Registration of Profit-Related Pay Schemes

New clause 3 – in the House of Commons am 4:15 pm ar 11 Mawrth 1997.

Danfonwch hysbysiad imi am ddadleuon fel hyn

'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. (1) The scheme was registered before the Finance Act 1997 received Royal Assent; or
  2. (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.

Photo of Dawn Primarolo Dawn Primarolo Shadow Spokesperson (Treasury)

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 benefit from relief from income tax on profit-related pay. The Government propose to phase out the relief by 31 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.

It is necessary to remind the House why profit-related pay was introduced, so that I can properly illustrate how the abuses are taking place. The scheme was introduced in 1987 and enabled any employer out to make profits to pay employees up to 20 per cent. of salary, or £4,000, whichever is the lower, free of income tax subject to certain conditions. At least 80 per cent. of employees must be able to participate, and all participants must do so on similar terms. The main beneficiaries of profit-related pay are likely to be employees on lower incomes.

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In the 1983 Budget the then Chancellor of the Exchequer asserted that £100 million would be saved in 1994ߝ95 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: 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.

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: 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?

The SITA scheme is merely one example of a number of schemes that are being established all over the country. The Government have scored a double whammy: first, the incompetence of creating a massive tax loophole, and then the incompetence of not closing it properly so that it continues to be exploited. The true extent of late applications to the Treasury for such schemes has been revealed in written answers to my hon. Friend the Member for Rotherham (Mr. MacShane). In the two months from 1 December 1996, 3,800 applications were made.

Putting it politely, I believe that there is clearly a problem. It is obvious from scrutinising the material sent to employees that the intention of the scheme is to take advantage of the tax loophole—the scheme has been set up for one year only, because the company presumably thinks that it can renegotiate it next year. I cannot believe that it is beyond the wit of the excellent brains in Her Majesty's Treasury to find a way of ensuring that bona fide schemes are protected and agreed and that such abuses are prevented.

Photo of Michael Jack Michael Jack , Fylde

I have listened carefully to the hon. Lady. She envisages that the new clause would maintain the existing registration mechanisms for schemes but would rule out a certain type of scheme. If the existing registration mechanism is to be maintained, how would the schemes to which she has referred be ruled out? The new clause is deficient in that detail. Could she supply it?

Photo of Dawn Primarolo Dawn Primarolo Shadow Spokesperson (Treasury)

With respect, the Financial Secretary could make that point when he responds to the debate. Frankly, if we were in government, I am sure that we would find a way. The principle in the new clause is clear, so surely to goodness the Government can find a mechanism to achieve it.

Photo of Denis MacShane Denis MacShane , Rotherham

I support the new clause, which my hon. Friend the Member for Bristol, South (Ms Primarolo) moved in a moderate and ministerial way. I shall be interested to hear how on earth the Minister manages to justify what is, by any honest examination, ministerial incompetence. The profit-related pay blunder, which my hon. Friend has examined in some detail, was identified as such in previous statements by the Chancellor. This is not a new discovery or the result of earnest research by the Labour party. It has been a matter of concern to Chancellors and to the Treasury, as shown by speeches reported in Hansard.

Having discovered the loophole, the Government have made no effort to close it. The new clause is the first concrete proposal to save the taxpayer what is potentially a serious loss of revenue, and to signal to companies that are rushing to take advantage of that tax loophole that the game is up.

The paradox is that, although the Budget is meant to be formulated in conditions of confidentiality and secrecy—the so-called purdah into which the Chancellor and his Ministers and officials must disappear until the Budget statement—the intention to remove profit-related pay from our fiscal regime was heavily flagged up a full two months before that statement. In mid-September, the business pages of every newspaper carried detailed reports suggesting that the elimination of PRP from the system was a racing certainty. As a result, there was a rush of firms seeking to register for PRP schemes between September and November, when the Budget statement was made.

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Following that, we all waited—or, at least, Opposition Members waited—for the Chancellor to announce that, with effect from his Budget statement or perhaps a week or two thereafter, as is the norm when such loopholes are closed, no more schemes would be accepted for registration, or, at best, the loophole would be closed once the Finance Bill became law. In fact, the opposite happened. Massive publicity was directed at firms, suggesting that here was a wonderful tax avoidance dodge, and that, although it was going to be phased out, any company that chose to register a scheme could do so in the meantime.

My hon. Friend the Member for Bristol, South mentioned a company in Bristol. I know of companies in the engineering and metal-bashing sphere—as one whose constituency contains Britain's, indeed Europe's, largest engineering steel plant, I have nothing but respect for the craft and industry of metal bashing, steel making and engineering generally—that have been rushing to set up PRP schemes. They have offered their employees an absolute guarantee of no loss of income, thus invalidating the very principle—a sensible principle—that underlies all profit-related pay: the idea that those who make that extra effort and put in that extra commitment will cause the company's profits to increase, and will be paid more as a result.

I do not know what package is described in the fancy words of accountants in letters to the Treasury, but, on the ground, employees being offered such schemes are being told that there is no way in which they will suffer any reduction in pay. Instead, they are told, they will pay less tax. As my hon. Friend the Member for Bristol, South pointed out, the clear implication is that they can moderate their pay demands, because they will gain the advantage of the tax break that the Chancellor will be able to offer for a number of years.

The very concept of profit-related pay has been nullified by the schemes that are being set up. They amount simply to a subsidy by the taxpayer to firms whose accountants and finance directors were able to read the business pages in September, and to follow the Budget speech. The Government waved an immense flag in front of their noses, saying, "Here is a way in which you can cut your company's overall tax burden."

The answers given to my parliamentary questions, which my hon. Friend mentioned, show that, between September, when the first massive publicity about the phasing out of PRP was leaked to the press—the breaking of the purdah—and the end of January 1997, the Treasury received 7,500 applications to register schemes, more than in the full 12 months of 1994. I do not have the figures for last month. The tax relief given since the Chancellor first said, through leaks to the press, that he was intending to take PRP out of our fiscal system amounts to £1.1 billion, more than the £1 billion in revenue forgone throughout 1995.

In the five months from the first Treasury-inspired publicity about phasing out PRP, through the Budget, to the end of January, schemes have been registered which the Treasury estimates will cost the Inland Revenue £1.1 billion. That money, which the Chancellor has lost through his incompetence, could be used to build 15 medium hospitals or 70 new schools with 1,000 pupils, to employ 60,000 new teachers or to put 30,000 extra police officers on the beat.

Opposition Members are concerned not just about the overall ideology of the fiscal regime as practised by the Government in the past five years, but about the incompetent handling of important technical issues. It is complete and utter nonsense to announce that a scheme is to be phased out, when that announcement is followed by a tidal wave of people rushing to join the scheme in order to profit from it, with a consequent massive loss of revenue to the Treasury in ensuing years. That is the point of the new clause to which my hon. Friend the Member for Bristol, South spoke so ably.

This is the real saga of the black hole. We know about the various other black holes—losses of revenue owing to serial ministerial incompetence in recent years—but this is the cherry on the icing of the black hole cake, if I may mix my metaphors. Conservative Members laugh at that, but I can tell them that constituents of mine in Rotherham who have been invited to join the Gadarene rush to help their firms to reduce their overall tax burden would much prefer a new hospital or a few more bobbies on the beat.

I do not know whether the Financial Secretary has seen the recent interesting report from Lloyds bank, which examines in broad terms the whole way in which Ministers managed to render the economy so unstable between 1980 and 1986. The bank's economists have drawn up headings for output, inflation, interest rates and exchange rates across the Organisation for Economic Co-operation and Development. The United Kingdom, as governed by Treasury Ministers, lies at the bottom of nearly all the stability indices. That issue of stability—which means people knowing what their regime will be for tax planning, pay planning and personal savings planning—is essential, but it has been denied to those people by the recent incompetence of Ministers.

The Financial Secretary is an honest and an honourable man, with whom we enjoy engaging in debate. I hope that he will take this final chance to apologise, on behalf of the Chancellor, for this last example of Government incompetence. I believe that the Chancellor is in Beijing, giving weird interviews about statements that he made to a conference of grocers; I do not know whether the right hon. Member for Old Bexley and Sidcup (Sir E. Heath) is with him to discuss the problems of the grocery trade. I hope that he will apologise for this last £1.1 billion that the Chancellor has managed to lose the Treasury since September last year, and apologise to the British people for the lack of the hospitals and schools that they could have had, the teachers who could have been in those schools and the bobbies who could have been on the beat. All that has been denied them because of the mishandling of the scheme—the profit-related pay fiasco.

I urge hon. Members on both sides of the House, irrespective of party allegiance, to vote for the new clause, to give the new Government a fresh start to close this loophole and to ensure that such tax fiddles never again disgrace Conservative Members.

Photo of Stephen Timms Stephen Timms , Newham North East

As Labour Members have said, it is absolutely clear that, since the Budget announcement and the suspicion leading up to the Budget, there has been a stampede into profit-related pay to take advantage of it in its closing years. I pay tribute to my hon. Friend the Member for Rotherham (Mr. MacShane) for extracting from the Minister the information that he has referred to, which puts the scale of the problem into context.

What has emerged is that, in the past few years, the growth in the use of the PRP scheme has been almost exponential. The cost to the Treasury of the schemes registered in 1994 is expected to be just over £0.5 billion, in 1995, £1 billion and in 1996 nearly £1.7 billion. As my hon. Friend has said, in the five months from September to January alone, the cost is more than £1 billion. He also said that there were about 7,000 new applications in that period. According to Inland Revenue statistics, there were only 12,740 schemes at the end of 1996, so there has been a huge increase just in the past few months.

The new clause that was moved by my hon. Friend the Member for Bristol, South (Ms Primarolo) ensures, first, that any employee currently in a PRP scheme that has been successfully registered and is tax favoured will continue to benefit from that scheme and, secondly, that employees in bona fide new schemes will be able to enjoy the benefits, until the Government phase those schemes out. However, we surely need to prevent, as the new clause proposes, employers from using the scheme simply to cut their pay bill by cutting income tax payments, with little or no benefit to employees.

PRP loopholes have already been closed. The Chancellor moved to close the most glaring loophole in 1993, when he ensured that it was no longer possible to have PRP schemes that were entirely risk free—that is, where the profit-related element of the pay bore no relation at all to the profits that were being earned by the firm. Thankfully, that loophole was closed, but the evidence now is that most of the cost of the scheme—possibly the great part of the cost—in forgone tax is related to schemes that are almost risk free. It is no longer possible to have an entirely risk-free scheme, but it is still possible to have schemes that are almost risk free, where the link between the company profits and the level of pay received by the employees is extremely slender, so that the scheme is, in reality, a method just of avoiding tax on regular salary payments.

Photo of Denis MacShane Denis MacShane , Rotherham

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.

Photo of Stephen Timms Stephen Timms , Newham North East

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.

Photo of Michael Jack Michael Jack , Fylde

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?

Photo of Stephen Timms Stephen Timms , Newham North East

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.

Photo of Stephen Timms Stephen Timms , Newham North East

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

Photo of Michael Jack Michael Jack , Fylde 5:15, 11 Mawrth 1997

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 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?

Photo of Stephen Timms Stephen Timms , Newham North East

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.

Photo of Mr Tim Smith 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.

Photo of Stephen Timms Stephen Timms , Newham North East

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.

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.

Photo of Paddy Tipping 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 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.

Photo of Michael Jack Michael Jack , Fylde

As the hon. Gentleman says, I have been looking carefully at the amendment. Using the registration criteria for profit-related pay and the terms of the Opposition's amendment—it is, in fact, a new clause; I should not want to downgrade it to an amendment—will he say how, in reality, the scheme would work?

Photo of Paddy Tipping Paddy Tipping , Sherwood

That is the comment of a genuinely inquiring Minister. He has had since January to consider the issue. He has had the benefit of knowing the terms of the new clause—I am grateful for his correction—for a little time. If he is not satisfied with it, he at least knows its spirit: that the risk, the downside of profit-related pay, should be shared as well as the upside. I am sorry that he finds the new clause difficult; it is very straightforward. In essence, it proposes that current members of the scheme would not lose out until 2000 and that only genuine, bona fide schemes will in future qualify.

I want to draw the Financial Secretary's attention to good schemes and bad schemes—especially to one that is about to be introduced at Nottingham university. In the past, Nottingham university has been viewed as being in the public sector. It has now decided that it is in the private sector. It has corporate status and is to introduce a profit-related scheme. I would call the scheme not a profit-related scheme but a salary-conversion scheme.

The accountancy firm, Ernst and Young, which has looked at the issue, suggests that 75 per cent. of all profit-related schemes are salary-conversion schemes. Staff at Nottingham university—I am delighted that the Chancellor, who received an honorary degree from Nottingham university some time ago, is in his place—were told that the scheme was a no-risk scheme; that if 80 per cent. of them voted for it, it would be pound notes all the way; and that there was no element of risk.

I still find it difficult to understand conceptually how a university can make a profit. Moreover, many of the staff at the university are anxious about the notion of profit-related pay at a university. They recognise it for what it is—a tax avoidance scheme—and know that the most significant part of their income comes from the public purse. They are avoiding tax and are not paying it to the Exchequer. Simultaneously, however, university and student funding comes from the Exchequer. It is bizarre.

I should like to contrast that scheme with another in the Nottingham area that has been operated for many years by a well-known manufacturer of net curtains, Phillip A. Minsen. The significant difference between the two schemes is that employees of Phillip A. Minsen share all the company's risks and are real stakeholders. They share the profit, if there is one, but they also share the downside. New clause 3 is important because it tries to distinguish between proper and well-meaning profit-related schemes and those that can be described only as scams.

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New clause 3 would end the element of tax avoidance. My hon. Friends have already mentioned the increase in the number of schemes that people are attempting to establish by 2000. I support the new clause because it would improve the Bill. I hope that we shall have an opportunity to make more progress on the subject in the debate.

Photo of Mr Tim Smith Mr Tim Smith , Beaconsfield

Having listened to the debate, I conclude that new clause 3 would be ineffective and that it is misdirected. The Government have become a victim of their own success. Tax relief on profit-related pay was introduced in 1987 and was generally welcomed. A chart in the Red Book shows how the cost of relief has risen substantially over the past few years, especially since 1991, when it was doubled. This year, it is estimated that it will cost £1,500 million. Therefore, one could reasonably say that the relief has achieved its objective, and that it would be sensible to phase it out.

I have no knowledge of the figures produced by the hon. Member for Rotherham (Mr. MacShane) and I certainly do not dispute them. Companies may have been attempting to take advantage of the relief although it is to be phased out, and that issue should be addressed, but if the Opposition are as concerned as they claim, they should have drafted a more effective new clause. Surely it would have been more sensible to say that no new schemes will be registered as from today. Why not? If the relief has achieved its objective, why not say, "We'll finish the existing schemes, but no new schemes will be admitted"?

The difficulty with the Opposition's new clause is that it is unintelligible and would achieve nothing. It states: The pay before deduction of tax of employees to whom the scheme relates does not change as a result or consequence of the scheme. As I understand it, however, to qualify initially as a profit-related pay scheme, a part of one's pay must be variable in relation to the profits of the organisation for which one works. As the hon. Member for Bristol, South (Ms Primarolo) and other Opposition Members said, only a small proportion of someone's pay may vary, but I do not believe that a scheme would be approved if no part their pay varied although the employing enterprise's profits fluctuated. Therefore, new clause 3 would achieve little or nothing.

New clause 3 does not go far enough and is rather feeble.

Photo of Denis MacShane Denis MacShane , Rotherham

Is not subsection (1) the key part of the new clause? If the new clause is agreed, we will, de facto, be announcing a winding-up of profit-related pay schemes. Lawyers and accountants have made fun of interpretations of subsection (2), but that is a matter for experts and the Revenue and, ultimately, for the courts. We face that problem with all complicated amendments to tax law. However, the thrust of the new clause is quite clear: it is politely to say that no one wants such schemes any more and that it is time to say goodbye to existing schemes. There is no problem with existing schemes—they can continue and no one will face any problems with them—but new ones will not be allowed. Surely the hon. Gentleman should be urging the Minister, in the interests of sensible tax raising, to accept this important new clause.

Photo of Mr Tim Smith Mr Tim Smith , Beaconsfield

It is not the Minister's new clause. It has been tabled by the Opposition, and we are entitled to ask a few questions about its implications. The hon. Gentleman seems to be shifting his ground and saying that we should place more emphasis on subsection (1), but that is what I have been saying. Why not stick to the first condition and drop the second? Subsection (2) does not make sense. It is no good merely saying that we want to outlaw schemes that are not bona fide and keep those that are. We must draft legislation that achieves the objective, but I do not think that that can be done in one sentence. I certainly do not think that new clause 3 achieves that objective, and that is why I think that it should be thrown out.

Photo of Michael Jack Michael Jack , Fylde

I have listened assiduously to the debate. The hon. Member for Rotherham (Mr. MacShane) accused Conservative Members of incompetence, but this is an incompetent new clause. No Opposition Member could answer my question about how the second condition would work. The hon. Member for Bristol, South (Ms Primarolo) shakes her head. I shall give way to her if she can tell me how it would work within the terms of the existing registration scheme. Clearly she cannot do so. She asks the House to approve a new clause that, essentially, will not work.

I caution the hon. Member for Bristol, South that the Opposition have not thought through the full implications of their proposal. She said that in principle Labour supports the Government on phasing out profit-related pay. I assume, therefore, that she supports the argument advanced in the Budget debate by my right hon. and learned Friend the Chancellor, whom I am delighted to see in the Chamber, when he said that he wants an orderly withdrawal of profit-related pay so that companies can adjust their affairs as tax relief is withdrawn. New clause 3, however, would cause a disorderly withdrawal of relief. The Opposition cannot have it both ways.

Photo of Michael Jack Michael Jack , Fylde

The hon. Lady shakes her head. It is her new clause—let her tell me that I am wrong. Under the new clause, no more profit-related pay schemes could be registered for tax relief after the Bill received Royal Assent. That would eliminate 50 per cent. of profit-related schemes, some of which may be entirely virtuous, according to the Opposition's definition.

How will the Opposition explain their proposal to the 36,000 employees of the John Lewis Partnership—an organisation that was prayed in aid by the Opposition as operating a good scheme? Some Opposition Members did not want such schemes to be affected. How will they explain why such employees will be unable to continue their profit-related pay scheme and take advantage of phased withdrawal of tax relief? Other companies are in a similar position.

Photo of Michael Jack Michael Jack , Fylde

I do not want you to blunder into this and have to face the slings and arrows of outrageous fortune in the form of—

Photo of Mr Michael Morris Mr Michael Morris , Northampton South

Order. All Members in the Chamber are hon. Members, not "you" or "I".

Photo of Michael Jack Michael Jack , Fylde

I apologise.

Whitbread, with 67,000 employees, Safeway with 60,000, Barclays with 62,000 and many other companies that I could name have annual registration for schemes that the Opposition would call virtuous but that the new clause would eliminate. The House should not be invited to support the new clause.

As for the second condition in the new clause, the registration requirements simply identify the business unit effect, the number of employees, the size of the profit-related pool, how long the scheme would last, the total of profit-related pay that would be required and the upper limit of the profit pool. The new clause would not comply with those requirements; it would not work. It would mean that no more profit-related pay schemes could be registered for tax relief. No serious operator would propose such a measure while claiming to agree with the Government's approach on phasing out profit-related pay. If the new clause is pushed to a vote, I invite the House to throw it out.

Question put, That the clause be read a Second time:—

The House divided: Ayes 264, Noes 296.

Division No. 91][5.41 pm
Abbott, Ms DianeBrown, Rt Hon Gordon
Ainger, Nick(Dunfermline E)
Ainsworth, Robert (Cov'tryNE)Brown, Nicholas (Newcastle E)
Allen, GrahamBurden, Richard
Anderson, Donald (Swansea E)Byers, Stephen
Anderson, Ms Janet (Ros'dale)Caborn, Richard
Armstrong, Ms HilaryCampbell, Mrs Anne (C'bridge)
Ashton, JosephCampbell, Menzies (Fife NE)
Austin—Walker, JohnCampbell, Ronnie (Blyth V)
Banks, Tony (Newham NW)Campbell—Savours, D N
Barnes, HarryCanavan, Dennis
Barron, KevinCann, Jamie
Battle, JohnCarlile, Alex (Montgomery)
Bayley, HughChapman, Ben (Wirral S)
Beckett, Rt Hon Mrs MargaretChisholm, Malcolm
Beith, Rt Hon A JClapham, Michael
Bell, StuartClark, Dr David (S Shields)
Benn, Rt Hon TonyClarke, Eric (Midlothian)
Bennett, Andrew FClarke, Tom (Monklands W)
Benton, JoeClelland, David
Bermingham, Gerald Clwyd, Mrs Ann
Berry, RogerCoffey, Ms Ann
Betts, CliveCohen, Harry
Blair, Rt Hon TonyConnarty, Michael
Blunkett, DavidCook, Frank (Stockton N)
Boateng, PaulCorbett, Robin
Bradley, KeithCorbyn, Jeremy
Bray, Dr JeremyCorston, Ms Jean
Cousins, JimJamieson, David
Cunliffe, LawrenceJenkins, Brian D (SE Staffs)
Cunningham, Jim (Cov'try SE)Johnston, Sir Russell
Cunningham, Rt Hon Dr JohnJones, Barry (Alyn & D'side)
Cunningham, Ms RoseannaJones, leuan Wyn (Ynys Môn)
(Perth Kinross)Jones, Jon Owen (Cardiff C)
Dafis, CynogJones, Dr Lynne
Dalyell, Tam(B'ham Selly Oak)
Darling, AlistairJones, Martyn (Clwyd SW)
Davidson, IanJones, Nigel (Cheltenham)
Davies, Chris (Littleborough)Jowell, Ms Tessa
Davies, Rt Hon Denzil (Llanelli)Keen, Alan
Davies, Ron (Caerphilly)Kennedy, Charles (Ross C & S)
Davis, Terry (B'ham Hodge H)Kennedy, Mrs Jane (Broadgreen)
Denham, JohnKilfoyle, Peter
Dewar, Rt Hon DonaldKirkwood, Archy
Dixon, Rt Hon DonLestor, Miss Joan (Eccles)
Dobson, FrankLewis, Terry
Donohoe, Brian HLiddell, Mrs Helen
Dowd, JimLitherland, Robert
Eagle, Ms AngelaLivingstone, Ken
Eastham, KenLloyd, Tony (Stretf'd)
Ennis, JeffLlwyd, Elfyn
Etherington, BillLynne, Ms Liz
Evans, John (St Helens N)McAllion, John
Ewing, Mrs MargaretMcAvoy, Thomas
Faulds, AndrewMcCartney, Ian (Makerf'ld)
Field, Frank (Birkenhead)Macdonald, Calum
Fisher, MarkMcFall, John
Flynn, PaulMcGrady, Eddie
Foster, Rt Hon DerekMcKelvey, William
Foulkes, GeorgeMackinlay, Andrew
Fraser, JohnMcLeish, Henry
Fyfe, Mrs MariaMaclennan, Robert
Gapes, MikeMcNamara, Kevin
Garrett, JohnMacShane, Denis
George, BruceMaddock, Mrs Diana
Gerrard, NeilMahon, Mrs Alice
Gilbert, Rt Hon Dr JohnMallon, Seamus
Godman, Dr Norman AMandelson, Peter
Golding, Mrs LlinMarek, Dr John
Graham, ThomasMarshall, David (Shettleston)
Grant, Bernie (Tottenham)Marshall, Jim (Leicester S)
Griffiths, Nigel (Edinburgh S)Martin, Michael J (Springburn)
Griffiths, Win (Bridgend)Martlew, Eric
Grocott, BruceMeacher, Michael
Gunnell, JohnMeale, Alan
Hain, PeterMichael, Alun
Hall, MikeMichie, Bill (Shef'ld Heeley)
Hanson, DavidMilburn, Alan
Hardy, PeterMiller, Andrew
Harman, Ms HarrietMitchell, Austin (Gt Grimsby)
Harvey, NickMoonie, Dr Lewis
Hattersley, Rt Hon RoyMorgan, Rhodri
Henderson, DougMorley, Elliot
Hendron, Dr JoeMorris, Rt Hon Alfred (Wy'nshawe)
Heppell, JohnMorris, Ms Estelle (B'ham Yardley)
Hill, Keith (Streatham)Morris, Rt Hon John (Aberavon)
Hinchliffe, DavidMudie, George
Hodge, Ms MargaretMullin, Chris
Hoey, KateMurphy, Paul
Hogg, Norman (Cumbernauld)Nicholson, Miss Emma (W Devon)
Home Robertson, JohnOakes, Rt Hon Gordon
Hood, JimmyO'Brien, Mike (N Warks)
Hoon, GeoffreyO'Hara, Edward
Howells, Dr KimOlner, Bill
Hoyle, DougO'Neill, Martin
Hughes, Kevin (Doncaster N)Orme, Rt Hon Stanley
Hughes, Robert (Ab'd'n N)Pearson, Ian
Hughes, Roy (Newport E)Pendry, Tom
Hughes, Simon (Southwark)Pickthall, Colin
Hutton, JohnPike, Peter L
Illsley, EricPowell, Sir Raymond (Ogmore)
Ingram, AdamPrentice, Mrs Bridget
Jackson, Ms Glenda (Hampst'd)(Lewisham E)
Jackson, Mrs Helen (Hillsborough)Prentice, Gordon (Pendle)
Prescott, Rt Hon JohnStevenson, George
Primarolo, Ms DawnStraw, Jack
Purchase, KenSutcliffe, Gerry
Quin, Ms JoyceTaylor, Mrs Ann (Dewsbury)
Radice, GilesTaylor, Matthew (Truro)
Randall, StuartThumham, Peter
Raynsford, NickTimms, Stephen
Reid, Dr JohnTipping, Paddy
Rendel, DavidTouhig, Don
Robertson, George (Hamilton)Trickett, Jon
Robinson, Peter (Belfast E)Tyler, Paul
Rogers, AllanVaz, Keith
Rooker, JeffWalker, Rt Hon Sir Harold
Rooney, TerryWallace, James
Ross, Ernie (Dundee W)Walley, Ms Joan
Rowlands, TedWardell, Gareth (Gower)
Ruddock, Ms JoanWareing, Robert N
Salmond, AlexWelsh, Andrew
Sedgemore, BrianWicks, Malcolm
Sheerman, BarryWigley, Dafydd
Sheldon, Rt Hon RobertWilliams, Rt Hon Alan
Short, Clare(Swansea W)
Simpson, AlanWilliams, Alan W (Carmarthen)
Skinner, DennisWilson, Brian
Smith, Andrew (Oxford E)Winnick, David
Smith, Chris (Islington S)Wise, Mrs Audrey
Smith, Llew (Blaenau Gwent)Worthington, Tony
Soley, CliveWray, Jimmy
Spearing, NigelWright, Dr Tony
Spellar, John
Squire, Ms RachelTellers for the Ayes:
(Dunfermline W)Mr. Greg Pope and Mr. Dennis Turner.
Steinberg, Gerry
Ainsworth, Peter (E Surrey)Burns, Simon
Aitken, Rt Hon JonathanBurt, Alistair
Alexander, RichardButcher, John
Alison, Rt Hon Michael (Selby)Butler, Peter
Allason, Rupert (Torbay)Butterfill, John
Amess, DavidCarlisle, John (Luton N)
Ancram, Rt Hon MichaelCarlisle, Sir Kenneth (Linc'n)
Arbuthnot, JamesCarrington, Matthew
Arnold, Jacques (Gravesham)Cash, William
Arnold, Sir Thomas (Hazel G)Channon, Rt Hon Paul
Ashby, DavidChapman, Sir Sydney
Aspinwall, Jack(Chipping B)
Atkins, Rt Hon RobertChurchill, Mr
Atkinson, David (Bour'mth E)Clappison, James
Atkinson, Peter (Hexham)Clark, Dr Michael (Rochf'd)
Baker, Rt Hon Kenneth (Mole V)Clarke, Rt Hon Kenneth
Baldry, Tony(Rushcliffe)
Banks, Matthew (Southport)Clifton—Brown, Geoffrey
Banks, Robert (Harrogate)Coe, Sebastian
Bates, MichaelCongdon, David
Batiste, SpencerConway, Derek
Beggs, RoyCoombs, Anthony (Wyre F)
Bellingham, HenryCoombs, Simon (Swindon)
Bendall, VivianCope, Rt Hon Sir John
Beresford, Sir PaulCormack, Sir Patrick
Biffen, Rt Hon JohnCouchman, James
Body, Sir RichardCurrie, Mrs Edwina
Bonsor, Sir NicholasCurry, Rt Hon David
Booth, HartleyDavies, Quentin (Stamf'd)
Boswell, TimDavis, Rt Hon David (Boothferry)
Bottomley, Peter (Eltham)Day, Stephen
Bowden, Sir AndrewDorrell, Rt Hon Stephen
Bowis, JohnDouglas-Hamilton,
Boyson, Rt Hon Sir RhodesRt Hon Lord James
Brandreth, GylesDover, Den
Brazier, JulianDuncan, Alan
Bright, Sir GrahamDunn, Bob
Brooke, Rt Hon PeterDykes, Hugh
Brown, Michael (Brigg Cl'thorpes)Eggar, Rt Hon Tim
Bruce, Ian (S Dorset)Elletson, Harold
Budgen, NicholasEvans, David (Welwyn Hatf'ld)
Evans, Jonathan (Brecon)Knox, Sir David
Evans, Nigel (Ribble V)Kynoch, George
Evans, Roger (Monmouth)Lamont, Rt Hon Norman
Evennett, DavidLang, Rt Hon Ian
Faber, DavidLegg, Barry
Fabricant, MichaelLeigh, Edward
Fenner, Dame PeggyLennox—Boyd, Sir Mark
Field, Barry (Isle of Wight)Lester, Sir Jim (Broxtowe)
Fishburn, DudleyLidington, David
Forman, NigelLilley, Rt Hon Peter
Forsyth, Rt Hon Michael (Stirling)Lloyd, Rt Hon Sir Peter (Fareham)
Forsythe, Clifford (S Antrim)Lord, Michael
Forth, Rt Hon EricLuff, Peter
Fowler, Rt Hon Sir NormanLyell, Rt Hon Sir Nicholas
Fox, Dr Liam (Woodspring)MacGregor, Rt Hon John
Fox, Rt Hon Sir Marcus (Shipley)MacKay, Andrew
Freeman, Rt Hon RogerMaclean, Rt Hon David
French, DouglasMcLoughlin, Patrick
Fry, Sir PeterMcNair—Wilson, Sir Patrick
Gale, RogerMadel, Sir David
Gallie, PhilMaitland, Lady Olga
Garel—Jones, Rt Hon TristanMalone, Gerald
Garnier, EdwardMans, Keith
Gill, ChristopherMariand, Paul
Gillan, Mrs CherylMarlow, Tony
Goodlad, Rt Hon AlastairMarshall, John (Hendon S)
Goodson—Wickes, Dr CharlesMarshall, Sir Michael (Arundel)
Gorman, Mrs TeresaMartin, David (Portsmouth S)
Grant, Sir Anthony (SW Cambs)Mates, Michael
Greenway, Harry (Ealing N)Mawhinney, Rt Hon Dr Brian
Greenway, John (Ryedale)Mayhew, Rt Hon Sir Patrick
Griffiths, Peter (Portsmouth N)Mellor, Rt Hon David
Gummer, Rt Hon JohnMerchant, Piers
Hague, Rt Hon WilliamMitchell, Andrew (Gedling)
Hamilton, Rt Hon Sir ArchibaldMitchell, Sir David (NW Hants)
Hamilton, Neil (Tatton)Moate, Sir Roger
Hampson, Dr KeithMolyneaux, Rt Hon Sir James
Hanley, Rt Hon JeremyMonro, Rt Hon Sir Hector
Hannam, Sir JohnMontgomery, Sir Fergus
Hargreaves, AndrewMoss, Malcolm
Harris, DavidNeedham, Rt Hon Richard
Haselhurst, Sir AlanNeubert, Sir Michael
Hawkins, NickNewton, Rt Hon Tony
Hawksley, WarrenNicholls, Patrick
Heald, OliverNicholson, David (Taunton)
Heath, Rt Hon Sir EdwardNorris, Steve
Heathcoat—Amory, Rt Hon DavidOnslow, Rt Hon Sir Cranley
Hendry, CharlesOppenheim, Phillip
Heseltine, Rt Hon MichaelOttaway, Richard
Hicks, Sir RobertPage, Richard
Higgins, Rt Hon Sir TerencePatee, James
Hogg, Rt Hon Douglas (Grantham)Patnick, Sir Irvine
Horam, JohnPatten, Rt Hon John
Howard, Rt Hon MichaelPattie, Rt Hon Sir Geoffrey
Howell, Rt Hon David (Guildf'd)Pawsey, James
Howell, Sir Ralph (N Norfolk)Peacock, Mrs Elizabeth
Hughes, Robert G (Harrow W)Pickles, Eric
Hunt, Rt Hon David (Wirral W)Porter, David
Hunt, Sir John (Ravensb'ne)Portillo, Rt Hon Michael
Hunter, AndrewPowell, William (Corby)
Hurd, Rt Hon DouglasRedwood, Rt Hon John
Jack, Rt Hon MichaelRenton, Rt Hon Tim
Jackson, Robert (Wantage)Richards, Rod
Jenkin, Bernard (Colchester N)Riddick, Graham
Johnson Smith,Rifkind, Rt Hon Malcolm
Rt Hon Sir GeoffreyRobathan, Andrew
Jones, Gwilym (Cardiff N)Roberts, Rt Hon Sir Wyn
Jones, Robert B (W Herts)Robertson, Raymond S (Ab'd'n S)
Kellett—Bowman, Dame ElaineRobinson, Mark (Somerton)
Key, RobertRoe, Mrs Marion
King, Rt Hon TomRoss, William (E Lond'y)
Kirkhope, TimothyRowe, Andrew
Knapman, RogerRumbold, Rt Hon Dame Angela
Knight, Mrs Angela (Erewash)Ryder, Rt Hon Richard
Knight, Rt Hon Greg (Derby N)Sackville, Tom
Knight Dame Jill (Edgbaston)Scott, Rt Hon Sir Nicholas
Shaw, David (Dover)Thornton, Sir Malcolm
Shaw, Sir Giles (Pudsey)Townend, John (Bridlington)
Shephard, Rt Hon Mrs GillianTownsend, Sir Cyril (Bexl'yh'th)
Shepherd, Sir Colin (Heref'd)Tracey, Richard
Shepherd, Richard (Aldridge)Tredinnick, David
Shersby, Sir MichaelTrend, Michael
Skeet, Sir TrevorTrotter, Neville
Smith, Tim (Beaconsf'ld)Twinn, Dr Ian
Smyth, Rev Martin (Belfast S)Vaughan, Sir Gerard
Soames, NicholasViggers, Peter
Speed, Sir KeithWaldegrave, Rt Hon William
Spencer, Sir DerekWalden, George
Spicer, Sir Jim (W Dorset)Walker, A Cecil (Belfast N)
Spicer, Sir Michael (S Worcs)Walker, Bill (N Tayside)
Spink, Dr RobertWard, John
Spring, RichardWardle, Charles (Bexhill)
Sproat, IainWaterson, Nigel
Squire, Robin (Hornchurch)Watts, John
Stanley, Rt Hon Sir JohnWheeler, Rt Hon Sir John
Steen, AnthonyWhitney, Sir Raymond
Stephen, MichaelWhittingdale, John
Stem, MichaelWiggin, Sir Jerry
Stewart, AllanWilkinson, John
Streeter, GaryWilletts, David
Sumberg, DavidWilshire, David>
Sweeney, WalterWinterton, Mrs Ann (Congleton)
Sykes, JohnWinterton, Nicholas (Macclesf'ld)
Tapsell, Sir PeterWolfson, Mark
Taylor, Ian (Esher)Wood, Timothy
Taylor, John M (Solihull)Yeo, Tim
Taylor, Sir TeddyYoung, Rt Hon Sir George
Temple—Morris, Peter
Thomason, RoyTellers for the Noes:
Thompson, Sir Donald (Calder V)Mr. Bowen Wells and Mrs. Jacqui Lait.
Thompson, Patrick (Norwich N)

Question accordingly negatived.