Clause 54 - Employee shareholder shares

Finance Bill – in a Public Bill Committee am 9:15 am ar 11 Mehefin 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of David Gauke David Gauke The Exchequer Secretary 9:15, 11 Mehefin 2013

I beg to move amendment 56, in clause 54, page 27, line 5, at end insert

‘and provision for an exemption from income tax in connection with advice relating to proposed employee shareholder agreements.’

Photo of David Crausby David Crausby Llafur, Bolton North East

With this it will be convenient to discuss the following:

Amendment 51, in clause 54, page 27, line 5, at end add—

‘(2) The Chancellor of the Exchequer shall review the impact of this section on tax avoidance activity, and place a copy of this review in the Library of the House of Commons within six months of Royal Assent.’.

Clause stand part.

Government amendments 57 to 59.

That schedule 22 be the Twenty-Second schedule to the Bill.

Photo of David Gauke David Gauke The Exchequer Secretary

Thank you, Mr Crausby. It is a great pleasure to serve under your chairmanship once again.

Clause 54 and schedule 22 introduce the tax reliefs that form part of the new employee shareholder employment status. The reliefs reduce the amount of income tax payable in respect of employee shareholder shares and exempt from capital gains tax income from up to £50,000 worth of shares received by each employee shareholder. The clause also provides consequential changes to corporation tax provisions. The measures will support the wider aims of employee shareholder status by providing a further incentive for individuals to take up the new status and by addressing some of the tax barriers that have arisen for businesses and individuals wishing to do so.

As I am sure the Committee will be aware, the new employment status was announced on 8 October 2012, and has been debated extensively as part of the Growth and Infrastructure Act, which received Royal Assent at the end of April. I am sure that you will be pleased to learn, Mr Crausby, that I intend to focus on the tax aspects of the policy set out in the Bill, although I would not be entirely surprised if some of the broader issues were also raised.

The clause and schedule 22 are divided into three main parts. Part 1 relates to the income tax treatment of employee shareholder shares when they are acquired. Part 2 relates to the capital gains tax treatment of the shares when they are disposed of. Part 3 concerns the availability of corporation tax relief when employee shareholder shares are awarded.

As set out last year, the Government will exempt from capital gains tax gains on up to £50,000 worth of shares acquired by employee shareholders. That will enable growing companies to attract and retain talented and entrepreneurially minded individuals by offering the opportunity for a potentially significant tax-free gain on shares in the company.

After last year’s announcement, the Government recognised that the tax treatment of shares awarded under employee shareholder status was causing concern  to prospective users and could be a barrier for many who would like to be employee shareholders. We therefore announced in the Budget that the first £2,000 of share value would effectively be exempt from income tax or national insurance in most cases. That will ensure that most employee shareholders receiving only the minimum amount of shares will not be subject to any up-front tax charges.

The statutory corporation tax relief available to companies awarding employee shares is broadly linked to the operation of rules for taxing employment income, or the amount that is or would be taxable when the employee acquires the shares. The special income tax rules for employee shareholder shares mean that it is necessary to make consequential modifications to the corporation tax provisions. The modifications ensure that corporation tax relief is available for employee shareholder shares on the same basis as it is currently available in other cases in which an employer issues shares to an employee for no payment. All these tax reliefs are subject to certain conditions being met; in particular, there are a number of anti-avoidance provisions in the legislation to prevent misuse of the new status.

The Government expect that the new employment status will particularly benefit fast-growing small and medium-sized companies that want to create a flexible work force. It will, however, be open to all companies, although we recognise that it will not be appropriate for everyone. It is intended that the new status and associated tax reliefs will take effect from 1 September 2013.

I am well aware that the new employment status received scrutiny and criticism as the Growth and Infrastructure Bill passed through Parliament. The Government considered the comments made by peers in the other place and tabled a number of amendments. On 16 April, the Government introduced an amendment to make it clear that no one receiving jobseeker’s allowance could be obliged to take up an employee shareholder job offer. On 23 April, two further amendments were introduced. The first requires employers to provide a written statement of the details of the employee shareholder offer before it can be accepted; the second requires that the prospective employee be given seven calendar days to consider the offer before acceptance. A final amendment requires that an individual considering a job under the new status must receive independent advice on the terms and effect of the proposed employee shareholder agreement and that the employer should bear the reasonable costs of that advice.

Each of the amendments ensures that individuals considering the new status are well informed and cannot be forced into taking up employee shareholder status if they do not wish to do so. The status is a purely voluntary undertaking between employee and employer. The Government believe that the new employment status is an important measure that will stimulate business and entrepreneurial activity in a way that is fair and rewarding for those who agree to accept it and is attractive for fast-growing companies that wish to use it.

I turn now to amendments 56 to 59. Section 31 of the Growth and Infrastructure Act 2013 requires that an individual considering whether to adopt the new status must receive independent advice on the terms and effect of any new employee shareholder agreement; reasonable  costs of that advice must be met by their employer. Under normal tax rules, that could create a benefit or receipt that is taxable on the individual as employment income, although the exact tax consequences would depend on the particular circumstances of the individual and the advice provided. The Government amendments provide certainty to prospective employee shareholders that they will not face a tax bill for receiving that advice. I can also confirm that corresponding changes to the NICs regulations will be made to ensure that neither employee nor employer NICs will be due on the cost of the advice.

Amendment 51, tabled by the Opposition, calls for a review to be conducted and placed in the House of Commons Library, this time on the potential impact of the clause on tax avoidance activity. I am aware that there are some concerns that the new status will introduce avoidance risks into the tax system. We have already looked to respond to those concerns, while keeping the operation of the new status as simple as possible for employers and employees to use.

In particular, the legislation contains a number of provisions aimed at preventing abuse of the new status. For example, there are rules that will stop people with a material interest in a business from exploiting the tax reliefs for the benefit of themselves or their families and to prevent tax advantages applying where there is multiple use of the status through connected companies.

The Government have also published a tax information and impact note on the HMRC website, which includes an assessment of the expected impacts of the tax changes covered by the clause. That is in addition to the impact assessment published by the Department for Business, Innovation and Skills on employee shareholder status. In any case, it would not be appropriate to publish a further document to the time scale proposed. The new status aims to enable employees to benefit from the company’s long-term growth. It is not due to come into force until 1 September.

The capital gains tax relief will apply only when employee shareholders sell their shares. In many cases, we expect that to be some time later, especially as we believe that many employee shareholders will want to retain shares over the long term to benefit from the growth to which they are contributing. It will, therefore, take some time for meaningful information on the take-up and the use of the status, and its tax reliefs, to become available; it will certainly not be available after six months.

Nevertheless, in both what we have said and done as a Government, we have made clear that we find aggressive tax avoidance and tax evasion unacceptable. Should it become apparent that the new status is subject to particular forms of abuse, we will take the appropriate action. I therefore ask the hon. Members from the Opposition to withdraw their amendment.

In conclusion, the tax relief set out in the clause and schedule forms a key part of the new employee shareholder status, which fosters employees’ commitment to the success of their employer and reduces burdens on business in a new and innovative way. I hope that amendments 56 and 59 will be accepted and that the clause and schedule may stand part of the Bill.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury) 9:30, 11 Mehefin 2013

As the Minister outlined, the clause introduces schedule 23, and both concern the tax treatment of employee shareholder shares, a rather strange measure created by section 31 of the Growth and Infrastructure Act 2013. The provisions exempt any capital gains on the disposal of up to £50,000 worth of shares, acquired by employee shareholders under their employee shareholder agreement, from capital gains tax. The Minister also outlined how the clause works and he introduced the Government’s amendment to it.

As members of the Committee will be aware, however, and as the Minister acknowledged, there has been a lot of opposition to the measure. As the official Opposition, we very much oppose it because we object to the notion of linking the concept of employee ownership, which we support, with employees being expected to give up their basic rights in the workplace.

We also have serious concerns about the measure’s implications in terms of tax avoidance. Those concerns are shared by a wide variety of organisations and individuals across the political spectrum.

Photo of Paul Uppal Paul Uppal Ceidwadwyr, Wolverhampton South West

If the hon. Lady does not accept the argument on share ownership, is she not moved by the announcement made at the weekend by the right hon. Member for Morley and Outwood (Ed Balls) that a future Labour Government—if the country had the misfortune of that—would announce a cap on the state pension? Essentially, people are looking for financial security and this measure will help secure the financial future of many workers.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

Without doubt, Mr Crausby would rule me out of order if I delved into such broad policy areas that do not relate to the specific measures that we are considering. The hon. Gentleman makes light of the measures, but they are deeply concerning and I will explain why. I am surprised he is not taking the potential implications of the measures more seriously.

Photo of Stephen Doughty Stephen Doughty Llafur, De Caerdydd a Phenarth

My hon. Friend mentions the opposition from across the political spectrum. Was she not surprised to read the comments from Lord Forsyth in the debate in the other place? He said:

“Frankly, I am surprised that this clause has survived so long. The scheme is ill thought through, confused and muddled.”—[Official Report, House of Lords, 20 March 2013; Vol. 744, c. 597.]

It has,

“the trappings of something that was thought up by someone in the bath...It is a foolish measure”. —[Official Report, House of Lords, 20 March 2013; Vol. 744, c. 614.]

That was said by a Tory former Minister with responsibility for employment.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

I thank my hon. Friend for his intervention. We could detain the Committee all day by reading out quotations from the wide spectrum of people, organisations and indeed former Conservative Ministers and Cabinet members in the Lords who have deep concerns about the measure. That is also why we are disappointed that our amendment 53 and new clause 3 were not selected for debate. We feel strongly about the policy and its impact on employment rights.

Amendment 51, which we are considering now, asks the Government to review the overall impact of the measure specifically on tax avoidance activity. It is critical that the Treasury monitor it very carefully. As Committee Members know, the policy of employee shareholders shares, more commonly known as “shares for rights”, was first announced by the Chancellor of the Exchequer at the Conservative party conference in October 2012. I will quote from his speech:

“Today we set out proposals for a radical change to employment law. I want to thank Adrian Beecroft for the work he has done in this area. This idea is particularly suited to new businesses starting up; and small and medium sized firms. It’s a voluntary three way deal. You the company: give your employees shares in the business. You the employee: replace your old rights of unfair dismissal and redundancy with new rights of ownership. And what will the Government do? We’ll charge no capital gains tax at all on the profit you make on your shares. Zero percent capital gains tax for these new employee-owners. Get shares and become owners of the company you work for. Owners, workers, and the taxman, all in it together. Workers of the world unite.”

I hear muttering.

It would be faintly amusing were the idea itself not so appalling. My hon. Friend the Member for Cardiff South and Penarth has already quoted the Conservative peer and former Minister with responsibility for employment, Lord Forsyth, who described the idea as

“positively dreadful” with

“all the trappings of something that was thought up by someone in the bath.”—[Official Report, House of Lords, 20 March 2013; Vol. 744, c. 613-614.]

Of course, perhaps knowing perfectly well that the proposal had virtually no backing, the Chancellor’s announcement on 8 October was followed very rapidly by a consultation, which opened on 18 October and closed just three weeks later on 8 November. The Growth and Infrastructure Bill containing the proposal was published on the same day that the consultation closed, which says everything we need to know about the Government’s intention to actually listen to the consultation and act on it.

Despite overwhelming opposition, with fewer than five out of the 209 organisations that managed to respond to the consultation in the time permitted saying that they were in favour of the idea, the Government ploughed on anyway. Thus, in relation to the tax treatment of employees, the Chancellor confirmed in the 2012 autumn statement on 1 December—some would consider that winter rather than autumn—that they were,

“considering options to reduce income tax and NICs liabilities that arise when employee shareholders receive shares, including an option to deem that employee shareholders have paid £2,000 for shares they receive.”

The measure was subsequently included at Budget 2013.

The employee shareholder status was originally due to be implemented in April this year, but—as the Minister outlined and the Red Book indicates—it has already been pushed back to September. It is therefore important to understand exactly what it will mean in practice. In return for paying no income tax and NICs on the first £2,000 of any shares and being exempted from capital gains tax on the first £50,000, employees will give up the right not to be unfairly dismissed, the right to a redundancy payment, the right to request flexible working and the right to leave for study or training and will have to give 16 weeks’ notice rather than the normal eight weeks  before returning to work from maternity leave or adoption leave. It is worth noting that the latter two will disproportionately impact female employees, which is somewhat begrudgingly noted in the tax information and impact note.

I want it to be absolutely clear that the Opposition do not oppose the concept of employee ownership. Such schemes have significant benefits for both employers and employees, but we strongly object to the idea being linked to the removal of employment rights. The Employee Ownership Association also takes that view and has said:

“The decision to allow [Section 31] of the Growth Bill, in which worker rights on such matters as redundancy and unfair dismissal have to be sacrificed by employees in order for them to be allowed an ownership stake in the business in which they work, is hugely disappointing.

There is absolutely no need to dilute the rights of workers in order to grow employee ownership and no data to suggest that doing so would significantly boost employee ownership. All of the evidence is that employee ownership in the UK is growing and the businesses concerned thriving because they enhance not dilute the working conditions and entitlements of the workforce.”

Liberal Democrat peer, Baroness Brinton, made a similar point on Report during the passage of the Growth and Infrastructure Act 2013:

“Morale is important because while the shares in an SME are unlikely to yield high returns in the first few years, if any at all…after a company is founded, especially during this period of low consumption and investment, it has to find ways of motivating employees to help get the business off the ground.”

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

I will just finish quoting Baroness Brinton:

“It might offer flexible working hours and shares without links to a cut in employment rights. The founders of such firms have been offering shares without any removal of rights for years, and it works. Why would they take up a proposal that destabilises the employee and the company?”—[Official Report, House of Lords, 20 March 2013; Vol. 744, c. 606.]

Photo of Paul Uppal Paul Uppal Ceidwadwyr, Wolverhampton South West

For the sake of clarification, my initial intervention was not flippant in any way; I am quite serious about this. I have run my own business, as have many members of my extended family, and having people come to work but not visualising it as such is always effective. Expanding the idea of employee ownership—there is always an element of trust—creates an environment that is conducive to people feeling that they have a connection. Rather than being employees, they feel that they are employers as well. It creates a relationship of trust.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

I accept the premise of the hon. Gentleman’s point, but he seems to ignore my point and the point that Baroness Brinton, whom I was quoting, was making. In the experience of the organisations that fed back on the proposal, that trust and feeling of shared ownership is better achieved when there is no trade off against employment rights. Indeed, Lord O'Donnell, the former head of the civil service, said:

“If an employer is offering this, they are probably the kind of employer that you do not want to go near. If an employee accepts  it, it is probably because they do not really understand what they are doing. On those grounds, it is bad.” —[Official Report, House of Lords, 20 March 2013; Vol. 744, c. 617.]

The former Conservative Cabinet member, Lord King of Bridgwater, also remarked:

“As soon as I heard the announcement of this proposal and of the brief period of consultation which would take place on it—and I understand that 92% of those who responded to the consultation were against the proposal—I carried out my own consultation. I have not found anybody yet who is in favour of the proposal or who says that they think that they will use the provision.” —[Official Report, House of Lords, 20 March 2013; Vol. 744, c. 611.]

Many concerns have been expressed by many business organisations about this risible idea. I give credit to the hon. Member for Wolverhampton South West for his loyalty in trying to defend the Government’s measure, but few companies or business organisations understand the rationale for the measure or what the Government hope to achieve with it. It is little wonder that the Government suffered two embarrassing defeats in the other place, on the independent legal advice that would need to be given in return for employees giving up their shares and on the cooling-off period. They are both vital concessions, but the Opposition do not consider them to be enough.

Lord Bishop said:

“Permitting companies to purchase certain rights in this way seems ethically wrong in principle. It is foremost the precedent of allowing employment rights to be bought and sold like a commodity that…must be rejected. Basic safeguards against unreasonable employer behaviour should not have a price tag attached to them.”—[Official Report, House of Lords, 20 March 2013; Vol. 744, c. 609.]

Perhaps the most cutting comment of all was made by Lord Deben, who simply stated,

“I cannot imagine any circumstances whatever in which this would be of any use to any business that I have ever come across in my entire life.”—[Official Report, House of Lords, 6 February 2013; Vol. 743, c. 293.]

There are serious concerns about exactly how this divisive measure will benefit employers and employees, about how it undermines the employee ownership model, about the pressure that existing and new employees may come under to participate, and about what will happen to those employees who took up this option when the going gets tough for a firm.

I will focus on the implications of the clause for the Exchequer. The 2012 autumn statement policy costings assume that the overall cost to the Exchequer of the measure will be £20 million in 2016-17, rising to £80 million in 2017-18. The costings note that

“The main uncertainties are around assumptions on take up rates, the average value of shares that are entered into the scheme, the extent of tax planning and the timing of disposals.”

In its certification of the costings, the Office for Budget Responsibility said:

“there are a number of uncertainties in this costing. The static cost is uncertain in part because of a lack of information about the current Capital Gains Tax arising from gains on shares through their employer. The behavioural element of the costing is also uncertain for two reasons. First, it is difficult to estimate how quickly the relief will be taken up; this could make a significant difference as the cost is expected to rise towards £1 billion beyond the end of the forecast horizon. Second, it is hard to predict how  quickly the increased scope for tax planning will be exploited; again this could be quantitatively significant as a quarter of the costing already arises from tax planning”.

In contrast, the Government’s impact assessment of the measure, published belatedly after the consultation closed, made no mention of either tax planning or the potential £1 billion cost to the Exchequer. That issue was highlighted by the director of the Institute for Fiscal Studies, Paul Johnson, in a Financial Times article aptly entitled “Shares for rights will foster tax avoidance”. He wrote:

“There may be a case for more flexible approaches to employment legislation. But as a tax policy, ‘shares for rights’ always looked pretty questionable. At a time of increasing scrutiny of tax avoidance schemes, it has all the hallmarks of another avoidance opportunity.”

He went on:

“So, just as concern over tax avoidance is at its highest in living memory, just as government ministers are falling over themselves to condemn such behaviour, that same government is trumpeting a new tax policy that looks like it will foster a whole new avoidance industry. Its own fiscal watchdog seems to suggest that the policy could cost a staggering £1bn a year, and that a large portion of that could arise from ‘tax planning’.”

Of course, the scheme may well have the apparently unintended consequence that employee shareholder shares may be used for senior employees or executives in management buy-out situations, or more generally to access tax reliefs, provided the material interest provisions do not block their availability. For senior executives, shares with a low up-front value and significant potential for upside could be used to take advantage of the tax reliefs, while at the same time statutory rights foregone may just be written into senior employees’ and executives’ contractual documents.

It is bad enough that the policy is divisive and damaging and undermines the notion of employee ownership, but it could cost the Exchequer up to £1 billion, with a quarter of that arising from tax planning or tax avoidance activity. How will the Government ensure that the measure benefits ordinary workers and not just those senior employees and executives at the top? Given the Government’s tough talk about clamping down on tax avoidance, it will be particularly helpful if the Minister addresses those points.

Further concerns about the practicalities of the scheme for business and how it will be managed by HMRC have been raised. The Chartered Institute of Taxation has expressed concern about the impact on small, unquoted companies, which is especially worrying given the Chancellor’s original announcement that the policy would be “particularly suited” to new businesses and SMEs. For the scheme to operate, the value of any shares will need to be agreed before being issued; as the CIOT has pointed out, that is particularly important as the shares must be valued at more than £2,000 for the scheme to be engaged. If the shares allocated prove to be worth £1,999, the income tax and national insurance contributions exemptions will be lost, so valuation is clearly critical to how the measure will function.

Can the Minister explain how that is to be done in a timely fashion for small, unquoted companies? Will it involve HMRC’s share valuation unit? If so, what plans do the Government have in place to ensure that this unit is sufficiently resourced and that demand and expectations for share valuation agreements are managed? What thought have the Government given to how the scheme  relates to company law restrictions on issuing shares for less than their nominal value? There may be an argument that entering into an employee shareholder agreement represents payment of a nominal value for the shares, and therefore the company law restrictions do not apply. Clearly, though, public companies would need to secure an independent valuation for this purpose. Otherwise, if entry into the employee shareholder agreement is not regarded as adequate consideration for the nominal value of the shares, a company will need to have sufficient profits available for distribution, which it can apply to issue shares to the employee without breaching company law, which will add further complexity to the Government’s measure.

A further concern expressed by the CIOT about the operation of the scheme relates to share buy-back where there is not a ready market for the shares, which it says will be “difficult for many companies”. The Government’s summary of responses to their consultation states:

“the Government believes that sufficient mechanisms already exist for employers to sell shares to their employees and for employees to buy and sell them back to the company.”

However, both the CIOT and the Office of Tax Simplification regard that as questionable, so I would be grateful if the Minister replied to those concerns as well.

Finally in relation to the operation of the scheme, the CIOT has drawn attention to what happens to old shares that are exchanged for new shares as part of a company reorganisation. The legislation on the measure suggests that new shares will cease to be exempt from capital gains tax, which the CIOT describes as

“a surprising outcome when the employee has not realised any value from the shares.”

Will the employee be deemed to have acquired the new shares at the open market value, plus the gain on the old shares, so at least any gain accruing from the old shares prior to the exchange is effectively exempted from capital gains tax? If not, will the value in having employee shareholder shares be lost?

In conclusion, I return to the thoughts of the former Employment Minister and Conservative peer Lord Forsyth. When asked about the proposal back in October on the BBC’s “Daily Politics” he replied:

“I couldn’t work out what problem”— the Chancellor—

“was trying to solve. If the problem is that people want to take on workers but they’re not sure—particularly young workers—and they’re worried that if they take them on they will be very expensive to fire them, because they’ll threaten to go to a tribunal—legal costs will be enormous—I don’t see how having a scheme to give them shares in the business if they give up their employment rights is going to be in the interests of the employer or the employee, because they end up with shares in an unquoted company which they can’t deal with, and the incentive is apparently that there will be a benefit because you won’t have to pay capital gains tax. Well everybody’s got a £10,000 gains tax allowance before they have to pay any capital gains, so that doesn’t seem to be much of an incentive.”

He finished as he started, concluding:

“I just wonder what problem he is trying to solve.”

Eight months later, we still do not know what problem the Chancellor is trying to solve with the measure, yet grave concerns remain about its impact, particularly on employment rights and on tax avoidance activity.

Photo of Ian Mearns Ian Mearns Llafur, Gateshead 9:45, 11 Mehefin 2013

I wonder whether Government Members expect the inducement to a new member of staff in some of those schemes to be shares worth massively more than £10,000.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

I think we are all pondering exactly what the intention is and what Government Members are thinking in supporting a measure that has been roundly criticised as rather hare-brained. I would be grateful if the Minister responded to those concerns and to our reasonable amendment calling for a review of the impact of the measure on both individual rights and on tax avoidance activity, which is a key concern for everyone in the country and should be the key concern for the Treasury at the moment.

Photo of David Gauke David Gauke The Exchequer Secretary

I will focus most of my remarks, as the hon. Lady has, on tax avoidance and cost, but I want to respond to her more general comments and refer to the purpose behind the measure.

We received many representations from businesses that are concerned that the actual and potential costs of employment rights can be a deterrent to taking on staff. Employee shareholder status is one way of addressing those concerns and of furthering the Government’s objective of increasing employee involvement in the success of their employers. We are taking a host of other measures to support the objective of employee ownership. From next year, we will provide £50 million annually to further incentivise growth in employee ownership, in response to the Nuttall review. From 30 April, we relaxed rules that apply where certain companies purchase their own shares, for example, as in employee share arrangements. At the Budget, we announced capital gains tax relief for the sale of a controlling interest in a business to an employee ownership structure, which will be introduced in 2014. We have also arranged for the introduction of a model trust deed, which businesses can use if they wish to move to an indirect model of employee ownership. This measure therefore has to be seen as part of a wider agenda to make employee ownership more attractive, which I hope is supported by all parties.

Photo of Stephen Doughty Stephen Doughty Llafur, De Caerdydd a Phenarth

The Minister mentioned the businesses that are in favour of the scheme. How many businesses did he hear from that are interested in taking up the scheme or think it is a good idea? Does he have a specific figure or perhaps some examples to share?

Photo of David Gauke David Gauke The Exchequer Secretary

I will quote the chairman of the Federation of Small Businesses, John Walker, who said:

“We believe it will promote share ownership and loyalty to those companies which offer this initiative, with potential benefits following in terms of greater productivity.”

The director general of the British Chamber of Commerce, John Longworth, said:

“The plans would particularly aid new and fast-growing businesses.”

Simon Walker of the Institute of Directors said:

“This scheme has the potential to reduce...burden[s] on companies and make employees better off at the same time.”

Just to complete the point, not long before the announcement was made, I met an overseas business that was looking to expand in Europe and was deciding where they should do so. They raised two concerns,  entirely unprompted, about the UK: one was the costs incurred due to employment rights, and the second was that the UK’s share incentive regime was not as generous as they would like. That is a specific case I know about—I will not name the company. That is part of the concern that we seek to address, to make the UK an attractive place.

No one is arguing that this is the right mechanism for all businesses. It is worth stressing that it is an entirely voluntary arrangement, both for businesses and individuals. It will not suit everyone, but that is not a reason to deny the option to those who do want to use it.

Photo of Stephen Doughty Stephen Doughty Llafur, De Caerdydd a Phenarth 10:00, 11 Mehefin 2013

The Minister quotes the FSB, but he will recall that the FSB said that the scheme was unlikely to be appropriate for many small businesses. I want to press him again on this point. One would expect, if it were such a great thing, a clamour from businesses writing to the Government, inside and outside the consultation, to say that they want to see it go ahead. Can he give us a figure of the number of businesses—as opposed to representative organisations—that wrote in? If he does not have the figure, perhaps he could write to the Committee and tell us how many.

Photo of David Gauke David Gauke The Exchequer Secretary

I do not disagree, if the hon. Gentleman is arguing that the FSB says it is not appropriate for lots of small businesses. It is not appropriate for every business. We are arguing that it is appropriate for some businesses. Being inappropriate for many businesses does not mean that it will not be appropriate for some—for example, a fast-growing business with staff who want to commit to the business, or an entrepreneurial undertaking where it may not necessarily work, but there is a group of people who together want to make it work. This measure would provide a degree of flexibility. I will give way to my hon. Friend who knows something about business.

Photo of Brooks Newmark Brooks Newmark Ceidwadwyr, Braintree

I remain perplexed about why the Opposition continue to baulk at this proposal. I congratulate the Government on the initiative because it is about giving individuals choice. Does the Minister agree with the point made by my hon. Friend the Member for Wolverhampton South West? The measure gets employees to think a little bit more like owners. Aligning interests with ownership will help build a company, because people will think more like owners and less like employees. To emphasise the Minister’s point, no one is twisting an employee’s arm to take this on, and no one is twisting a company’s arm to adopt the scheme.

Photo of David Gauke David Gauke The Exchequer Secretary

My hon. Friend is right on both points, which he put well. It is worth bearing in mind that there are arrangements whereby people are employees and have a full range of employment rights. There are also circumstances whereby somebody may be self-employed, perhaps a partner in a firm, in which they lose pretty well all their employment rights.

The proposal would create a new arrangement that is somewhere between those two situations. An employee will potentially be more like an owner and, in those circumstances, one would expect there to be some changes  to employment rights. It is also worth pointing out, however, that employee shareholders will continue to enjoy many important statutory rights, such as the right to paid holiday, protection from discrimination at work and a safe environment.

I underline the point made by my hon. Friend the Member for Braintree. Whether a person is a prepared to give up the specific rights involved will be a decision for them, based on their own circumstances and the terms offered by the employer company.

We have introduced several safeguards to ensure that anyone considering an employee shareholder offer will receive full details of what that involves as well as independent advice.

Let me deal with the costs. The hon. Member for Newcastle upon Tyne North raised the OBR estimate of a £1 billion cost. It is worth pointing out that the OBR has certified the costs of the tax reliefs attached to the new status. In total, the reliefs are expected to cost £120 million by the end of the scorecard period in 2017-18. That is made up of £45 million for the CGT exemption and £75 million for the income tax and national insurance contribution changes. We believe that those costs are proportionate in achieving the policy’s aims.

It is true that the OBR originally commented that the cost of the CGT exemption could rise towards £1 billion beyond the end of the forecast horizon. Those comments, however, require some clarification. First, the OBR was unable to take account of the anti-avoidance provisions now included in the Bill. Secondly, estimating the long-term costs of targeted measures like this is an inherently uncertain business. It depends on many factors, not least take-up, which the OBR notes is difficult to predict. Furthermore, any rise towards £1 billion would occur well beyond the end of the forecast period of 2017-18. In fact, the figure referred to by the OBR goes beyond the 2020s.

The figure of £1 billion taken in isolation simply does not tell the whole story. Best estimates of the cost of the CGT measure have now been refined and show it increasing to £45 million in 2017-18. It is also worth pointing out that the OBR’s more recent comments on the Budget costings again mention the uncertainties involved, but no longer provide any projected figures for the long-term cost.

As for the concerns about tax avoidance, the tax reliefs are intended to encourage the take-up of employee shareholder status by individuals where it is offered to them, but are not an end in themselves. There are a number of rules in the Bill to prevent abuse of the new status, while keeping it as simple as possible for employers and employees to use.

It would perhaps be helpful to the Committee, given the focus of the hon. Member for Newcastle upon Tyne North on tax avoidance, to look at some of the measures involved. There are rules to prevent those who are in a position to control a company from getting the tax reliefs if they control 25% or more of the voting power in the company. There are similar rules to prevent people connected to those who can control the company, such as spouses or children, from benefiting from the reliefs. Individuals cannot get multiple reliefs by entering two consecutive employee shareholder contracts with the same company or related companies. People will not  be able to use company liquidations to realise their gains and then get more reliefs on new shares under the same control. We will require two years to pass between the liquidation of the company and the employee receiving further exempt shares in a related company. The Bill will prevent the manipulation of share values by, for example, placing restrictions on the values.

The issue of whether employers and employees will need to know the value of the employee shareholder shares and what HMRC will do to help them was raised. HMRC will consider and, where possible, confirm for tax purposes the share valuations that are put to it. It will do that before the shares are given as employee shareholder shares, and any confirmation will be valid for a specified time to allow the shares to be issued. That will provide certainty to both employer and individual that the shares meet the minimum value of £2,000 and confirm the values on which tax and reliefs can be calculated. HMRC provides an assurance service in real time to consider the share valuation provided by an employer. It is not a formal share valuation service. It ensures that an employer and a prospective employee shareholder can gain confirmation of value in a timely manner. Employee shareholder status is essentially an agreement between the employer and the employee, entered into with the full understanding of both sides.

I was also asked whether it was unfair if the capital gains tax exemption were lost as a result of an internal reorganisation or a takeover—the point about old shares to new shares. There will be a rebasing when new shares are received, but no CGT charge will be made at that stage. To put it another way, the tax exemption is not wholly lost when employee shareholder shares are involved in a reorganisation of share capital or takeover. Indeed, without the special rule that we are introducing, gains accruing before the reorganisation or takeover will be taxed in full when new shares are sold. That would be unfair, so we are making sure that gains attributing to the period between receiving the shares and the reorganisation or takeover on which the shares are surrendered will continue to be exempt from tax.

As for whether the measure will benefit only the wealthy, it is worth saying that it is designed to stimulate business and entrepreneurial activity. It is expected that it will appeal to a range of employees, particularly those working in fast-growing companies. It will give them a real and valuable stake in the future of the company for which they work, which could be well above the annual exempt amount for CGT purposes. I appreciate that the measure does not have the support of all members of the Committee, but it is a useful addition to the process in the United Kingdom. It will provide further flexibility and help fast-growing and entrepreneurial businesses. It will attract and retain staff, and I welcome it. The Government are pleased that we will have it in place.

Photo of Ben Gummer Ben Gummer Ceidwadwyr, Ipswich

My hon. Friend has made a persuasive speech. It is an interesting matter, and we have had an interesting debate. Can he comment on those directors who might misuse the measure? He put forward a positive argument about where it might fit into the general employment pattern in the United Kingdom. I used to work in the construction sector. Some of its elements attracted particular pond life, and I can imagine some people with whom I used to do business misusing the measure, if they chose to do so,  by setting up sham companies, employing people in them, dissolving the companies and making use of the absence of employment rights to abuse their workers. That would be a misuse of what the Minister has convinced me is a good scheme. What will he be able to do to ensure that that does not happen and, if it does, that those directors are held responsible for their fraud?

Photo of David Gauke David Gauke The Exchequer Secretary

I refer my hon. Friend back to a couple of issues, the first of which is that not all employment rights are lost in such circumstances. Employee shareholders will continue, for example, to have protection from discrimination at work and be able to work in a safe environment. Protections will be available.

Employees will also have provided to them a summary of the status and what it would involve. They would have the opportunity to consider it for seven days before accepting the arrangements. Some of my hon. Friend’s worry relates to the ability to misuse the measure as a tax avoidance arrangement, using liquidations to benefit again and again. There are sufficient protections in the Bill to prevent that from happening. There are steps designed to deal with such misuse.

The focus, and I suspect the take-up, will be on fast-growing businesses that want to ensure that they can incentivise their work force. I suspect that the type of sector that gets most use out of the measure will be technology companies, for example, that want to have a broad base of committed, well-motivated and incentivised staff who expect and hope that their business will expand rapidly and want to share in the gains. That is where we are coming from.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury) 10:15, 11 Mehefin 2013

I appreciate the Minister’s sincere reply to the sincere and legitimate concern of the hon. Member for Ipswich. However, I have to dispute what he says about employees retaining sufficient rights, because they will lose the fundamental right that relates to unfair dismissal. The clue is in the title—a dismissal that is unfair. That is a fundamental right for an employee.

The Minister makes a good case for our amendment. If he is so confident about the types of business that will benefit from the measure and the way in which they will do so, I assume that the Government would want to keep a close eye to ensure that the Bill is being used for those purposes and that it is not being used for tax avoidance or abusive purposes. Therefore, I expect the Government to support our amendment.

Photo of David Gauke David Gauke The Exchequer Secretary

I will conclude by returning to my earlier point about the weakness of amendment 51, given that the focus of the remarks is on tax avoidance and so on. The arrangement would provide an exemption related to CGT, which is paid on a capital gain, hence the title. It will take some years to have the details that the hon. Lady seeks. It will take some years for people to participate in the arrangement, for companies to grow and for a capital gain to be realised when somebody sells the shares. The idea that in six months, following Royal Assent, we will be in a position to make a full assessment of that is clearly wrong. That is one concern.

In addition, although I appreciate that Oppositions table amendments requiring reviews and Governments then by and large reject them, in this case, a review six months after the policy is introduced, given that it is a long-term policy whose effects will occur over the long term, would be a great mistake.

I hope that I have provided clarification for the Committee and persuaded my hon. Friend the Member for Ipswich. Members of his family can, in general, be persuaded on these matters if the case is put persuasively.

Amendment 56 agreed to.

Amendment proposed: 51, in clause 54, page 27, line 5, at end add—

‘(2) The Chancellor of the Exchequer shall review the impact of this section on tax avoidance activity, and place a copy of this review in the Library of the House of Commons within six months of Royal Assent.’.—(Catherine McKinnell.)

Question put, That the amendment be made:—

The Committee divided: Ayes 10, Noes 18.

Rhif adran 6 Decision Time — Clause 54 - Employee shareholder shares

Ie: 10 MPs

Na: 18 MPs

Ie: A-Z fesul cyfenw

Na: A-Z fesul cyfenw

Question accordingly negatived.

Clause 54, as amended, ordered to stand part of the Bill.