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Westminster Hall
Tuesday 7 March 2006
[John Cummings in the Chair]
Employee Share Schemes
Motion made, and Question proposed, That the sitting be now adjourned.—[Dawn Primarolo.]
9.30 am
Mr. Mark Hendrick (Preston) (Lab/Co-op): I am fortunate to be selected to have this debate. As a Labour and Co-operative MP, I believe that it is important for employees in an enterprise to have a stake in the business in which they work, for a variety of reasons. First, a stake incentivises them, because they are likely to be more motivated to ensure that the enterprise is a success. Secondly, a stake tends to give the employee more influence in the running and operation of the enterprise than if they had no stake whatever in the company. To some extent that gives the employee a voice and allows various democratic influences to be brought to bear on the enterprise. Co-operative businesses have played a role in achieving those outcomes, but employee-owned and trust-owned businesses generally have also operated to some degree on that basis.
I shall propose a number of ways of improving the tax and legal regimes that affect the environment in which employee share schemes operate. Following that, I intend to suggest the setting up of a support unit working alongside the Inland Revenue to deal with the non-financial aspects of employee share ownership.
The Employee Share Schemes Act 2002 was carried through the House by my hon. Friend the Member for Edinburgh, North and Leith (Mark Lazarowicz). It received strong support from the Co-operative party, and its passage was also assisted by the advice and guidance of Job Ownership Ltd, which, for those who are unacquainted with it, is an association of employee-owned and trust-owned businesses.
There are a number of key points to be made about employee share ownership schemes. First, employee financial participation is welcomed by the Government and has grown significantly, owing to favourable tax treatment, in particular my right hon. Friend the Chancellor's tax advantaged share incentive plan and his enterprise management incentives share option plan, both of which were introduced in 2000. However, research shows generally that employee financial participation alone does not transform employee commitment or greatly boost productivity.
David Taylor (North-West Leicestershire) (Lab/Co-op): My hon. Friend is a fellow Labour and Co-operative Member, as, indeed, is my hon. Friend the Member for Edinburgh, North and Leith, who has done so much in this and the previous Parliament. Does he agree that, for employee commitment and all the other benefits that can come from employee share ownership, it is important for a broad-based ownership to arise from the use of such measures and any fiscal incentives? There is some evidence that ownership is sometimes restricted to the upper tiers of
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the employees—directors and others. There have also been some rather unfortunate activities, as in QinetiQ and elsewhere, which bring such activity into disrepute.
Mr. Hendrick : I totally agree. Indeed, I will propose that share ownership plans that provide facilities for wider participation, involving not just the big boys at the top in management, should receive tax advantages that other employee-owned trusts should not.
Research generally shows that employee financial participation on its own does not transform employee commitment or boost productivity. Improved commitment and productivity require three components from employers: financial participation, to which I have referred, a serious commitment to employee involvement, and some form of collective voice for employees. The significance of achieving a collective voice cannot be overemphasised. The current tax treatment of employee share schemes needs to be reformed to remove the barriers, so that some key means can be used for that collective voice, namely in the employee trusts.
Before I go into more detail, it is important to distinguish between the various types of share ownership that are available. First, there is direct share ownership, whereby workers own their shares individually. Secondly, there is indirect ownership, whereby shares are held by or for employees collectively in some form of trust. Direct or individual share ownership can give employees a real sense of owning a piece of the business. Indirect or collective ownership through a trust is, some would argue, even more important, as it provides the collective voice that is vital to the mix of the three components.
A trust may often offer the only affordable vehicle for achieving employee ownership in the first place and provides a secure block of shares that cannot be traded, which protects the business against instability or predators. Individual shareholdings, with uninfluential voting rights, do not in themselves create a strong basis for employee involvement. An employee trust with a significant shareholding adds that extra dimension. Trustees have to take into account the interests of beneficiaries. An employee trust provides a means of rewarding employees financially, and can deliver the necessary employee involvement and collective voice to ensure that the three key components boost productivity. An employee trust designed to benefit all employees in that way is less likely to be abused by the few.
However, various problems still loom. First, the employee trust structure is at a tax disadvantage as compared with the treatment of direct shareholdings. Most of the relevant tax incentives focus on direct—that is, individual—employee share ownership, which is only one of the components and the least likely to produce stable employee ownership. There is no corporation tax deduction for a company contributing to an employee trust if the trust retains those shares for the long-term benefit of staff. A previous deduction was removed in the Finance Act 2003, because Her Majesty's Revenue and Customs was trying to stop trusts being used for tax avoidance. It is important to make a distinction between trusts that are set up to benefit all employees in a company and those that are set up to benefit just one or two people—the fat cats.
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There are no tax breaks at all for employee trusts with long-term shareholdings. There is also some complexity in the system, in that companies must have one trust to hold shares for any period and a SIP trust to distribute shares tax efficiently to employees. That is costly in both fees and time.
The SIP tax breaks are given if an employee agrees to keep his shares in a SIP trust for five years. That is considered by some to be too long to make employees wait before they can sell shares that they have bought as part of a SIP scheme, and it might be regarded as a reason not to buy shares in the first place. However, it can also be argued that if the period were to be less than five years, the investment might not be considered to be long term.
Returning to the benefits of tax breaks, existing law has various ways of trying to prevent abuse and target tax benefits. The SIP, for example, requires all employees to be offered participation, and to participate on similar terms. The EMI plan is available only to companies in certain qualifying trades with gross assets of £30 million or less. Any change must be carefully focused to avoid abuse.
What changes are needed? My right hon. Friend the Paymaster General should consider the likely impact of shortening the SIP waiting time, before which employees who have bought shares under the scheme can sell them, to less than five years. That might encourage share ownership generally. I would not like the five-year rule to be abolished if the result is that things do not work so well in terms of wider share ownership and the SIP scheme, which has been a considerable success.
Consideration should also be given to the statutory recognition of an acceptable—in tax avoidance terms—form of employee trust, contributions to which are tax deductible even if shares are held indefinitely in the trust. That is to say that there would be no corporation tax on money that an employer put into that trust. The trust structure could be simplified so that a single trust could hold shares for a long period, and easily and efficiently distribute shares to employees. There is a way to achieve both those aims in a manner that focuses on the tax break and avoids abuse, by building on the tax break introduced by the 2002 Act.
The Government accept that if a stake of at least 10 per cent. is bought by a SIP trust from individual shareholders, the company financing the purchase can get a tax deduction, and the SIP trust can take up to 10 years to distribute the shares to employees. There is also a suggestion from JOL that the 10-year requirement be removed for a defined class of eligible companies. The defined class could be based on the EMI qualifying company tests in order to show its availability. In that way, eligible companies would get a tax deduction for shares bought and held permanently in the SIP trust. The SIP is an approved plan and so is subject to Her Majesty's Revenue and Customs scrutiny, again to prevent abuse. Many would argue that if such tax breaks were created within the SIP legislation a company would need only one employee trust—a SIP trust—to hold shares for a long period and to distribute them to employees.
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I propose setting up what I would call an employees direct unit to deliver and promote the productivity benefits of employee share ownership. It would raise the Government's profile in relation to employee ownership, through both the number of companies that introduce the SIP and the way in which they operate it. Companies that follow Government guidelines and what I would call best practice, and introduce employee ownership alongside true participation, will be more likely to achieve enhanced productivity.
Government support for the introduction of the SIP, through the offices of the Inland Revenue, is based only on the financial aspects of the scheme in the form of tax relief. The problem with that is that companies will continue to regard tax relief as the main purpose of the scheme and will pass that message on to their employees. Only enlightened and committed companies will seek to introduce complementary participation schemes; hence the need for the employees direct unit, which would deliver and promote the productivity benefits of employee share ownership schemes.
David Taylor: My hon. Friend mentions the potential benefits of employee participation. He makes an elegant and persuasive Budget submission, even at this late date. Does he agree that to achieve one of the benefits of employee share ownership—more tranquil industrial relations, which has generally been obtained where employee share ownership has been widespread—employee participation is vital? It is much more than just a fiscal incentive. If people feel part of and valued by an organisation, the former tension between management and work force will be replaced by something more positive.
Mr. Hendrick : I totally agree. We need to change the culture and the way in which business operates. Instead of there being a them and us between management and work force, there needs to be a culture of involvement and participation, and the democratisation of the workplace. Only by giving the employee a stake in that enterprise—
Mr. Hendrick : And a voice. Only then will that be engendered. Schemes should be seen not just as providing a tax break or—some would say—a tax dodge, but as a means of enabling a new culture to permeate the British workplace. If the Government were to set up such a unit, to work alongside the Inland Revenue, they would play a great part in promoting that culture.
Mr. Philip Hollobone (Kettering) (Con): I have listened carefully to the hon. Gentleman. Does he think that his latest proposal would be appropriate if applied, for example, to the Post Office?
Mr. Hendrick : I am being asked to tread on some controversial ground. I would not want to comment on any specific business. All I would say is that if that culture were to permeate business, the biggest benefit would be to private business and publicly owned companies. While there is scope for that, it would need to be considered in a different light.
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The Government cannot hope to reap the maximum reward of improved productivity if they do not provide clear, constructive advice to companies and organisations on what we regard as best practice in the implementation and operation of employee ownership schemes. They are being too optimistic if they believe that a scheme can be introduced on a purely financial basis, and succeed. The introduction and operation of such schemes in any company is a complex process, which depends for its success on effective communication, ongoing provision of information and a clear commitment to the concept of partnership across the organisation. We cannot assume that companies will automatically understand that without the information, clear guidance and examples of best practice that the Government could give. If companies are left to learn by experience, their enjoyment of the benefits of employee ownership might be delayed or not fully realised.
If the Government wish to reap the greatest productivity rewards from employee ownership, they should be proactive and should, from the outset, provide advice and assistance to companies on human resource-based policies that will enhance the introduction of the SIP and establish a participation audit for the operation of such schemes. Therefore, I request that a new dedicated unit be established to work alongside the Revenue on the non-financial aspects of employee ownership: collating research, information and case studies on best practice, providing training for employee trustees, and, if thought fit, establishing a code of conduct for all companies that wish to participate in the SIP.
The Government should consider giving statutory recognition to an acceptable form of employee trust, contributions to which would be tax deductible even if shares were retained indefinitely in that trust. Such a trust could benefit from other tax advantages to promote employee ownership, such as an exemption from the loans to the participators' provisions and other measures to remove the barriers that I mentioned and even to encourage such trusts.
I acknowledge the positive steps taken by the Government to foster employee share ownership, and the need to prevent and address tax avoidance, but my proposals merit serious consideration. I respectfully ask the Paymaster General to let Treasury officials consider them to see whether they could supplement and enhance the Government's approach to the wider encouragement of employee share ownership schemes.
9.51 am
Dr. Vincent Cable (Twickenham) (LD):I welcome the hon. Member for Preston (Mr. Hendrick) to the Chamber and thank him for securing a debate on this important subject, which perhaps does not get the discussion and analysis it deserves. It is useful to point out at the outset that although worker share ownership has been described in a generic way, we are talking about different philosophies and approaches. On the one hand, we have worker, co-operative type structures that are all-inclusive, equitable and have one philosophy. On the other hand, as the hon. Member for North-West Leicestershire (David Taylor) reminded us, there are share option schemes of the kind that are common in the United States, which are designed to remunerate highly paid management employees and are
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highly exclusive. Such schemes have a completely different philosophy and different consequences. When we talk about worker share ownership, we need to be clear that there is a wide continuum of different kinds of animals.
There is a long history behind such schemes. The idea is not new and has been through many changes over the years. I was born and grew up in the city of York, and my parents worked in the Rowntrees and Terry's factories, where the idea of worker share ownership has been around for generations—when the divvy came was always a talking point in the family. The concept has been embedded for a long time. Whatever their other consequences, such schemes created much better labour relationships. There were rarely any industrial disputes at Rowntrees or Terry's, as there was a sense of involvement. However, it shaded into paternalism; that is one aspect of the schemes about which the trade union movement has been nervous over the years.
The development of worker share ownership had a burst of life with the intellectual debate in the 1960s, when people were looking for middle ways between socialism and raw capitalism. Certainly, people in the liberal tradition argued strongly for that model. However, it was criticised by at least sections of the trade union movement on two grounds, the first of which was that it blunted what were, in many cases, clear divisions of interest between owners of capital and workers—although that may not have been right, politically. The more serious and practical objection, which is relevant to this day, was that it increased the risks to workers. They are always at risk of losing their jobs, and occupational pension schemes if they are tied to a particular employer. It was thought that those who owned shares were exposed to an additional, highly concentrated risk. That downside has been widely understood over the years.
The next stage at which worker share ownership had a new lease of life was in the early 1980s, when people were looking for alternatives to the incomes policy of trying to get the work force to appreciate the problems associated with the profitability of companies, and to moderate pay claims. There was a strong stream of thinking led, I think, by Sam Brittan of the Financial Times, which Nigel Lawson, or Lord Lawson as he now is, took up when he was Chancellor, to encourage worker share ownership, with one of the objectives being to moderate pay claims. There was a different element in the argument. I make those points to stress that different people have come at this subject for different reasons over quite a long period.
The hon. Member for Preston rightly wanted to concentrate on the advances made in the period of Labour Government. He rightly said that there has been a big step forward in enlarging worker share ownership. There is also the separate system of share save, which is about taking options rather than taking shares. It reduces the risk but might be less remunerative. There are different models even within the current arrangement that the Government have introduced. A large number of companies are now involved. Some 6,400 have a form of employee share ownership, and the total business is about £20 billion a year. We are talking about substantial amounts.
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I shall trespass on the rather sensitive question of how we take this matter forward, as raised by the hon. Member for Kettering (Mr. Hollobone). The Government could use their few remaining publicly owned assets to develop share ownership. The sensitive subject of the Post Office has been touched on, and I shall touch on it again, because we raised it at our party conference this weekend.
We have adopted a model for the Post Office that would involve selling 49 per cent. of Post Office shares to employees and small investors, and dividing the remaining 51 per cent. equally between a state golden share and a John Lewis-type partnership. We argued for that because previous attempts to use privatisation as a way of developing worker share ownership foundered in the case of the National Freight Corporation, in which the people who were given shares quickly disposed of them in the secondary market. It simply became another private company and any sense of employee involvement was lost. The way to get around that would be to have a John Lewis trust model, whereby the shares are kept within a trust structure that is not diluted. That is the best way of keeping the motivation.
David Taylor : The hon. Gentleman describes his party's U-turn on the Post Office over the weekend. Does he believe that such an arrangement would soothe industrial relations between the Post Office's management and work force, which are notoriously fractious, although they have been quieter in the past year or two?
Dr. Cable : The hon. Gentleman is right to say that relations are notoriously fractious. My experience is that there is a particular problem in the large postal sorting offices in London, but that in some of the smaller operations, such as the one in south-west London, where I am the local MP, relations are very good. I have always found the representatives of the work force there with whom I have dealt constructive, although they have rejected the option that we suggest because they think that it would open the way to what they see as the wrong kind of privatisation. That is a legitimate point of view, but we think that if it were done in the right way, it would do exactly what he wants: increase motivation and involvement.
The other way in which the Government could advance the situation is through the tax regime. We need to consider seriously two proposals made by the hon. Gentleman. The first is the suggestion that we restrict tax privileges in certain areas to schemes with which there is a genuine model of participation and involvement, rather than share option schemes of the QinetiQ type model, with which there are elements of serious abuse. I have secured a debate to discuss that in an hour or so. If such privileges can be narrowed to areas of genuine participation, that would be more appropriate and less costly to the Treasury.
The hon. Member for Preston's other proposal went in the opposite direction: that we should enlarge tax privileges to be sympathetic to trust arrangements. That is a good suggestion. I do not know what it would cost—perhaps the Paymaster General will tell us—but the
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concept seems right. It is unfortunate that because of measures to prevent tax evasion or avoidance by unscrupulous operators, good schemes such as those provided by John Lewis, Ove Arup and the Bader Foundation have found themselves at a disadvantage. It would be helpful to find a way around that.
The final point that I want to make is that not only a lot of anecdotes but a lot of research have come out of the United States, among other places, where there are good and well conceived worker share ownership schemes linked to participation. Empirical evidence shows that that does a lot to improve productivity and motivation. Common sense would suggest that that would be the outcome.
David Taylor : The hon. Gentleman cites the example of the United States of America. Would he care to speculate on the spectacular problems encountered by United Airlines, where the majority of shares were owned within such frameworks?
Dr. Cable : There are risks with such schemes. As the hon. Gentleman well knows, much of the airline industry in the United States is bankrupt and there are risks as well as benefits associated with worker share ownership. That is why people putting all their eggs in one basket, with workers having almost all their asset wealth in shares in their own company, is not sensible. However, it is almost certainly sensible for them to have some involvement. As I suggested, research shows that the outcome is generally positive.
My final point repeats one made by the hon. Member for Preston. In order for worker share ownership to be broadly accepted and to gather wide political support, it has to be seen to be genuine and not simply an excuse for the kind of share option schemes that we have seen in some companies which have involved serious abuse.
10.1 am
Mr. Mark Hoban (Fareham) (Con): I congratulate the hon. Member for Preston (Mr. Hendrick) on securing the debate, which raises important issues about how we should align the interests of the work force and employees with the interests of the owners of a business. One reason why we have share option schemes is to strengthen that alignment of interests so that both employees and shareholders work in the same direction to strengthen the business and bring about its goals. That is an important reason why so many share option schemes are available.
The hon. Member for Twickenham (Dr. Cable) said that there are 6,400 share schemes. It is interesting to break that down and consider their availability. Just over 1,000 all-employee share schemes are available. A good proportion are in listed companies, so that 93 of the FTSE 100 and 160 of the FTSE 250 have all-employee share schemes. If we compare the number of all-employee share schemes with the number of discretionary share option schemes, we start to see the difference opening up. Although there are 1,000 all-employee share schemes, there are more than 6,300 discretionary share option schemes, predominately among unlisted, private companies. If we are to align the interests of shareholders and employees, it is important that we also take into account the number of unlisted companies with share schemes as well as the number of listed companies.
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The hon. Member for Preston waxed lyrical on the benefits of aligning ownership and employment. I am surprised that he did not grip with more enthusiasm the suggestion from my hon. Friend the Member for Kettering (Mr. Hollobone) that the model that he outlined should be applied to the Post Office. The hon. Gentleman was somewhat reticent in identifying the way in which the interests of postal employees could be aligned with those of management by introducing an element of employee share ownership. I am sure that the Secretary of State for Trade and Industry would be interested in considering the ideas that he has put forward, in order to introduce such a congruence of interests in the Post Office. Perhaps we would see a continued improvement in industrial relations if that were to continue.
There is a reluctance at times from the collective voice of employees—the trade unions—to embrace employee share ownership. The hon. Member for Twickenham referred to the National Freight Corporation and the way in which employees sold their shares in the secondary market. I also understand that the trade unions representing those employees were reluctant to encourage employees to take up the ownership of shares in the corporation.
The subject is important and we need to recognise the continuum of interest. There are businesses that are happy to ensure that a share option scheme forms part of the remuneration of their employees and to encourage the identification of a common interest, but there are those who want to move further down the route referred to by the hon. Member for Preston, where share ownership is allied with more formal participation and a collective voice on the way in which the company is run. Many businesses will go for the share option scheme and will be able to introduce that, but will not go down the route of greater employee involvement. Businesses in my constituency, particularly the smaller businesses that might not have employee share option schemes, find ways to ensure that employees are engaged with the business. They have regular consultations about the productivity and profitability of the business, and try to encourage input from employees. They do not necessarily need to go down the route of share ownership to have that involvement in the way in which the business is run.
I was slightly concerned by the direction in which the hon. Gentleman was heading when he talked about the employees direct unit. I was not sure whether he was suggesting that it would be a precondition of tax incentives for employee share ownership to have greater participation in the running of the business. He talked about participation orders, which sound quite expensive. I am not sure who would fund the participation order—the business or the taxpayer. We would need to consider that.
The hon. Gentleman also referred to a code of conduct being required for businesses with share options and share ownership schemes. Again, it was not clear whether that code of conduct would be compulsory and whether employers who did not wish to set up some mechanism for employee share owners to have a collective voice would be forced to go down that route. We need to be careful that in trying to promote the goal of one distinct model of employee share ownership and participation through the combination of the three conditions to which the hon.
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Gentleman referred—financial participation, employee involvement and collective voice—all employee share schemes do not cease to be attractive to employers as a means of remuneration. I was not sure where he was heading, and whether he wanted a voluntary or compulsory scheme. Perhaps he would like to elaborate.
Mr. Hendrick : I was not trying to be prescriptive with any formula for any particular company. I was trying to give an impression and idea of what needs to be involved, so that we can move towards a generalised model that would allow participation, give a voice and be financially beneficial to the companies and employees by providing tax incentives and tax breaks. I would not say that anything should be conditional on a code of conduct, but such a code would be strongly advised if companies want any of the schemes that they may wish to operate to succeed.
Mr. Hoban : I am sure that I and others will be reassured that the hon. Gentleman meant a voluntary scheme. That would remove some of the disincentives that might arise if codes of conduct and participation orders became compulsory or even strongly advised. They could act as a disincentive for employers who wish to introduce employee share schemes. It is important to consider that. We would not want to see a decrease in the number of employee share schemes.
The hon. Gentleman identified a means by which the effectiveness of the beneficial impact of such schemes on businesses might be increased, but I do not think that we should be forced to go down a particular route to maximise the benefit. There are a range of reasons why businesses would introduce share option schemes, and they are not necessarily all of the model that he identified.
Following a significant expansion in the number of share option schemes, approval of such schemes is starting to tail off. It is interesting that 120 save-as-you-earn schemes were approved in 1999–2000 but that that fell to 38 in 2003–04. It might be argued that that was a consequence of the introduction of the share incentive plan, but there again the number of plans that have been approved has fallen from 220 in 2001–02 to 95 in 2003–04.
An issue therefore arises about the take-up of those schemes and the number of businesses that want to establish new schemes, particularly given the large gap between the number of all-employee share schemes, which is just over 1,000, and discretionary schemes, at just over 6,300. We need to continue to consider the matter and to find new ways of encouraging employee share ownership, to bring about greater alignment between the interests of employees and shareholders. I am sure that the House and the Government will return to the topic.
10.11 am
The Paymaster General (Dawn Primarolo) : I congratulate my hon. Friend the Member for Preston (Mr. Hendrick) on securing this important debate. From the comments made by the hon. Members for Twickenham (Dr. Cable) and for Fareham (Mr. Hoban), there appears to be agreement across Parliament on the importance of providing for employee share ownership,
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notwithstanding the need to consider safeguards in ensuring that the schemes achieve their objectives, as mentioned by my hon. Friend.
I want to reinforce the important points that my hon. Friend made about the importance of share ownership: it gives financial participation; it can bring about a commitment from employees and employers in partnership; and it can, if other arrangements are established, give a collective voice not only to employees but to everyone who wants their business to prosper. I recognise the contribution not only of my hon. Friend, but of those who have been involved for a considerable time in the development of policies on employee-owned businesses. That has contributed to a rich and important debate not only in Parliament but in the country. I particularly want to mention the Co-operative parliamentary group, which continues to make important contributions.
The Government have shown their commitment to employee share ownership with the introduction in 2000 of two extremely generous schemes to encourage employees to take a stake in their employer, as my hon. Friend said. They have both been mentioned: the share incentive plan and the enterprise management incentive. In addition, the save-as-you-earn and company share option plans are also available. The SIP plan incorporates specific provisions to enable mutually owned co-operatives to enter into a plan.
In 2002, the Government and the House collaborated with my hon. Friend the Member for Edinburgh, North and Leith (Mark Lazarowicz) on his private Member's Bill, the Employee Share Schemes Bill, which enabled companies to obtain "up-front" corporation tax relief on money given to a share incentive plan trust to buy a larger block of shares. The 2002 Act enshrined in legislation the right to elect worker shareholders as trustees of share incentive plan trusts. That was followed by legislation in 2003 to provide employers with the certainty of a statutory route to a corporation tax deduction for the cost of their employee share schemes.
Reference has been made to the scale of participation. I take in the spirit in which they were intended—of wanting to build on something important—the points made by the hon. Member for Fareham about the number of schemes being registered now. However, more than 4 million employees—nearly 20 per cent of private sector employees—are participating in tax-advantaged schemes. In 2004, more than 6,000 companies were operating tax-advantaged schemes and more than 1,000 were open to all employees. The share incentive plan has become the most popular tax-advantaged all-employee share scheme ever, with nearly 3.9 million people buying shares in 2003–04. There could be many explanations for our reaching the point that we are at, but it is not a lack of popularity, or, currently, lack of participation.
The fact that the schemes are tax advantaged means that the employees benefit from about £710 million in income tax and national insurance contributions relief on shares and share option gains in 2003–04. That is very significant and generous support by any international standards for participation in the schemes.
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My hon. Friend the Member for Preston referred to Job Ownership Ltd., and I want to return to that subject. It is important to establish how well the schemes have gone before we begin to consider how to improve them. A recent report published by Job Ownership Ltd called "Shared Company: how employee share ownership works" comments:
"Largely thanks to HM Treasury's determination to make employee shareholding a serious element in corporate governance, the UK now leads at least its European competitors in both the degree of meaningful employee financial participation, and in the scale of our employee owned business sector ".
We must not be complacent, but that is an important milestone. I was interested in the points made about the need to continue to engage in dialogue to see how we can continue to take things forward, and I should like to deal with some of the specific points that my hon. Friend and the hon. Members for Twickenham and for Fareham made.
The first point that my hon. Friend made was about a major awareness campaign. He mentioned it several times, including when he referred to the employee unit. I was not clear what the role of Government might be in that context. The remit of a number of industry-sponsored organisations includes considering the wider benefits. Perhaps he felt that if things were left to Her Majesty's Revenue and Customs the focus might be only on tax advantage, whereas there are wider advantages. I took that point, although the hon. Member for Fareham rightly picked up on whether he had in mind a complex scheme. I took my hon. Friend's point in its broadest sense of whether a unit with the role of advocacy on a wider basis, without compulsion, would be appropriate.
The Government already participate in the arena of discussion of employee share ownership. I do not have a view, particularly, on whether a unit of the kind in question is necessary, what it would do, where it would fit, or whether it would bring a benefit, and the hon. Member for Fareham made a relevant point about increasing awareness and thus application. Her Majesty's Revenue and Customs does participate in a series of what are called "employer talk" events around the country, at which officials not only talk to business about employee share schemes, and raise awareness, but discuss the wider benefits. The approach of my hon. Friend the Member for Preston is interesting, although a lot of work would need to be done on it. However, I am happy, as always, to tell people, including those outside the House who advocate such an approach and who have a contribution to make on improving schemes, that speaking to officials at HMRC who deal with such issues is an important first step. I do not know exactly what that would entail, or whether it would be appropriate, but I am happy to take such representations to my officials.
I would also need to be sure that we were adding something. We need to have a view of the current situation and of why employees and employers take up share ownership schemes. What do they feel the benefits are? What are the major drivers and how might we measure them? Is there a gap in understanding or can more be said about productivity and participation? If so, what is the appropriate unit? I am a Treasury
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Minister, and before Treasury Ministers agree to spend money, they need to be assured that there is a purpose to doing so and that there will be an outcome.
Mr. Hendrick : Does my right hon. Friend accept that many people believe that the SIP scheme and other schemes are a means of giving financial advantage to the share ownership? As I said, participation and a collective voice would go a lot further towards promoting such schemes and making them more successful. If she agrees, would she also accept that the Government could facilitate that process, if not through the unit that I suggested, then through the Department of Trade and Industry or HMRC?
Dawn Primarolo : I was coming to SIPs, but I would make one point to my hon. Friend, which was mentioned by the hon. Member for Twickenham. Share ownership schemes, by themselves, might not be enough to achieve all the objectives that my hon. Friend identified. I think that everyone who has spoken would agree on that. We need to consider other changes in the workplace, as well as attitudes to partnership and involvement in the workplace. That will need to involve not only employees, but management, which takes me back to his point.
SIPs are the largest schemes; they are all-employee and very successful, and a lot of taxpayer's money is invested in the SIP principle through reliefs. A review of SIPs is under way, and internal research contractors have been engaged to carry out detailed research into employees' and employers' use of SIPs and to evaluate the policy's impact. On the financial side, we know from the sheer numbers that take-up is very high, but we need to look at the wider issues. That research will be published in due course, although I do not have a date for that. Like today's debate, that would be an appropriate time for anybody with ideas for improving schemes, and particularly SIPs, which have been the major issue this morning, to put those ideas forward.
Specifically on SIPs and trusts, the Government are not against including mutual or trust-owned businesses in a SIP if the right way of doing so can be found. My officials and I will continue to consider proposals from trusts, employee-owned companies and mutually owned organisations, but any arrangement would need to meet the Government's aim of linking employees' effort and commitment with outcomes such as productivity, a voice, participation and performance, as my hon. Friend said.
Regrettably, there are those who, regardless of Parliament's intent, seek to use tax reliefs, including even those that apply in this area, in ways that were not intended. Given that experience, there is always a precautionary principle. As a Minister, therefore, I am somewhat reluctant to go beyond what is offered now until the case for doing so is absolutely established. However, where companies allow their employees to hold a real stake through direct shareholdings, and that is done in conjunction with wider, good employee participation measures, there is evidence that the company's productivity and performance will improve. The Government's tax advantage schemes are a good basis on which to align treatment of such issues.
My hon. Friend also mentioned trusts, which involve complex issues. Companies have a choice about which structure to use. When the Government offer a complete
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scheme, we cannot go into all the vagaries, reflecting what every company might like: we offer a general scheme, and companies have a choice about which structure to use. Some use SIPs with tax breaks, and others use a trust, including a SIP trust that involves tax breaks. I agree that that is more complicated. If we add two trusts to a financial and legal chain, it is bound to be more complicated, but that is the company's choice. Perhaps we need to consider that.
As I said, however, it is a sad fact of life that employee benefit trusts can be used to enable employers and employees to avoid paying their proper share of tax and national insurance on employment reward. The problem takes many forms. An employer might offer an employee a way of apparently earning less, but in fact getting more. It might reduce the employee's tax and national insurance liability, and the individual will go for it because it makes economic sense. When everything is unwound through the system, and the mechanisms that are used are identified, particularly by the tax authorities, it is then suggested that that was not actually the intention.
My hon. Friend referred to the changes in 2003, which ensure that companies get corporation tax relief where the employee reward is in share-based form and is properly subject to tax and national insurance. I am sorry to say that any change must still fit in with those changes. There have been repeated discussions across the board, including with established and good companies, such as the John Lewis Partnership and its advisers, which have sought a proposal allowing them to put in place new arrangements. However, there have been difficulties at every stage, and the tax authorities immediately felt uncomfortable, not about the intention of those who made the proposals, but about the possibility that others outside that circle would be able to use the relief in ways that we could not allow.
The five-year rule for SIPs was part of the consultation that took place before they were set up. All the advice was that five years was a reasonable period for which to give employees a stake in a business and for employees to have a voice in the choices that influenced that business, as opposed to having a tax-reduced way of receiving employment income. That is why we have five years. We should wait to see what the research says, but I have seen nothing advocating that five years is an unreasonable period. Of course, the shares can be removed between three and five years, but a different regime applies in that respect.
I referred to Job Ownership Ltd., as did my hon. Friend. He will know that the Chancellor spoke at its conference last year and that representatives from that organisation have met officials to discuss share ownership through a trust structure. I have said that we are committed to listening to such ideas and that if we can find a way, and if proposals come forward that meet with his agreement—it depends on whether they cost a lot of money or not and there might be other priorities—we are prepared to take them forward.
On the Royal Mail, I have only two things to say on Government policy. First, other people can say what their policy is, but the Government have no plans to privatise or part-privatise the Royal Mail. Secondly, however, as the hon. Member for Fareham said, it does not need to be privatised or part-privatised for those within the organisation to favour some form of
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employee share scheme. I understand that some are in favour and that the Department of Trade and Industry is willing to consider such a scheme. Again, that depends on the proposals. Let us not suggest that the Royal Mail has to be privatised to get share ownership. That is, rightly, a commitment that can be achieved, as others have said.
I again congratulate my hon. Friend on securing the debate. I am heartened, and I hope that he will be, that this might just be the first debate on employee share ownership in which all three political parties present—the Conservatives, the Liberal Democrats and Labour—have talked about making a commitment to it. We are clearly saying that it must be done in a structured and not overly complex way that protects the taxpayer from its being used inappropriately. It should enhance employee participation and voice, create improvements in productivity and give them an important stake.
Leaving aside the fact that my hon. Friend now has my agreement to go away to examine a number of things, he should be congratulated on, and heartened by, the fact that at last we have reached the point at which the political parties are agreed that this is the way forward. That must surely lead to a blossoming in the future development of employee share ownership.
10.32 am
Sitting suspended.
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