§ (2) In paragraph 88 (income tax), after sub?paragraph (4) there is inserted—
§ "(4A) In the case of shares acquired by the trustees by virtue of a payment in respect of which a deduction is allowed under paragraph 112A, the period applicable to the shares is (notwithstanding sub?paragraphs (3) and (4)) the period of ten years beginning with the date of acquisition."
§ (3) In paragraph 98 (capital gains tax), after sub?paragraph (3) there is inserted—
§ "(3A) In the case of shares acquired by the trustees by virtue of a payment in respect of which a deduction is allowed under paragraph 112A, the relevant period is (notwithstanding subparagraphs (2) and (3)) the period of ten years beginning with the date of acquisition."
§ (4) In paragraph 100 (classes of share for the purposes of capital gains tax), at the end there is inserted—
§ "(4) For the purposes of that Chapter, any shares which—
- (a) were acquired by the trustees by virtue of a payment in respect of which a deduction is allowed under paragraph 112A, and
- (b) have not been awarded under the plan,
shall (notwithstanding that they would otherwise fall to be treated as of the same class) be treated as of a different class from any shares held by the trustees that were not so acquired by them."—(Mr. Lazarowicz.]
§ Brought up. and read the First time.9.33 am
§ Mr. Mark Lazarowicz (Edinburgh, North and Leith)
I beg to move, That the clause be read a Second time.
When I realised a few weeks ago that this morning's debate would coincide with other events thousands of miles away in the far east, I was somewhat alarmed. I was even more concerned when the eventual participants were confirmed a few days ago. I am therefore grateful to the Members who have come to the Chamber this morning and dragged themselves away from the analysis of the 518 game. As a Member representing a Scottish constituency, I extend my commiserations on the result to colleagues representing English constituencies.
Moving quickly to the substance of the new clause, I declare first as an interest support from the Co-operative party and Job Ownership Ltd. in the preparation and development of the Bill, which I have declared in the Register of Members' Interests. If we reach Third Reading, as I hope we will, I shall say a little more about that support.
New clause I was tabled following a welcome offer by my hon. Friend the Paymaster General in Committee. When the somewhat lengthy Committee proceedings were drawing to a close, I told Committee members that the Government were willing to extend the scope of tax advantages in the Bill—an offer that I and people supporting the Bill both inside and outside the House welcomed. It was not possible to introduce an amendment in Committee, but new clause 1 gives effect to the change proposed by the Paymaster General. As hon. Members can see, the new clause was tabled in her name and mine.
To clarify the purpose of the new clause, I shall make brief reference to the provisions in the Bill that it seeks to amend. The Bill includes a provision allowing corporation tax relief to be granted upfront where a significant block of shares-10 per cent. or more—is transferred to an employee trust. Under the share incentive plan provisions that give taxation advantages to encourage employee share ownership, such corporation tax relief is available only when shares are transferred from an employee share trust to individual employees. However, such a transfer of shares to individual employees may take a long time when a large part of a shareholding in a company is transferred at the outset for the benefit of employees. As a result, the current taxation concession would not be available in such circumstances, making such a route expensive and in many cases so prohibitive that the transfer of shares would not take place.
Clause 1(3) allows a period of 10 years in which shares can be held by an employee share trust if it is to gain the benefit of corporation tax relief. That measure makes it much more feasible for an employee trust to acquire shares and gradually distribute them to employees if it wants to do so. The trust will therefore be more easily able to plan the acquisition and distribution of shares in the best way for the development of the business and the trust itself. No doubt it is also in the interest of the employees and may encourage the trust to act as their corporate voice, particularly when the provisions in clause 1(2) are utilised.
New clause 1 seeks to give a further tax concession to trustees holding employee shares. It does so in two ways. First, subsection (2) ensures that the dividend and other distributed income arising from shares held by the trustees during the 10-year period and not otherwise appropriated will be charged to income tax at the special rates applicable to such trusts as set out in section 686 of the Taxes Act 1988. Secondly, subsections (3) and (4) ensure that such shares will not be charged to capital gains tax during the time in which they are held by the trustees in the 10-year period.
§ Mr. Tom Watson (West Bromwich, East)
I am grateful to my hon. Friend for giving way, and I am particularly pleased by his kind comments at the start of 519 his speech. I assure him that there is no more solid return to reality than discussing new clause 1, after a heroic performance by England that was none the less disappointing. How does my hon. Friend think the new clause will affect take-up by companies?
§ Mr. Lazarowicz
It is impossible to give a precise estimate of the number of firms that might benefit from the new clause, but a number of businesses have told me that they would welcome the package of measures contained in the Bill as a whole. I shall refer to that at greater length on Third Reading, if we get to that stage. There is certainly some evidence of companies wanting to make use of the entire package. I hope that hon. Members accept that we are discussing not just the measure, but a change in the culture and attitude of business, financial institutions and the tax regime to employee share ownership. We are pointing the way for changes in the future which, I hope, many companies will take advantage of.
§ Mr. Andrew Love Edmonton)
I add my voice—which may seem a rather strange voice, coming as it does with a regional accent—to that of other hon. Members who have commented on England's sad loss today. The players put up a heroic performance, but the run of play did not quite go with them.
Does my hon. Friend recognise that there was concern that if we had continued with the tax advantages for only the two and five-year periods, as set out in the original legislation, that would have been a significant disincentive, given how long it takes to set up a trust—
§ Mr. Deputy Speaker (Sir Alan Haselhurst)
Order. Even on a Friday, that is going beyond the bounds of an intervention.
§ Mr. Lazarowicz
My hon. Friend makes a good point—so good that I was about to make it myself. As he pointed out, provisions for such tax concessions already exist under the Finance Act 2000 for shares held in an employee trust, but they apply only for periods of up to two or five years, depending on the specific circumstances. There was concern that, with the welcome 10-year concession applying to the company that transferred the shares to the employee trust, but with the trustees not having a similar 10-year concession, the effect of the measure could be restricted. He made that point well.
The combined effect of the provisions in the new clause is to bring the treatment of shares acquired with the benefit of upfront corporation tax relief into line with the treatment of shares acquired by the trustees of the employee trust, in respect of both taxation of dividends on the shares held by the trust and capital gains for a period of up to 10 years, depending on how long the shares are held. In other words, when the shares are transferred to an employee share trust, the company transferring them gets the up-front corporation tax relief and when the trustees have acquired those shares, they get those advantages also.
Such a concession will greatly increase the utility of what I might term the 10-year period of grace before shares must be distributed to individual employees by a 520 trust. That will make the concession much more attractive and of much greater assistance to businesses and owners of businesses who want to go along this route. I am grateful to the Government for volunteering a further tax benefit to encourage the holding of shares by employee trusts, and I commend the new clause to the House.
§ Ms Meg Munn (Sheffield, Heeley)
I, too, welcome the new clause, which was ably moved by my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz). I shall not say anything about the football. I do not know much about it, other than the result, so let us move on to more important and long-lasting matters.
The new clause is complex. When I first read it, I thought that I would never be able to understand it, but fortunately I was a member of the Standing Committee, where my hon. Friend the Paymaster General explained in great detail what the new clause would mean and why the Government were offering the concession to further the aims that my hon. Friend the Member for Edinburgh, North and Leith is trying to achieve. The commitment was made at that stage, and it was most welcome. It clarifies the position, by bringing the extended period of 10 years for shares acquired with the new corporation tax relief into line with other tax provisions. The new rules will improve matters for everybody concerned.
As we discussed at length on Second Reading, there is an important role for share incentive plans. The measure adds to the incentives for companies to go down that route. The early deduction of corporation tax is particularly important on the money that is provided by the company to a share incentive plan trust. so that it can buy a block of shares that, over the longer period, it can begin to transfer to its employees.
I support the new clause, which improves a strong and welcome Bill. I hope that the House will endorse it.
§ Linda Gilroy (Plymouth, Sutton)
I add my voice to that of my hon. Friend the Member for Sheffield, Heeley (Ms Munn). As a member of the Standing Committee who struggles to understand some of the more technical clauses, I could perhaps say in plain English that the new clause is a way of moving goal posts—if I may make an oblique reference to a subject that we are all trying to pass over—in a favourable way. Perhaps that might have been helpful out in Japan earlier today.
I congratulate my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz) on the new clause. By means of it, probably after some rather painstaking discussions with our hon. Friend the Paymaster General, he proposes to extend income tax and capital gains relief for share incentive plan trustees from two to five years under the current rule to 10 years, to correspond with the time allowed in the Bill for shares to be distributed.
At present, corporation tax deductions are given when shares in the share incentive plan trust are distributed to employees. The Bill provides for corporation tax deduction to be given earlier, when a company contributes money to a share incentive plan trust to buy a block of shares. I think I have got that right. Under the new clause there will be no risk of the benefit of that early corporation tax relief being eroded by tax changes affecting the shares within the 10-year period.
521 All that is relevant only where the trust holds 10 per cent. of the ordinary share capital of the company, which it must do before it qualifies for the deduction, and the shares must be distributed to employees through the share incentive plan within the 10-year period.
With the addition of the new clause, the Bill will be better designed to encourage the flow of shares from the trust to individual employees over that period. It will thereby meet more fully the key objective of the Bill: to improve productivity by encouraging employees to take out a long-term stake in the company and share the rewards of the company's success. I congratulate my hon. Friend on negotiating the new clause. It satisfies the Treasury, which is no mean feat, as others who have failed in such matters will confirm.
We have heard how share incentive plans were introduced in 2000 after extensive consultation. Officials worked with an advisory group made up of representatives from large and small businesses, the TUC, share scheme experts and academics to design the plan, which has been well received.
Earlier, my hon. Friend the Member for West Bromwich, East (Mr. Watson) asked how the new clause might improve the number of those taking up the scheme. We know that almost 600 companies have already applied to set up plans, over half of which have formal approval from the Inland Revenue. The remaining plans are in the process of seeking that approval or are being worked on by the Revenue with the companies to ensure that they meet the legislative requirements and are therefore capable of approval.
The new clause, along with the other measures in the Bill that is set to come into force in April 2003, will add significantly to that number over time as people become familiar with the new possibilities. The growth in the sector is still modest, but I am sure that it is set to increase. The acorns that are being planted now will become saplings and perhaps, during the millennium, a veritable forest of trees will bear the fruits of the benefits that we all attribute to the potential of employee share ownership schemes today.
I add my voice in support of the new clause and hope that it will be added to the Bill.
§ Mr. Michael Connarty (Falkirk, East)
It gives me extreme pleasure to support the new clause in the name of my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz) and to put on record my admiration for his consistent pursuit of positive but not extreme measures for the benefit of those in his constituency and throughout the United Kingdom. I also wish to put on record for the first time my great joy at the fact that he has eventually joined a number of us who served for many long and weary hours in local government under the previous Conservative Government, fighting the cause of the Scottish people.
The new clause is an excellent Government concession that extends the benefits under share incentive schemes to 10 years rather than two. Ten or 20 years ago I would not have viewed encouraging employees to share in the ownership, responsibility and benefits of successful enterprise as a positive move. I would rather have been seizing the commanding heights of the economy than sharing the benefits of such enterprise among its employees. But we have clearly moved on.
522 Many employees wish to be involved not just in the information and consultation processes that are coming from Europe but in the incentive of having a share in the capital of an enterprise and the benefits that flow therefrom. If the new clause were not to be approved, some of those benefits would be taken away by the requirement to pay capital gains tax and income tax at an early stage.
§ Mr. Love
Does my hon. Friend agree that because the Bill is specifically geared to substantial share ownership transfer, which will take a considerable time, without the new clause there would have been a significant disincentive as the trustees would have had imposed on them taxes that would have detracted from the transfer?
§ Mr. Connarty
My hon. Friend puts lucidly the benefits that flow from the new clause. The idea is to incentivise share ownership, and the removal of barriers to that, which have been revealed in Committee, will be beneficial, but we still have a long way to go.
I am a long-term member of the Co-operative party and the Co-operative Society and a former chairman of the Stirlingshire branch of the Co-operative party. Some older members had these ambitions in their early days—
§ Mr. Connarty
I acknowledge my hon. Friend's intervention. We are remaking the co-operative ideal in introducing such Bills, and I commend my hon. Friend the Member for Edinburgh, North and Leith for that.
I hope that the new clause will be supported and will give people the incentive to take up these employee share schemes. It will probably be more difficult to find trustees than we think because they will have great responsibility. As we see in the credit unions movement, convincing people requires much work and is often a slow and arduous progress. The new clause will make it easier to convince people that this is a tax efficient and beneficial way to invest in an enterprise. If the tax man and the Government are willing to help, people will be enthused. I commend the new clause to the House.
§ Mr. Iain Luke (Dundee, East)
As a co-sponsor with the hon. Member for West Ham (Mr. Banks), and one of the five Scots who added their name to the early-day motion, I am disappointed that we will not have the joy of a Bank holiday on 1 July. However, I should like to propose an amendment to that early-day motion to add "and Brazil", so that we have the best of both worlds.
I support the new clause. As a member of the Committee, which met for only a short time to consider the Bill, I am happy to see the new clause. It is evidence of the collaborative approach that we have witnessed to this small but worthwhile Bill. It is testimony to the thoughtful approach adopted by my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz) and my hon. Friend the Paymaster General, who was particularly helpful. That approach demonstrated the Inland Revenue's commitment to making SIPs—share incentive plans—work practically for the benefit of those who take them up. In that regard the measure should be commended. This is a small step. I am not a Co-op 523 member—[Interruption.] Perhaps I should be. I do not want to declare an interest at this stage, but I shall certainly join, given the pressure—
§ Mr. David Lepper (Brighton, Pavilion)
As we all know, the foundations of the co-operative movement were laid in my constituency in the 1820s and I commend to my hon. Friend membership of that movement. Does he agree that, welcome though the Treasury's co-operation is on the Bill and the new clause, once the Bill receives its Third Reading today, as we all hope that it will, the Government, the co-operative movement, the credit unions, and so on, will have an important job during the next few years in publicising the real merits of the Bill?
§ 10 am
§ Mr. Luke
I pay tribute to my hon. Friend's commitment to the co-operative movement. When I was a young boy in Scotland, co-operatives were the only major form of retail store. I remember queueing up with my mother to put the book in the slot at the end of the week and the discount on one's goods that one got for doing so. In Dundee, we called it the "sosh" rather than the co-operative and social society.
My hon. Friend made a relevant point. Further co-operative and collaborative efforts are needed to bring the industry together and give employees a more vigorous say in how their workplace is operated, which is enhanced by the Bill and the SIPs options introduced in the 2000 Budget. It is worth making sure that people know about it, and we should advertise it more widely. Uptake is the big issue—it needs to be greater than it has been.
On Third Reading, I hope to address extending such schemes into football clubs. There has been some movement towards that, and we need to give it some attention.
§ Mr. Watson
I am grateful to my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz) for clarifying the provision, which is very complex, as every member of the Committee said. They had the greatest minds of the Treasury to unpick it for them; I am afraid that I do not. I was concerned that its complexity would discourage employers and employees from taking up the offer, but clearly that is not the case. The new clause will help to lighten the burden, and it is a welcome concession. Now, those shares acquired with up-front capital tax relief can be distributed over a longer period. That will go a long way to increasing the impact of the Bill. There is consensus in the House on extending the role of share incentive plans.
In a busy workplace, the employer might have felt that the scheme was another burden on his time, so I am pleased that the Treasury has agreed to this incentive. I have talked to employers in my constituency who have said that extending the period to 10 years means that they will definitely take another look at the provisions. I hope that they will go some way to encourage the flow of shares from the trust to individual employees over time. So far, only 600 companies have applied or shown an interest. I have 4,500 companies in my constituency that would welcome the new clause, and I am pleased that it is before us this morning.
§ Roger Casale (Wimbledon)
I put on record, as have other hon. Members, that this is a very sad day for English 524 football. If anything has prepared me to confront that psychologically and emotionally it is the fact that I am only just recovering from another sad day for English football two weeks ago—the Football Association's decision to allow Wimbledon to go to Milton Keynes.
§ Mr. Watson
Does my hon. Friend agree that if the new clause had been enacted at that time, the players at Wimbledon football club might have had greater direction over the decisions of the club's management, which might have gone some way to ensuring that Wimbledon stayed in its rightful home—Wimbledon?
§ Mr. Deputy Speaker
Order. I congratulate the hon. Gentleman on cleverly steering his hon. Friend back into the realms of the new clause, but I hope that he will not be tempted to maintain a sporting theme.
§ Roger Casale
I will not be tempted, Mr. Deputy Speaker. I sometimes refer to my hon. Friend the Member for West Bromwich, East (Mr. Watson) as the hon. Member for West Bromwich Albion. The answer to his question is yes. Perhaps I shall elaborate on that on Third Reading.
Although I was not selected to serve on the Committee, I welcome the new clause, as I welcome the Bill itself. It will strengthen and widen the benefits of the Bill. The Bill will bring many benefits to those who take up the opportunity of employee share ownership, but also to the economy as a whole. As well as establishing a framework for economic stability, the Government are concerned to use the tax system to change incentives at the micro-economic level in a way that encourages enterprise and boosts productivity. The Government introduced many such tax measures in previous Budgets, and did so again in 2002, many of which enjoyed, and are enjoying, cross-party support and will help to boost Britain's productivity.
The Government's support for the Bill is entirely consistent with their approach to promoting enterprise and Britain's competitiveness. It is important to frame legislation in a way that accommodates the understandable demand to broaden share ownership consistently with the Government's overall approach to economic stability and to reforming the tax system. That is why I am pleased that my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz) has had such good consultations with the Treasury and that the Government have worked with him jointly on the new clause, which is a beneficial measure that will enhance the overall benefits of the Bill. Extending income tax and capital gains tax relief for share incentive plans to 10 years will, as my hon. Friend the Member for Edinburgh, North and Leith argued so well, make it more likely that such schemes will be taken up, because early corporation tax relief will not be eroded by tax changes on the shares within the 10-year period.
The Government's support shows that they are prepared to allow, and indeed to encourage, such measures to come forward from the co-operative movement. There has also been support from trade unions, as well as a great deal of input and support from small and medium-sized enterprises—through the Small Business Federation, for example.
The new clause will make employee share ownership more viable. It will encourage more schemes and encourage more employees to participate in them. Many 525 people in my constituency of Wimbledon support the Bill and the new clause, and perhaps some will pioneer such schemes and take them up. The newly formed Wimbledon amateur football club, set up because the professional club is disappearing, will be able to take advantage of these new measures, as well as many others that the Government are introducing, such as the tax relief announced in the Budget for participation in and donations to community amateur sports clubs.
I am pleased to support the new clause, to have the opportunity for the first time to voice my support for the Bill as a whole, and to congratulate my hon. Friend the Member for Edinburgh, North and Leith on introducing it. I also put on record my appreciation of the fact that the Government have worked with my hon. Friend and with organisations outside the House to draft the Bill so as to ensure that it works for everybody. I hope that the House will give it its support.
§ Mr. Howard Flight (Arundel and South Downs)
I lend support from the Opposition both to the Bill and to the new clause. The Conservative party has long supported the principle of employee share ownership. As hon. Members will know, we introduced the save-as-you-earn option scheme, the approved profit sharing scheme, the company share option plan and the qualifying employee trust, two of which the share incentive plan replaces.
In my personal career, extending share ownership of the business that I led and built up for 15 years meant that it succeeded. The mentality of motivating everyone who works for a business to want to make it a success so that they are willing to work extra hours if necessary and pull together makes a dramatic difference. From 1992 until last year, and the sad fall of the stock market after the pensions crisis, the performance of companies that had substantial employee ownership was roughly double that of those that did not. However, I cannot help but make the point that people who had not previously thought about such matters become capitalists once they have an ownership stake. They understand profit and loss and that it is hard to win business; things do not simply drop into one's lap. They adopt a capitalist mentality.
§ Mr. Chris Bryant (Rhondda)
Is it not true that if everyone shares ownership, we all become socialists?
§ Mr. Flight
The hon. Gentleman should return to his political studies because the essence of socialism is not the profit motive, and the essence of employee share ownership is ownership and participating directly in profits and the capitalist mentality that accompanies it. However, the possibility of crossing strands and overlap is interesting.
§ Linda Gilroy
Will the hon. Gentleman sign up to at least one important part of our clause 4, which states that wealth, power and opportunity should be in the hands of the many, not the few? Far from all being Thatcherites now, we are all socialists now.
§ Mr. Flight
I shall not stray into the realms of unreality. Business is business. As the employees of the John Lewis Partnership and the other successful businesses that have widespread employee share ownership would tell the hon. Lady, we are not 526 considering Utopia. Hard decisions must be made and people have to devolve decision making, just as the socialist Government have devolved decision making to their Ministers. However, hon. Members should be happy that there is widespread support for the Bill.
The new clause was essential to make sense of clause 1(3) and (4); otherwise the Bill would put in place the block transfer of 10 per cent. and the requirement for attaining an SIP basis in 10 years; but if the business did not receive the same tax treatment, it is unlikely that anyone would use the measure. The new clause is sensible and in line with the Bill's intent.
A question was asked about take-up. The latest figures that I have seen for SIPs since they were introduced in 2000 show that there are 202 schemes. That is positive, but we would like a great deal more take-up. I shall be interested to hear whether the promoter or the Government have any plans for promoting the achievement of the full mechanisms that enable employee share ownership.
If I understand the position correctly, the clause that the Government deleted—I call it the John Lewis clause—tried to encourage employee share-owned companies, the shares of which were already held collectively in employee trusts, by enabling the shares to become eligible for distribution to individual employees under the SIP. I also understood that the Government's objection to that was that they did not want the SIP to allow anything other than ordinary share capital to be distributed under its provisions, because of the danger of employees having inferior shares. However, SIP arrangements permit employers to select non-voting shares and it could be argued that voting shares are more valuable and powerful than non-voting shares. The arrangements that the new clause tidies up would, in principle, enable the block schemes with their tax advantages to involve non-voting shares, so I cannot understand the logic of the Government's earlier objection to the John Lewis clause.
The Bill is a positive measure. The more widely shares are owned in this country, the more successful we shall be. All the studies that have been undertaken here and in the United States show that companies with serious employee share ownership have succeeded markedly better than those without it. We welcome the new clause, which completes the necessary facilities for companies to put in the 10 per cent. block employee share transfers.
§ The Paymaster General (Dawn Primarolo)
I welcome the comments of the hon. Member for Arundel and South Downs (Mr. Flight) on the contribution that employee share ownership schemes can make not only to involving employees in businesses but to the success of the businesses. I do not want to go down the route on which the hon. Gentleman started and dwell on the definition of the difference between capitalism and socialism, but if he has a spare moment over the weekend, he should examine the proud history of the co-operative movement and the Labour party. He will then realise that social ownership, sharing and wealth creation have been at the heart of the Labour movement's philosophy.
I shall deal briefly with take-up of SIPs. So far, it has been satisfactory. To date, the Inland Revenue has approved the plans of some 337 companies. Of those, 527 160 never previously had an all-employee share scheme. That is well on track for meeting our aim of encouraging approximately 1,750 companies to adopt an all-employee plan for the first time. Forty per cent. of the approved plans are from unlisted companies and 45 per cent. are small or medium-sized enterprises, with fewer than 250 employees. I am delighted with that progress.
§ Linda Gilroy
I am interested in my hon. Friend's progress report. Does she hope and expect that there may be increased employment in those small businesses because the business has prospered?
§ Dawn Primarolo
Indeed, that is the hope and intention of all hon. Members in supporting the Bill, which was promoted by my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz). That echoes the point that the Member for Arundel and South Downs made about his direct experience in his company and his broad experience in the City. All the research demonstrates the contribution that these companies make to productivity and growth, and the Government place great value on that.
The broader question that hon. Members touched on earlier—[Interruption.] Bless you! I have just saved the soul of the hon. Member for Arundel and South Downs. That is a superstition; I should say, for the benefit of those not watching the debate, that the hon. Gentleman has just sneezed, and it is an automatic reaction from my childhood to be polite and say such a thing. I am digging myself into a hole here. I hope that I have now converted him to socialism.
The campaigning and information provided by the Inland Revenue, including the roadshows that have been undertaken with those in the industry, are contributing to the successful take-up of share investment, and I hope that they will continue to do so.
§ Mr. Gareth Thomas
Does my hon. Friend not think that there will be a role for Members of Parliament in the campaign on the benefits of employee share ownership, following the passage of the Bill, to celebrate not only the benefits of the Bill but the wider benefits of employee share ownership? I am sure that she will have confidence that that could happen on this side of the House. I see the hon. Member for Tunbridge Wells (Mr. Norman) sitting behind the Conservative Front-Bench spokesman. I understand that he used to be a director of Asda. Perhaps he will want to intervene on the Minister to say how he thinks his side will champion employee share ownership.
§ Dawn Primarolo
I urge all hon. Members to view the Inland Revenue website, which lays out the details of the share incentive plans and the benefits that they can bring to companies. I am sure that the hon. Member for Tunbridge Wells is aware of those and plays his part already in encouraging companies to be productive, to grow and to employ more people; he already has a certain reputation for that.
In Committee, I offered to work with my hon. Friend the Member for Edinburgh, North and Leith to table a further beneficial amendment to the Bill. The new clause eliminates the possibility of share incentive plan trustees 528 having to pay tax on shares secured with the benefit of the early corporation tax relief during the 10-year period they have to award the shares to employees.
Under the current share incentive plan rules, tax is charged on dividends received by trustees. In the case of shares that are readily convertible into cash, the trustees will be charged income tax if the shares have not been awarded to employees within two years. For shares that are not readily convertible into cash, tax will be charged if they have not been awarded within five years.
In the same way, trustees may also become liable to tax on capital gains when they award shares to their employees. Again, if the shares are readily convertible into cash, and they are not awarded within two years of their acquisition, capital gains tax may be charged. If the shares are not readily convertible into cash, the trustees may become liable if the award takes place after five years.
The new early corporation tax deduction allows the trustees 10 years in which to award to the employee beneficiaries the shares acquired with the benefit of the deduction. This would not work well with the existing charging rules, to put it mildly. Tax charges arising after two or five years would reduce the benefit of the corporation tax relief. Smaller companies trying to fund the transfer of shares into employee ownership would be particularly badly affected.
I think that it was my hon. Friend the Member for West Bromwich, East (Mr. Watson) who asked whether this provision was another way of ensuring greater take-up of share incentive plans. The amendment secures the benefit that the Bill seeks to provide, because it protects the interaction with the rest of the tax system.
I am pleased to support the amendment, because it will remove this awkwardness. In wishing to see the Bill progress, the House would be a little concerned—I put it no more strongly than that—if we passed the Bill, only to find that the capital gains tax system clawed back what had appeared to be an award of benefit to encourage share incentive plans. As soon as we realised that that was a possibility when we checked the Bill again, I suggested, in Committee, that we should table this amendment. I apologise that we were unable to deal with this in Committee, but it is important that we do so now. The amendment will extend the tax exemptions that share incentive plan trustees now have for two years or five years to 10 years, to match the period allowed for the distribution of shares acquired with the new relief.
The new clause makes three changes to the existing legislation. I apologise for the fact that it is a rather complex clause, but that is necessary to ensure that we deal with this matter properly. The first change is to the rules in paragraph 88 of schedule 8 to the Finance Act 2000, and concerns the exemption for dividend income. The new clause extends the period from two or five years to 10 years for all shares acquired with the new corporation tax relief.
The second change is to the rules in paragraph 98, exempting the trustees from capital gains tax on plan shares that they hold. Again, a change is required to extend the period from two or five years to 10 years in the case of all shares acquired with the benefit of the new corporation tax relief. These exemptions require rules for identifying the plan shares in respect of which the 529 exemptions are to be claimed. So the third change requires plan shares acquired under the new corporation tax relief to he identified separately from all other plan shares.
We estimate that the cost of the new clause is likely to be negligible to the Government, although, as I have tried to explain, without it there might have been no cost because we would have recouped it, but that was not our intention. We believe very few share incentive plan trustees are likely to be holding shares beyond the two or five years which give rise to charges on capital gains and dividends under the normal rules.
Finally, it falls to me as the Minister to confirm to the House that the Bill, as amended, is compatible with the European convention on human rights. I therefore commend the new clause to the House.
§ Question put and agreed to.
§ Clause read a Second time, and added to the Bill.
§ Order for Third Reading read.10.30 am
§ Mr. Lazarowicz
I beg to move, That the Bill be now read the Third time.
Today's proceedings are the end—or rather, this is the beginning of the end—of a very long process, stretching back to June of last year when I decided, in my enthusiasm after the general election, to enter the ballot for private Members' Bills. As a new Member, I did not fully appreciate the task that I had set myself when I drew a high place in the ballot, but it has been a rewarding experience and I have learned a lot about parliamentary procedure and the passage of legislation. It has also been illuminating for me to learn the degree to which Back Benchers can influence the legislative process—and the strict limits on their doing so.
The fact that the Bill has reached this stage is testament to the staunch support that I have received from a large number of organisations and individuals with an interest in promoting wider employee ownership in the United Kingdom. As we heard from the philosophical exchanges earlier, the approach to employee ownership comes from a number of different perspectives and traditions. The wide interest is to be welcomed, and I am glad that, as well as being of value in itself, the Bill has been a useful way of highlighting the employee share ownership movement to a wider audience, as well as to Members of this House.
Although support for the Bill has been most evident among Labour and Co-operative Members, many of whom are present in the Chamber today, it exists also among some Opposition Members. I am glad to see the hon. Member for Tunbridge Wells (Mr. Norman) in his place; he has supported such a Bill in the past and was unable to be here on Second Reading. Hon. Members from other parties are also present.
Support for the Bill from Ministers and officials in the Treasury and the Inland Revenue has been crucial. I would have had to say, even if it were not true—but it is—that their support has been helpful and, indeed, essential in getting the Bill to this stage. It has been productive for me in so far as I was involved, and those advising me on the Bill have been in contact with the Revenue on many occasions.
530 Third Reading is not the time to go into great depth about the detail of the legislation—
§ Mr. Lazarowicz
My hon. Friend tempts me to do so. In matters involving the complexities of tax law, it is not advisable to go into too much detail; otherwise hon. Members who have joined me in the Chamber might decide to take a short break from our proceedings.
Let me say a little in broad terms about the Bill's provisions, to bring hon. Members up to date with some of the developments in Committee and to paint the full picture of what the Bill seeks to do. I also want to set out the wider context in which the Bill has been introduced.
The Bill can be summarised as consisting of three main provisions. The first gives a clear pointer, in the share incentive plan, that employees can elect the trustees of the trust that holds the employee shares. It is not a compulsory requirement; no one is forcing companies, or employees, to have the trusts managed by employee representatives if they do not want to. However, the provision makes it possible for a number of the trustees to be employee representatives.
We debated whether the clause was absolutely necessary, and some officials believed that such an arrangement was possible under existing rules. However, the Bill's supporters felt that it was important to make it absolutely clear in legislation that such appointment of trustees by the employees was competent within the legislation, that it would not be challenged and that tax concessions would not be at risk. From their experience from talking to people who were interested in going along this route, businesses and even officials had responded that arrangements in which employees were involved in appointing trustees were at least questionable. If one is engaged in setting up a structure for a company that one wants to last for a long time, one does not want to risk a challenge at a later stage from the Inland Revenue; one wants to he sure of what one is doing from the start. That is why this provision was regarded as so important.
§ Mr. Lazarowicz
My hon. Friend has the ability to foresee exactly the points that I am about to make. Once again, he has helped me to move on to my next point. I thank him for that assistance.
Numerous case studies have shown that the most successful results arising from employee share ownership are where employees have real involvement and participation in the non-financial as well as the financial aspects of share ownership and, as a result, feel a greater sense of ownership not just of the shares but of the whole company structure, ethos and direction. Appointing employee trustees can be an extremely effective way of achieving that. It is also to be hoped that, as a result of such involvement by employees in the culture of a company, the wider objective of increasing productivity, which is a main objective of the Government but one that 531 the whole House would endorse, is much more likely to be achieved, particularly when the non-financial aspects of ownership are supported and encouraged.
§ Mr. Gareth Thomas
Is not my hon. Friend being a tad too modest about the benefits of employee participation? There is considerable evidence to suggest that genuine employee participation in the running of a company brings much greater benefits, and those companies are more successful on average than companies that have no active employee participation.
§ Mr. Lazarowicz
My hon. Friend is right and in a moment I hope to come to some examples of concrete improvements in the performance of companies that have taken that route.
The clarification of rules that encourage the appointment of employees as trustees of the trusts that hold the employees' shares is one important provision of the Bill. The second, even more significant, provision is the way in which the Bill seeks to support the position of companies, and particularly the owners of businesses, that want to make a significant move towards employee ownership. The provision assists that change by allowing corporation tax relief to be made up front where a significant block of shares—10 per cent. or more—is transferred to an employee trust.
As we heard in our earlier debate, such relief is currently available only when the shares are transferred to the individual employees under the scheme. However, there is plenty of reason to believe that, in many cases, the requirement as provided for in legislation discourages businesses from going down that route. A few months ago, I attended an interesting conference organised by the Scott Bader company and a number of presentations were made by companies involved in that area.
It was pointed out, for example, that the owner of a business who wants to transfer ownership to his or her employees, and who recognises the value of involving employees in that way, might want to conduct the transfer gradually, perhaps to retain some interest in the running of the company in future years. After all, if the business had been built up over many years, it would be unsurprising if the owner did not want completely to let go of the reins of control on day one in the process. However, such a person would find that the gradual transfer of shares is not encouraged by the current regulations. If they took the route of transferring the shares initially to the employee trust, they would be hit by a large corporation tax bill at that stage of the process. Clearly, that is a great inhibitor to such transfer of business ownership.
In some cases, the transfer of shares from the current shareholders to an employee trust may require a certain degree of financing by the employees themselves. Employees are often asked to make a certain contribution towards the purchase of the shares. Again, they might not be able to provide the necessary finance from day one. The current provisions ensure that, if the shares are held in the trust for a period sufficient to allow them to accumulate the funds necessary for acquisition, the shares' transfer to the trust does not attract corporation tax relief at the start of the process. That can obviously 532 inhibit the transfer of shares in the first place, so a very important aspect of the Bill is the way in which corporation tax relief is allowed up front.
The Bill also contains the important qualification that the shares must at some stage be transferred from the employee share trust and to the individual employees. There was some discussion about this matter among hon. Members, Ministers and officials. Views were expressed in some quarters about organisations in which it might be desirable to hold employee shares in the trust indefinitely and allow a block to be maintained in the trust's ownership all the time. A strong view was expressed to the contrary, and I can see its strength, which is why the Bill was amended in Committee. It was important to ensure that the shares are eventually distributed to employees, precisely to maintain the link between productivity and employee benefits.
In my view, the Bill makes the right compromise between those two factors. It allows the shares to be held by the employee trust for a considerable period, but also requires eventual transfer by providing that 30 per cent. of the shares acquired with a payment in respect of which deduction is made be distributed under the share incentive plan within five years. The balance should then be distributed within a further five years—10 from the initial acquisition—and the Bill also provides that if the distribution does not take place within those limits, the deduction will be withdrawn and a charge to corporation tax will follow.
I am grateful that the Revenue and the Government were happy for the Bill to provide that if all the shares in question are subsequently distributed, the deduction will be reinstated at that time. That provision allows the tax benefits to be reinserted if the transfer cannot for any reason be completed within 10 years of the initial acquisition. The Bill also contains provisions to prevent double relief and allows for the various concessions to be withdrawn if the Inland Revenue withdraws approval of the company's share investment plan. It also contains various formal and anti-avoidance provisions.
As hon. Members who have followed the Bill's progress are aware, it could have contained a little more. As the hon. Member for Arundel and South Downs (Mr. Flight) mentioned, concern was expressed in some quarters about the clause that has come to be known as the John Lewis clause, and which was removed in Committee at the Government's request. It was designed to enable companies controlled by an employee trust and/or a charitable trust on the employees' behalf to set up a share incentive plan from which ordinary shares could be distributed to individual employees. Unsurprisingly, there was considerable support for the provision among employees of the John Lewis Partnership, but it was also supported by hon. Members in all parts of the House.
I fully appreciated the Government's concerns about the way in which such a provision might operate in practice and their view that there would be tax-avoidance consequences that had not been fully appreciated by those who drafted the Bill on my behalf. For that reason, I was happy to accept their concerns as valid. As hon. Members will know, my hon. Friend the Paymaster General gave a helpful commitment on Second Reading tocontinue actively to consider whether there are other ways of extending the share incentive plans to trust and employee-owned companies that wish to use the plan as conventional companies do, 533 in ways that preserve the aims of improved productivity and do not allow scope for abuse."—[Official Report, 18 January 2002; Vol. 378, c. 580.]I welcome that commitment, and I am sure that it will be welcomed throughout the House. I know that it is welcomed by the John Lewis Partnership. Many of the organisations that are interested in this matter intend to follow up with the Government and the Revenue that commitment, which my hon. Friend was happy to make.
In some respects, the provisions in the Bill might be considered relatively limited, but in my view they are important none the less. They will give a clear boost to any company that seeks to establish the principle of employee share ownership firmly at the heart of its corporate ethos. They are also being introduced at a time of great cultural change for business. Traditional ownership structures are ripe for change and many businesses are now recognising the benefit in productivity terms of participation by employees in the ownership and running of firms.
The changes that the Bill seeks to introduce go alongside much other work that is taking place elsewhere. Some hon. Members may be aware of the excellent contribution to employee share ownership issues made by the work that the special share taskforce, consisting of various experts, has been undertaking along with the Revenue. I hope that measures such as those in the Bill will further encourage those working in this field.
The Bill should be seen not in isolation, therefore, but in its wider context of greater movement towards employee participation in both the ownership and management of firms. There is a wide range of types of financial participation by employees in the ownership of businesses. They include direct employee ownership, workers' co-operatives and simple profit-sharing schemes. Employee share ownership schemes themselves can also perhaps be divided into two types. The first is the narrow-based scheme that is limited to only a small percentage of the work force—typically the senior management. Secondly. the type of scheme that I want to promote and that the Bill is designed to encourage is the broad-based scheme that can be opened to 80 per cent. or more of employees, or indeed to the entire work force.
It is that type of broad-based involvement of employees in the ownership of businesses that presents an exciting opportunity for business in this country. That is why I hope that the Bill goes some way towards encouraging that trend. Notwithstanding the relatively limited take-up of some such schemes, in comparison with our European neighbours and partners, the UK is the leader in broad-based share schemes.
The European Foundation for the Improvement of Living and Working Conditions recently carried out a study of 2,500 businesses in the European Union. It found that the United Kingdom was the leader in these schemes, followed by France, the Netherlands and Ireland. It also found that in the past decade there had been an increase in the number of schemes in those EU states, although profit-sharing schemes remained much more widespread.
§ Mr. Connarty
I am very buoyed up by my hon. Friend's comments about the position of the UK, but is he sure that that analysis of the share ownership spread is not similar to the analysis of wealth increases, in that because many people at the top have become richer it looks as though people have done much better across the spectrum?
534 Since the last Government's privatisation programme, large tranches of share options have been handed out to Members. One Member who is present was formerly a director of a company—in fact, she was the head of it—and probably benefited from the large tranches that went to the board. Could not such factors distort the proportion of shares going to the work force on the shop floor?
§ Mr. Lazarowicz
My hon. Friend is right to be sceptical about any over-simplistic statistical comparison, but I do not think his fears are justified. If he wants to pursue the matter I shall be happy to give him a copy of the comprehensive report, which will doubtless allay those fears.
Nevertheless, my hon. Friend may be right to express concern. The survey showed that, both in the UK and in other EU countries, it was often the larger companies—particularly those in the financial and service sectors with a large proportion of white-collar workers—that had implemented employee share ownership schemes. I hope that the Bill will go some way towards extending the benefits of the share incentive plan to smaller businesses.
§ Mr. Watson
Could not some of the older industries—I am thinking of small and medium—sized engineering firms in my Black country constituency, for instance—benefit as much as, dare I say, some of the greenfield newer technological companies in the information technology and communications sector? How can we promote the Bill to the more traditionally run companies?
§ Mr. Lazarowicz
My hon. Friend makes a good point. I know that he has contacts with business in his constituency. It is possible that, as others have suggested today, Members themselves could play a part in encouraging awareness of the Bill among businesses in their constituencies.
There is strong evidence that employee share ownership has a positive effect on business productivity. There are examples of that in both the EU and the United States. As the hon. Member for Arundel and South Downs pointed out, the productivity of companies with such schemes is about double that of companies without them. For instance, a £100 investment on the FTSE index in 1992 would be worth only £186 today, while the same investment in a company in the employee ownership index, with more than 10 per cent. of capital held by employees other than directors, would be worth £370.
Another recent study, by Conyon and Freeman, shows that while UK companies giving shares only to directors or senior managers experienced an increase in productivity, companies that went further and spread share ownership to all their employees achieved a productivity boost of nearly 50 per cent. more. Similar studies conducted in the US show that the increase in sales, employment and total sales per employee in companies with employee share ownership schemes is between 2.3 and 2.4 per cent. per year above what would have been expected in the absence of such schemes. The US studies also confirm that the companies experiencing the highest productivity gains combine elements of both ownership and participative management. That bears out something said earlier by my hon. Friend the Member for Edmonton (Mr. Love).
§ Mr. Love
My hon. Friend made a comparison with other European countries. We could also make a 535 comparison with the United States, where share ownership is much more widespread than it is here. I think that is partly due to widespread cynicism among ordinary UK employees, engendered in part by the privatisation programme of 1980s and 1990s. Does my hon. Friend agree that if we could convey the benefits of this kind of share ownership to employees rather than directors, we too would see a widening of share ownership?
§ Mr. Lazarowicz
Yes—and the benefits could extend to entire communities. They should certainly not be restricted to directors.
Let me now give an example that may answer a question put by my hon. Friend the Member for West Bromwich, East (Mr. Watson). Earlier this week I was contacted by David Erdal, executive director of the Baxi Partnership Limited, which is wholly owned by the Baxi Trust. The Baxi Trust has a substantial sum that it intends to use to encourage the growth of employee share ownership. Mr. Erdal told me that his organisation had recently invested £1.3 million in helping Woollard and Henry, a specialist engineering company in Aberdeen employing 26 people, to transfer shares from retiring owners to employees. He said that if the Bill had been in force, Baxi would have used the share incentive plan to buy a significant proportion of the shares, which would have greatly facilitated the financing of the buy-out.
If the buy-out had not gone ahead, the consequences for the company and indeed the area would have been dire. The only alternative to the proposal to finance an employee ownership scheme was a trade sale to a competitor who would have had no interest in maintaining the Aberdeen operation. That would probably have led to a rundown of the operation, and unemployment for the workers. The employee buy-out anchored the company in the local community, allowing it to generate extra wealth through the productivity improvements accompanying employee share ownership and to spread that wealth in the community. Over time, each employee will amass a significant amount of capital. Because of the financial strength of Woollard and Henry and the Baxi Trust, employees' savings are not put at risk.
There is a lesson to be learned from the success of the buy-out. The Baxi Trust has now been contacted by a number of companies interested in achieving a similar buy-out. In each case the aim is to use the share incentive plan as part of the financial structure. Mr. Erdal believes that the Bill will make partial transfers to employees, or complete buy-outs, much more likely. That will protect businesses and employees but also, crucially, will often help to support small and medium-sized enterprises that would otherwise be closed or run down. In so doing, the Bill may help smaller businesses, to which my hon. Friend the Member for West Bromwich, East referred, and the community as well.
It is useful to refer to the example of Wilkin and Sons, which hon. Members might recognise as the makers of Tiptree jams. The company is privately owned, has an annual turnover of about £10 million and employs about 170 people. It set up an employee benefit trust in 1989 to build up a substantial shareholding to be held on behalf of the employees. Indeed, that trust now holds 25 per cent. of the company's shares and it can benefit from the Bill's new, upfront tax reduction measures, which will make it 536 easier for it to buy shares from any shareholders who want to sell. Many of its shares remain in the hands of the Wilkin family.
Those are examples of businesses that may benefit from the Bill and thereby help to spread the employee ownership model from larger companies to many smaller and medium-sized companies in the UK. However, the context of the Bill is more than just encouraging the growth of employee ownership and share ownership, important though they are. It reflects a year of work in which the co-operative movement, of which I am proud to be a member, has made a genuine impact on this legislative process.
The support of the co-operative movement has been vital, not only for the Bill, but for the success of the Bill introduced by my hon. Friend the Member for Harrow, West (Mr. Thomas), which makes important changes to the regulation of industrial and provident societies and which I understand has passed through the House of Lords.
The success of my hon. Friend's Bill and of mine is a tribute to the support and hard work of the wider co-operative movement. I pay particular tribute to Peter Hunt, national secretary of the Co-operative party, and Matt Ball, the party's parliamentary officer, who gave advice and assistance on each stage of the Bill's passage through the House.
Support for the Bill is extensive and it has been shown in sectors far beyond the co-operative movement. Important backing has come from those involved in the employee ownership movement, and I thank in particular Ann Tyler of Job Ownership Ltd. and Graeme Nuttall of Equity Incentives Ltd., a subsidiary of Field Fisher Waterhouse, for their tireless support during lobbying for and drafting of the Bill. That work went far beyond any obligations that might arise from their posts or duties, and they have helped me to understand the minutiae of the tax legislation provisions to which the Bill refers.
I thank also Peter Townsend of Cobbett's solicitors and, above all, I pay tribute to the broad coalition of people and organisations that have backed the Bill and its aims. Many hon. Members across the House received hundreds of letters from members of the John Lewis Partnership in support of the Bill, which it has continued to back, even though the measures that might have been of direct benefit to it were removed in Committee. The partnership has continued its support because it recognises that the Bill is important not just for what it does, but for what it says about Government and public backing for employee ownership and involvement.
The Baxi Trust has been very supportive, as has the Scott Bader Company Ltd. and many mutuals in the financial sector. Standard Life, which is a major company in my constituency, supports the Bill, as do the Industrial Society, the Trades Union Congress and many consumer and co-operative societies the length and breadth of the country. The Arup group, Tullis Russell and many others were also part of the wide coalition of support.
The Bill is particularly significant because it reflects a revival and, indeed, a realignment of the co-operative ideal and philosophy, which have inspired Labour and Co-operative Members in particular, although I accept that they can be shared, to a greater or a lesser degree, by many Members across the House. We have heard about the co-operative movement's history, which I thought 537 went back to Rochdale in 1844, but my hon. Friend the Member for Brighton, Pavilion (Mr. Lepper) apparently makes a claim for Brighton in the 1820s.
§ Mr. Lazarowicz
Indeed. My hon. Friend reminds me of the movement's Scottish history. I am also grateful to my hon. Friend the Member for Dundee, East (Mr. Luke) for explaining the derivation of the term "sosh" for a co-operative movement in Dundee. I was aware of the term, but not of the derivation, so I thank him for that illumination.
Although the co-operative movement has that long, proud history, it is hardly a secret and it must be admitted that success has not, in recent decades—
§ Mr. Deputy Speaker
Order. Third Reading debates are about the content of a Bill. Diverting though this history may be, the hon. Gentleman is straying outside the rules of order.
§ Mr. Lazarowicz
I apologise for straying from the subject, Mr. Deputy Speaker, and I shall draw my remarks to a close.
The Bill seeks to link the employee share ownership movement and a host of other initiatives such as the profit motive, social commitment and consumer interest to encourage economic efficiency and support for business as well as support for building strong communities, especially in areas that have suffered from economic deprivation over the years. As was said many times on Second Reading, this is a movement whose time has come.
I congratulate the Government on responding to those calls by taking employee ownership further forward through their backing of the measure, and I thank those Members who are present today. I urge the House to support the Bill on Third Reading.
§ 11.8 am
§ Dr. Vincent Cable (Twickenham)
I want to add a few words of support for the Bill and warmly congratulate the hon. Member for Edinburgh, North and Leith (Mr. Lazarowicz), who introduced it. on getting so far. I am taking a private Member's Bill through the House and although I have not so far been troubled by amendments, let alone perilous negotiations with the Treasury, I know from my more limited experience how difficult it is.
I strongly support the principles underlying the Bill. It tends to be forgotten that the principles of employee share ownership are long-standing, but over the years it has been difficult for them to progress. I was born and brought up in the city of York, and my parents started their working lives on the shop floor—my father at Rowntree's and my mother at Terry's. Those liberal, Quaker-owned companies believed passionately in the principle of employee share ownership—getting the divvy was a major feature of the life of many working families in the city, as it often financed the annual holiday—and it created a distinctive approach to business.
There were few strikes, if any, despite the difficulties in changing manning systems and industrial structures, which would have created conflicts in other environments, and there was a wider impact in that the companies were 538 much more socially responsible. We try to legislate for social responsibility, but it was embedded in those companies' values.
Sadly, many of those companies have found it difficult to progress. The two in York were taken over many years ago, as the families were unable to retain ownership. Much of the idealism was lost, and the system wound down. Relatively few companies—I think Clarks Shoes is one of the few that continues—have been able to maintain those values on the back of a committed family owner. One of the lessons to be learned is that, if employee share ownership is to be sustained and grow, it must be embedded much more securely and not depend on the enlightened attitudes of one or two owners. It must be embedded in the system of corporate governance and in the tax system.
Share options are widely used to incentivise senior management. Some big companies have operated share ownership schemes with some success. Before coming to the House I was with Shell, which offered one of the more imaginative schemes that worked. The fact that the shares outperformed the FTSE for many years was a major incentive for people to join the company and to stay with it. People in the company understood the problems of the accounts. When it got into some difficulties in the 1990s and needed major restructuring, there was probably more understanding of what management had to do than there would have been had the employees not had a stake in the ownership.
Such schemes do work, so it is frustrating and disappointing that employee share ownership has not spread more. I welcome the initiatives that have been taken, initially by Lord Lawson and then by this Government, whose recent share incentive plan is a positive step forward. However, those initiatives are limited, and the value of the Bill is that it takes a few extra steps in opening up the share incentive plan to a wider group of people and companies. I am sure that the hon. Member for Edinburgh, North and Leith would acknowledge that the Bill is not revolutionary, because it does not make massive changes, but it represents a welcome increment.
As the hon. Gentleman said in his closing remarks, the Bill gives a small boost to mutuality. In the early and mid-1990s, the mutual movement was in retreat, but the position has been stabilised. The hon. Member for Edmonton (Mr. Love) has played a major part in that by pointing the way to practical initiatives that can be taken to strengthen mutual ownership. This Bill and the measure promoted by the hon. Member for Harrow, West (Mr. Thomas) are good, practical ways of making mutual ownership worth while.
Like the hon. Member for Edinburgh, North and Leith, I am disappointed that the problems of the John Lewis Partnership have not been addressed. My constituency draws heavily on the John Lewis Partnership. Our big retail department store across the river in Kingston is John Lewis, and in the past three years the town centre of Twickenham has been transformed by Waitrose, which has made a success of a store that defeated all the other supermarkets chains that tried it. We have satisfied customers and committed employees, who have lobbied me to see whether we can break this problem with the share incentive plan and its relationship to trust-owned companies. I am disappointed that that has not happened, 539 but the language from Treasury Ministers gives some encouragement. I shall take that back in a positive spirit, and I hope that it is followed through.
I should like to register my strong support for the Bill, and I congratulate the hon. Member for Edinburgh, North and Leith. I hope that the Bill completes its passage through the House.
§ Mr. Adrian Bailey (West Bromwich, West)
My association with the co-operative movement has been declared on many occasions in this Chamber. I was employed by the co-operative movement for many years. I have long been an evangelist for the principles that are embodied in the Bill.
I congratulate my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz) on introducing the Bill, and on piloting it through the labyrinthine processes that are necessary for a private Member's Bill to be successful. In doing so, he has had to work with the Treasury and get its acceptance of the implications of some of the clauses. That is no mean achievement for any Back Bencher, but for a new Back Bencher it is a significant success. The Bill shows that, even in these so-called cynical times of business management, it is still possible for a Back-Bench Member of Parliament to introduce significant legislation.
The Bill is simple in principle, but complex in practice. When I read the explanatory notes on the clauses, I wished that there were explanatory notes to explain the explanatory notes. In spite of those complications, which were lucidly explained by my hon. Friend, parties have been signed up to this simple principle for a number of years; it is the recognition that, to get the best out of employees, they have to have a stake in their company. That stake should not be confined to the payment of wages for their weekly work, but should involve a mechanism that enables them to benefit from the capital growth in the company to which they are committed.
There is also considerable evidence to show that when that stake is extended and employees have some say in the management of the company, its productivity, output and growth are even better. I am old enough to remember the days in the 1960s and 1970s when industry was dominated by an "us and them" attitude—the underlying belief that the interests of ownership and labour were irreconcilable. We all know what impact that had on British industry, and the reputation that this country had for strikes, low productivity and low economic growth. The Bill reflects the change in culture that has taken place since then, and it promotes a change in culture that few of us would have dreamed of 10 or 15 years ago.
On Second Reading, it was interesting how many Members read out letters from employees of the John Lewis Partnership—a company oft cited in this debate—and other companies that have adopted such management structures, principles and ownership. There could not be a clearer demonstration of enhanced commitment than that shown by those employees to their company. Many employees of the John Lewis Partnership who wrote to us recognised that, even though the Bill may not in the end be relevant to their specific interests—and irrespective of their own self-interest—their work and experience in the company encourage them to believe that this practice is good for everyone and should be promoted.
540 The problem is that, for far too long, companies such as the John Lewis Partnership and Scott Bader have been regarded as little models of a different culture within industry, and looked upon almost as oddities and not part of the industrial norm in our economy. Too few owners of businesses, employees and trade unions have been prepared to consider the culture that has developed in those companies to see what relevance it has for other industries. That has been changing. I compliment the former Tory Government on beginning to adopt that process, and particularly the current Government on the way in which they have developed it. I see this legislation as—I was going to say the culmination but I hope that it will not be the culmination of the process. I hope that future legislation will do even more, but the Bill is certainly a major step towards improving the culture in industry and promoting democratic participation and management, with all the economic benefits that go with it.
My hon. Friend the Member for Edinburgh, North and Leith went into some detail about the surveys on companies that adopt these particular principles and the economic benefits that have been derived. I will not go into them in detail, but in the United States, where employee share ownership is quite widespread, there has been a lot of research and all the indications are that there are marginal improvements in productivity when employees have just a capital stake in the company, and significant improvements in productivity when they have both a capital stake and some say in the management of that company. Studies both in Europe and in the United Kingdom substantiate the findings in the United States.
This is one of those rare Bills that benefits everyone. There are advantages for all. There are advantages for employers in gaining upfront tax incentives to put money into trusts for the purchase of shares for employees. I think that by now they can be confident that improved commitment, productivity and output will be generated as a result of this Bill.
The Bill provides an incentive for employees because they know that, by working within this structure and being part of it, their benefits from the company are not limited to the wages that they get at the end of the week. They know that if they do that little bit extra and come up with ideas that may be adopted, in the long term, they will share in the benefit to the company that will accrue. That is obviously part of the underlying reason why such companies have done so well.
The Bill also gives employees a share in the challenges that a company faces—the market—and the problems that have to be worked through in any successful company. It gives them confidence and an insight into investment. No longer will people regard themselves just as employees who spend their money and play no part in the capital wealth-creating process of industry. They will be part of it, and they can use the experience that they gain in other areas to invest in other ways.
Above all, the Government, the country and the economy will benefit from the surge in productivity which, on all the evidence that we have, should take place as a result of this measure. I am told that we are in advance of our European neighbours. I hope that, arising from this legislation, schemes will be adopted elsewhere. and we will see the benefit feeding through into our economic performance, which will benefit everyone.
541 I hope that the Bill marks a surge in this type of ownership. A number of people have raised the issue of how we advertise it and get companies to sign up to it. I was encouraged by the figures provided by the Minister, which show that 45 per cent. of share incentive plans were from small and medium-sized enterprises. In constituencies such as mine of West Bromwich, West, the huge major employers have disappeared. The backbone of the economy in West Bromwich is small and medium-sized enterprises. Indeed, if we look at the proportion of the national product generated by them, we realise that it is very high. With this legislation being so beneficial and relevant to smaller businesses, I hope that it will have a disproportionate effect on output in that particular sector.
There are big issues of how to enlighten local companies about the potential benefits that will accrue from the legislation. Members of Parliament have an important role to play in their day-to-day contact with companies. The Government have an important role to play in promoting it. Those among us with business contacts must also play their part.
I have campaigned for 20 years for the adoption of principles such as are embodied in the Bill. It is a major step forward. I am pleased that there appears to be a high degree of cross-party support for it. I hope that everyone will go out to ensure that it is translated into real benefits for our industrial structure, and that the whole economy benefits as a result.
§ Mr. Flight
I congratulate the hon. Member for Edinburgh, North and Leith (Mr. Lazarowicz) on steering this Bill through successfully, and pay tribute to the speech by the hon. Member for West Bromwich, West (Mr. Bailey). Most hon. Members share the same ground. I thank the hon. Gentleman for his efforts over the past 20 years in promoting wider employee share ownership, and for his kind giving of credit to the efforts of the last Conservative Government.
The hon. Gentleman made the point about small and medium-sized companies, which the Bill is really all about, and which are the economic backbone of the country. Its application is reasonably limited and there is a separate issue as to how to achieve employee share ownership in larger quoted companies, as my hon. Friend the Member for Tunbridge Wells (Mr. Norman) did in his stewardship of Asda. I hope that he may have something to say on that subject in due course.
While I was pleased to hear from the Minister that the number of companies that have applied for SIPs is up—to 330, I think she said—overall it has been a bit slow going. As I understand it, the number of employees covered by employee share ownership plans—ESOPs—has been fairly static for three years. The National Centre for Employee Ownership reported that about 8.5 million employees were beneficiaries of ESOPs and stock bonus plans in 2001, the same figure roughly as in 1998, so I hope that the Government will put their efforts where their mouth is and give employee share ownership a greater boost.
I am sorry that the Minister is not here. I would have hoped to hear her give a pledge that the John Lewis issue will be solved in another way. I am still not clear whether the Government's objection to the proposed provisions 542 was a tax objection—that it could have been used more widely in potential tax-avoidance schemes—or whether their objection was to the potential use of inferior share classes. It seems wrong in the case of companies such as John Lewis, with employee share schemes set up by charitable trusts, for shares not to be eligible for distribution to individual employees under SIPs, with the resultant tax benefits for both the employees and the company.
I return to the theme of making it all succeed, so to speak. It is a powerful mixture of employees feeling part of the business, being involved in it, being involved in decision taking, having their hearts in it, feeling as if they are employee owners, which is my phrase; and businesses being well led.
The hon. Member for Edinburgh, North and Leith referred to the Baxi Trust. I remind hon. Members that the Baxi company, which is owned by an employee trust, has now become fairly commercial, having been somewhat unsuccessful as a result of fuzzy strategic thinking and not particularly good management. It is crucial for a company to have good, well-motivated management as well as involving the work force in the company.
§ Mr. Lazarowicz
I am grateful to the hon. Gentleman for giving way. Obviously, I am aware of the history of the Baxi Trust. Does he agree that although employee share ownership will not be suitable for all companies, it is more likely to produce the benefits that I highlighted in my speech.
§ Mr. Flight
Yes, that is axiomatic. However, there is a point to be made about employee share ownership. In my personal experience, we made widespread use of the approved share option scheme and it is quite mistaken that that remains limited to a maximum of £30,000, particularly for medium-sized companies that compete with large companies for top management, as we did. It afforded a way of paying regular salaries that were significantly below what top managers could obtain from a large competitor, but locking them into the business with the incentive of a significant equity upside if the business succeeded. It is well overdue that that figure should be reviewed and increased. I should point out that the last Conservative election manifesto included a commitment to increase it to £100,000 for companies with capitalisation up to £100 million. We are talking particularly about small and medium-sized companies that need to compete for good management but may not be able to pay for it on an ongoing basis—and for locking them in likewise.
Without causing offence, I should say that one of the saddest commercial non-successes in my lifetime has been the co-operative movement. When I was a boy, my grandparents and parents participated actively, but the movement faded away because it was not a commercial success. Success requires good management as well as the co-operative spirit.
§ Mr. Bailey
Does the hon. Gentleman agree, however, that although some sectors of the co-operative movement have withered away, it is still a major organisation? It is the largest farmer in the country, a major retailer, one of 543 the largest funeral operators and a bank. Although there is an element of truth in what the hon. Gentleman said, he did not give the full picture.
§ Mr. Flight
I did not wish to cause offence. I grant that the co-operative movement still has the opportunity to become a big success in some sectors. However, the hon. Gentleman would agree that in food retailing, for example, commercial supermarkets dominate the market and the Co-op missed a great opportunity. The formula for success includes employees feeling that they are part of the business and able management who potentially have a larger ownership stake in it.
The hon. Member for Edmonton (Mr. Love) felt that employee share ownership had been damaged by privatisation. The majority of privatised utilities have been successful and their employees have shares in the business. Some have sold them, but a hell of a lot have not and are happy with the situation. However, recent events have been damaging. Hon. Members will recall that Railtrack employees used their dividends to invest in more shares just a few days before Railtrack was put into administration and it is increasingly apparent that the intent of the then Minister was to do just that. I have raised the matter with the Financial Services Authority because, under normal circumstances, that would have been an offence under the Financial Services and Markets Act 2000. The FSA is of the questionable legal view that Ministers have Crown immunity, but the Government should remember that in the privatised utilities sector huge numbers of staff are share owners as well as being involved in pension schemes and so on, and if there is no legal obligation to act in accordance with the Financial Services and Markets Act there is jolly well a moral obligation so to do.
§ Mr. Lazarowicz
Does the hon. Gentleman agree that the real lesson of the Railtrack experience as far as employee share ownership is concerned is that had employees been given more shares earlier on and been able to deal on a collective basis, they might have had more influence on the management of Railtrack and therefore its direction, and life could have been very different?
§ Mr. Flight
I know that you will stop me very quickly, Mr. Deputy Speaker, if I go on for more than a second in response to that question. There was significant employee share ownership. In essence, the problem with Railtrack affects the whole public-private partnership structure in which businesses have safety requirements and depend on subsidies from central Government, and there is sometimes a lack of clarity about their obligations. Time will tell, but the biggest issue about Railtrack was that the management responded to Hatfield with massive expenditure and effort which eventually led to the Government being able to put the company into administration. However, that is an aside.
My main point is that there is plenty of employee share ownership within the privatised utilities. Most of it has been successful and has made employees much more active participants in their operations. Would there were a way within the public sector to achieve the same participation that employee share ownership has brought and can bring within the private sector.
544 In conclusion, I welcome the Bill and repeat my request to the Government to say whether or not they will find a way of sorting out the Peter Jones, or rather John Lewis issue—hon. Members can tell which I prefer—which in part the Bill was about. In fairness, it would be a great pity if the Bill were on the statute book and the Peter Jones situation remained unresolved.
§ Mr. Iain Luke (Dundee, East)
I rise as I did on Second Reading to support the Bill into which my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz) has put a great deal of effort to get the provisions contained in this slim document into law. I pay tribute to the way in which he and his staff have handled the Bill. Having shared an office with him, I know that he has worked extremely hard. I also gained a unique insight into what goes into presenting, preparing and promoting a private Member's Bill. It is my fervent hope that there will be a successful conclusion to his efforts and that, when the Bill becomes law, it will benefit those to whom its clauses seek to extend the possibility of profiting from the share scheme option.
As a new Member, I found the process instructive, educational and profoundly satisfying. In observing the progress of this Bill, participating in its brief Committee stage and serving on the Standing Committee considering the Finance Bill, which will conclude next week, I have been privileged to participate in Treasury law making in detail and in the round, and I have benefited from being able to see the bigger picture. Although the proposals are detailed and technical, the Bill has underlined for me how Parliament can have a beneficial impact on the lives of the ordinary people throughout the country whom we represent, as has being able to view at close quarters the help that my hon. Friend received from officials of the Inland Revenue and the Treasury, and from Ministers.
It has been uplifting to witness the official Opposition playing such a constructive part in supporting the Bill's principles and making pertinent and sound comment on how the detailed proposals could be improved. I have seen more evidence of that attitude from the hon. Member for Arundel and South Downs (Mr. Flight) during his excellent contributions on the Finance Bill, although there is one point that I want to take up with him. He says that companies such as his aim for profit, but he will surely agree that companies can have a range of different objectives, which often means that companies give up profit to satisfy social objectives. The hon. Member for Twickenham (Dr. Cable) mentioned his employment with Shell, a company that spends a lot of money on ensuring that the environmental issues that confront it are dealt with properly.
§ Mr. Flight
I am pleased to assure the hon. Member that capitalism is about a lot more than profit. As I see it, capitalism is about building wealth, and short-term profit often needs to be sacrificed. Building wealth is about many things, but the idea that capitalism is solely about profit is mistaken.
§ Mr. Luke
Perhaps we might describe the hon. Gentleman as the more acceptable face of capitalism in Parliament. Although some of the hon. Members who sit behind him might be less acceptable in that respect, I accept the tenor of his comments.
545 I am sure that this process will conclude successfully, with the Bill taking its rightful place on the statute book. It will extend the benefits, and encourage the spread, of employee share ownership to a much wider range of businesses. We must work to ensure that its provisions are well publicised and that there is greater take-up in the years ahead, building on the encouraging start since the improved concept was announced m the 2000 Budget. The useful and beneficial improvement to the SIP schemes introduced by the Government in that Budget has gone some way to encourage employees to hold shares in the company or group for which they work, and to use them for the collective benefit of all concerned.
The furtherance of the aims of the Bill has, I am glad to say, gained wide support that crosses the business and political divide, which fits well with the highly commendable aims of the Co-operative party and movement whose goals and activities acted as a catalyst for the Bill. The Bill is firmly anchored in the belief that it will help co-operative and mutual forms of economic organisation based on the principles of mutual ownership and democratic control. It represents another small step in the work of that excellent collaborative movement, which was formed as a party in 1917 to promote a stakeholder economy, a one-nation Britain, and to protect the rights of citizens as both consumers and employees.
The movement has a long history of consumer-employee involvement. Its example of co-operative effort here in the UK has been taken up by some 800 million co-operators worldwide. In a 1995 report, the UN estimated that the number of livelihoods throughout the world made secure by co-operative effort was approaching 3 billion—close to half the world's population.
The Bill fits well into the co-operative movement's work by promoting provisions that create fairer and more equal opportunities in the workplace for all employees. In a small but important way, it also supports a national economic strategy aimed at promoting worker co-operative action, and creates the potential for successful employee share ownership plans in future. That will, I hope, result in greater employee involvement in the running of the companies and businesses that employ them and provide them with the money—the wages—on which they and their families depend for a living.
The Bill would make it easier for employee trustees to gain a direct voice in the ownership and management of the business at which they work by facilitating the transfer of shares and allowing tax incentives for employee trusts set up by companies that want to take a significant step towards employee ownership. The new clause agreed this morning will help that process on its way to a significant extent.
§ Mr. Love
Does my hon. Friend agree that an important facet of the Bill is that the transfer of share ownership will be significant? Whereas under the ordinary SIP scheme the transfer can consist of any number—small or large—of shares, the Bill will facilitate the transfer of a significant number of shares to employees. I hope that all hon. Members support that aim.
§ Mr. Luke
I am happy to acknowledge that. Reference has been made to the involvement of small and medium-sized companies. I contend that in future, 546 substantial share transfers will help to ensure that larger companies do not indulge in the sort of footloose decisions on location that have so often blighted many areas of the country.
Without being coercive, the Bill as amended will provide companies that set up SIPs with more coherent guidance that elected employees may become trustees. It will also encourage employees and their representatives, giving them confidence to request representation on the trust body without fear of legislative uncertainty. That is without doubt the way to give employees a stronger sense of ownership, which will lead to better productivity and employee-employer relationships. Benefits will accrue to both shop floor and boardroom in companies that take up that positive and progressive type of organisational structure. Ultimately, that will bring them far closer together than they have ever been in the past.
As well as small and medium-sized companies, we must look for ways to extend share ownership schemes through the whole range of companies. I believe that once a company gets involved in that way, the decisions made within it will become more collective in character, and the community of workers will have a bigger say. It will become less likely that a company will move out of a town, or even the country, to reduce costs; instead, decisions will be made according to what best suits the workers and efforts will be made to continue production at the company's existing location.
We have been talking about participation in management and a collaborative mode of running business concerns. I hope that they will be extended far more meaningfully to other organisations, such as football clubs. The Bill offers the model of employee representation on a SIP trust, and I hope that that model will be extended to groups of football supporters who, through trusts and co-operative action, seek greater influence on the way in which their local football team is run both as a business and as a sporting concern.
The work of supporter directors should be encouraged. Supporters Direct was the result of a Government initiative. The hon. Member for Arundel and South Downs mentioned his efforts to create different forms of mutualisation. When launching the Supporters Direct initiative in September 2000, when he was the Secretary of State for Culture, Media and Sport, my right hon. Friend the Member for Islington, South and Finsbury (Mr. Smith), said:football and sport in general offers a fertile ground for the development of mutualisation".Let us hope that the example of big foreign teams such as Barcelona will be promoted as widely as possible in the United Kingdom. In Scotland, Glasgow Celtic, a team of national standing, has created a trust board on which my predecessor, John McAllion, sits. As well as encouraging more supporters to get more involved in clubs, perhaps the Bill will also help clubs that are companies to give players a stake by giving them shares rather than paying them vastly inflated salaries. That should increase players' productivity and give a better result at the end of the season for the money that the supporters have put in.
I hope that the House will forgive me for digressing into the sporting aspect of mutualisation. With the recent saturation coverage of football on the television, it is difficult to avoid the subject. I urged my fellow Scots to support England, in the hope that we would end up with an extra bank holiday—but without success.
547 I am happy to have made a modest contribution to the Bill's progress. My hon. Friend the Member for Edinburgh, North and Leith set out its aims clearly in January and said that he wanted to widen the application of tax relief on employee shareholdings in a greater range of companies. He said that he hoped to enable employee shareholders to play a greater role collectively in the management of the shares, and to make it easier for companies to transfer to employee share ownership schemes. Those are laudable aims and I believe that the Bill has gone a long way towards promoting them.
Ministers, the Treasury and the Inland Revenue have given a great deal of help, and it is clear that the Government are happy to support these efforts to give employees a greater stake in both their working lives and the way in which their workplace interacts with the community.
Although the provisions relate to the private sector, I believe that the Government can also do more to give a share to those in state employment in the running and management of the services that they deliver, as the hon. Member for Arundel and South Downs said.
The concept is not new. On leaving school, I was employed as a civil servant in the Inland Revenue. I was a tax collector in London for some time. As a union rep, I was involved in the Whitley councils, which I believe have now disappeared. The principle was to bring workers face to face with management. If the better productivity and employment relations that we have talked about in the private sector could be brought into the public sector, that would be a positive benefit. However, one step at a time is a good motto in this context.
I am sure that my hon. Friend the promoter will be glad, at the end of this debate, to know that his Bill has become an Act. I would gladly join the Co-op party if a member of it would give me a membership form—and slip me the fee. Despite my non-membership, I can safely say, as a long-term trade union member, that there has been a spiritual home for me and many like me. I follow the Co-operative party in believing that people will achieve more by working together than they can by working alone. By increasing co-operation, we will achieve a sustainable future for our economy and the businesses in it. I support the Co-operative party's efforts and those of my hon. Friend the promoter to bring about the empowerment of individuals and communities through this move towards more co-operative self-help economic initiatives.
The Bill rests on three major foundations. The first is enterprise, ensuring that we can continue to build a sustainable economy. The second is that we continue to promote empowerment, with a culture of citizenship and involvement in business decision making. The third is accountability, ensuring that we create a society in which business acts in a socially responsible way. There has been a lot of talk about corporate responsibility in this Parliament. I believe that the Bill will promote that concept, and I commend it to the House.
§ Mr. Archie Norman (Tunbridge Wells)
I cannot resist taking this opportunity to add my congratulations to the hon. Member for Edinburgh, North and Leith 548 (Mr. Lazarowicz) on promoting the Bill and steering it through all its stages in the House. Unfortunately, I could not be here for Second Reading, but he has demonstrated an outstanding grasp of the subject, and it is no doubt largely because of his perseverance and skill that we have arrived at a highly satisfactory and consensual resolution today. I also congratulate the organisations that have contributed to the Bill's success, through skilful lobbying.
I want to place it on the record that I have been an active practitioner of wide-scale employee share ownership. I would like to think that, when the hon. Member for Dundee, East (Mr. Luke) referred to me—I think it was me—as the less acceptable face of capitalism, he was doing me a minor injustice, but I shall take his remarks in the humorous way in which they were intended.
When I was chairman and chief executive of Asda, which is a much larger company than those that will benefit from the Bill but which provides an interesting example, we sought to change the whole ethos of the business, and one part of that process was creating a very large employee share ownership trust, which made shares available to more than 65,000 employees. I think that it ended up as the largest employee share ownership trust of its kind in Britain at that time. The benefits were substantial.
The effect of such share ownership schemes is entirely a function of the extent to which they rhyme with everything else that the management do and the way in which the company is run. Simply distributing share benefits to employees, particularly in an organisation such as Asda, which employs a very large number of part-time working women and so on, will have no effect whatever unless people are invited into the management process as well. One needs to create a culture in which ownership is part of the way of life and of the workplace community. We set out to achieve that, although this is not the time or place in which to say how that was done. However, we had the biggest employee suggestion scheme in Britain for five years—we received more than 40.000 suggestions—which suggests what sort of organisation has to be in place.
I congratulate the hon. Member for Edinburgh, North and Leith on introducing a Bill that is part of a broader change in approach to management in this country, which, as many other hon. Members have said, is leading other countries in western Europe. It reflects the fact that most good employers recognise that employees no longer come to work simply to earn a daily crust but because they want to do something worthwhile and belong to a socially responsible organisation that is seeking to help them achieve that and is prepared to listen to what they say. Their contribution is far broader than their immediate job definition within the organisation and helps to create a single-status business culture in which everyone is equally valued regardless of their role. Obviously, we recognise that people are paid differently and perform different roles, but that does not mean that they are not equally valued and respected for their worth and contribution to the company.
That is a much broader set of changes than some hon. Members have acknowledged. I accept the points that they made about the co-operative movement, which in some respects is a forerunner of share schemes and parts of which remain successful. Hon. Members also referred to mutual organisations, one of which, the Tunbridge Wells 549 Equitable, started out successfully in my constituency. Mutual organisations, too, partly reflect the ethos of the Bill. Fundamentally, however, we are looking at a change in attitudes to management in the boardroom and share schemes are part and parcel of helping to facilitate that cultural change. The more that we can push those ideas and that management approach and encourage smaller companies, industrial companies and so on to adopt them, the better.
As my hon. Friend the Member for Arundel and South Downs (Mr. Flight) said, there is no reason why share schemes should apply just to white collar employees in the financial services and so on. At Asda, most of the people whom we employ are part-time working women who have come back to work after bringing up a family; some of them are in their first job ever. Of course, we recognise that such employees are not well versed in the nature of the balance sheet, earnings per share and so on, but there is no reason why the company cannot make an effort to explain the relationship between financial performance and employee benefits. Such schemes require the company to do that and encourage that virtuous circle.
I welcome the idea that has been built into the Bill that employees can be trustees of share ownership trusts, which helps to bring employees into the management process and encourages feedback and involvement. The hon. Member for Dundee, East made a good point about public services. There is no reason why the idea behind share ownership cannot be extended to public service organisations. In fact, because they are often vocational in nature, they are susceptible to higher levels of employee ownership. A former colleague who is now chairman of the Royal Mail or Consignia has talked about introducing a shadow share scheme for Royal Mail employees, which may be a pioneering example of the way in which such schemes can be extended to the public services.
Finally, I welcome the Bill, which has tremendous support on both sides of the House and outside. However, a number of hon. Members believe that it should not be the final step in the process. I hope that, after today, the Minister will consider what more can be done to extend share ownership to accommodate the John Lewis point, which has been made on a number of occasions. It would he very sad after all the efforts that that organisation has made and its support for the process if it were left out in the cold. We also need to consider whether we can extend the benefits in the Bill to larger as well as smaller companies. Several hon. Members rightly said that small businesses are the backbone of their constituencies and, in many ways, the economy, but the 10 per cent. requirement effectively precludes such schemes from applying to larger companies with a high-value total shareholding.
There are changes to be made, but they are a matter for another time. We should extend the proposals so that large public companies in Britain such as Asda could benefit if encouraged to adopt such schemes. There would be other benefits too—not just employee motivation, but changes in attitude to boardroom pay. However, the Bill is welcome and the hon. Member for Edinburgh, North and Leith has done terrific work. I support the Bill completely as does everyone in the House. I hope that we can go on to consider what further steps can be taken in the same spirit.
§ 12.4 pm
§ Ann McKechin (Glasgow, Maryhill)
I support my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz) in his bid to secure this important Bill. The measure will play an important part in strengthening and extending the concept of mutual and co-operative ownership in all types of businesses, and will encourage a constructive partnership between employers and employees. The Bill shows the increasing sophistication of the mutual and co-operative principle.
Like many hon. Members, I am sure that our earliest memories of co-operative ownership are as children visiting co-op stores in our local towns and villages, and learning about the mysterious concept of the divi and, more importantly, the ability to quote one's divi number as readily as one's own date of birth. The basic principles and benefits of shared ownership could be readily understood by children barely of school age.
I was brought up in Paisley, a town steeped in the principles of co-operative ownership. We had co-op grocers, co-op butchers and co-op chemist shops, not forgetting the Co-op's ability to look after us from beyond the grave. In Paisley we even benefited from two full Co-op department stores, which both survived for a good number of years, even though they faced each other in the same street. One belonged to the Paisley Co-operative Wholesale Society and the other to the Paisley Co-operative Manufacturing Society. In a town famous for having a church to represent every schism of the Protestant faith, it is hardly surprising that for a very long time the community could support different retail co-operatives.
The reason those shops survived is that so many people, particularly the less well-off, depended on them and put their trust in them to assist in their basic requirements. No private organisation would ever be able to enjoy such a continued level of community support and trust. As the years have passed, the co-operative organisations have had to show increased management skills, innovation and technical expertise to allow them to survive in a complex and competitive environment. The remarkable transformation of the Co-operative bank in the past 10 years is just one example of how co-operatives can compete with large multinationals in the tough financial services market.
Despite those changes, the principle of shared ownership remains at the heart of co-operatives' enterprise. That concept of ownership deserves a strong and permanent place in our society, to ensure choice for consumers and to provide strong links with local communities and a different way of working which avoids the old-style class base.
For 10 years before I entered Parliament, I worked as a staff partner in a legal firm, which had about 40 employees when I left. Because of the specific nature of our work, no other form of ownership was available. There are obviously freedoms attached to partnership ownership, but there were also drawbacks. Many of our staff had skills that were in high demand, so staff retention was a permanent issue, particularly with a business growing year on year. We had no direct mechanism to offer them a real share in the business, which I believe would have acted as a substantial incentive to them to remain as long-term workers in the firm.
551 The use of annual salary increases or a one-off bonus does not have the same direct effect, when an employee is often not aware of the level of profit generated in a business. Shared ownership would also have changed the employer/employee relationship to allow a greater degree of consultation and a better spread of responsibility, making possible a greater appreciation on either side of the work of the other. The results would give a higher level of productivity, along with an improvement in staff retention and staff morale.
Even in today's world, with the increasing presence of powerful multinational companies that are often wealthier than entire nation states, many people are looking to the concept of mutuality and shared ownership to provide a new way forward that is more flexible and responsive to their wishes for a more satisfying form of work, allowing them to contribute, often in new and innovative ways, to the fortunes of the organisation for which they work, as well as having a direct share in the rewards.
For partnership to deliver, it must be genuine. We as parliamentarians need to put in place the appropriate structures to ensure that partnerships are demonstrably real and equal. Collective shareholder trusts could signify a shared interest in the long term success of the enterprise, while providing a collective voice at boardroom level for the members of such a trust—namely, the employees who generate wealth for the company.
This small but important piece of legislation will, I hope, significantly increase the attractiveness of employee share schemes, particularly for smaller companies where the current heavy administrative costs in forming a mutual ownership structure can be a strong disincentive.
Figures from a recent EU study showed that the organisations most likely to have some form of financial participation by employees are larger companies, as the hon. Member for Tunbridge Wells (Mr. Norman) said, with more than 5,000 employees, usually through the narrow-based schemes open to only a relatively small minority of workers, and firms with a high proportion of white collar workers.
I am certain that the principles of mutual ownership could be extended further to reach small and medium-sized enterprises, which form the bulk of employment opportunities in Britain and which, in many instances, are ideally suited to this type of scheme.
Take, for example, the small family-owned firm whose owners wish to devote less time to the day-to-day running of the operation, perhaps because they are retiring or want to work part time. This type of scheme offers a method of retaining a strong interest in their original enterprise while handing over more of the control and responsibility to their staff, thereby giving the company the advantage of continuity and stability, both internally and to their market and financiers.
By providing corporation tax relief up front for share distribution into an employee share ownership trust, and making it easier for employee trusts to elect employees as trustees, thereby encouraging a direct say in management and ownership for employees, the Bill goes a substantial way towards achieving the Government's ambition to double shared ownership. As many are aware, employee shared ownership is widespread in the United States, in 552 some cases involving large organisations with global markets, particularly in agriculture. A good example of that is Ocean Spray, the major exporter of cranberry juice. I believe that the cranberry is the United States only indigenous domestic fruit.
On a vacation a few years ago, I do not say that I was forced to, but I visited Ocean Spray's cranberry museum in New England where not only does one receive a full tour of the various agricultural methods used in harvesting the crop and its range of products, but one is made aware of its proud history of shared ownership and the success that that has brought the company. It is viewed as its strength and one of the main reasons why it has achieved a consistently high quality product, recognised throughout the world and able to compete in an aggressive market and to export world wide. Each of the farmer producers has a direct share in the future of the business.
Most of the recent research on such organisations in the United States has shown that this type of ownership, crucially combined with other means of active employee participation, has a positive impact on productivity and corporate performance. Such structures promote stability and encourage good working relationships by combating short-termism in management decision making.
As well as congratulating my hon. Friend the Member for Edinburgh, North and Leith—he has just left the Chamber, I am sure temporarily-on introducing the measure, the Government should also be commended on their support for the Bill and their encouragement of shared ownership, particularly in giving corporation tax relief up front and the share incentive plan introduced previously, providing important and essential financial assistance for greater flexibility in ownership structures. The new clause is accordingly welcome and I trust that the Bill will receive the support of the House today.
§ Ms Munn
Like my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz), I entered Parliament just over one year ago, and although most hon. Members once they have been here a while might expect to have had some influence on legislation, those of us who were fortunate enough to have been elected in the 2001 election did not necessarily expect to be having such an impact so early on.
Unlike my hon. Friend, I hesitated before putting my name into the private Member's Bill ballot. I was a bit daunted by the prospect of what it might mean, but having found out a little more about it I too had a go. However, unlike him, I was not lucky enough-or perhaps I was lucky, depending on how he now views it-to be drawn in the top 20. In reality, that is where the luck runs out, because it is difficult for ideas from Back-Bench Members to reach the statute book. Having closely watched the progress of two such Bills-those of my hon. Friends the Members for Edinburgh, North and Leith and for Harrow, West (Mr. Thomas)—there seem to be several key elements in ensuring that one's Bill has a better than average chance of reaching Third Reading and the statute book.
Choice of subject is important. My hon. Friend has had a long-term interest in this issue, and as we have seen today and during previous debates, he is supported in that by many hon. Members on both sides of the House. His attention to detail has also been important, as has the 553 support of organisations such as the Co-operative party and other worker co-operative interests. The Treasury's helpful assistance was also crucial.
I welcome the Bill, whose overall purpose is to encourage wider employee share ownership. We have heard a lot today about how it will do that. Hon. Members emphasised the importance of promoting the schemes to organisations in our constituencies and others with which we have contact.
The Bill has two key elements—first, the move to have employee representatives on share incentive plan trusts, and, secondly, as my hon. Friend the Member for Glasgow, Maryhill (Ann McKechin) said, allowing early corporation tax deduction on money provided by a company to a share incentive plan trust to buy a block of shares to transfer into employee ownership within 10 years. The first of those elements is crucial as regards how employee share ownership can help businesses to be more successful. In itself, the measure would not necessarily encourage wider employee share ownership. However, if employers look at what has happened in companies that have adopted such schemes—we have heard some excellent examples, not only from this country, but from the United States—they may be persuaded that giving their employees proper representation and an active voice can be beneficial to the business in many ways.
The second key element relates to allowing companies the financial incentives that they should rightly have, because the benefits of employee share ownership accrue not only to individuals and to the company, but to society at large, and it is right to have tax laws that support the development of such trusts.
Share incentive plans were introduced in 2000 after extensive consultation by officials working with an advisory group representing the whole range of interests that needed to be included. It included representatives of large and small businesses, the Trades Union Congress, share scheme experts and academics who are involved in designing the schemes. Perhaps that explains why some matters are difficult for some of us to understand. As we said earlier, the new clause initially appeared difficult; perhaps the involvement of academics explains that, or perhaps it is due to my being relatively new to this place.
The Bill means that take-up of share incentive plans will be more viable and attractive. We know that the measure has been well received, although perhaps take-up has not been as quick as we would like. However, I believe that the Bill will help matters to progress.
Hon. Members of all parties accept that the Bill is a good measure. We need to ensure that all types of businesses—co-operatives, mutuals or private organizations—have good corporate governance. To achieve that, it is important that shareholders take a long-term interest and do not look for short-term gains or benefits, perhaps from investments. Employee shareholder trusts can contribute significantly to the long-term vision that I advocate.
Many case studies show that most successful results arise from employee share ownership schemes whereby employee share owners are genuinely involved and participate in the non-financial elements as well as the financial aspects of share ownership. They thus feel a greater sense of ownership.
554 The Bill makes it easier for employee trusts that hold shares to elect employees as trustees of the shareholding. That crucial mechanism gives employees a direct voice in the business. They therefore do not benefit from simply having shares: they also have a voice.
It is appropriate for larger organisations to have employee share ownership, but it is easier for individuals in such organisations to believe that their voices cannot be heard. Giving trustees a voice changes their stake from an individual shareholding to a collective voice that can begin to achieve the results that everyone wants from employee share ownership schemes. The Bill ensures that employees' interests are represented, but it also convinces them that their individual shareholdings can give them a stake in the enterprise.
It is not only the company that benefits, as the hon. Member for Arundel and South Downs (Mr. Flight) said at the outset. The schemes help the company and improve the bottom line, but above all, they can enrich the experience of people's working lives. Different ownership structures may have different incentive structures and operational methods to achieve different levels of efficiency, but employee participation is important in generating company loyalty. As my hon. Friend the Member for Glasgow, Maryhill said, at a time of skills shortage and problems with recruitment and retention, encouraging employer loyalty and a long-term commitment to an organisation should benefit it.
The Bill will help in ensuring and enhancing employees' competence. Employee share ownership affects their motivation and commitment. Having such a commitment to the organisation can lead people to get involved in designing work that encourages the fullest contribution from employees so that the processes and procedures benefit the company.
Employee share ownership is, in itself, important, but these measures build on the inherent advantages by providing a mechanism for employees to have a collective voice and for their stake to be recognised through the appointment of employee trustees. I particularly regret the fact that my hon. Friend the Member for Edinburgh, North and Leith is not in his place at the moment, because I want to add my warm congratulations to him on steering the Bill through to this stage. That is an incredible achievement for a Member in his first year in Parliament, and I think that he will look back on this with some pride in the years to come. [Interruption.] Here he comes now.
This is particularly important for me because, like my hon. Friend the Member for Edinburgh, North and Leith, I am a Labour and Co-operative Member. He and I are the two most recently elected such Members, and we brought the membership of the Labour and Co-operative group in Parliament up to 29 members—its largest number yet. Perhaps we should put in for some of the considerations for minority parties that we heard about the other night in the debate on the reform of the House of Lords. I shall not pursue that issue today, however. I am heartened by the support that we have heard today on both sides of the House, and I congratulate my hon. Friend on getting the Bill to this stage.
§ Linda Gilroy
It is a great pleasure to follow my hon. Friend the Member for Sheffield, Heeley (Ms Munn) again, having also followed her in the debate on new 555 clause 1. It is also a great pleasure to congratulate my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz) who has steered his Bill to this stage with skill, thoughtfulness and the full understanding that his background as a Co-operative Member of Parliament gives him.
The Bill widens and deepens the provision for employee share owners. There has been cross-party support for measures of this kind for many years under Governments of all colours, and the Bill builds on that tradition, exploring and improving in Committee and on the Floor of the House today this important measure. It is good to have heard the commitment of hon. Members, including myself, to getting our heads round the technicalities that give life to some of the principles that we all understand.
The Bill widens existing provisions by making more companies eligible for tax reliefs in relation to any move that they may be considering to distribute shares to employees by means of an employee trust. It thereby makes that distribution more likely to happen, and stands a strong chance of extending employee share ownership to many more people over time.
Clause 1(2) of the Bill as amended in Standing Committee B gives encouragement to companies to involve employees on those trusts when drawing up a trust instrument. Like my hon. Friend the Member for Edinburgh, North and Leith, I believe that it is important to bring about that clarification, as it will be an important part of ensuring that more companies take on board the measures that the Bill makes possible.
The Bill helps to ensure that, as years go by, employee share ownership becomes a more common experience for the many, not the few, which will make an important contribution to ensuring that wealth, power and opportunity are in the hands of the many and not the few. Some significant figures have been quoted during the debate to illustrate what employee share ownership means for the prosperity of companies, as measured through growth in share values. The hon. Member for Arundel and South Downs (Mr. Flight) referred to the importance of this in the current climate, with regard to share value, which is not currently as benign as it has been in recent years. That is one reason why the Chancellor and his colleagues have been keen to increase the number of employees with access to such schemes in all their various forms.
The measure builds on the provisions of the 2000 and 2001 Budgets in a way that should increase the number of employees with access to such schemes. It contributes to the quality and added value that arise from employee share ownership schemes. It introduces greater choice in the forms of ownership available, and it certainly builds on co-operative traditions and principles. We have seen a growth in, for instance, the industrial common ownership movement and in industrial common finance models.
The creation of the social enterprise unit in the Department of Trade and Industry is a significant landmark in recognising the important contribution that mutually owned organisations have made, as we marked recently when the Industrial and Provident Societies Bill passed through the House.
556 There are a number of perspectives that one can bring to this measure. It has all-party support, but is underpinned by co-operative principles that sit comfortably with those of the Labour party. I shall quote a little more from those principles:By the strength of our common endeavour, we achieve more than we achieve alone so as to create for each of us the means to realise our true potential and for all of us a community in which power, wealth and opportunity are in the hands of the many, not the few.Employee share ownership schemes are good for employees, for their companies and for the economy. Let me take each of those in turn. They are good for employees because the important financial stake that the Bill underpins rewards employees if their company does well. After all, there is nothing more galling than when others benefit disproportionately from one's efforts as a worker in a company, and this measure is one way in which such an imbalance can be addressed.
Clause 1(2) is important in encouraging companies to involve employees when drawing up trust instruments. Equally, when the going gets tough, it gives employees a sense of having an integral stake in the company's well-being—perhaps even a sense of being an important part of any survival strategy that needs to be developed.
Employee share ownership schemes are good for companies, because the financial involvement leads to increased employee commitment. They allow employees to become more involved in the running of their company, which, as the hon. Member for Tunbridge Wells (Mr. Norman) said, is absolutely crucial.
If employees are more aware of any difficulties that arise within the company, it makes them more aware of the management processes and more likely to be able to help in heading off the problems and tackling them constructively. If employees are more aware of opportunities that arise within the company, those opportunities can be taken early and not missed altogether. Through that involvement, employees are more likely to act on their awareness. That results in a virtuous circle of commitment, which companies need if they are not only to survive but to thrive in an increasingly competitive world.
Drawing on that experience is especially important and beneficial to companies that rely for progress on research and development, or need to get their choices right first time. I refer to the Scott Bader company, which has given sterling support to my hon. Friend the Member for Edinburgh, North and Leith in developing the Bill. I think that I am right in saying that the company is at the cutting edge in the development of polymers and composites—exactly the sort of research and development that I am talking about.
The need to get choices right first time is especially important for the service industries. We have heard it suggested in a number of interesting contributions that there may be a need to extend the provisions to the public sector, especially because of the importance of public services, in which employees' sense of ownership of what they doing can be critical.
My hon. Friend the Member for West Bromwich, East (Mr. Watson) suggested that more traditional firms could also be encouraged to consider such issues. He mentioned the engineering firms in his constituency; my constituency also contains such firms. It was suggested to my hon. 557 Friend the Member for Edinburgh, North and Leith that he should look ahead, beyond the hoped-for successful passage of the Bill, to see what can be done to encourage take-up of employee share ownership proposals.
That is very important, and one good way of proceeding is to look at what works. Perhaps we should look within the co-operative movement, maybe with the support of the companies that have been so energetic in backing the Bill, to see whether we can find an annual way of celebrating what is being done in respect of employee share ownership proposals. Perhaps that could be done across the different sectors, so as to include engineering, services and research and development. My hon. Friend the Paymaster General might tell us that that is already happening, but unless it is, those of us who have developed an interest in employee ownership might look at what we could achieve through such an annual celebration of take-up by companies not only of the proposals in the Bill, but of the other various forms of employee share ownership that have been mentioned.
The provisions will be good not only for employees and their companies, but for the country. The more we can encourage their take-up, the better, in terms of developing a long-term approach to the companies' welfare, not only contributing to the economy at a survival level, but helping it to thrive. The Bill is also important for competitiveness, for the sort of reasons that I outlined, as employees will take a keener interest at an earlier stage in making progress on the threats or opportunities of which they are aware.
Employee ownership also encourages growth, plus the wider benefits of social cohesion and regeneration. Research in Italy and the USA has demonstrated that the benefits include not only economic ones of the sort that have been mentioned, but improvements in respect of education and health, reduced crime, greater social participation and better capacity to weather periods of unemployment in local economies.
As I mentioned on Second Reading, John Monks, in a foreword to the Mutuo publication "Employees Direct", said:the shareholder voice of the employees could prove a powerful counterweight to the short-term horizons of other investors and create the conditions necessary for stable workplace partnerships to flourish".Not many of the hon. Members who are present are not convinced of the arguments, but I recommend that document to them, as it contains a range of powerful arguments to show how important to the general economy of the country the principles that we are debating are.
The Bill, as refined and amended in Committee, will open up more opportunities for employee share ownership and add to the eligibility of a small but important sector of employees to participate in such schemes. It will help to obtain added value for people's interest and commitment to their work. Employees, their companies and the country will benefit. I am grateful to my hon. Friend the Member for Edinburgh, North and Leith for involving me in the Bill through my membership of the Standing Committee. I wish it well in the other place, where it will go today, and look forward to its return to this House.
§ Mr. Watson
The Bill gives a practical expression of partnership values. It will promote a new culture of work and innovation in the workplace. It represents a renaissance for the co-operative and mutual movement. 558 I support the Bill not just because it embodies the values of my party—values that gave me a reason to stand for Parliament—but because I admire the tenacity and determination that enabled my hon. Friend the Member for Edinburgh, North and Leith (Mr.Lazarowicz) to steer a technical and complex Bill through nearly all its stages during his first year as a Member of Parliament. That gives hope to new Members and Back Benchers: it shows that we really can make a difference to the lives of those who elected us. I only hope that when, having dealt with seven items in two and a half hours, we reach the Organ Donation (Presumed Consent and Safeguards) Bill, my hon. Friend will be present to support it and me.
Members on both sides of the House have agreed that we should find a way of encouraging wider share ownership. I am pleased to note that there is also a consensus between us and our industrial partners the Confederation of British Industry and the Trades Union Congress. The Bill presents challenges to both organisations. It challenges trade unions to change the way in which they relate to their members and to employers. I am glad that it has had so much support not just from the TUC as a whole, but from leading unions.
The general secretary of my union, Sir Ken Jackson, has been at the forefront of changing TUC policy, introducing more innovative ways of working and providing an impetus for the TUC to change its view of employee share ownership. He has pressed for such developments for many years. Today is a big day for him: the ballot papers for the election are being posted. I am sure that union members will take account of a debate in the House of Commons in which his contribution has been recognised when deciding how to mark the papers that land in their letterboxes on Monday morning.
As I have said, the Bill is concerned with promoting a culture change, and with innovation. Those are key elements in the future of our economy. Productivity lies at the heart of the economic challenges with which we will be presented over the next five years. I was pleased to learn that more than half the current employee share ownership schemes are in small and medium-sized enterprises, because those are the companies that need to grow. Unless they embrace the productivity challenge they will face over those five years, such growth will not be possible. As hon. Members on both sides of the House have said, more employee participation in company decisions can really help productivity, and the Bill will provide that.
The Bill also challenges employers, however. My constituency contains excellent employers, but some use dated management practices. The Bill would allow them to embrace change so that their employees can have not just a greater economic say in their companies, but a louder voice in the boardroom—and in the sectors to which a number of companies in my constituency belong, engineering and manufacturing, the say of skilled people, many of whom still work with their hands, is very important. A slight refinement of a production method, a slight change in the distribution chain or a slight speeding up of the process can make a real difference to the bottom line on a balance sheet. In such areas, where returns are so small these days, the Bill might be the difference between success and failure.
The Bill may also provide the impetus to create new, innovative ways of working and organising companies. When the House debated the Industrial and Provident 559 Societies Bill, I suggested that pop groups might work as IPSs, and I understand that Dave Stewart, the former Eurythmics lead singer, has set up a co-operative company. It would be fantastic if his is the first company to take up the initiatives in this Bill.
My hon. Friend the Member for Dundee, East (Mr. Luke) described how player power might play a role in the direction of football clubs, just as supporter power has breathed new life and direction into lower-league clubs. As a result of the debate on the Industrial and Provident Societies Bill, my own club, Kidderminster Harriers, set up a Supporters Direct group, although I wish that this Bill had been in place six months ago. Had the players, manager and employees been able to take a stake, the then manager, former Liverpool player Jan Molby, might have dipped his hand in his pocket to make a financial injection to the club before deserting it to move to Hull. The Bill is a socially good innovation. Indeed, had it been in place previously, Wimbledon football club might still be in Wimbledon.
The law of unintended consequences might kick in when the Bill is introduced, as it will create new ways of working and new institutions. It will also contribute to job satisfaction in the workplace and improve company organisation. I shall take these measures to the black country chamber of commerce, which is always looking for support for its businesses from the Treasury and from this place, and they will be welcomed by small and medium-sized companies throughout the land.
My hon. Friend the Member for Edinburgh, North and Leith said that the Bill is a practical expression of these words:By the strength of our common endeavour we achieve more than we achieve alone".He has achieved something special today, because the Bill does more than make financial sense—it provides a good model to improve industrial relations in Britain and makes the rhetoric about partnership between workers and employers a reality. It will be welcomed by employers as well as by employees throughout the land, especially in my constituency.
§ Mr. Love
Like other hon. Members, I congratulate my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz) on so successfully piloting the Bill to this stage in his first year as a Member of the House. I also congratulate all those who have supported the Bill, such as the Co-operative party and Job Ownership—two diverse organisations that have given such effective back-up to that endeavour. Their success is the Bill that we have before us today.
I welcome the Treasury concession, which came in the amendment that we debated earlier. I shall take my hon. Friend aside afterwards to ask him how he achieved it, as it is a great success for a new Member to persuade the Treasury of the case for such a change. I also welcome the cross-party support for the Bill, which is crucial. The hon. Member for Twickenham (Dr. Cable) spoke for the Liberal Democrats and the hon. Member for Arundel and South Downs (Mr. Flight) for the official Opposition. It was pleasing to see someone of the experience of the hon. Member for Tunbridge Wells (Mr. Norman) taking the 560 time to support the Bill. No matter that we all have different perspectives; we have all reached the same conclusion, and it is important that we support these measures.
However, some things are missing from the Bill. A number of hon. Members referred to employee trusts, John Lewis and Peter Jones. That point still needs to be taken up. On Second Reading, I raised the issue of mutuals. I was approached by Nationwide, and I recognise the difficulty for such organisations. We need to establish a critical link between share ownership and corporate performance, because that is what lies at the heart of widening share ownership. We should extend the benefits of share ownership to people who work in successful sectors of the economy; otherwise they will not be able to work on a level playing field with competitors that can develop those benefits.
The Bill encourages wider share ownership and employee participation and representation in the share incentive plan. It does so by extending tax benefits to companies that want to make a significant move towards employee share ownership, and it is important to stress that. It extends the benefit of an upfront corporation tax relief. The Bill ensures that, in return for that tax relief, the shares must be distributed to individual employees within a certain time scale, in order to maintain the critical link between productivity and employee benefits.
The Bill also provides a safeguard, in that the shareholding being transferred must be significant. It sets that at a minimum of 10 per cent. of the ordinary share capital, which must be held by the trustees in one year. I accept what the hon. Member for Tunbridge Wells said about that excluding larger companies, but it is important that we set a benchmark. That distribution must take place within certain limits. Thirty per cent. of the shares must be transferred to employees within five years, and 100 per cent. within 10 years; otherwise the tax relief is taken back.
Almost as important, the Bill encourages representation and participation by allowing—it does not enforce this—elected employees to become trustees of the share incentive plan. We have not discussed how they should be elected, and I shall not begin that debate, but it is interesting that that issue was never raised. I believe that the person who sits on the trustee board should be a representative of the employees, who will help to foster trust and confidence in the company.
All the studies show that the non-financial aspects of share ownership are just as important as the financial ones in ensuring better results, improved performance and that we get the successful companies that this country needs.
Like other hon. Members, I do not want to overstate the effect of the Bill, which is a modest measure. However, it reinforces some of the effects of wider share ownership, and I should like to refer to one or two of them that it will help to promote.
The Bill will further employee participation. I mentioned trust earlier. As a result of the greater commitment that trust will engender, employees are much more likely to hold on to their shares. One of the great failures of the privatisations of the 1980s and 1990s was that employees got rid of their shares at the earliest opportunity, so they did not benefit from the major pluses of wider share ownership. It was no good for them as employees, and it did not assist the companies that were privatised.
561 The Bill will engage employees in the performance of their company. That is critical because employees bring specific skills. They bring specialist knowledge of the shop-floor. They have a different, perhaps unique perspective to offer. All those things will bring benefits to the company.
Employee engagement improves employees' motivation. They can support the aims of the company. They can foster innovation at local level. I was interested that the hon. Member for Tunbridge Wells mentioned in particular the role that shop-floor workers have played in the development of his company. There is a lot of evidence of all those things providing effective input towards greater productivity.
Participation reduces confrontation. We talk all the time in the House about confrontation on the shop-floor. Wider share ownership will develop a more co-operative ethos. We will have more partnership working between management and employee. All that will go to creating a more stable, better environment for the company to succeed.
I want to look at how increased share ownership will help. It gives employees a meaningful voice. Attitudes change when they are given such a voice. Behaviour changes and performance improves.
Increased share ownership aligns the interests of the two different groups: the owners, represented by the management, and the employees. They start to work towards the same goal: the success of the company. As someone mentioned earlier, it tends to reduce short-termism, which is a great problem in the British economy.
Employees have a longer-term perspective of what is happening in their company. They take not the two or three-year time scale that shareholders and the City take but a much longer time scale. They are likely to spend their life with the company and want effective investment decisions in terms of research and development and of capital employed in their industry. That can be brought home in the boardroom.
In the boardroom, we will get better corporate governance because there will be a wider group. It will not be the narrow group of shareholders alone who decide things. There will be a wider interest that takes into account the role of the employees. We talk a lot about shareholder value and the need to improve it, but there are other issues to be taken into account in the boardroom, and the employees will be able to assist with some of that.
I believe that this measure, although relatively limited, will go a long way to reinforcing some of the issues that were so important when the share incentive plan was first introduced. It is important to state here and now that the greatest benefit of the changes that were made in 2000 is to recognise that all employees must be included. One of the great failings and shortcomings of some of the previous measures was that certain groups in the company benefited from those measures, rather than everyone. All the studies show that, if we stand by that principle and involve everyone, company performance improves by far more than if wider share ownership is limited to specific groups in the company.
Performance is important because competitiveness is important. We talk continually about having a more competitive market. That is critical, not only in the United Kingdom but internationally, where we face considerable competitive pressures.
562 At the end of the day, what we are really in favour of is getting increased productivity. We hear a lot of criticisms about productivity. I notice that in recent months productivity has improved significantly. I welcome that and wish to see it enhanced. This Bill will go a long way to assisting that process.
I commend the Bill, a relatively small measure, but one that will reinforce all the issues that are so critical to the future of the company and of British industry. I congratulate my hon. Friend the Member for Edinburgh, North and Leith on bringing the measure before us.
§ 1 pm
§ Dawn Primarolo
We have had an excellent debate on an important issue, with thoughtful contributions from hon. Members on both sides of the House. I start by thanking my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz) for introducing the Employee Share Schemes Bill and for guiding us so expertly through the technicalities. I am pleased that my hon. Friend and his advisers have been able to work closely with the Inland Revenue so that we can agree on a set of provisions that can be supported.
Let me say to my hon. Friend the Member for Edmonton (Mr. Love) that, despite the Treasury's reputation, we do not always say no. We are capable of spotting good ideas and we are here to help, although hon. Members may not always feel that that is the case.
I join all hon. Members who have spoken in congratulating my hon. Friend the Member for Edinburgh, North and Leith. As my hon. Friend the Member for West Bromwich, East (Mr. Watson) said, he is truly to be congratulated on his tenacity, skill, patience and perseverance in his first year in the House. Now that he is an expert in the procedures in the House, other hon. Members may consult him in future, although he may be more reluctant to have his name in the private Members' ballot. He should sleep easy tonight, as I am sure that the other place will look kindly on the Bill—I certainly hope so. It is a huge achievement for my hon. Friend to have developed his principles to this point.
The Government attach great importance to employee share ownership and participation. Increasing employee share ownership is at the heart of the Government's productivity agenda, which includes points that have been echoed repeatedly in today's debate. In our first term in government we put stability and employment creation first. Building on that, over the next decade we want to secure the fastest productivity growth of our competitors. To achieve this goal we must reform and modernise our product, capital and labour markets and create for the first time a truly entrepreneurial culture that is not confined to the few, but open to all, so that in every community people with ideas and initiative have the opportunity to develop.
We must ensure that business investment increases and we must do more to promote competition, innovation and entrepreneurship. Considerable progress has already been made, but our discussions with business have revealed that we can do more to remove the barriers to opportunity and ambition—the ambition not just to start and build a successful business, but to see the firm in which one works succeed and individuals succeed with it. As my hon. Friend the Member for Glasgow, Maryhill (Ann McKechin) said, when those who work in a firm are able to be truly part of that firm, enormous benefits are derived in ensuring that it can develop.
563 The share incentive plan introduced in the Finance Act 2000 has made it easier not just for some but for all employees to become stakeholders in their companies. In their contributions today, my hon. Friends constantly returned to the importance of all employees being able to be stakeholders in their company.
The Bill represents a milestone in rewarding long-term commitment by employees and removing, once and for all I hope, the old "them and us" culture in British industry—on which the hon. Member for Tunbridge Wells (Mr. Norman) commented. There is no better incentive and motivation for employees than for their work to be recognised and for them to share in their firm's success. The share incentive plan is an example of how each and every one of us—business, employees and Government—can contribute to achieving our productivity goals.
We want employee share schemes to appeal to all employers and employees, and to companies large and small, quoted and unquoted. There can be no doubt about the Government's commitment to employee share ownership in general, and to the share incentive plan in particular. There is a sound basis for that commitment. As my hon. Friend the Member for Dundee, East (Mr. Luke) said, research has shown that businesses with widespread employee share ownership outperform their rivals.
For the past 10 years, the stock market performance of companies with widespread employee share ownership has been monitored and compared with that of other comparable companies. The results are consistent over that period, showing that companies with widespread employee share ownership have regularly outperformed their competitors by a significant margin, and that has continued throughout the recent downturn in the market. That points to a clear link between employee share ownership and company performance.
We are of course not saying that an employee share plan will automatically lead to enhanced company performance. What the evidence points to is a link between the two, especially when other measures are adopted to enhance employee participation. Ultimately, a range of academic studies has concluded that companies with share schemes have higher productivity than those without.
It is the perceptions of the employers and employees that matter. The hon. Member for Tunbridge Wells spoke of the need for a culture change. Employees need to see and believe in the positive effects of employee share ownership schemes. A recent survey of employers by Proshare showed that 83 per cent. of employers who had introduced a share plan found that it had had, or had exceeded, the impact that they desired. Some interesting results also emerged from a survey of employee shareholders. Of those employees, 34 per cent. said that they were now more interested in the company and what it was doing; 28 per cent. said that the plan had improved their commitment to the company; and 25 per cent. said that it made them stay with their employer rather than change jobs.
Those are powerful results. One clear message from the research findings is that productivity improves where there is employee share ownership combined with wider employee participation. That illustrates the crucial point 564 made by my hon. Friend the Member for Sheffield, Heeley (Ms Munn) about loyalty, and relates to the comments of the hon. Member for Tunbridge Wells.
Throughout our time in government, we have placed great emphasis on the importance of people in any successful organisation, and we are right to do so. People are essential, but so too is the way in which we work together. Without good people a business cannot flourish, but without good management good people cannot flourish. Without maximising the potential of and listening to its employees an organisation is lucky to survive the present, let alone get to the future first. That is what good workplace relationships can achieve—the creation of an environment in which employees can work to the best of their abilities, where they feel empowered and involved and where they know they are listened to.
At the heart of good workplace relations must be partnership between employers and employees. An employee needs to know and understand what will make the business succeed, and the employer needs to know how to get the best from the staff. That is pretty basic science, and of course good partnership goes beyond that, but partnership is ultimately all about communicating. Unfortunately, with the challenges that we face in the global economy, there are all too many employers who do not appreciate that fundamental fact.
The benefits to business of successful workplace relationships speak volumes: productivity and performance; recruitment and retention; customer service: return on investment in training; diversity within the work force; morale, commitment and loyalty; reducing absenteeism, sickness and stress; and flexibility in staff attitudes, with an ability to deal with change. As my hon. Friend the Member for Plymouth, Sutton (Linda Gilroy) said, that is an impressive list. Why companies would not want to benefit from all that is a matter that we need to pursue. The links between partnership and those benefits is clear. That continues to be demonstrated in modern work practices.
Organisations adopting those principles can be flexible and adapt quickly to change, which is ever important in a global market. They can know the choices that they face, and seize on and develop them, moving employers and employees forward together. They will understand the need for change and react to it instead of fearing and resisting it. Share incentive plans offer share ownership to all employees in a company, and the Bill seeks to amend the provisions for such plans, to the benefit of all.
I congratulate my hon. Friend the Member for West Bromwich, West (Mr. Bailey) on his 20-year campaign. I am sure that he is delighted at this outcome, and I sincerely hope that it does not take him another 20 years to achieve his next goal—I hope that I will be able to play some part in that, if it falls to me as a Minister.
The hon. Members for Arundel and South Downs (Mr. Flight) and for Twickenham (Dr. Cable) referred to the John Lewis Partnership. John Lewis cannot take part in a share incentive plan because of its corporate structure. Its shares are not eligible under the SIP rules. They are not listed on the stock exchange, nor are they in an independent company. They are under the control of a corporate trustee, and the SIP rules are clear that shares used in the plan must be ordinary shares, with rights equal or superior to the company's other ordinary shares, and they must be either listed on a recognised stock exchange 565 or in a company that is not under the control of another company—or, if they are under such control, the controlling company must itself be listed and must not be a close company.
The John Lewis corporate structure means that none of those tests is met. The shares are all under the control of one person—the corporate trustee—and the employees have a mediated ownership, not the kind of individual ownership that underlies the approved share relief. Those rules protect the interests of all employees and ensure that they have a direct stake in the company's real value. However, as I said on Second Reading, I am glad to report that Revenue officials met representatives of John Lewis at the end of April to discuss how the company could meet the requirements of SIP legislation. I cannot pretend that that will be easy or that we have found a way to achieve it, but I am prepared to consider the technical issues and try hard to resolve the outstanding issue, provided that the central principles of SIPs are not breached. In the past, other types of SIPs and share ownership could be used only by a small proportion of the work force, sometimes at considerable cost in tax revenue. I hope that I made clear the Government's belief that all employees should be able to benefit in the ways that we have proposed.
The hon. Member for Arundel and South Downs referred to the take-up of SIPs, which he believed had been rather slow. It has been faster than take-up of previous all-employee share plans. The Government have received more than 600 applications. The approved profit-sharing scheme, which SIPs are designed to replace, will not disappear until the end of the year. As everyone in the House acknowledged, there is still a great deal of work to be done proselytising for the benefits of SIPs.
The hon. Member for Tunbridge Wells spoke about its being difficult for larger companies to participate in the scheme because of the 10 per cent. requirement. The Bill allows an early corporation tax deduction for companies buying shares from owners. We want to assist share owners to pass substantial holdings to trusts for distribution to all employees. In that way, we move from a company with ownership concentrated in the hands of a small number of people—perhaps the founder shareholders of a company—to widespread employee ownership and involvement. Crucially, the same issues do not always arise in larger companies, where ownership is not generally concentrated in the hands of a small number of people. In addition, large companies are likely to pass shares on to their employees quickly and regularly, generating corporation tax relief anyway, assuming that that is done for a SIP.
My hon. Friend the Member for Edmonton (Mr. Love) again raised the issue of mutuals and trusts. Rather like the John Lewis Partnership, mutuals, trusts and owned organisations cannot take part in a SIP or any approved employee share arrangements because they do not have a share structure based on individual ownership. Mutual organisations such as building societies do not have equity, so it is difficult to see how they can participate in a share ownership plan, where tax relief encourages alignment between employee share owners and other shareholders.
§ Dawn Primarolo
I was not aware of that possibility in relation to Consignia, but I am happy to confirm, as I did on Second Reading, that I am not against including mutuals or trust-owned businesses in the share incentive plan, if the right way of doing that can be found. I said that I would continue to consider proposals from trusts and employee-owned companies and from mutually owned organisations, but I return to the basic principle that I have maintained throughout our discussion of the Bill: those must be consistent with the provisions for a share incentive plan. Those provisions exist for good, solid reasons—to protect the employees in such an arrangement.
The Bill sets out to change the rules of share incentive plans to make them even more attractive to small and medium-sized enterprises. As approved in Committee, the Bill has two main objectives. First, it puts beyond doubt the ability of employee representatives to act as share incentive plan trustees. Secondly, it seeks to encourage the transfer of more shares into employee ownership. That will help with succession planning and in securing the future of small businesses.
The Bill does that by allowing a company an early corporation tax deduction on money that it gives to SIP trusts to buy a block of shares. The shares acquired in that way must be distributed to employees within 10 years. The new clause considered today is beneficial and now forms part of the amended Bill. It extends income tax and capital gains tax relief for SIP trustees from two or five years, under the current rule, to 10 years, to correspond with the time given in the Bill for shares to be distributed.
I am more than happy to support my hon. Friend the Member for Edinburgh, North and Leith in his aims of encouraging greater employee participation. As I said, research confirms that a combination of employee share ownership and employee participation yields the best results for everyone. The company benefits, the shareholders benefit and the employees benefit from the greater success of the company.
The proposal in clause 1(2) is that the deed of a share incentive plan trust must allow companies, if they so wish, to have at least one selected employee representative on the board of trustees. I am happy to support employee representation on the SIP trust. Strictly speaking, that can be done already, but I agree that, as many hon. Members pointed out in their contributions today, there is a case for that to be put beyond doubt.
As I said on Second Reading, I am happy for Inland Revenue officials to work with my hon. Friend's team on a trust deed that would provide for employee trustees. That could be offered on the Inland Revenue website alongside the existing model trust deed used by the Revenue. We are working on the draft model that has been provided by my hon. Friend's team and we look forward to offering both model deeds. We would like to make them known to companies and advisers in other ways.
The Bill provides for a corporation tax deduction to be given when a company contributes money to a share incentive plan trust to buy a large block of shares. That 567 might apply where an owner has a substantial shareholding and wishes to retire and ensure that the company stays in the hands of the employees.
At present, corporation tax deductions are given when shares in a SIP trust are distributed to employees. The Bill provides for the corporation tax deduction to be given earlier, when a company contributes money to a SIP trust to buy a block of shares. The trust must hold 10 per cent. of the ordinary share capital of the company before it qualifies for the deduction, and the shares must be distributed to employees through the share incentive plan within 10 years. That is designed to encourage the flow of shares from the trust to individual employees during the 10-year period. The objective of the share incentive plan is to improve productivity by encouraging employees to take a long-term stake in their company and to share in the rewards of its success.
I share my hon. Friend's aim of encouraging employee participation and employee share ownership. As I said, my officials met my hon. Friend and his team on three separate occasions to discuss the Bill.
I am satisfied, as I have to inform the House, that the amended Bill is compatible with the European convention on human rights. We have also assessed that it is unlikely that there will be any additional regulatory impact. The risks and benefits in the original regulatory impact assessment for the share incentive plan remain unchanged and there is no need for a formal assessment.
I hope that the other place is as pleased to receive the Bill as this House is now to conclude the debate on it. I give my heartfelt congratulations to my hon. Friend on successfully piloting the Bill through the House and I am delighted to join him in supporting it today.
§ Question put and agreed to.
§ Bill accordingly read the Third time, and passed.