Lord Flight
Main Page: Lord Flight (Conservative - Life peer)Growth and Infrastructure Bill
Lord Flight Excerpts
Lord Flight
“(12) Shares issued or alloted under subsection (1)(b) up to a value of £25,000 will not be treated as a benefit for the purposes of the Income Tax (Earnings and Pensions) Act 2003.”
Lord Flight
My Lords, I have always been a strong supporter of employees owning shares in the companies that they work for, particularly smaller companies. In my own history, virtually everyone had shares in the company that I built up in the 1980s and 1990s. Obviously, the principle is observable in groups like John Lewis. It is self-evidently very positive, not just commercially but when people feel part of the business for which they are working.
Anyone is being blind if they do not perceive that employment law has strayed across the boundary of discouraging employment. There are good reasons for much employee protection, a cause that has been fought for over almost 200 years. However, we are now in an area where—dare I say?—there would not have been just 1 million new jobs created over the past year; if employment law was not so discouraging of taking on new people, there might have been 2 million new jobs. Again, in my own history I have seen too often how people are put off by the costs and risks involved. This House is slightly out of touch if it does not perceive that employment law actually discourages us in succeeding economically and producing more jobs.
Lord Martin of Springburn
The noble Lord mentioned John Lewis. We all know that everyone working in John Lewis is a partner and therefore a shareholder but, to my knowledge, John Lewis has never asked anyone to give up their statutory employment rights.
Lord Flight
I am sure the noble Lord is correct. The employees who had shares in the company I built did not give up their employment rights, albeit that at that time they were not quite as discouraging of employing people as they are today. The point I was making was that I believe hugely in employees owning shares in their business. On the other hand, it is blind not to see—I understand where the noble Lord comes from, and very decent it is—that employment law has strayed across the boundary to where it does more to discourage new jobs than to protect people.
The point I was working my way towards and commenting on was that the proposals in Clause 27 are clearly not of interest to or appropriate for a lot of people; they are appropriate for certain categories of people, above all, for people who feel that their contribution to their business is such that they do not need to be gold-plated by the extent of the employment protection laws that we currently have.
We now come to the rub, where I hope to encourage the Government further, albeit that it is Budget day today. The limit of only 2,000 shares on which you do not pay tax is too low. There is complete misthinking by the Treasury. Without this legislation, there would be no additional tax whatever because no one would have any more shares to pay any tax on, so it is not a question of losing tax revenues, but of the potential for forgone tax revenues that would not exist if the scheme did not exist.
On the forgone bit, the issue is that if people have worthwhile equity—£20,000 or £30,000—if they are going to have a tax bill of £10,000 or £15,000 including national insurance, they will not be able to afford to do it. People will not have that sort of money lying about in the bank to pay that sort of tax bill. To borrow money to acquire shares in a relatively high-risk small business is not a particularly wise thing to do because it may not succeed and you may be left with the money you have borrowed and no asset against it. The Government ought to think again about the tax position of shares under the employee shareholder scheme. I repeat that I think the starting point is wrong. It is not a tax cost, but how much tax will be forgone as a result of this scheme. The point is simple: unless there is a larger amount with no tax and national insurance liability, people will not take it up so there will be no tax revenue anyway.
The logic is pretty clear. Imagine working for a smaller business, which might employ 10 to 100 people and may be in a new area. One of the great things about success in this country is the number of businesses growing in new, high-tech areas, but it is a tough, competitive world with American businesses trying to out-compete you and products coming in cheaply from China. Not all these businesses are going to succeed. If you are enthusiastic, you can certainly say, “I really want to make this succeed. I would like to take advantage of this scheme. I candidly think that my existence in this company is not about employment protection law, but is due to my working my butt off to make a success of it”. People will want to take advantage of it. However, if they are going to be given a large tax bill, they will either not be able to afford it or the risk-to-reward ratio will not be right.
I encourage the Government to think again about the tax position as part of my genuine support of the proposal. Dare I say that many in this House have not really thought it through? They have not been entrepreneurial. They have not worked for a small business. It is an attractive opportunity for people. Well may they take the risks, succeed and build up some value in the company for which they are working. I ask the Minister to go back to the Treasury and reconsider a greater degree of fiscal generosity. I beg to move.
The Earl of Erroll
My Lords, I will speak only to this amendment. We will have the debate on whether employees should give up rights for shares when we deal with the next amendment. I restrict myself purely to the tax issue here. It is a serious point, because I have hit this when I have been offered share options. Because you receive the benefit, theoretically, you are meant to pay income tax on it in that year. You do not really have any money to pay it with because you have not yet been paid. If you are rich, you can use these benefits and invest in start-up companies using the SEIS: the Seed Enterprise Investment Scheme. However, you must have some other income against which to offset it, so taking this up is of no interest to the average employee. They have no other outside income. They will have nothing to pay the tax with because of the cash flow: they are being forced to pay a tax when they have not yet received the money. It is therefore complete lunacy, for the logic of this clause, not to accept the amendment of the noble Lord, Lord Flight. It makes this clause work.
Whether it should exist is a separate issue that we are about to discuss in the debate on Amendment 50. I accept that entirely. However, if the clause is to stay in the Bill, the amendment improves it greatly. The clause will then achieve its purpose of trying to get employees involved in the running of the company and the drive to make that company succeed. However, if they cannot afford to take up the shares because of the tax regime, and there is an anomaly in it and it will just fail anyway—in which case, Amendment 50 will be redundant, because no one will bother with the scheme.
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.
Baroness Wheatcroft
My Lords, many noble Lords today have explained that this is not the way to get the workplace flexibility that we need, and I agree. This clause purports to construct a new class of employee shareholder, but there are already 3.5 million people who believe themselves to be employee shareholders, in more than 5,000 companies. It threatens to give the wrong idea of what employee ownership is all about.
Employee share ownership brings many good things, such as lower absenteeism, staff turnover and higher productivity. The Deputy Prime Minister is a fan. He is so enthusiastic about this concept that in January last year, in the City, he suggested that perhaps employee ownership was such a good thing that the Government should consider giving employees the right to ask for shares in their business. We seem to have turned that round in the most extraordinary way. I cannot believe that he envisaged a scheme whereby employees would have to give up their rights in order to become shareholders.
This proposal troubles me, as it did in Committee, because I fear that it will bring out the worst in business, and not the best. We have heard about so many things that are wrong with this clause. The original government consultation was responded to by 184 organisations. Only three said that they might consider adopting it. However, being told that probably very few will take it up is hardly a recommendation.
There are some supporters. The Institute of Directors has now come out in favour of the proposal, although when I asked if they had consulted their members, the answer was no. The chief executive of the British Venture Capital Association has also come out in favour. He says that in every start-up that he has ever been involved with, employees have been given shares. I am sure he is right, and I am sure that it has worked. Clause 27 might be more acceptable—I doubt it, but it might—if it were restricted to start-ups, where the rate of failure is obviously clear, and where the potential of gain, if one were lucky enough to be employed by Google or the like, would be an attractive alternative. However, the scheme is not restricted to start-ups or even small companies. Instead, it will appeal to those middle-sized and larger businesses that may see it as a way of becoming part of what is already being referred to as the “Gradgrind tendency”.
Let us imagine a group of employees who have sold their rights—for a mess of pottage, as we have heard—and another group who have not. The company falls on hard times and has to declare redundancies. Who will be first in the line for redundancy? I would hazard a guess that it will be those who have shown the most commitment to the business by becoming employee shareholders under the new scheme. That is the sort of perverse effect that we are likely to see if the clause goes through.
This legislation risks giving employee ownership a very bad name. I would not advocate the idea, suggested by the Deputy Prime Minister, that we should give employees the right to request shares in their company. However, to give those in larger companies the option of taking shares and giving up their right to request training seems extraordinarily perverse at a time when we need the best-skilled workforce we can get.
There are so many reasons why this clause should be opposed today. Much as it grieves me to speak against my Government, and much as I see many things in the Budget that should be applauded, this would end in tears.
Lord Flight
My Lords, as I suggested in our debate on the previous amendment, I accept that some improvements could be made to this clause, and it is unlikely that its take-up will be substantial if it goes ahead as it is. I also certainly agree with the principle that it has to be voluntary. If it was the case—I am not sure that it is, despite the advice of the noble Lord, Lord Pannick—that people lost their jobseeker’s allowance if they did not accept employment, I think that is wrong. But this House should listen a little more to the noble Earl, Lord Erroll, and those who really are engaged at the SME level. It is very interesting that nearly all those opposed to this clause had nothing to comment on the extent to which employment law has clearly become discouraging of employment and has, in a sense, gone too far in the protective direction, generating massive income for lawyers, with too many vexatious claims. This clause is, in some senses, no more than a perhaps not totally well thought out attempt at an experiment to see what happens and whether we can agree, with benefits to the employee, to have much less demanding employment law.
I am a little concerned that those opposing this Bill are, to me, today’s establishment from all sides of the House, and not the people at the coal face who are trying to promote small businesses. The clause could be polished up—I hope that it will be—before it is enacted, and some things may be wrong, but at least in an important way it accepts the point that many others do not seem to accept, which is that employment law in this country, particularly in the world in which we live today, is costing us jobs and prosperity, and something needs to be done about it.
Lord Adonis
My Lords, in my eight years in the House I have never witnessed a government policy with less support not only in Parliament but within the Government themselves. We greatly admire the stoicism of the noble Viscount, who will read out his brief in a moment, but it is no secret that his own Secretary of State, Vince Cable, does not support this clause. This is what he said when he vetoed the original Beecroft plan to scrap unfair dismissal rights:
“Britain has already got a very flexible, co-operative labour force. We don’t need to scare the wits out of workers with threats to dismiss them. It’s completely the wrong approach”.
Most Conservative and Lib Dem Back-Benchers clearly think that it is the wrong approach, too. Only two government Back-Benchers have supported this clause at any stage in our debates, and they have been not only outnumbered on their own Benches but massively outgunned, not least by the powerful speeches made this afternoon by the noble Baroness, Lady Brinton, the noble Lords, Lord Forsyth, Lord King, and Lord Vinson, and the noble Baroness, Lady Wheatcroft.
To remove this clause today would be an act of mercy to the Government, let alone to the employees adversely affected by it. Justin King, the chief executive of Sainsbury’s, who was on the Prime Minister’s business advisory group, said that trading basic employment rights for shares was,
“not what we should be doing”.
He went on to say:
“What do you think the population at large will think of businesses that want to trade employment rights for money? … Our agenda … should be making employing people easier and less costly”.
That is absolutely right.
We are talking here about the right to statutory redundancy pay, the right not to be dismissed unfairly, the right for parents and other carers to request flexible working, and the right to request training. The idea that depriving employees of these basic rights is somehow going to boost growth is not supported by a single employer I have met, let alone employee. Out of the 219 responses to the government consultation, only five welcomed the idea. The noble Lord, Lord Deben, summed up the mood of the business community and the House when he told us in Committee:
“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”.—[Official Report, 6/2/13; col. 293.]
He might have added that protection against unfair dismissal and the restriction on contracting out from basic employment rights were introduced by Conservative Governments in the 1970s and 1980s.
Throughout our debates, I have emphasised that we on this side strongly support wider employee share ownership, and we backed proposals to that effect in the Nuttall report, published only eight months ago. However, that is entirely different from trading shares for basic rights in what is generally an unequal employment relationship, which is the very reason why employment rights exist in the first place and why they have been built up by Governments of all parties over many decades.
I stress that the Nuttall review did not so much as mention trading shares for rights, and the Minister has been quite unable to explain to the House why, if this proposal is such a good idea, it was not even considered, let alone endorsed, by the most comprehensive review of employee share ownership in recent years. Meanwhile, the Employee Ownership Association has said:
“There is no need to dilute the rights of workers in order to grow employee ownership”.
However, let me put these arguments of principle aside for a moment. The policy is internally flawed in two key respects. First, its key rationale is that it will promote growth by reducing employment law red tape for companies. In fact, as the Law Society argues cogently, it will create more red tape, not less, because it is bound to lead to costly litigation. In particular, it will lead to a rash of claims of discrimination because discrimination will be the only avenue for aggrieved employees to pursue once they have no rights to redundancy pay or unfair dismissal.
The second respect in which this proposal is internally flawed is that the Government claim—the noble Viscount repeated the claim in the previous debate—that this is an entirely voluntary new employment status, with no coercion on anyone to accept it. The problem is that on any fair assessment this claim is simply not true. There is no requirement in the Bill for employers to provide independent advice to those being offered these shares-for-rights jobs. It is therefore likely that individuals, particularly the more vulnerable and low paid, will not be properly aware, if they are aware at all, of the rights they are forgoing in return for shares worth as little as £2,000 at the time they are issued—shares that could easily be worthless by the time they come to sell them. That is why, in Committee, we supported amendments requiring independent advice to be made available before individuals sign shares-for-rights contracts, but the Government refused to accept those amendments. This being the case, Clause 27 stands condemned by the Equality and Human Rights Commission, which says in its advice to your Lordships:
“A failure to include effective safeguards in the proposals would make it strongly arguable that the proposals indirectly discriminate against those less likely to be able to make a properly informed or truly voluntary decision, for example, people whose first language is not English, those with learning disabilities, or young workers”.
Worse still is the position of individuals on unemployment benefits, who far from being given a voluntary choice about accepting no-rights jobs are being told by the Government that they stand to lose their income if they do not do so. In order to make it look as if they were sympathetic to these concerns, Ministers said that they would amend the guidance to DWP decision-makers in cases of appeal against loss of benefits so that decisions were taken on a reasonable basis. Despite months of badgering the noble Viscount and his department, we did not even see this revised DWP guidance until last week. I am very grateful to him for finally making it available to us. Now that we have it, I can see why the noble Viscount thought concealment the better part of valour, as the noble Lord, Lord Pannick, said so eloquently, for it states in terms:
“Employee shareholder vacancies should on the whole be treated in the same way as any other vacancy”.
In other words, if the jobseeker does not take a no-rights job, they are likely to lose their benefits. I cannot see what is voluntary about that transaction.
As Paul Callaghan, a partner of the respected legal firm, Taylor Wessing, puts it,
“shares-for-rights contracts will be optional to the extent that eating and drinking are optional”.
As if all I have said so far is not enough, there is another major and completely unacceptable aspect of this shares-for-rights proposal. The independent Office for Budget Responsibility has reported that it opens up a £1 billion tax avoidance loophole. During Committee, the noble Baroness, Lady Brinton, quoted the coalition agreement, which says that the Government will,
“make every effort to tackle tax avoidance”—
and,
“will seek ways of taxing non-business capital gains at rates similar or close to those applied to income”,
yet Clause 27 does precisely the opposite.
In his letter to me last week, the Minister confirmed that the first £50,000 of shares given to an employee shareholder will be free from capital gains tax when they are sold. It is for this reason that the Office for Budget Responsibility estimates that the scheme will cost the Exchequer £1 billion a year when it is mature. At this point, we enter the world of the surreal.
Lord Flight
I cannot see the argument that making shares free from capital gains tax is an act of tax avoidance or improper tax treatment, when one considers the other side of the coin, which is that a valuable employment allowance is being given up. It is not dissimilar to other situations where there are tax incentives to invest.
Lord Adonis
I am sorry that the noble Lord has difficulty in seeing the argument. This is creating a completely new branch of the tax avoidance industry. If that is not obvious, not many obvious statements have been made in the House this afternoon.
Lord Adonis
My Lords, a new scheme is being introduced by this Bill. It is not an existing scheme. If that were the case, we would not be here debating it. It is the new opportunities that the scheme creates for efficient tax planning, if I may put it that way, that has led the Office for Budget Responsibility to say that it will lead to the Treasury forgoing up to £1 billion.
At this point, we enter the world of the surreal because we are debating a tax loophole that will add £1 billion a year to the deficit. The proposals are from a Chancellor of the Exchequer who tells us day in and day out—indeed, only a few hours ago in the Budget—that reducing the deficit is the nation’s overriding priority.
Lord Adonis
My Lords, I have given away twice to the noble Lord. He has had plenty of opportunity to make his case.
Lord Adonis
I am happy to give way to the noble Lord because every time he intervenes he maximises the vote in favour of the amendment.
Lord Flight
The noble Lord clarified my previous point that the scheme was a new scheme that did not create tax avoidance. If the scheme did not exist, there would be no tax revenue at all. The Treasury will therefore not lose tax revenue as a result of the tax arrangements; it will merely not get as much as it might otherwise get.
Lord Adonis
My Lords, who knows to what the funds would have been devoted before the scheme was created? That is the answer to the point about whether the scheme leads to more efficient tax planning of a kind that leads to real income being forgone, not just additional income that might be generated from these contracts.
To conclude, by removing this clause we will be saving the Chancellor from himself; we will be saving the Government from themselves; we will be doing our basic duty as a revising Chamber; but, more importantly than any of this, we will be protecting decent hard-working people from the unfairness and humiliation of being stripped of basic rights at work. Our duty is clear.