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Mr. MacShane: Is my hon. Friend aware that, in all the profit-related pay schemes set up in the past few months, employers are saying to both trade unions and employees that their salary is not at risk? Therefore, whatever the Treasury may suggest, in the real world, about which Ministers know nothing, people are being told that there is absolutely no risk of any reduction in monthly pay.

Mr. Timms: I am grateful to my hon. Friend because that underlines the point that we have a flagrant abuse of the rules with this scheme.

I understand that it is widely the case--my hon. Friend the Member for Bristol, South mentioned an example of this in Bristol--that, where employees in a firm anticipate that they will have a 2 per cent. pay rise, the employer says that he will give them a 3 per cent. pay rise if 80 per cent. of the employees accept his proposal, but then he does not increase his pay bill at all; he simply introduces an element of PRP into the existing pay arrangements. By so doing, he is able to increase the employees' take-home pay by 3 per cent.

I understand that it is possible to construct a scheme where more than 90 per cent. of the supposedly profit-related element of the pay is guaranteed--the point that my hon. Friend the Member for Rotherham has just made. For example, in schemes that make 12 monthly payments to employees, only the 13th payment is profit related.

Mr. Jack: I have listened carefully to what the hon. Gentleman has said. Given that the new clause maintains the existing registration scheme for profit-related schemes, how in detail would the new clause that he is advocating deal with the point that he has outlined?

Mr. Timms: I am not entirely clear what the Minister's difficulty is because our new clause makes it clear that it would exclude from registration a number of schemes for which application was being made, unless

"The pay before deduction of tax of employees to whom the scheme relates does not change as a result or consequence of the scheme."

Mr. Jack rose--

Mr. Timms: Perhaps the Minister wants to say something more about what the difficulty is.

5.15 pm

Mr. Jack: The question I asked is: given the existing criteria for registering schemes, will the hon. Gentleman tell me in detail how the new clause achieves the

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objective, which he has just described with some clarity, within the terms of the existing registration scheme? Will he please give me the detail of the legislative route through?

Mr. Timms: Clearly, there is a difficulty that the Minister grasps which I do not. The new clause seems to me to be clear: schemes of the sort that I am describing could not be registered. If that is not so, the Minister will no doubt explain that and perhaps he can propose a form of words that would do the trick, but I hope that he is perhaps showing by his interventions that there is a serious problem and that a loophole needs to be closed. I know that my hon. Friend the Member for Bristol, South would be delighted if the Minister proposed a form of words that dealt with the difficulty that is clearly in his mind, although it is not apparent as yet to us.

A number of schemes of this nature are being brought forward where perhaps 12 monthly payments are fixed and only the 13th payment is profit related, so the overwhelming bulk of what is supposed to be a profit related element of the employees' pay is not in any way profit related.

The Treasury press release from November states:

"PRP is that part of pay which varies with changes in the profits of the business in which the employee works."

However, in these schemes, the majority of which are being registered now, the degree of change with profits is extremely small and the schemes are primarily a device for avoiding tax. They certainly do not introduce the sort of incentive that all of us understand and support.

Mr. Tim Smith (Beaconsfield): There is an important difference between a variation that is extremely small and no variation at all. The new clause refers to a situation in which there is no variation at all, so I do not understand what it would add to the existing arrangement because, to qualify for a PRP scheme, people had to have some element of pay that varied in accordance with movements in profits.

Mr. Timms: The problem is that, as I have mentioned, in some schemes, the 13th payment is predictable; there are 12 fixed monthly payments and only the 13th payment varies very marginally. Those schemes comply with the existing Treasury requirements for registration. We are seeking to change the rules so that they would not. If there is a difficulty in the form of words that appears on the amendment paper, the Minister will no doubt draw that to our attention and perhaps he or the hon. Member for Beaconsfield (Mr. Smith) will suggest a form of words that will deal with the difficulty. I would hope that there is agreement across the Floor of the House that there is a loophole that needs to be blocked.

The issue raises a basic question of morality. It is certain that there is no significant performance-related element in the great bulk of schemes that are being registered in the current rush. They are a one-way bet for employers. It is very hard for employers to resist such a temptation. A device is available--advertised by all the publicity surrounding the Budget--by which employers can reduce their tax bill without adversely affecting their employees. Employers are in turn putting out leaflets of the sort that we have heard read out in the debate to encourage employees to take part in what is in fact a scam.

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As the poll tax created a personal tax avoidance culture, from which we are only recovering many years later, such schemes are encouraging employers and employees to become part of an income tax avoidance culture. All Opposition Members and I are anxious--I would have thought that Conservative Members would be anxious too--to ensure that that loophole is blocked. If there is an alternative way in which to do that, we would be delighted to hear about it. It is important to ensure that the loophole is blocked and that many more thousands of schemes do not come into effect with all the adverse consequences that I have described.

Mr. Paddy Tipping (Sherwood): The important new clause deals with an interesting aspect of social and fiscal policy. I share a constituency boundary with the Chancellor and I share some of his views on profit-related pay, but the action that he proposed in the Budget, which the Bill would enact, is not sufficient. The new clause strengthens and improves that action.

It is important that hon. Members remember that in his Budget statement the Chancellor said that he believed that

"employees' rewards should depend on the success of the business for which they work."

He added that he had

"argued publicly for many years, that in a modern enterprise economy people's pay should be closely linked to the performance of the business for which they work."--[Official Report,26 November 1996; Vol. 286, c. 165.]

That must be right. Employees must have a say and a stakeholding in their company; they must be able to share the benefits and profits. Conversely, they must share the risks. The present system, although right in principle, is badly conceived and has been a one-way bet for many years.

It is important to remind ourselves that the scheme dates back to a Green Paper in 1986, in which Nigel Lawson said:

"There is considerable inertia to overcome, so it might make sense to offer some temporary measure of tax relief."

It is important to emphasise the phrase "temporary measure". The experiment has been running for almost 11 years. It is suggested that it has cost the Exchequer £4 billion. Inland Revenue statistics suggest that it will cost £1.5 billion in 1996-97, although a recent written answer from which some of my hon. Friends have quoted suggests that it could cost £1.7 billion.

The figure of £1.7 billion is significant because it is almost the amount that would be raised by increasing the rate of income tax by 1p. Although 3.6 million people benefit from 12,740 profit-related pay schemes, it is important to recognise--the Chancellor recognised it in his Budget statement and I know that the Financial Secretary recognises it too--that 22 million other taxpayers could benefit by using that £1.7 billion to take 1p off income tax. We know that we face hard choices at the moment--priorities have to be judged and decisions made. I suspect that the wrong decision has been made, and I am pleased that the Government propose to stop the experiment--the tax loophole--by 2000.

We have had plenty of time to discuss the issue. It was discussed at length in a Committee of the whole House on 22 January. I am pleased that the Financial Secretary appears to be taking a genuine interest in the amendment. He has asked probing questions. It is a pity that he did

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not show such interest in the debate in January, when his winding-up speech occupied less than a third of a column in Hansard, which could be described as minimal. He said that he saw nothing to commend the amendment. I am delighted that, over the past few months, he has taken a genuine interest in the issue. I hope that he has looked closely at our amendment. It may not be perfect, but as he has had months to look at it, perhaps he could do better.

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