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Mr. Lazarowicz: My hon. Friend tempts me to do so. In matters involving the complexities of tax law, it is not advisable to go into too much detail; otherwise hon. Members who have joined me in the Chamber might decide to take a short break from our proceedings.
Let me say a little in broad terms about the Bill's provisions, to bring hon. Members up to date with some of the developments in Committee and to paint the full picture of what the Bill seeks to do. I also want to set out the wider context in which the Bill has been introduced.
The Bill can be summarised as consisting of three main provisions. The first gives a clear pointer, in the share incentive plan, that employees can elect the trustees of the trust that holds the employee shares. It is not a compulsory requirement; no one is forcing companies, or employees, to have the trusts managed by employee representatives if they do not want to. However, the provision makes it possible for a number of the trustees to be employee representatives.
We debated whether the clause was absolutely necessary, and some officials believed that such an arrangement was possible under existing rules. However, the Bill's supporters felt that it was important to make it absolutely clear in legislation that such appointment of trustees by the employees was competent within the legislation, that it would not be challenged and that tax concessions would not be at risk. From their experience from talking to people who were interested in going along this route, businesses and even officials had responded that arrangements in which employees were involved in appointing trustees were at least questionable. If one is engaged in setting up a structure for a company that one wants to last for a long time, one does not want to risk a challenge at a later stage from the Inland Revenue; one wants to be sure of what one is doing from the start. That is why this provision was regarded as so important.
Mr. Love: Does my hon. Friend agree that a lot of evidence suggests that employee involvement in the non-financial as well as the financial aspects of share ownership brings benefits to the company and the employee?
Mr. Lazarowicz: My hon. Friend has the ability to foresee exactly the points that I am about to make. Once again, he has helped me to move on to my next point. I thank him for that assistance.
Numerous case studies have shown that the most successful results arising from employee share ownership are where employees have real involvement and participation in the non-financial as well as the financial aspects of share ownership and, as a result, feel a greater sense of ownership not just of the shares but of the whole company structure, ethos and direction. Appointing employee trustees can be an extremely effective way of achieving that. It is also to be hoped that, as a result of such involvement by employees in the culture of a company, the wider objective of increasing productivity, which is a main objective of the Government but one that
the whole House would endorse, is much more likely to be achieved, particularly when the non-financial aspects of ownership are supported and encouraged.
Mr. Gareth Thomas: Is not my hon. Friend being a tad too modest about the benefits of employee participation? There is considerable evidence to suggest that genuine employee participation in the running of a company brings much greater benefits, and those companies are more successful on average than companies that have no active employee participation.
Mr. Lazarowicz: My hon. Friend is right and in a moment I hope to come to some examples of concrete improvements in the performance of companies that have taken that route.
The clarification of rules that encourage the appointment of employees as trustees of the trusts that hold the employees' shares is one important provision of the Bill. The second, even more significant, provision is the way in which the Bill seeks to support the position of companies, and particularly the owners of businesses, that want to make a significant move towards employee ownership. The provision assists that change by allowing corporation tax relief to be made up front where a significant block of shares—10 per cent. or more—is transferred to an employee trust.
As we heard in our earlier debate, such relief is currently available only when the shares are transferred to the individual employees under the scheme. However, there is plenty of reason to believe that, in many cases, the requirement as provided for in legislation discourages businesses from going down that route. A few months ago, I attended an interesting conference organised by the Scott Bader company and a number of presentations were made by companies involved in that area.
It was pointed out, for example, that the owner of a business who wants to transfer ownership to his or her employees, and who recognises the value of involving employees in that way, might want to conduct the transfer gradually, perhaps to retain some interest in the running of the company in future years. After all, if the business had been built up over many years, it would be unsurprising if the owner did not want completely to let go of the reins of control on day one in the process. However, such a person would find that the gradual transfer of shares is not encouraged by the current regulations. If they took the route of transferring the shares initially to the employee trust, they would be hit by a large corporation tax bill at that stage of the process. Clearly, that is a great inhibitor to such transfer of business ownership.
In some cases, the transfer of shares from the current shareholders to an employee trust may require a certain degree of financing by the employees themselves. Employees are often asked to make a certain contribution towards the purchase of the shares. Again, they might not be able to provide the necessary finance from day one. The current provisions ensure that, if the shares are held in the trust for a period sufficient to allow them to accumulate the funds necessary for acquisition, the shares' transfer to the trust does not attract corporation tax relief at the start of the process. That can obviously
inhibit the transfer of shares in the first place, so a very important aspect of the Bill is the way in which corporation tax relief is allowed up front.The Bill also contains the important qualification that the shares must at some stage be transferred from the employee share trust and to the individual employees. There was some discussion about this matter among hon. Members, Ministers and officials. Views were expressed in some quarters about organisations in which it might be desirable to hold employee shares in the trust indefinitely and allow a block to be maintained in the trust's ownership all the time. A strong view was expressed to the contrary, and I can see its strength, which is why the Bill was amended in Committee. It was important to ensure that the shares are eventually distributed to employees, precisely to maintain the link between productivity and employee benefits.
In my view, the Bill makes the right compromise between those two factors. It allows the shares to be held by the employee trust for a considerable period, but also requires eventual transfer by providing that 30 per cent. of the shares acquired with a payment in respect of which deduction is made be distributed under the share incentive plan within five years. The balance should then be distributed within a further five years—10 from the initial acquisition—and the Bill also provides that if the distribution does not take place within those limits, the deduction will be withdrawn and a charge to corporation tax will follow.
I am grateful that the Revenue and the Government were happy for the Bill to provide that if all the shares in question are subsequently distributed, the deduction will be reinstated at that time. That provision allows the tax benefits to be reinserted if the transfer cannot for any reason be completed within 10 years of the initial acquisition. The Bill also contains provisions to prevent double relief and allows for the various concessions to be withdrawn if the Inland Revenue withdraws approval of the company's share investment plan. It also contains various formal and anti-avoidance provisions.
As hon. Members who have followed the Bill's progress are aware, it could have contained a little more. As the hon. Member for Arundel and South Downs (Mr. Flight) mentioned, concern was expressed in some quarters about the clause that has come to be known as the John Lewis clause, and which was removed in Committee at the Government's request. It was designed to enable companies controlled by an employee trust and/or a charitable trust on the employees' behalf to set up a share incentive plan from which ordinary shares could be distributed to individual employees. Unsurprisingly, there was considerable support for the provision among employees of the John Lewis Partnership, but it was also supported by hon. Members in all parts of the House.
I fully appreciated the Government's concerns about the way in which such a provision might operate in practice and their view that there would be tax-avoidance consequences that had not been fully appreciated by those who drafted the Bill on my behalf. For that reason, I was happy to accept their concerns as valid. As hon. Members will know, my hon. Friend the Paymaster General gave a helpful commitment on Second Reading to
- "continue actively to consider whether there are other ways of extending the share incentive plans 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."—[Official Report, 18 January 2002; Vol. 378, c. 580.]
In some respects, the provisions in the Bill might be considered relatively limited, but in my view they are important none the less. They will give a clear boost to any company that seeks to establish the principle of employee share ownership firmly at the heart of its corporate ethos. They are also being introduced at a time of great cultural change for business. Traditional ownership structures are ripe for change and many businesses are now recognising the benefit in productivity terms of participation by employees in the ownership and running of firms.
The changes that the Bill seeks to introduce go alongside much other work that is taking place elsewhere. Some hon. Members may be aware of the excellent contribution to employee share ownership issues made by the work that the special share taskforce, consisting of various experts, has been undertaking along with the Revenue. I hope that measures such as those in the Bill will further encourage those working in this field.
The Bill should be seen not in isolation, therefore, but in its wider context of greater movement towards employee participation in both the ownership and management of firms. There is a wide range of types of financial participation by employees in the ownership of businesses. They include direct employee ownership, workers' co-operatives and simple profit-sharing schemes. Employee share ownership schemes themselves can also perhaps be divided into two types. The first is the narrow-based scheme that is limited to only a small percentage of the work force—typically the senior management. Secondly, the type of scheme that I want to promote and that the Bill is designed to encourage is the broad-based scheme that can be opened to 80 per cent. or more of employees, or indeed to the entire work force.
It is that type of broad-based involvement of employees in the ownership of businesses that presents an exciting opportunity for business in this country. That is why I hope that the Bill goes some way towards encouraging that trend. Notwithstanding the relatively limited take-up of some such schemes, in comparison with our European neighbours and partners, the UK is the leader in broad-based share schemes.
The European Foundation for the Improvement of Living and Working Conditions recently carried out a study of 2,500 businesses in the European Union. It found that the United Kingdom was the leader in these schemes, followed by France, the Netherlands and Ireland. It also found that in the past decade there had been an increase in the number of schemes in those EU states, although profit-sharing schemes remained much more widespread.
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