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Mr. Edward Davey: The hon. Gentleman raises the issue of elections. It has cropped up several times and, as hon. Members said, we could consider it in Committee without being too prescriptive. Perhaps he can set out criteria or principles that would determine how a group of workers in a company would elect representatives. For example, perhaps we could state in the Bill that every employee should have a vote of equal value, without being too prescriptive about electoral systems.

Mr. Love: Let me state here and now that I shall not be a member of that Standing Committee and will not be able to enter into that debate. However, if the share ownership plan is for all employees, everyone who is involved must be able to take part in electing those who want to represent them. I suspect that all hon. Members would uphold that principle. No doubt principles will be laid down for such elections, but it will be important to allow some flexibility; otherwise, the Bill will be as rigid as other legislation, which will not help to persuade companies to take up the scheme.

The Bill also deals with the discrimination that those people who want to make a significant move towards employee ownership experience as a result of paying corporation tax up front and of the considerable time that it takes to distribute shares. Opposition Members are having a rather good time. I think that the right hon. and learned Member for Rushcliffe (Mr. Clarke) was on the sensible wing of the Conservative party, and this may well be a case in point. The arrangements for corporation tax discriminate against small family-run businesses in particular. Rather than selling out to a major larger competitor, they might prefer to reward their employees for many years of long service, but that option is not open to them. The current tax regime puts them at a disadvantage and no owner would choose to put himself in that situation, so it is sensible to make the change.

The 10 per cent. threshold is a safeguard. It would at least make companies pause for thought before using the measure as a tax-saving mechanism, because they would be creating a significant employee shareholding. That might want to do that, but I suspect not in the circumstances. No doubt that could be discussed at length in Committee.

Finally, I want the Minister to have a flexible approach to the extension of employee share ownership. In the Finance Act 2000, the Government extended the SIP

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scheme to industrial and provident societies, in particular to redeemable shares. Such shares do not require the same involvement in the company as ordinary share capital, but the Government thought that that would benefit employees. I supported that policy and the impetus behind it. However, I mentioned earlier that mutual organisations have considerable difficulty. As a result of discussions that I had, I wrote to the previous Financial Secretary to the Treasury, whose response was illuminating:

However, discussions were on-going. I asked my hon. Friend the Economic Secretary to the Treasury a parliamentary question and received the response:

Building societies and other mutuals do not issue shares. Therefore, it is very difficult to have a share ownership scheme. I understand the problem, but employees of commercially successful businesses are being disadvantaged because they are not allowed to take part. Even more important, mutuals are not operating on a level playing field. They are suffering a disadvantage, and there are many other disadvantages, so I hope that the Minister will look at the issue.

The Bill allows the Government to extend employee share ownership to employee trusts. I hope that over the next few months the Minister will look constructively at the matter to see whether a similar extension could be made for mutual organisations. The scheme has dramatic benefits for companies and for employees. It should be available as widely as possible.

The Paymaster General (Dawn Primarolo): I congratulate my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz) Leith on introducing the Bill. Like all hon. Members who have spoken, I recognise—dare I say it?—his bravery in taking such an issue through the House under the private Member's Bill structure. It is a difficult task and will give him a great deal of work over the next few months. I thank him and his team for working so constructively with me and my officials on the Bill.

Hon. Members on both sides of the House have contributed to what has been an excellent debate on this important issue. Increasingly, employee share ownership is at the heart of the Government's productivity agenda. All Members recognise the importance of the style of company ownership and the structures of a company, as well as of rewarding employees.

I am pleased that we are agreed on the general thrust of the Bill. However, there are elements of the Bill that I would not be able to support. I will come to those. My comments will follow many of the points that were made by the hon. Member for Aylesbury (Mr. Lidington) in his thoughtful speech.

As another caveat, I say to all hon. Members that the tax system is a very important part of our democratic system, but it is not easily amended or dealt with. It does not always produce the effect that hon. Members believed it was going to produce when they drafted legislation. The

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House will forgive my caution, but after five years as a Treasury Minister, I understand that things do not always work precisely as one intended them to.

First, I shall focus on the Government's record. There is a wealth of evidence to support employee share ownership. In July 2000, the Government introduced the share incentive plan and enterprise management incentives. The two schemes are very different, but both are aimed at encouraging enterprise and productivity, and both offer generous tax reliefs.

At the end of October, I launched a nationwide roadshow on the share incentive plan, with my right hon. Friend the Chancellor of the Exchequer. The launch was supported by Digby Jones of the Confederation of British Industry, John Monks of the Trades Union Congress, and George Cox, all of whom expressed unreserved support for the plan. That demonstrates that all hon. Members who have spoken are right to say that there has been a sea change in attitudes toward participation in employee share ownership schemes.

The aim of the roadshow, run jointly with ProShare, was to tell companies directly about the benefits of SIP and how to go about introducing a plan. Comments have been made about complexity; in fact, after extensive consultation on SIP, the options available to companies are as simple or as complex as they feel necessary in their circumstances. I do not want the House to think that there is a "one size fits all" approach.

Since enterprise management incentives were introduced in July 2000, we have made improvements. Already, almost 2,000 companies have notified us that they have granted more than 16,000 options. This month, we doubled the gross assets limit to £30 million, allowing 6,000 more small and growing companies to qualify. There are other tax approved schemes—the ones I have described are not the only ones that give employee share schemes access to tax advantages.

No one can doubt the Government's commitment to employee share ownership. A sound basis for our commitment is provided by research that clearly shows that companies with widespread employee ownership and participation outperform their rivals. Some of the most powerful support is found in a survey carried out by ProShare. It found that 83 per cent. of employers who had introduced a share plan said that it met or exceeded their expectations. There are also interesting results from shareholding employees: 34 per cent. said that they were now more interested in the company and its activities, and 25 per cent. said that share ownership made them more likely to stay with their employer. Similar views were expressed by everyone who has spoken in the debate. Results like those can translate into a significant effect on business success.

The Government are justifiably proud of SIP, which is the most tax-advantaged share plan ever introduced by a United Kingdom Government. Our aim in introducing the plan was to encourage employees to take a long-term stake in the company for which they work. We want to align employees' interests with those of other shareholders, and give them access to the rewards that flow from the success that they help to create. That is crucial to fulfilling the principles underlying the plan.

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The plan was developed in partnership with industry, which wanted a framework that would appeal to smaller and unquoted companies. SIP was therefore designed to meet the needs of a range of companies. It has already proved successful. To date, 260 companies have had share plans approved and well over 250 plans are awaiting implementation by the company or are in the process of being approved by the Inland Revenue. The plan is being taken up by companies both large and small, listed and unlisted.

The hon. Member for Aylesbury asked for details and I can tell him that, of the 260 plans so far approved, 150 are in companies that never previously had an all-employee share scheme, and 71 companies are replacing their old profit sharing schemes with a share incentive plan, and that is what we hoped for. In addition, another 250 or more plans are in the process of being set up by companies. The hon. Gentleman asked how we would meet our target. No time limit was placed on the target of doubling, but given the present pace of change, we can be reasonably confident that in the next few years we shall be close to our target.

Several hon. Members asked about the involvement of low-paid and part-time workers in share incentive plans, and it seemed to be the view that, particularly in the retail sector, the plan was not being taken up. Hon. Members should be aware that a number of the large supermarket chains already operate, or are bringing in, a share incentive plan. Employees must be properly advised about the most appropriate way in which to use their funds. All hon. Members will appreciate that shares are not a one-way street and there is a risk—a point that the hon. Member for Kingston and Surbiton (Mr. Davey) sought to make in an intervention.

As the Bill seeks to extend the share incentive plan, it is important that I should spend a little time describing how it works. The share incentive plan allows a company to bring its employees into direct share ownership in several different ways. Up to £3,000 worth of free shares can be given annually to participants tax free. In addition, employees can contribute up to £1,500 a year out of pay before tax and national insurance to buy what are called partnership shares. Employers can then reward the commitment by awarding up to two matching shares for each partnership share bought.

Employees pay no tax or national insurance on the shares that they are awarded under the plan as long as they are held in the plan for at least five years. I shall not go through the reasons for that, because they have been adequately dealt with today. There are capital gains tax benefits and links to pensions and individual savings accounts. There are also tax breaks for companies, which are allowed deductions against corporation tax for the costs of awarding shares and for their costs in setting up a plan. Employers make substantial savings on employers' national insurance contributions on the salary that employees use to buy partnership shares and on shares given to employees through the plan. It is fair to say that all parties gain from the share incentive plan, whether from direct tax breaks or greater productivity.

Having set out the Government's commitment to employee share ownership schemes, I shall deal with the Bill, which sets out to change the rules of share incentive plans and has three major objectives. First, it seeks to extend the share incentive plan to companies whose shares are held for charitable purposes or in an employee

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benefit trust. A number of changes are needed to allow that, including allowing the award of share types not currently allowed in the plan. Secondly, the Bill provides for elected employee representatives to act as trustees of a company's share incentive plan. Thirdly, the Bill aims to encourage the transfer of shares into employee ownership through early corporation tax deduction on money given by the company to a plan trust for buying shares from an individual on behalf of the company's employees.

I shall deal with each of those aims in turn. Clause 1(2) seeks to extend the share incentive plan to trust-controlled or employee-controlled companies. Because of their structure, those companies are currently excluded from the approved employee share arrangements. They cannot use the arrangements because their constitution prevents them from awarding shares to employees.

A number of Members asked about the cost of the Bill, including the hon. Members for Chesham and Amersham (Mrs. Gillan) and for Aylesbury. The cost of extending the share incentive plan to trust or employee-controlled companies would be about £25 to £30 million a year, assuming that there is high participation. Corporation tax costs, if the Bill is amended as I seek and as I hope my hon. Friend the Member for Edinburgh, North and Leith will accept, would be about £5 million to £10 million a year. However, as a Minister, I have a problem with that part of the Bill, which is not drafted tightly enough to ensure against abuse. The John Lewis Partnership has been mentioned a great deal; I am not suggesting for a minute that such organisations would be involved. However, as we saw in high costs to the taxpayer of the profit-related pay experience, there are people who seek to use elements in the tax system to reduce their tax, even though they were not designed for that.

Awarding different classes of shares is a problem. To allow employee-controlled companies to use the share incentive plan without changing their share structure, clause 1(4) seeks both to extend the class of share that can be accepted under a plan and to place restrictions on it. It seeks to enable ordinary share capital held in trust or for charitable purposes to remain untouched, by allowing companies to use another class of ordinary share for the plan; that class may have restricted rights which may affect their value.

The share incentive plan does not allow companies to use anything for the plan other than the company's ordinary share capital, to ensure that employees are not being awarded shares inferior to the shares of other shareholders. I appreciate the point about the John Lewis Partnership. Under the 1929 settlement, the company established a profit-related scheme, under which all distributed profits to the employees as partners, in the form of an annual profit-related bonus, were paid pro rata to the salary. Because the company could not take part in employee share ownership schemes, in 1990 it converted its existing bonus schemes into a tax-relieved profit-related pay scheme. I do not want to go over again the problems with the profit-related scheme, which was designed to help companies like John Lewis, but had an astronomic cost for the taxpayer. Experience teaches us to be careful in that area.

I am aware that employee and trust-controlled companies feel that they are at a disadvantage compared with other companies which can use approved employee share schemes, particularly now that profit-related pay has been phased out.

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This is an extremely complicated area, to which many of my hon. Friends referred. We have struggled in the past and we continue to struggle to see how we might help such companies. I know that my hon. Friend the Member for Edinburgh, North and Leith and his team have encountered the same difficulties in devising a practical approach for the Bill. That, in part, is why I hope that he will agree that these provisions should be removed from the Bill. I cannot consider an arrangement that moves away from ordinary shareholdings, or one which breaks or weakens the link with improved productivity, or reintroduces profit-related pay by some other means.

I am, of course, conscious that flagship employee-controlled enterprises have successful arrangements for achieving and rewarding employee participation and involvement. Various such structures were discussed today. It is unclear how they would want to use the share incentive plan, and in what ways it would add to the incentives already available to their employees.

We have, however, already provided for co-operatives to participate in the share incentive plan by allowing them to use redeemable shares in the plan, which conventional companies using the plan cannot do. That was because redeemable shareholding is the vehicle for co-operative membership. Allowing redeemable shares meant that employees would be issued with the same shares as other members.

Having asked for the provision to be removed from the Bill, I will continue actively to consider whether there are other ways of extending the share incentive plan to trust and employee-owned companies that wish to use the plan as conventional companies do, in ways that preserve the aims of improved productivity and do not allow scope for abuse. I hope that my hon. Friend the Member for Edinburgh, North and Leith will accept that.

On elected employee representatives as trustees of a company's share incentive plan, I share my hon. Friend's aim of encouraging greater employee participation. The proposal in subsection (5) is that the deed of a share incentive plan trust should allow companies to have at least one elected employee to act as a trustee. I am happy to support the election of employees as trustees. Strictly speaking, that can already be done, but if hon. Members want it to be beyond doubt and written into the Bill, we have no problem in supporting that.

I am happy for Inland Revenue officials to work with my hon. Friend and his team on a trust deed that would provide for elected employee trustees. That could be offered alongside the existing model trust deed on the Inland Revenue website.

Finally, I shall deal with early corporation tax deduction on money given by a company to a plan trust to buy shares from an individual. Subsection (6) provides for a corporation tax deduction to be given when a company contributes money to a share incentive plan trust to buy shares from one or more individuals. The figures of £5 million and £10 million that I gave are calculated on the basis that what I am about to say will be accepted, not on what is in the Bill. That would be more expensive.

Again, I support my hon. Friend's aim of encouraging individuals such as family owners to sell their shares into employee share ownership. I am mindful, however, that the early corporation tax deduction that is currently available through qualifying employee share ownership trusts—sometimes called QUESTs—has been used very

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little by the individuals such as family owners for whom it was originally designed. The Government have already gone a long way to facilitate the transfer of shares from individuals such as family owners into the share incentive plan.

My particular concern with the provision is that the corporation tax deduction would no longer be linked to the distribution of shares to employees, which is crucial to the relationship between productivity and employee benefits. The shares acquired by the plan trust could remain indefinitely in the trust. As I said, that would be contrary to the fundamental aim of the share incentive plan. I know that my hon. Friend the Member for Edinburgh, North and Leith is aware of those concerns and I hope that he accepts that the provision is drafted a little too widely, in terms of missing that crucial link. I would be prepared to accept an early corporation tax deduction where that is clearly linked to the aims of the share incentive plan legislation. That would mean that shares would need to be distributed to employees through the share incentive plan over a defined period. If he can accept those amendments as well, the Government can be satisfied that his proposals fit squarely with and support the actions that we have already taken.

I share my hon. Friend's aim of encouraging employee participation and share ownership. None the less, I have had to conclude that, in some respects, the Bill as it stands would work against the purposes and design of the current share incentive plan. I do not believe that the plan is the right vehicle for achieving collective employee share ownership, because its purpose is to increase productivity through direct individual employee shareholding. Nevertheless, I would be prepared to support an amended Bill along the lines that I have set out.

First, I would support a Bill in which clause 1(2) to (4) and clause 1(7) were dropped. As I explained, those provisions seek to extend the share incentive plan to company structures that cannot currently use it. Secondly, clause 1(6) would need to be amended so that the shares acquired with up-front corporation tax relief were distributed to employees within a defined limit.

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I am satisfied, having taken advice, that no human rights, European Community or devolution issues would be raised by the amended Bill that I propose. We believe that the impact on the regulatory burden, which was mentioned by the hon. Member for Chesham and Amersham is negligible. None the less, officials will do further work on the shape of the Bill and on assessment.

I hope that my hon. Friend will accept the amendments that I propose so that I can accept the progress of the Bill into Committee, where the issues can be sorted out. Again, I congratulate all hon. Members who participated in the debate, which was an excellent example of how Government policy can be probed in the House—and, indeed, improved a little—in a spirit of co-operation.

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