Growth and Infrastructure Bill
Debate between Lord Forsyth of Drumlean and Lord Flight
Lord Flight
I thought that what the OBR was effectively saying was that if capital gains tax on these arrangements were payable, that is the sort of revenue it would generate and the extent of the capital gains tax revenue that will be lost is because capital gains tax will not be payable. I am not clear that the OBR was citing fancy and wrong tax avoidance schemes for which it picked up intentions that they would be used. I stand to be corrected.
Lord Forsyth of Drumlean
With all due respect to my noble friend, the tax provisions within the Bill provide for the taxable gains on up to £50,000 shares not to apply, so if it were possible for people who would in the normal course of their employment receive shares to change their employment status, then £50,000-worth of shares that they received would no longer be subject to capital gains tax, which would apply if they had normal employed status. That is the kind of loophole that I hope my noble friend and the Treasury will deal with and which would cause a loss of revenue. While my noble friend and I may think that capital gains tax is too high, it would clearly discredit the scheme if the only people using it were people who would otherwise have had to pay tax in the normal way and who benefited by changing their employment status. That is the argument that we raised at an earlier stage, and I am content to take my noble friend’s assurances that this will be looked at and will not happen.
Lord Flight
I had indeed understood that that was the point, but if an individual chooses to invest in a fairly high-risk new venture via an EIS scheme, he does not pay capital gains tax. If he invests and it does not qualify for that scheme, he does. Self-evidently, new companies will as far as possible qualify for the EIS scheme because it gives that incentive to investors. The position here is not so dramatically different. People may well have equity in new start-ups that does not qualify for this scheme, but in terms of the overall package, as we are well aware, they will have to pay income tax up front, there is a limit to the amount of equity they can have and it is of cash-flow benefit to the company in terms of the potential costs that it removes. I do not see it as a vehicle of fancy tax avoidance. There is a perfectly fair debate about whether it is a good idea, but I do not believe it is useable as a vehicle for the sort of tax avoidance that we are trying to get rid of.
Nearly everything that there is to be said about this has been said in this House.
Growth and Infrastructure Bill
Debate between Lord Forsyth of Drumlean and Lord Flight
Lord Forsyth of Drumlean
My Lords, I hesitate to follow the noble Lord, Lord Pannick, who has set out very clearly and persuasively the points that we discussed before and which are causing concern to the House. I share his concern about the Commons debate, which, as he indicated, was guillotined. All the serious points that were raised in this House have not really been addressed by my noble friend. I exonerate him from any blame in that respect but they are important points. Many of them may be slightly peripheral to the substance that we are discussing here, which is about employment rights, but, for example, I remain concerned as to whether the estimate made that this could result in more than £1 billion disappearing in tax-avoidance schemes is correct. It is not clear to me whether the Treasury has found ways of ring-fencing this scheme, which provides for up to £50,000 of capital gains tax to be relieved, and whether this could not be used as a great tax-avoidance scheme.
I got a call this afternoon from a Mr Mark Florman of the British Venture Capital Association, who wanted me to know that all his members were absolutely behind this scheme and very much supported it. I said to him, “Why are they concerned about a scheme that enables people to give up, in effect, only their rights against unfair dismissal if they have been employed for more than two years and can have £2,000 worth of shares, tax-free? What conceivable interest can that be to the membership of the British Venture Capital Association?”. He said that it was keen to encourage share ownership and for employees to be involved in share ownership. I am sure that people on all sides of this House are keen on that concept. That is why I would strongly support any schemes that encouraged share ownership. However, this proposal mixes up two things—one is employment rights and the other is share ownership. It is not at all clear to me how it would be beneficial to either employers or employees to embark on this scheme.
Being a reasonable, moderate sort of fellow, I looked at where we had got to in this debate, and I looked at the vote in the House of Commons, where the majority was actually somewhat less than the Government’s majority. I looked at the short-term nature of this matter and thought, “Is it possible to find a way of making this look not more sensible but more practical?”. It seemed to me that the Government could have done two things. One was, as the noble Lord, Lord Pannick, pointed out, to ensure that people who were embarking on an employee shareholder contract were given independent legal advice that the shares were worth what the employer was telling them, on what the arrangements in respect of the valuation of the shares would be at the end of the period, and on what employment rights they were giving up and the consequences of that. That seems to be an entirely reasonable suggestion. Regarding the idea that people on low incomes can go and get legal advice on these matters or that issuing and putting values on shares in private companies is straightforward, I have to say to my noble friend that the entire investment banking industry is based on the premise that the valuation of shares is not straightforward.
There is also the idea that by giving people shares in return for employment rights the employee is in a negotiating position. However, they want a job and are not in a position to say no. Even if the provision was that the employer may provide legal advice at the request of the employee, that would not be enough because the thought would be, “It’s going to cost the employer £1,000 and if I say I don’t need the advice, I might have a better chance of getting the job”. The fundamental point was made by the noble Lord, Lord Pannick: the reason that we have employment rights—while I think they go too far in some respects—is that they even up the position between the employer and the employee. I am not particularly persuaded on this.
However, I thank the Government for at least taking up one point, which is to alter the guidance in respect of the jobseeker’s allowance. I was grateful to my noble friend for the letter that he sent us, but I have to say that amending the guidance to say that people who refuse to take up this voluntary agreement would not be found to be intentionally refusing employment is not a concession; that was just a mistake by the Government that they have now corrected. It is not right to present this as a concession. The concession that is needed is to protect the position of the employee against the unscrupulous employer, and independent advice is part of that.
My other thought was that the Government say that this proposal will be of interest to small firms. Some people suggested to me that there could be an exemption stating that the measure would apply only to small firms. However, on reflection, I do not think that that is the issue at all. This is a general provision for employees, and whether it is a big firm or a small one is not the key issue here.
I am also worried that my noble friend said in his opening remarks that it will not be easy for employers to get the shares back, but in his own guidance he makes it clear that these schemes can include a provision that requires the employees to give the shares back. What is the deal here? It is: “You give up your right to be protected against unfair dismissal. We will give you some shares that we tell you are worth a certain value, but you have no idea whether or not we are right, and when you get those shares you have to pay tax and national insurance on them if their value is more than £2,000. Then at the end, I, as your employer, if I decide to sack you, can take them back at a valuation that may be less”. That does not seem to be a scheme that will set the nation alight with people wishing to participate in it.
I have to say to my noble friend that this thing is not thought through. Not only that, but to those of us who have tried to be constructive—I was prepared to go along with this today if the Government showed some sensitivity to the concerns that have been so elegantly expressed by the noble Lord, Lord Pannick, and others—the Government seem determined just to railroad this through and not deal with the arguments. I, as a Conservative, perhaps a Thatcherite Conservative, am not identified particularly with employment rights, but I am proud that it was a Conservative Government that first introduced them because we recognise that there has to be a fair balance in the labour market.
I therefore say to my noble friend, can he not think again and at least offer us a concession in respect of the right to have independent legal advice paid for by the employer whose initiative this is, so that the employee is in a position to know exactly what they are being asked to sign up to?
Lord Flight
My Lords, I cannot match the advocacy of either the noble Lord, Lord Forsyth, or the noble Lord, Lord Pannick, but I feel that there is a saddening negativity towards these proposals. I am glad that everyone agrees.
A lot of the issues raised in this House have been addressed—in particular, the concern, which I completely supported, that it would be a nonsense if people were forced to give up the ability to claim their jobseeker’s allowances if they turned down the offer of an employee shareholder job. That is the most important issue of the lot. But there are other important issues where the proposals have been improved. I see the situation in the context of a half-way house between self-employment and standard, typical, large-corporation employment.
An interesting survey has been published by the RSA which finds that more than 30% of people in their 20s now want to be entrepreneurs, self-employed individuals who will have no protection rights whatever. In terms of giving up rights, there are three important areas, including unfair dismissal rights—which are not given up as regards improper grounds such as discrimination—rights to statutory redundancy pay, and certain rights to request flexible working hours and time to train. People retain a whole lot of other employment rights and the issue is not, by a long chalk, about giving up all your employment rights.
Of the concessions that have come from the Commons, the most important is that the Secretary of State will have power to regulate the buy back of shares. That does not amount to legal advice, which would be nice, but it does afford a protection there. I suggest that, in practice, what will happen if any businesses embrace these schemes is that there will be the usual sort of standard formula. If there is a buy back by the company, then there will be a prescribed price earnings multiple, or such like, on which to value them. That will unfold as time passes.
Lord Forsyth of Drumlean
I am most grateful to my noble friend. I agree with his point about the tax allowance. If someone is awarded shares in the way that he has described and the value of the shares is, say, £20,000, will they then be liable to pay the tax and national insurance on that? Where will they find the money from?
Lord Flight
That is the very point that I made when we last debated the issue in this House. That is why I think the £2,000 limit is too low. The response to that is that it obviously depends on their tax rate. If people are accepting £10,000 worth of shares they may be able to find the tax which might be of the order of £2,000 to £2,500 on that award. It entirely depends. I also make the point that in more traditional entrepreneurial circumstances, which was my own experience, I had to put up the money myself and I had to remortgage my house to raise the money to start a business. I would like to see the limit raised, and I think for the scheme to work it will need to be raised, but we should not overstate the tax burden.
Lord Forsyth of Drumlean
I am most grateful to my noble friend. Does that not then mean that the value of the employment rights you are giving up depends on how much money you are able to find in order to buy the shares?
Lord Flight
First of all, it depends on what is on offer. It is broadly for the company to decide the amount of employee shares that it is going to offer under this scheme. To repeat the point, the employment rights which are being surrendered, particularly as viewed by ambitious entrepreneurial types, are not perceived as of particular value. The grant of free shares is of value and, to the extent there is a tax bill, I wish it were lower, but the tax bill is not entirely outrageous. I suspect that the tax limit will be raised in due course.
It is easy to be negative and to pick holes in what has not yet been fully addressed. I would like to see some of the improvements that noble Lords have suggested. But I think to take a rather superior view of, “Oh, no, we really don’t want this”, is wrong. I think it should be given a try and the issues that need sorting out will be sorted out. There are substantial numbers of ambitious young people for whom the objective is not to work for the Civil Service or to work for Shell or Unilever and to have a secure job with a generous pension, but to have equity in the businesses they work for, to make that business work and to make their equity worth a considerable amount of money.