§ Question proposed, That the Clause stand part of the Bill.
§ 9.15 p.m.
§ Dr. Gilbert
It is interesting that the Chief Secretary should murmur that kind of comment on Clause 18, because we on the Opposition side understood that it was to be discussed at the behest of Government back benchers, of whom I see a great number panting to take part in the debate. I have no wish to prolong our proceedings. We made clear last year our views on share options and share incentive schemes. We have no objections to share incentive schemes in principle but we have profound objections to their receiving preferential tax treatment. Our objections on that score have in no way diminished since last year.
1433 We believe that benefits under these schemes should be related—and visibly related—to employees' contributions to companies' profits. But that is mainly the concern of the companies which set up schemes of this nature. We believe also—and this should be the province of the Chancellor of the Exchequer—that benefits received under these schemes should be taxed at marginal rates for any beneficiary as with any other form of unearned income.
It might be argued that the scheme to which Clause 18 refers, which is detailed at greater length in Schedule 8, introduces two new principles. That was a point which the Chancellor of the Exchequer tried to establish in his Budget speech. He pointed out that these new save-as-you-earn share incentive schemes must apply to all employees of a company which introduces them. In our view this is little more than a cosmetic effect. These schemes are limited to a contribution of £20 per month for ordinary employees, whereas the executive schemes—the top-hat schemes—can have for the member an entitlement of four times his annual salary.
It was interesting to read in one of the newspapers recently that a new scheme was being introduced by the Shell Company which was being restricted to no more than 40 of its top executives. The last balance sheet of the Shell Company showed the chairman as holding a total emolument of between £60,000 and £65,000. Under the existing scheme, the Government's provisions and the scheme which Shell is introducing, that gentleman will be entitled to stock options of about £250,000, and the profits he could make therefrom could be vastly more. This compares with the £20 a month which is being set as the bare minimum for the ordinary individual on the shop floor in the Government's save-as-you-earn option scheme.
Another inflation factor will be the down-side protection in the scheme for workers, but what the Chancellor failed to say was that if one takes purely the cash option, having made one's contributions over the years, one gets one's cash options without any reinvested earnings or interest; and price inflation means that the amount of cash one would take up, if taking the cash option at the end of the
1434 period of saving, would be worth a lot less than would otherwise have been the case had it been in any form of investment, for the simple reason that the initial contributions in terms of pounds and pence were worth more than if the option had been exercised.
We still maintain our original fundamental objection that all schemes of this sort tend to reduce mobility of labour and that they are at variance with the social objectives of transferability of industrial pension schemes. Equally, the objection we voiced last year still holds good: that there is nothing in these schemes either for people in the public service or nationalised industries, on the one hand, or for the self-employed, for people working for professional firms or, for that matter, firms without schemes, on the other hand. We still have profound objections to encouraging the creation of a new privileged class of taxpayers in this way, whatever cosmetic treatment is given to the types of schemes introduced.
Our distaste is in no way mitigated. We stand by our commitment to eliminate preferential tax treatment for all such schemes. We promise to give the details of the scheme, in so far as they are revealed in Schedule 8, the most searching scrutiny in Committee upstairs. We also promise to give such scrutiny to the subsequent orders, because I am sure that that is where we shall find the guts of the matter. There will be far more in the orders than in Schedule 8.
We do not see a great deal of enthusiasm by Government back benchers to discuss the matter, although we were originally led to believe that there was such enthusiasm. I am tempted to advise my hon. Friends to divide against the clause, but we shall see what the Chief Secretary says.
§ Mr. Peter Rees
I should hate to cheat the hon. Member for Dudley (Dr. Gilbert) of the spectacle of Conservative back benchers showing enthusiasm for the clause. I hope that I can speak for many of my hon. Friends in saying that there is widespread enthusiasm for it. [HON. MEMBERS: "Hear, hear."] Comparing the number of back benchers behind me with those on the Opposition benches, I think that we are showing by 1435 our attendance that we feel that it represents a substantial advance on the enlightened measures introduced last year.
I must deprecate his insensitive use of language, although we have come to expect it from the hon. Gentleman. The clause is not a question of giving preferential tax treatment to any particular class; it is mitigating the unconscionable burdens imposed by Labour Chancellors who imperfectly understood the tax system that they were trying to operate.
The hon. Gentleman's arguments were as flimsy as those he advanced last year. That is not surprising, because they were precisely the same. His thinking has not developed, although my right hon. Friend the Chancellor and my hon. Friend the Chief Secretary clearly have had further thoughts about the advisability of share option and share incentive schemes. We are delighted that they should have had further thoughts.
The fact that such schemes cannot be extended to employees of the public sector is regrettable, but Labour Members must take the consequences. They are in favour of extending the public sector year after year, remorselessly, and this is one objection, but not the only one, that can be raised to such an extension. It is egalitarianism run mad to say that because all cannot have the benefit of share option and share incentive schemes, therefore none can. I am sure that that is not a view that will commend itself to the country.
I could make detailed criticisms of the measures introduced last year, because, generous though they were, they could be broadened, and some of the rules could be relaxed a tiny bit. We could also make detailed criticisms of the measures proposed this year, by reference to the restraints last year, particularly the limitation that the share option and share incentive schemes can relate only to quoted companies. [Interruption.] If they can be extended to private companies, that is good news. I hope that my hon. Friend will examine the provision that they cannot relate to a subsidiary in a group.
These are in essence points of detail that we can no doubt debate in Committee upstairs.
That was a point I made last year, but I was unable to press it in Standing Committee as I was not privileged to be a member of it. This year I am in such a fortunate position, and, therefore, hope to be able to press the point on my hon. Friend.
The points I have raised are matters of detail, and I had not wished to deploy them now. I wished merely to correct the erroneous impression the hon. Gentleman tried to create that there is not widespread enthusiasm, both on the Conservative benches and in the country, for these far-sighted measures, which I hope will go far to associate people who work in industry with both capital and management. These measures will perhaps emphasise to them more than have previous measures their ultimate identity of interest with the people who put up the capital for the industries and the executives who manage that capital.
This is a modest beginning, but it is none the less welcome, and I hope that is presages many further developments in the years to come.
§ Mr. Loughlin
I wish to intervene only on the subject of the value of what the Liberals call co-partnership. It is not only the people who are employed in socially-owned industries who are dis-advantaged by co-partnership or profit-sharing schemes. The hon. and learned Member for Dover (Mr. Peter Rees) forgot the vast numbers of people who are employed by local authorities or in the hospital service and are part and parcel of the apparatus of the State but are denied any advantage from share ownership no matter how the scheme is devised.
I have been associated with certain sectors of industry which have had share ownership schemes. My experience is that most of the share ownership schemes in private industry are completely phoney. They carry no voting rights and difficulties arise with the buying and selling of the shares. No hon. Member on the Conservative benches would ever invest in shares on the basis of the net return of dividend.
§ [Sir ROBERT GRANT-FERRISin the Chair]
§ 9.30 p.m.
§ Mr. Loughlin
I am willing to give way to the hon. Gentleman, but if he does not wish to rise I will tell him why. The ratio of interest to the total investment is low. A person would not invest in equities on the basis of the net dividend return. It would be more profitable to invest in a building society. Such a person invests on the basis of the growth rate of a share. Almost all the share schemes with which I have come into contact and which are related to this clause provide no opportunity for the shareholders to obtain additional capital from them. If we consider the nationalised industries, the National Coal Board and the Central Electricity Generating Board for example, it would be just as easy for them to introduce share option schemes for their employees as it would be for any private employer.
Those who are disadvantaged are not those in the nationalised industries, to whom the hon. and learned Member for Dover referred in his witty and vacuous speech. They are the men and women in the public service, such as those in the hospital service who are taking home £15 a week. As their employers we ought to be thoroughly ashamed of that.
§ Mr. Peter Rees
Since the hon. Gentleman has called me, in a sense, frivolous and vacuous I would like to put two points to him. Because of the lateness of the hour I will not debate the level of hospital workers' wages. In any case that would be out of order. First, workers in the public sector enjoy a degree of security not enjoyed by those in private industry. He will be aware that two major private companies have been in serious difficulties and have laid off workers. I refer to Rolls-Royce and BSA. Secondly, I would welcome any development of a scheme which would enable workers in the nationalised industries to take a shareholding in them. If the hon. Member can propose a practical scheme to give National Coal Board employees an equity participation in the board he can count on my support.
§ Mr. Loughlin
The hon. and learned Gentleman demonstrated to the Com- 1438 mittee that he was vacuous. I merely put the label on it. His speech was witty but if he looks at HANSARD tomorrow he will see that he did not say a thing. I appreciate that there are difficulties in introducing equity shareholding schemes in the nationalised industries. I would be glad if such schemes could be arranged.
The hon. and learned Gentleman twitted my hon. Friend the Member for Dudley (Dr. Gilbert) about what happens in the nationalised industries. On this issue many Conservatives are more concerned about scoring political points than about doing anything constructive. I do not know what you are laughing at—or, rather, Sir Robert, I do not know what the hon. Gentleman the Minister of State is laughing at.
§ Mr. Loughlin
The hon. Member for Cannock (Mr. Cormack) is half asleep again. I have already withdrawn the word "you"and referred to" the hon. Gentleman ".
To get back to what I was saying, share options may be of some marginal value in private industry, and it may be advisable in productivity terms to give those who are engaged in private industry the opportunity of having an equity interest in the company in which they are engaged. That is a proposition with which nobody could argue. The only argument that can arise is as to the value of the schemes which have so far been introduced by private industry and whether they give the right kind of interest to an employee in an industry who has invested in that firm not only his own life but the life of his family.
It is incumbent on Conservative Members when discussing these problems to rid themselves of their prejudices. It must be remembered that the great proportion of the working population who must of necessity be excluded from any share option schemes are those who are employed as industrial civil servants, or even civil servants themselves. After all, one could not give the Permanent Secretary of the Treasury an equity share in the Treasury Department. I hope that the Financial Secretary will give me his attention.
§ Mr. Loughlin
If we think in terms of the industrial civil servants and, for example, the total number of people employed in the Department of the Environment and the Department of Health and Social Security, and if we also think of all those employed in public authorities, we can take all the tax measures we like but we shall find that in the totality of those employed the tax relief given in terms of this kind of share option scheme is not worth while.
§ Mr. Dalyell
I wish to echo some of the views expressed by my hon. Friend the Member for Gloucestershire, West (Mr. Loughlin). Government Ministers should recognise that there is a problem here. If it is argued that share option schemes are good, as my hon. Friend says they have to be extended somehow to a great many more people than at present, and there is the problem of those working in the public sector. It is no good saying that those in the public sector have security, as the hon. and learned Member for Dover (Mr. Peter Rees) says. That is not quite the issue. For those in circumstances similar to my hon. Friend's hospital workers there is a very real problem.
I want to pick up the point made by my hon. Friend the Member for Dudley (Dr. Gilbert) and to return to a point which I laboured last year in Committee upstairs, possibly at unconscionable length. It concerns the nature of schemes and the bad blood which is often caused in a company.
It so happens that I have with me the letter which Shell sent out about its share option scheme. It says:Only executives in full-time Group service and working in the United Kingdom will be eligible to receive options under the Scheme, so that Shell Petroleum's existing Stock Option Plan will still be needed for executives of Shell Petroleum's subsidiary and associated companies overseas. It is the intention of the Board of Shell Petroleum to renew that Plan in due course. You will, however, appreciate that the existence of several schemes or plans applicable to executives of different Group companies does not mean that there is, in fact, a multiplication of benefits; they are, and will continue to be, administered in such a way as to be complementary, not cumulative, in however many parts of the world an executive may have worked in the course of a Shell career.1440 Now comes the operative part:If the Scheme comes into operation it is expected that the number of executives selected to participate at the outset will be in the neighbourhood of forty.In an enormous concern like Shell, just imagine the human situation. Why should 40 key people in a huge enterprise get this kind of benefit? It so happens that I have friends in Shell who are of a seniority just outside the option scheme. I can assure hon. Members that it has created a great deal of bad blood. If one goes round a number of major companies, especially multi-national companies, as some of us have been doing in the past year, one knows the situation only too well. I echo the point that I laboured last year. It is a situation which can create a great deal of bad blood and dissatisfaction.
When we come to Schedule 8 it will probably be more in order to go over the arguments which the Chief Secretary answered during the Budget debate, as always very courteously, when I raised the subject of stock options. Tonight I wish simply to concentrate on a number of specific points because possibly this is the only opportunity I shall have to refer to them. If the hon. and learned Member for Dover is to join us in the Standing Committee considering the Finance Bill, he will have to learn as I did to my cost at an early stage that there are many matters which are out of order and that one has to take one's opportunity when it comes. Therefore I do not apologise for raising the subject of share option and share incentive schemes as it affects part-time directors, one reason being that the matter has been raised with me.
As I understand it, one of the conditions for approval of a share option or share incentive scheme is that eligibility to participate must be limited to persons who are full-time directors or full-time employees of the company concerned. In practice, in accordance with an undertaking given by the Chief Secretary in Committee last year, a person who works full-time as a director or employee of two or more companies within a group of parent and subsidiary or associated companies, but not for any one company in the group, will be treated as eligible to participate in a scheme which is open to directors or employees of any of the companies for which he works.
1441 The guts of the issue is whether the Treasury will be rigid in keeping it to full-time employees or whether, if these are to be benefits, they are to be extended to those who are in any sense part-time.
Quite a number of people involved in the export trade of British companies are, by the very nature of their employment, part-time employees. Many of these people sweat their guts out to sell British goods abroad. If there are to be any goodies going, clearly it is wrong that these people should be excluded. Therefore I raise the question of the Treasury's attitude towards part-time directors, many of whom work extremely hard in the interests of companies. Many of us have reservations about part-time directors, but I wonder whether they should be excluded from the scheme.
The second question I wish to put arises out of Schedule 12 to the Finance Act 1972. A Treasury release of 7th November 1972 on share option and share incentive schemes states:At the same time they will, where it seems appropriate, draw the applicant's attention to the possibility that, in the light of the Chief Secretary's announcement, any approval given may have to be withdrawn as respects shares acquired after 18th October. If a company wishes to guard against this possibility, it will be open to it to include a suitably worded provision in the scheme. This would empower the directors, after the Finance Bill 1973 becomes law, to amend the scheme, if necessary, as regards shares acquired after 18th October 1972 merely in such a way as to comply with the approval conditions then current.How does the Treasury intend to monitor these rather complex conditions? In particular, how much Inland Revenue and Customs and Excise time will the scheme take up? It is pretty complex. The example of the problem that I have given shows just how complex it is.
I should like now to refer to a Question that the hon. Member for the Cities of London and Westminster (Mr. Tugendhat) asked the Chancellor on 18th October. The Chief Secretary, in the course of a long reply, said:In such cases the restrictions will not reduce the value of the shares and an employee who acquires them at less than market value will be liable to income tax on the difference; but unless the shares are of a special class, subsequent increases in their value will not be subject to income tax whether or not the scheme is approved by the 1442 Inland Revenue."—[OFFICIAL REPORT, 18th October 1972; Vol. 843, c. 102.]What is meant by the phraseshares … of a special class"?Precisely what special classes do we have? We want to know about this matter.
Finally—I could go on at length on this matter, but I do not want to detain the Committee—I should like to refer to a letter in The Times of 18th September from Mr. C. A. Norman, managing director of Lowndes Management Incentives Ltd., in which he says:From a technical viewpoint option schemes appear to suffer from certain disadvantages the importance of which varies from company to company. One example … is that the issue price of a share under a share incentive scheme can be as low as 80 per cent. of the ordinary share price at the date of issue, whereas under an option scheme the minimum option price is 100 per cent. This discount can be used to great advantage where high targets are included in a scheme or where the prospective growth rate of the company's shares is modest. Other technical advantages of share incentive schemes include greater flexibility on cessation of employment and the ability of a loan scheme to provide participation in dividends, votes, etc., during the subsistence of the credit period.I should like to be given some comment on that rather technical point. I shall not go into the various political points that Mr. Norman made or his other reservations about the scheme. As it seems that this is the only opportunity that we shall have to discuss these things seriously, I should like to hear some Government comment on them.
§ Mr. Ridley
I propose to say a few words on this matter at this stage but we shall come back to it on the schedule, which is not being taken with the clause, when we get into Committee upstairs.
The hon. Member for West Lothian (Mr. Dalyell) made clear what a complex area this is, and I think it will be very difficult for the various schemes— development, option, deferred shares and loan shares—from the 1972 Act to be kept on a reasonable basis of parity with each other and, as the hon. Member for Gloucestershire, West (Mr. Loughlin) said, with persons who cannot participate in any of those schemes.
I have always had a slight doubt about share incentive and option schemes from the point of view that people who are not in public companies do not have the opportunity to buy these shares. I include 1443 all those who are not able to join in these schemes and not, as the hon. Member for Gloucestershire, West did, solely those in the public service. There are many people in the private sector who do not have such an opportunity, and I could not help wryly feeling, as the hon. Gentleman longed for shares in the nationalised industries, that perhaps at last I had a convert to my view that denationalisation of much of the public sector would be in the long-term interest of the country, but perhaps the hon. Gentleman has not quite thought that one through.
As I understand it—I hope that I shall be corrected if I am wrong because this is a complex area—the intention is that where shares are bought by an employee with money loaned to him by the company through trustees he shall be able to obtain them at 70 per cent. of the market price at the time of purchase. But that will involve very heavy borrowing if the shares are bought on any scale, and borrowing which, at present rates of interest—although he can deduct the interest for tax purposes—will be a considerable load on the employee.
It is thought that the principal way in which these shares will be purchased by employees will be through their entering into Save-As-You Earn schemes and buying them on a deferred basis. I hope that I shall be corrected if I am wrong, but I understand that if the second channel is used, instead of buying the shares at 70 per cent. of market price the employee will have to buy them at 125 per cent. of market price.
Here I refer to the income tax leaflet IR16 published in February 1973, where these matters are set out. The last table makes it clear that if over a seven-year period an employee takes up 5 per cent. as his initial payment he will have to pay 125 per cent. of the market price at the time of entering into the transaction. That is what is called the premium in respect of the deferral, and it is untrue to suggest that shares will be available to employees who undertake a SAYE scheme at 70 per cent. of the market, because in fact they will cost 125 per cent. I understand that to be the position, but it may be that I have got it wrong.
I have some doubts about the second scheme. Within the context of various 1444 principles which hon. Gentlemen may or or may not have, the first scheme seems to be in line generally with what is being offered to executives. But I doubt very much whether this is a sufficiently attractive scheme to be commendable to people on the shop floor.
First, its main benefit will go to the Treasury. Every £10 a month put in SAYE by an employee to buy shares will produce a complete term of SAYE for the Treasury. It will contribute towards the Government's borrowing, which is desirable from the Government's point of view, but the main beneficiary will be the Treasury, which will receive the benefit of £840 for every £10-a-month-term completed.
Secondly, the employee will be subject to capital gains tax if the shares subsequently show a profit, but before he makes any money at all they must show a profit in a seven-year period greater than 125 per cent.
I have done a few calculations on the sort of performance which will have to be expected if it is to be worth the while of the employee to take up the shares. It may be of interest, though I know it is a little complicated, if I give here a few figures.
If in the period of seven years, the shares double after the employee has paid capital gains tax, the employee would receive a profit of £412 provided he had paid the full £10-a-week which I am assuming in the calculations for the five-year period of SAYE. He has invested his £600, which becomes £840 after the end of the seven years, and he receives a further profit of £420. But if he had invested his £600 in gilt edged at the present yields he would have received £420 as oppose to £412 interest. Leaving aside income tax, therefore, he may well do better to put his money into gilt edged at present rates of interest rather than to buy shares in the Save As You Earn scheme when the value of the shares doubles in the next seven years.
To put it in another way, it would be necessary to have a gain of about 80 per cent. in the share value over seven years before the employee did better than by taking interest solely from gilt edged. This, I admit, neglects the value of the dividends which he may receive, but as 1445 the hon. Member for Gloucestershire, West said, they are likely to be low.
I question very much whether there will be much advantage in these schemes for the employee. It is a very big gamble to say that in seven years' time the value of the shares will have outstripped the pace of inflation. He can always refuse to take them up at the end of the period, but then that is an inducement to the employee to invest in SAYE and not in shares.
I hope my hon. Friend will be prepared to look again at this figure of 125 per cent. of the market price given in the Inland Revenue leaflet which seems to put the individual at a severe disadvantage as against the employer who can take up an option at 80 per cent. or an employee who can take up an option at 70 per cent. with his non-assisted purchasing power.
I believe this is nothing like the bargain it appeared to be when my right hon. Friend the Chancellor put it forward in his Budget speech. The difference between allowing loan-assisted schemes to purchase shares at 70 per cent. and SAYE-assisted schemes to purchase shares at 125 per cent. will totally discredit the scheme in the eyes of workers who might otherwise be induced to take up these shares.
We need some clarification whether what I have pointed out is right. I hope that my hon. Friend will be able to reassure us that the value of making purchases of this sort is better than it seems to be.
§ 10.0 p.m.
§ Mr. Patrick Jenkin
This has been a useful debate on the general principles of the schemes which we are discussing.
I endorse what my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley) said. Perhaps this will be of some comfort to the hon. Member for West Lothian (Mr. Dalyell)—we are discussing only Clause 18, which is merely a paving clause for the schedule. The schedule that goes with this clause will be fully open for discussion in Standing Committee, when I have no doubt that we shall be able to return to some of the matters that have been raised this evening. Indeed, we shall be able to tackle them in greater detail, and more 1446 appropriately, in a smaller Committee than in Committee of the whole House.
We heard from the hon. Member for Dudley (Dr. Gilbert) his now well-known criticisms and strictures on the measures which we took last year and which we are taking in this Bill to encourage those who are employed by companies to become shareholders in those companies as well as executives. We understand but do not accept the reasons for the hon. Gentleman's criticisms.
We believe that it is broadly in the interests of the economy as a whole that we should do what we can to break down the divide that exists between those who own and those who work for these enterprises. Last year we dealt with executive share option and share incentive schemes.
Under pressure from the hon. Member for West Lothian, I gave a number of undertakings that we would consider most carefully how it was possible to extend schemes of this nature to benefit shop floor workers with the rather different considerations that inevitably apply in those cases, not only because the incentive aspect is not and cannot be as direct when one is dealing with shop floor workers but because of the need to take greater steps to protect the capital of shop floor workers in the period before they come full shareholders.
We believe that these schemes are of advantage, because they give to employees a chance to share in the prosperity of the company they work for. They will help to reflect the community of interest that must exist between all who contribute to the wellbeing of an enterprise, whether as providers of capital or of labour.
The hon. Member for Dudley, in voicing his criticism, poured a certain amount of scorn upon the measures that we are introducing in the Bill for the SAYE share-saving scheme. The hon. Gentleman was wrong in saying that there is no advantage because there is no reinvested interest if the shareholder decides to withdraw. Once his SAYE contract has matured, the shareholder is perfectly entitled to take the contract. That is what the hon. Gentleman called the down-side protection. Until the shareholder has exercised the final choice, until he has made the election to take the shares—an 1447 election which remains open to him all during the savings period while he is making his contribution of up to £20 a month under SAYE—he always retains the right simply to take the money instead of the shares. That is the protection. He takes the money with the full benefit of the SAYE accumulations at the end of the period.
As the hon.. Member for Dudley knows, SAYE was introduced by the Labour Government. We welcomed the scheme at the time. We hope now to extend its use through its extension to the share-incentive schemes.
The hon. Gentleman said that this would affect the mobility of labour. This was a point which the hon. Member for West Lothian raised during the debates on the Budget Statement and which I answered at some length. It will be open to firms introducing these schemes to have a number of different ways of dealing with the employee who leaves during the currency of the saving period. Once he has the shares at the end of the saving period there is nothing to tie him to those shares or to that company. Some employees might decide at that stage that their right answer is then to sell their shares, which is their only answer to capital gains tax relief if they are above the limit and to invest more widely, perhaps in a unit trust or something of the sort.
§ Mr. Dalyell
On 12th March the hon. Gentleman said:I agree that we should aim to avoid any drag, and we have various means in mind to achieve this."—[OFFICIAL REPORT, 12th March 1973; Vol. 852, c. 901.]This was in relation to mobility. Shall we, not tonight perhaps, but certainly in Standing Committee, hear what means the hon. Gentleman has in mind?
While I am on my feet, in candour I must admit that perhaps my own view has changed rather from last year. This is not a matter of great credit, but certainly, as one has talked more about it, so one's view has changed.
§ Mr. Jenkin
I do not think that this is discreditable in the least. To adhere originally to a view that one has expressed earlier is not always the wisest course. But the more I see of this, the 1448 more I move in the other direction: the more attracted I am by these schemes. As we were working on them in the Treasury before the Budget, I gained the hope that a large number of companies would feel it right to embark on schemes of this sort.
The hon. Members for Gloucestershire, West (Mr. Loughlin) and Dudley said that the schemes are defective because they are limited to employees of private sector companies. But it is not only public companies. The schemes are open to those who work in unquoted companies. What one cannot do is to have a share in an unquoted subsidiary of a quoted company. My hon. and learned Friend the Member for Dover (Mr. Peter Rees) asked about that.
It is right to make a start. I would welcome the possibility of some form of expansion, if we could devise a system whereby it becomes possible for those who work in the public sector, whether nationalised industries or elsewhere, to become share owners. The division between those who own and those who do not own is one of the sources of discontent and disruption in our society. I am as anxious as anyone to try to break this down, and this is a modest step in the right direction.
§ Mr. Jenkin
I would like this to be extended to the dustmen, the hospital workers, civil servants, or anyone else. I see no reason against that. That is no reason for decrying this scheme, which makes a sizeable start in a practical way, in a way that I believe managements will find attractive.
I was slightly puzzled by the hon. Member for Gloucestershire, West, who, in one breath, complained bitterly that the advantages of these schemes would not be open to the employees of nationalised industries or to the Civil Service and the rest, and, in the next, said that the existing schemes of this sort were phoney.
If he studies Schedule 12 of last year's Finance Act, the hon. Gentleman will see that we have gone to great lengths to make sure that these schemes are not phoney. We provided in paragraphs 3 and 4 of our schedule that the shares which are the subject matter of this scheme—this applies equally well to the 1449 employees' SAYE scheme under this Bill —must be of a class quoted on a recognised stock exchange or shares in a company which is not under the control of another company—that is to say, not a subsidiary—and the majority of shares of the same class must be shares acquired otherwise than as mentioned in section 79. There cannot be a special category of non-voting shares issued to employees. The hon. Gentleman's criticisms of some existing schemes, which I agree are phoney for the reasons he mentioned, will not apply to schemes approved by the Inland Revenue under this clause.
§ Mr. Loughlin
As the hon. Gentleman reached his concluding point, he recognised that I was talking about the generality of the co-partnership concept. I was not referring to the specific clause in the Bill. I was talking in a general sense about my complaint against the general concept of co-partnership which has been plotted by the Liberals for the last 20 years. Most of those schemes were phoney. It was only in that respect that I used the word "phoney".
§ Mr. Jenkin
I am grateful for that explanation. Equally, I hope I have satisfied the hon. Gentleman that we have gone to considerable lengths to make sure that the schemes introduced in last year's legislation and this year's legislation will be anything but phoney. They will be genuine schemes.
The hon. Member for West Lothian raised a number of points. I do not disagree with him that the disadvantages of the limited kind of schemes with which we were dealing last year generate so much bad blood that they are hardly worth having. When one has a limited scheme for senior executives, there will be those who feel a sense of deprivation if they are just outside the limits. I have been aware of this in companies concerning people who do not have carpets or desks of the same size, and so on. One cannot escape that. The advantage and incentive of a well-run share option or incentive scheme is now well established.
We have examined very carefully the question of part-time directors and part-time employees. Perhaps this matter may be further considered in Committee. But we have felt that the disadvantages of 1450 its being open to manipulation, particularly in the sector of the wife who is nominally an employee of the company and so on, lends itself to abuse. We need to look at this a good deal more carefully before we come to the part-time aspect.
The hon. Member asked about the number of staff. The section of the Inland Revenue which will deal with this will be tiny. Probably about five people will be enough to administer the scheme.
The hon. Member then came to the point which was, in essence, the same as that raised by my hon. Friend the Member for Cirencester and Tewkesbury, who expressed considerable doubts about certain types of share incentive scheme, notably the so-called partly paid schemes. I am not sure whether the hon. Member for West Lothian and my hon. Friend the Member for Cirencester and Tewkesbury recognise that the limited category of scheme to which they were directing their criticism was the partly paid scheme. I can set my hon. Friend's mind at rest in that it is certainly not true to say that any scheme under the Bill which makes use of the SAYE contract must of necessity be a partly paid scheme which suffers from the disadvantages to which he drew attention. That is not so. It is perfectly possible for a scheme to be set up with trustees and loan-assisted purchase of shares when there is no question of having to discount for a partly paid share and, therefore, where the full benefit of the 30 per cent. discount and shares issued at 70 per cent. of market value will be open to employees who participate in the scheme.
There has been a good deal of misunderstanding about this matter. Some people genuinely have not understood it —I do not mean in the House of Commons but outside it—and some have appeared almost wilfully to have ignored the arguments. The fact is that if someone is in a position to buy an asset and is equally in a position to pay, let us say, only 5 per cent. of the price of that asset now and postpone the payment of the rest of the price until seven years' time, that price has to be enhanced to take account of the right to postpone. The advantage of postponement has to be discounted. It is for that reason that with a partly paid share scheme one can go up to the figure of 125 per cent.
1451 If that were the only way of developing schemes of this sort, my hon. Friend's criticisms and apprehensions might have more justification. But it is not the only way. In the case of an executive it is perfectly possible for shares to be transferred under last year's legislation under a loan scheme, for a loan to be made to the executive for the incentive shares, for him to pay either no interest or limited interest and get tax relief on it and to be able to take advantage of the 20 per cent. discount available to executives under last year's legislation.
Equally under this year's legislation it will be open to the company to make a loan to the trustees who can buy the shares under the existing Companies Act legislation which the trustees then hold for the benefit of the participants during the savings period. In these circumstances, if the full price is paid there is no question of having to discount for the deferral of the purchase price.
We envisage that the majority of companies embarking on schemes of this sort will prefer to go for the loan-assisted scheme as this is the most straightforward and is most likely to be beneficial to those participating. It is perfectly possible for the loan-assisted scheme to be run in conjunction with the SAYE contracts. There is no necessity, as my hon. Friend feared, for the SAYE contracts to be confined to the partly paid scheme, so that the discounting for the deferring of the purchase price has to apply.
§ Mr. Ridley
Surely the SAYE savings scheme against the loan advances to trustees is not only not partly paid but not paid at all and the option remains for the employee not to take up the shares. Will my hon. Friend confirm, because that was what he said, that if an employee takes out an SAYE policy the trustees may advance to him a loan to pay for the shares at 70 per cent. of the market value at the time of the transaction provided that he continues to subscribe to SAYE for the purpose eventually of repaying the loan? What happens if the value of the shares drops below the 70 per cent. figure at the end of seven years? The trustees surely get left with the shares because the employee decides not to proceed with the purchase. How is that situation to be dealt with?
§ Mr. Jenkin
On the first part of my hon. Friend's question, with the kind of SAYE savings scheme which is dealt with in this year's Bill we would not envisage that companies would wish the shares actually to be transferred to the employee during the savings period. They would be held by trustees on the employee's behalf while he was making his savings under the SAYE scheme. Of course, the company would have loaned the money to the trustees to buy shares and the money would then go back to the company for the purchase of the shares.
On the second part of my hon. Friend's question, in that eventuality the shares are left with the trustees. That is part of the risk which the company takes. My hon. Friend will remember that under last year's legislation a scheme of this sort had to be approved at a general meeting of the company, but it is part of the risk that the company takes in embarking upon this sort of scheme. It is a risk that the shareholders take because to them it is a dilution of their equity. They may regard it as having an advantage in that it might improve their relations with their employees and build up the sense of community of interest between themselves, the employees and the thing in which they are all investing.
But if the employee does not take up the shares, as he is perfectly entitled not to, at the end of the savings period, and takes instead his savings money, the trustees are left with the shares for the time being. These are shares which subsequently are open to be allocated to other employees who may wish to start taking out new SAYE contracts.
§ Dr. Gilbert
I am grateful for the hon. Gentleman's lucid exposition. Will the schemes bar trustees, who may find themselves with a lot of stock on their hands and apparently no continuing enthusiasm on the part of the employees to take out new contracts of this sort, from selling the shares back to the company? If not, will the company be able to take a capital loss where the shares have fallen in value?
§ Mr. Jenkin
The trustees in those circumstances would not be allowed to sell the shares back to the company. It is my impression—I am speaking without having studied the matter carefully— that the company would not be allowed 1453 to purchase its own shares. It would be open to the trustees to sell the shares on the market if it was a quoted company. Alternatively, in the last resort, if a company finds itself with a lot of shares, it can go to court and apply for a reduction in capital and a reduction in the shares. That would be rather an extreme step.
In most cases, we envisage that once a scheme has got going a steady stream of employees will go into it and that at the end of seven years they will become full ordinary shareholders free to dispose of their shares as they wish. In those circumstances, the only tax to which they would be liable would be for any capital gains. They would be in exactly the same position as any other shareholder.
The Government believe that these are sensible and attractive schemes. We hope that a large number of companies, when the Act becomes operative some time in the autumn—possibly in conjunction with phase 3 of the counter-inflation policy—will examine the situation carefully and decide that it is in their interests and in the interests of their employees to take up these schemes, introduce them and get them to work.
I noted the careful language which the hon. Gentleman used when referring to 1454 this legislation. His language was in contradistinction to the rather more sweeping condemnatory language that he used when speaking about last year's legislation. I hope that he feels that this legislation makes some contribution to the removal of sources of discord and of disruption which undoubtedly harm the nation's industrial life. If the schemes become widespread, and if the hon. Gentleman ever has any say about these matters whilst speaking from this Dispatch Box, I hope that he will be prepared to smile upon them.
§ Dr. Gilbert
I repeat that I am grateful to the hon. Gentleman for his lucid exposition. One or two of the matters which he has raised, which we suspected lay behind the new schemes, such as a company loaning money to the trustees to buy shares, in effect add to the tax discrimination enjoyed by the beneficiaries of the schemes. Features of that sort help only to make the schemes rather more obnoxious in the eyes of the Opposition. Having said that, I am content to let the matter rest.
§ Question put and agreed to.
§ Clause 18 ordered to stand part of the Bill.