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Mrs. Angela Knight: It is estimated that the new clause would save £50 million. However, as people talk to each other, there could be more costs to the Exchequer. That is why we have moved quickly to introduce this measure. Obviously, others might look to other types of derivatives apart from those covered by the new clause. I assure the hon. Gentleman that we shall keep a close eye on how matters develop. If it is necessary to change the legislation, we shall do so. Otherwise, we shall ensure that other sorts of transactions are challenged within the existing legislation.
The hon. Gentleman asked whether the legislation would catch all taxpayers, including those engaged in bona fide transactions. I assure him that, with the
exception of financial traders whose profits from such transactions will already be taxed as part of their normal case 1 trading profits, the legislation catches everyone. There are a few more exceptions: charitable trusts, pension funds and authorised unit trusts. Therefore, the hon. Gentleman can see that those who are engaged in legitimate transactions will be able to continue with those transactions.
The hon. Gentleman referred to a metal-bashing company and asked several questions in that regard. All the points relating to that company and others come under the general hedging heading. No commercial hedging will be caught: the legislation applies only where the guaranteed return arises from the futures or options used. I remind the hon. Gentleman that I said in my opening remarks that the clause applies only to a scheme or arrangement, involving two or more transactions, that is designed to produce a guaranteed return from the disposal of one or more futures or options if the return is similar to interest. I can put his mind at rest on that.
The hon. Gentleman asked a number of questions relating to case IV, but the taxable income will be calculated under case VI of schedule D.
Mr. Mike O'Brien:
The Minister is quite right; it is case VI rather than case IV.
Mrs. Knight:
I can assure the hon. Gentleman that taxable income will be calculated in accordance with the principles of case VI. That will usually mean the profit or loss--the difference between the acquisition cost and the disposal proceeds of the future or option. I think that I have answered most of his questions in that area.
We will keep faith with the unit trust industry's assurances that the statement of recommended practice for the authorised unit trusts will be effective in countering any use of the device by authorised unit trusts. However, we shall not hesitate to bring them within the scope of the new clause in future if there is evidence that individual authorised unit trust fund managers are trying to get around the spirit of the accounting rules. I can assure the hon. Gentleman that we will keep this matter under very close watch.
The hon. Gentleman had a list of technical points. A firm of solicitors raised the same points. Indeed, we received a letter from one today. I sincerely trust that it will engage in useful dialogue with the relevant officials, as those points need to be covered. That would probably be a better way to reach a conclusion on them, but if the hon. Gentleman insists, I will, of course, write to him.
Mr. O'Brien:
I do not know which firm of solicitors, as I have had no contact with it. The points were raised by our advisers, and not any firm of solicitors, so perhaps the Minister will, out of courtesy, write to me.
Mrs. Knight:
I will, of course, write to the hon. Gentleman. I suggest that his advisers go back to the solicitors, who no doubt informed his advisers in the first instance.
Question put and agreed to.
Clause read a Second time, and added to the Bill.
Ms Dawn Primarolo (Bristol, South):
I beg to move, That the clause be read a Second time.
It is important to outline to the House the intentions of profit-related pay, the problems that are emerging and how our amendment seeks to protect the taxpayer in the registration of such schemes.
We tabled the new clause to seek to deny tax relief to new profit-related pay schemes that simply convert taxable pay into non-taxable profit-related pay. Some 3.6 million employees in 12,740 schemes benefitfrom relief from income tax on profit-related pay.The Government propose to phase out the relief by31 December 2000 by reducing the taxable income relieved each calendar year. Labour supports the principle behind the Government's proposals, but proposes, in our amendment, to improve the legislation by preventing employers from using the phased withdrawal of the scheme to register new schemes that subsidise pay at the taxpayers' expense.
It is essential to make it clear that, as a result of our new clause, any employee who currently benefits from a tax-favoured profit-related pay scheme will continue to do so, as the Government intend. Any employees who are members of newly registered bona fide schemes can enjoy the benefits until the Government withdraw them. We seek to deny employers the opportunity to use profit-related pay schemes to subsidise pre-tax pay.
In the 1983 Budget the then Chancellor of the Exchequer asserted that £100 million would be saved in 1994-95 by closing a loophole in the profit-related pay rules that allowed companies to pay employees up to £4,000 per annum free of income tax and commercial risk, contrary to the intention of the legislation. The loophole was closed, and employers are now unable to offer profit-related pay without some degree of risk that payments made under the profit-related pay regime may vary with "profits" as defined in the scheme. I shall return to that point. However, the Chancellor did not prevent employers from constructing schemes that expose employees to only a negligible risk of loss of earnings.
Effectively, 80 per cent. of employees must vote in favour of the scheme--again, I shall return to that point--so it is unlikely that the majority of employees will vote for a scheme with a material risk to them. The overwhelming majority of schemes can be expected to convert approximately 20 per cent. of guaranteed pay into almost risk-free but also tax-free profit-related pay. That reasoning is supported by survey evidence from the income data studies report of June 1996 on profit-related pay, which suggested that the major part of the£1,500 million cost to the taxpayer of profit-related pay is funding schemes that provide tax-free pay rises rather than performance-related pay.
The Government published a research report on profit-related pay in May 1995, commissioned by the Inland Revenue, the Department for Education and Employment and Her Majesty's Treasury. The report's main conclusions were that tax relief has stimulated significant additional take-up of profit-related pay--which is not surprising--and that the main benefits of the relief, from an employer's point of view, are tax efficiency and employee involvement. The report did not provide conclusive evidence that the cost to taxpayers of profit-related pay was justified by improved economic performance.
In Committee, we tabled an amendment, which was unsuccessful, requiring the Treasury to publish a report each year on what companies with profit-related pay schemes propose and how their schemes would work. Our amendment seeks to highlight and, I hope, close the loophole whereby companies can now use the four years before the scheme is phased out to introduce schemes that provide tax relief for the company.
I want to draw the House's attention to a scheme and to a publication that was given to employees entitled "Tax Free Pay--Your chance to get more take home pay." It was provided by a firm called SITA, which is a large, French-based, multinational, contract service company. It has won a number of local authority service contracts through the compulsory competitive tendering process. As a result of a trade sale, the company took over responsibility for engineering services, ground maintenance, street lighting and refuse collection in a number of authorities, including Bristol city council. It employs 600 staff in Bristol, and more nationally. The company presents itself as a quality employer.
Last year, the company told its employees that it was unable to give them an annual pay award. Suddenly SITA announced that, instead of a pay award, it could offer staff the benefits of a so-called tax-free pay scheme, which is a national scheme. The booklet to promote the scheme was circulated in January 1997. The company says:
Risk does not feature in this publication either. The element of the entitlement that relates to the company's performance is simply described as "a bonus" to be paid later. So much for employees' involvement in the rough and tumble of the marketplace. The scheme is clearly a mechanism for exploiting the tax loophole. Worse still, the company originally tried to use the scheme as a substitute for an annual pay rise. Instead of profit-related pay being used to generate staff involvement in and commitment to a company and its affairs, the scheme is being used to give staff a pay rise funded by the state.
The company is quite open about this scheme. Apparently, a representative who spoke to the staff outlined the scheme and said, "Why should we fund the pay award when the Government will pay for it." Talk about making an offer that cannot be refused! The scheme requires that 80 per cent. of the staff must vote for it: that is an interesting concept. The company is so keen to achieve 80 per cent. support that, under the section entitled "What do I do next?", it says:
'A profit-related pay scheme shall not be capable of being registered under Chapter III of Part V of the Income and Corporation Taxes Act 1988 (profit-related pay) unless:
(1) The scheme was registered before the Finance Act 1997 received Royal Assent; or
(2) The pay before deduction of tax of employees to whom the scheme relates does not change as a result or consequence of the scheme.'.--[Ms Primarolo.]
Brought up, and read the First time.
"We have designed the Scheme to maximise the tax relief you can receive"--
"you" being the employee in the company. It says that the scheme is designed to share the benefits between the employee and the company. There is no mention in this publicity material of the principles and objectives of profit-related pay: no mention of encouraging closer working relationships between employees and the company; no mention of improving relationships between the company and its employees; and no mention of giving employees a stake in their company.
"If you want to accept this opportunity to increase your take-home pay through TFP, do nothing--you will automatically be included."
That is a new and interesting concept in balloting. The booklet goes on to say:
"If you do not wish to participate, please telephone and request an opt out form from the Group Personnel Manager's office".
It may, of course, be a P45. Employees should certainly consider whether non-participation would damage their chances of promotion in the company. I am sure that plenty of SITA's employees will think that if they question the scheme they will not have a future. What has happened to the concept of a secret ballot, which is supposed to be a provision of the scheme?
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