Lord Forsyth of Drumlean
Main Page: Lord Forsyth of Drumlean (Conservative - Life peer)Growth and Infrastructure Bill
Lord Forsyth of Drumlean Excerpts
Lord Forsyth of Drumlean
My Lords, very unusually, I find myself in disagreement with my noble friend Lord Flight. Normally, we are at one on these matters. I have considerable respect for his experience in the City, and I understand what has motivated him to table the amendment.
I do not propose to talk about Clause 27 until we come to the amendment in the name of the noble Lord, Lord Pannick. Frankly, I am surprised that this clause has survived so long. The scheme is ill thought through, confused and muddled. I will develop those arguments when we come to the next amendment.
This amendment, however, is an absolute open goal to allow the setting up of a huge tax-avoidance scheme. There is no restriction on people changing from being an employee to an employee shareholder. Therefore, they could get £25,000 from their employer as a tax-free sum. On the shares they could make tax-free gains of £50,000. This is therefore a handout of £75,000 to people who just choose to change their employment status. I find that very difficult to justify as a measure.
I have grave reservations about Clause 27. It confuses two desirable things: one is having sensible employment protection legislation, and the other is having sensible proposals for encouraging employee share ownership. My noble friend Lord Younger of Leckie, who I think will be responding to this debate, sent me a very helpful letter that sets out some of the concerns that have been raised about the scheme as a whole. I will concentrate on the issues that arise from this particular amendment.
The first point—and here my noble friend Lord Flight has not shown his normal attention to detail—is that there can be no question of anyone purchasing the shares. It is a condition of the scheme that the shares are given for free. In effect, we are producing a tax-free handout. One of my worries was how, in an unlisted company, perhaps a start-up company, you value the shares. The employer might have a particular view of the value of the shares, as might the employee. The expense and difficulties involved in valuing these shares would be considerable.
I hope my noble friend Lord Younger will not mind me reading out what he says in the letter about the tax treatment of the shares: “When an individual receives shares as part of an employment agreement, these are usually subject to income tax in the same way as that person’s salary”. That is correct, and it is what my noble friend Lord Flight is trying to address. However, he goes on to say: “In some cases income tax will be chargeable on the value of the shares at the time that the employee receives them. However, where certain conditions are attached to the award of shares, for example a requirement to stay in the job for a period, or a no-sale requirement, any income tax that would otherwise be chargeable on the award of the shares may be reduced or removed. In such cases, income tax would be chargeable on the shares at a later date. The precise detail of how the tax rules will apply to an employee shareholder depends upon the type of shares that are awarded. An employer should be able to confirm to an employee shareholder what type of shares they have received”.
This is a complete muddle. Are they shares which they hold, shares that vest at a later date, or shares that have to be sold back at a particular value? You need to have clarity on that before you even begin to consider the tax treatment. The normal tax treatment in employee share schemes is that the shares given usually vest over a period of time, and it is the point at which they vest that tax becomes payable. It is very unclear how that would work in the context of my noble friend’s amendment. Would the £25,000 apply when the shares were vested, and if they are simply options, or the ability for shares to vest subject to particular conditions, how does this offer the employee, who is giving up employment rights, any kind of security?
I entirely understand why my noble friend has tabled the amendment. He has seen that the scheme is not particularly attractive from the employee’s point of view, and the tax rules are certainly unclear. However, this would be used by people. The dead-weight cost of this amendment would be enormous, because anyone working for a company who had no possibility of being fired would want to avail themselves of what would be a huge, tax-free gift.
Lord James of Blackheath
My Lords, I feel mounting concern as a result of what I said in Committee about this clause in a discussion on the financial assistance Act. What we have just heard makes my original anxiety even greater. I asked the Minister at that time whether he would give an opinion as to the application of the Act to this clause. I think the situation has got even worse. Where there is in effect a deal between a company and the Inland Revenue to give somebody a tax advantage, or at least a complicit arrangement whereby they co-operate for it, surely there is a breach of the laws that were brought in at the time of the Guinness and Blue Arrow fraud cases and that prohibit any company from giving financial assistance to any employees for the purchase of its own shares. This seems to me to be exactly what is occurring here. It is highly dangerous. We cannot have a scheme that criminalises companies and their employees accidentally and at the same time.
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.
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.
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.
Baroness Garden of Frognal
My Lords, I remind Members of the rule that on Report no Member should speak to an amendment more than once, unless it is to seek brief clarification.
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 Forsyth of Drumlean
The noble Earl made a speech about employment protection being excessive. I am not sure I understand how Clause 27 would alter any of the things that he complained about, with the one exception of the request for flexible working, unfair dismissal and redundancy payments. All the issues that he referred to would still apply if Clause 27 went ahead.
The Earl of Erroll
Even better. Passing it does not matter then, but at least it would send the right signal and some people may relax. If, as the noble Lord says, it will not change the unfair dismissals process, we can all proceed happy that that continues. Why object? At the moment, I know that the law is biased in favour of the employee, not the other way round. With that, I will sit down. I would love to see other things tried. At the SME end, we need signals sent by the Government, and this is one.
Lord Lea of Crondall
My Lords, I think that it is fair to say that the noble Lord, Lord King of Bridgwater, has some of the best political antennae in the business. I therefore think that we can look forward with some interest to the response of the noble Viscount, Lord Younger of Leckie. In debate in Committee, precisely the proposition made by the noble Lord, Lord King—that in effect people could say, “You can only get this job if you sign up to the scheme”—was made. The Minister said:
“I have not seen the guidance”—
the 3,000-page guidance—
“but I do not believe that it will say that”.—[Official Report, 6/2/13; col. 289.]
Two questions arise. First, can the Minister tell us definitively this afternoon, before we vote, whether the noble Lords, Lord King of Bridgwater and Lord Pannick, are correct or incorrect: yes or no? I will not detain the House, but what baffles me, picking up the point made by the right reverend Prelate the Bishop of Bristol, is how on earth the Government got the idea that this was convincingly presentable as part of the moral platform for modernising capitalism. As I think that the right reverend Prelate said, straight out of the Bible we have the precept, which is probably in the Koran as well, that you do not sell your birthright for a mess of pottage—that was Esau, I recall. Let me dub this Esau’s clause. It is incumbent on the Minister to give us a brief reply on that question.
Lord Forsyth of Drumlean
My Lords, I think that this is a positively dreadful clause. Perhaps I should declare three interests as a former Minister of Employment, as chairman of a start-up run by my daughter and as someone who has set up a number of businesses in the past. I could not believe the clause when I read it. It seemed to involve two really good things. I have much sympathy with what the noble Earl had to say about the burdens placed on businesses and the costs of going to an employment tribunal, but that is an argument about the extent to which employment protection legislation should apply and the costs associated with sorting out whether there has been an injustice to employees.
Employee share ownership is a very desirable thing up to a point. It can go too far if your salary and your savings are tied up in the shares of the company that is your employer but, as a general principle, giving people a stake or encouraging people to take a stake in the business is part of being a good and successful employer. I very much agree with what my noble friend Lady Brinton had to say about creating a culture in a company where people can feel part of a team and motivated. The idea in this clause has all the trappings of something that was thought up by someone in the bath, taking these two ideas together and believing that they made for a great scheme. In fact, it is damaging to both. I do not propose to reiterate the careful and precise arguments that the noble Lord, Lord Pannick, made in moving this amendment, which I support and which I will vote for if he chooses to divide the House on it.