a huge advantage that would make lots more new jobs, perhaps the proposal is rather limited. I do not think the Government think that, otherwise they would not have limited it in this way.

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[Baroness Turner of Camden]

Old fashioned?

[Lord Deben]

The noble Baroness, Lady Turner, speaks from her seat, but she has put forward some opinions that I have not heard since 1945. I am not on that side but I still do not see this. I hope that the Government will help those of us who are naturally on their side to get out of this miasma—this difficulty of understanding the connection of the two halves. I have great sympathy with the question asked earlier by the noble Baroness, Lady Warnock. What is the connection and how will it improve things, one by one? I am very ready to be converted but at the moment I am finding it rather difficult.

[Lord Pannick]

The noble Lord, Lord Deben, posed a series of questions about the benefits of Clause 27. Perhaps I may add to the burdens on the Minister, who is playing a very straight bat—he would be a credit to the cricket team of the noble Lord, Lord Strasburger. I will put these questions to the Minister in the hope that he can explain whether the Government have taken account of two very troubling legal consequences that will follow from the current contents of Clause 27 and which are relevant to the amendments in my name and that of the noble Lord, Lord Adonis.

First, some of the rights that the employee or prospective employee is being invited to sell are concerned with issues that are particularly sensitive in anti-discrimination law. There is the right to request flexible working, which is obviously of particular importance to working mothers—as is the eight-week notice period that would be imposed for the return to work after maternity leave. These are very sensitive matters. It is inevitable that employers who seek to rely on an agreement which purports to override rights in this context will face legal challenges under EU law, the expense of which will far exceed the amounts that they would pay to employees for giving up those rights. Have the Government taken that into account in deciding on the merits or otherwise of Clause 27?

I would be grateful if the Minister would comment also on a second legal implication. If the law allows for the sale of unfair dismissal and redundancy rights, it is inevitable that aggrieved employees, when they are dismissed or made redundant at some stage in future, will not go quietly. Having sold their unfair dismissal and redundancy rights, they will formulate their grievances by reference to whatever legal avenue has not been sold. Nothing in Clause 27 affects—and because of EU law nothing in Clause 27 could affect—their rights of protection under anti-discrimination law. So instead of claiming unfair dismissal, or seeking compensation for redundancy, the aggrieved employee will contend that the dismissal or redundancy was based on a prohibited ground. Therefore, my second question to the Minister is whether the Government have really taken into account that any employer that enters into one of these agreements—and it seems highly unlikely that there will be many of them—will not be protecting themselves against the litigation that will result when an employee is dismissed or made redundant in future.

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[Viscount Younger of Leckie]

I can confirm that it is an entirely new status, so the individual who agrees with their employer to a contract to be an employee shareholder is not the same as an employee.

[Lord Deben]

Could my noble friend help the House, before we come to Report, by giving some estimate of how many businesses the Government think will take up this proposition? Given that many of us feel there will be few, it would be helpful to know why we need this big piece of legislation if we do not think many people will take it up. How many employee shareholders of this kind do the Government expect to have in two years’ time?

[Viscount Younger of Leckie]

I thank my noble friend for that question. It is extraordinarily difficult to ascertain a precise figure. It can be only a guesstimate, and I hope that the House will respect that. However, from the figures that we have ascertained, we think that around 6,000 companies will look at this seriously and take up this issue. However, that is, as I say, a guesstimate.

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[Lord Deben]

I hope that my noble friend will be very careful in his response to this because underneath there are two falsities. The first is the schizophrenia on the side of the Opposition. On the one hand, they say that no one will be taking it up, and on the other hand they say that it might be very expensive. I do not think that the noble Lord, Lord Adonis, should get away with that argument.

I also do not want him to take too seriously the comments about exempting people from capital gains tax. I declare an interest as the chairman of a number of small companies, which are, I hope, growing. I have the feeling that there is a kind of nastiness abroad on this issue, because capital gains tax is very much a destroyer of value and of enterprise. One problem in this country is that many people do not like other people being wealthy as a result of hard work and employment. I dislike that kind of attitude very much. If that is part of the coalition agreement, it is a bad part, because we need a society in which people are encouraged to put their lives into businesses and to gain some of the benefits of that. One reason the United States is so much more successful than other countries is that it has been more sensible about that bit of its taxation. It is very stupid about a lot of other taxation, but on that bit at least it has said that there is a real reason for encouraging people to create businesses. One way of encouraging them is by giving them a lower rate of tax on capital gains and dividends than they would have elsewhere. That seems perfectly right, and one problem that we have is that we have not taken that seriously.

I am not worried about this proposal because I do not think that anyone is going to take it up and so they are not going to lose any money. However, I hope that my noble friend will be kind enough to suggest that the Government will do a great deal more to enable people, through employment, to create wealth and to take some of that wealth in a way that we do not allow them to do at the moment.

It really is sad that we have a society in which it is perfectly proper to say, “We’ve really got to stop people possibly gaining from the creation of jobs”. That is what we mean when we say that we want to make sure that nobody benefits. That is not what I want to happen—and it will not happen—but I hope that in his answers my noble friend will make sure that he does not commit the Government to not taking some pretty radical steps to remove and reduce taxation in a number of areas that will encourage job creation.

[Baroness Brinton]

I should like to clarify the point that I was trying to make about finding a tax loophole that provides a source of employment for many industry experts. We need a capital gains tax system which is fair and which certainly encourages growth. I do not think that we would suggest anything other than that from these Benches. The concern arises when, on the one hand, the Government say that they want to make a clear, open and transparent level playing field but then, on the other, they create a category that appears to have a built-in loophole.

[Lord Deben]

I am sorry if I misunderstood my noble friend, and of course I accept what she has just said. I find it very hard when the guns are turned on this issue because of the loose use of the words “tax loophole”. This is not a tax loophole; it is a decision—a mistaken decision, I think—to encourage people to do something through a tax concession. I repeat: it is not a tax loophole. I shall tell noble Lords what a tax loophole is. It is Amazon organising itself so that it runs people out of the high streets of Britain by ensuring that it does not pay proper taxes. A tax loophole—I declare an interest as being concerned with the business of packaging recovery—is when Amazon can put packaging on the marketplace and not pay the proper price of so doing. That is what a loophole is. It is not a loophole if the Government specifically say that in particular circumstances people will pay a lower rate of tax. That is a proper use of the taxation system. For goodness’ sake, do not let us use the term “loophole” in this instance. There are some very big loopholes which we ought to be stopping and, for me, Amazon is the biggest example of a company that does not pay proper tax wherever it operates.

[Baroness Brinton]

I apologise for intervening again and I thank the noble Lord for his contribution. There is absolutely no doubt that we agree about Amazon. Perhaps I may give an illustration from the early 1990s of the sort of loophole that I was alluding to. The Conservative Government of the day created generous tax facilities for investors in the business expansion scheme. When the scheme was originally devised, it was intended for small high-growth companies—where have I heard that before in this debate? Investors would get those tax benefits because they were investing in something that carried a slightly higher risk. I confess, as the bursar of a Cambridge college, that within two or three years every Oxbridge college, and subsequently every university in the country, used the business expansion scheme, and that tax benefit was quickly closed down by the Government, who described it as a tax loophole.

It is exactly that sort of loophole that I want to avoid. I absolutely understand the Government saying that it is supposed to be a niche group of companies that will apply for this, although I still wait to hear which ones they are. However, I would not want to see some sort of tax provision that suddenly made this proposal attractive to the majority of companies in this country. That was not the intention and it certainly has not been the tenor of the debate.

[Lord Deben]

I do not disagree with that. However, I think that this proposal is going to be so unattractive to so many companies that that particular problem will not arise.

[Viscount Younger of Leckie]

My Lords, first, I am most grateful to my noble friend Lord Deben for extolling the virtues of employee ownership, which is very much part of the debate today.

This amendment stipulates that the clause should come into effect only once an independent assessment, conducted by the Office for Budget Responsibility, is laid before both Houses setting out the impact on the Exchequer for each financial year between 2014 and 2030.

The OBR’s role is to provide independent scrutiny and certification of the Government’s policy costings ahead of the Budget and the Autumn Statement. The OBR certified the costing of this measure submitted by HMRC using the methodology set out in the policy costings document published at the Autumn Statement, which is available on the HM Treasury website.

The main duty of the OBR is to examine and report on the sustainability of the public finances. The OBR performs this duty independently, with complete discretion to determine the content of its publications and its work programme of research and analysis.

The Government do not publish annual breakdowns of the cost of operating specific tax measures beyond the end of the forecast period, and this has been the case for some time. This will apply to the employee shareholder status in the same way as it applies to the cost of operating any other specific tax measures.

The noble Lord, Lord Adonis, is understandably concerned about the need to support the Government’s agenda for fiscal sustainability. I emphasise that we believe that investment in policies such as this one—aimed at reducing costs on business and increasing productivity —is exactly what is needed at this time. Strong, sustainable and balanced growth is the key to long-term fiscal sustainability. However, I assure the noble Lord that if further provisions are needed to limit its overall costs, we will have the opportunity to include these at a later date.

At this stage, I think it is worth picking up some points that the noble Lord, Lord Adonis, raised concerning the OBR. The OBR, with its responsibility, is right to note that predicting the take-up of new policies such as this one is very difficult. We recognise that, but its comments need clarification. First, the OBR refers to tax planning and not avoidance. Encouraging take-up of this targeted employment policy should not be misconstrued as encouraging avoidance. Secondly, any rise towards £1 billion is estimated to occur well beyond the end of the forecast period—in fact, beyond the 2020s, when national income is likely to be more than twice as high in today’s money. Finally, the draft legislation published on 11 December includes a number of anti-avoidance provisions. If further provisions are needed to address particular avoidance risks, we will have the opportunity to include them at a later date with a view to ensuring that this policy does not become disproportionately costly to the taxpayer.

[Viscount Younger of Leckie]

It gives me the opportunity to answer the noble Lord’s question by saying that the OBR has stated that in the long term this policy could cost up to £1 billion. That figure relates to the future period beyond the 2020s. However, there are uncertainties associated with costs so far into the future and I am sure that the noble Lord will appreciate that. The Government expect that the new employee shareholder status should help to stimulate business and entrepreneurial activity by affording businesses greater choice on the contract that they can offer to individuals while ensuring that appropriate levels of protection are maintained. If the policy achieves this aim, the cost, which is expected to reach £8 million in 2017-18, is proportionate. The draft legislation published on 11 December sets out a number of anti-avoidance provisions to prevent the manipulation of the capital gains tax exemption on shares received under the status. If further provisions are needed to address particular avoidance issues, as mentioned earlier, the Government will have the opportunity to include these at a later date with a view to ensuring that this policy does not continue.

My noble friend Lady Brinton raised the issue of whether the tax incentives were in effect a tax avoidance scam, if I can put it somewhat indelicately. She did not put it in that indelicate way. The Government have already included provisions to deal with various types of possible abuse in the draft legislation on capital gains tax exemption. If other forms of abuse come to light, the Government will make the necessary changes to combat that with a view to ensuring that the policy does not become disproportionately costly to the taxpayer.

Some concern has been raised, notably by my noble friend Lady Brinton about the capital gains tax exemption. This relates particularly to people taking up this new employment status, and although I touched on it slightly earlier, I shall address it directly. We believe that employee ownership is a good thing. We want people to become employee shareholders and to benefit from the exemption provided. Where it is used properly it should be seen as a measure of success and people should take advantage of this particular exemption. However, the draft Finance Bill published on 11 December takes a robust line on the potential misuse of the exemption and provides several measures that would prevent the misuse of employee shareholder employment status. There are rules to prevent those who control a company, such as company directors, holding exempt employee shareholder shares if they control 25% or more of the voting power in the company. Similarly, rules will prevent people connected to those who control the company, such as spouses or children, benefiting from the exemption. We will prohibit employees from benefiting from multiple £50,000 limits by entering into multiple consecutive employee shareholder contracts with related companies. Instead when related companies are involved, an employee will have a single £50,000 limit applying to all shares received by related companies. We will also ensure that those looking to get around the limit by using company liquidations to dispose of and then receive new exempt shares cannot do so. We will require two years to pass between the liquidation of the company and the employee receiving further exempt shares. This treatment strikes the right balance between preventing abuse and ensuring that genuine entrepreneurs are not unfairly hit.

Finally, the legislation will prevent the manipulation of share values, for example, by placing restrictions on them so that an employee can receive shares that are in fact worth more than £50,000. For the purposes of the capital gains tax exemption the value of shares will be based on an unrestricted market share. Taken together the measures and the safeguards outlined in the draft legislation will ensure that the tax benefits of a new employment status can be misused. I hope that that goes some way to satisfying the noble Baroness, Lady Brinton.

[Lord Deben]

Is not the fact that if this works, arguing about how much it costs the Treasury is not sensible? If it works, it will create jobs and make wealth, and the cost to the Treasury will be nil. If it does not work, nobody will take it up and the cost to the Treasury will be nil. It seems to me that this is not a necessary discussion. The only thing that we do not want is for it to be misused. The noble Viscount has explained how the Government intend to do that. No doubt they will do their usual thing of bringing in some more measures to stop it if that were to happen. The real fact is that this is one part of the argument that really does not hold water. We have to accept that if it does not work we have wasted a bit of time, which is not terrible, but if it does work we will have been proved wrong and I will be happy about it. The Treasury will not lose out because there will be jobs, people employed and money being made, which is really worth while.

[Viscount Younger of Leckie]

I am grateful to my noble friend for clarifying that and, of course, he is absolutely right. I felt that it would be helpful to the House to outline the safeguards and to reiterate that the Government have thought very carefully about these issues. Taking up some of the comments made by my noble friend Lord Deben, I emphasise again that it is a risk-reward status as the employee shareholder. The award is: yes, the opportunity is there to be given from between £2,000 and £50,000 and to be aware that if it is £20,000, £30,000, or whatever the figure might be, and the share price happened to double, the total amount, including the doubling would be free from capital gains tax. That is the reward bit, but equally, I am also realistic enough to say that it is possible that the shares might indeed be worth nothing. That is the risk, and it is best to be quite straight and open about that particular issue. With that in mind I hope that the noble Lord is willing to withdraw the amendment.