Schedule 13 - Employee share ownership plans: amendments
Finance Bill
11:15 am

Mr Howard Flight (Arundel and South Downs, Conservative)

I beg to move amendment No. 15, in page 146, line 2, at end insert—

`Accumulation periods for partnership share awards

(1) In paragraph 41 there shall be added—

``(5) It shall not cause an award of partnership shares to cease to satisfy the requirements of this Schedule if where the completion of a qualifying period (within the meaning of paragraph 14) falls after the commencement of the accumulation period, an employee is made an award of partnership shares on the same terms as would have applied at the start of the accumulation period save for a rateable reduction in the number of partnership shares available to him to reflect the proportion of the accumulation period which has expired by the completion of his qualifying period.

(6) It shall not cause an award of partnership shares to cease to satisfy the requirements of this Schedule if—

(a) prior to the commencement of the accumulation period an employee indicates that he would be willing to participate in that award during that accumulation period, but not from its commencement; and

(b) during that accumulation period an employee enters into a partnership share agreement on the terms which would have applied from the commencement of the accumulation period save for a rateable reduction in the number of partnership shares available to him to reflect the proportion of the accumulation period which has expired by the date of entry into the agreement.''.'.

Mr. Allen: On a point of order, Mr. O'Hara. After that exhausting piece of footwork by the Chair, it may be an appropriate moment to say that the usual channels, at great expense, have reversed the decision of the Refreshment Department, and that the chuck wagon is now very close to the Committee Room. While retaining a quorum in Committee, Committee members may want to avail themselves of refreshments—which will, I understand, be available for a period of no longer than 10 minutes.

Mr Edward O'Hara (Knowsley South, Labour)

I am grateful to the hon. Gentleman for what may not have been a point of order but was a most helpful intervention.

Mr Howard Flight (Arundel and South Downs, Conservative)

Thank you, Mr O'Hara, for accommodating the starred amendment to amendment No. 14. Amendment No. 15 picks up another part of the employee share ownership rules in the schedule that we feel could be improved, and reflects practical experience.

At present, awards of partnership shares can be made to employees under which they can purchase shares at market value from their pre-tax salary. That is usually done by means of what is known as an accumulation period, during which monthly deductions from payroll are contributed during 12 months into a fund that accumulates to buy the shares. We suggest a little more flexibility about such accumulation periods. It is possible to exclude anyone who has not served a minimum service period, but if that period is completed after the start of the accumulation period, such employees will be excluded from the award until the next year.

Equally, employees who are eligible at the start must make an immediate decision about whether or not to join. They cannot change their minds part way through—for example, once they are more certain about their financial position and ability to subscribe. However, people who sign up at the start can change their minds and reduce their contributions during the accumulation period. The net result of that is a little unfair, and causes practical difficulties. Would not it be simpler—as the amendment would allow—to let such people catch up during the year and offer them fewer shares to reflect the proportion of the accumulation period for which they participated?

Mr Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)

The issue here is achieving the right balance between flexibility for employees with the administrative burden for employers.

The Chairman's attention having been called to the fact that ten Members were not present, he suspended the proceedings; and other Members having come into the room and ten Members being present, the proceedings were resumed.

Mr Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)

The current rules allow employers to set a qualifying period for participation in the all-employee share ownership plan of up to 18 months. That allows employers to exclude certain employees from the plan—for example, those on short-term contracts. However, the employer is free to choose whether to introduce a qualifying period. For the purposes of saving for partnership shares, the employer can choose whether to introduce an accumulation period—the period over which employees save to buy shares. Where the company sets an accumulation period, it will be a fixed period, which applies to all employees. The accumulation period could be the financial year from 1 April to 31 March, or could be much shorter if the company wished. An employee cannot start to accumulate funds to buy shares until they have served any qualifying period set by their employer, and must always start at the beginning of the accumulation period. However, the employee needs to have served a qualifying period of only six months to buy shares through an accumulation period, in recognition that accumulation periods may be as long as 12 months.

The all-employee share ownership plan was designed with maximum flexibility for employers who choose to offer a plan to their employees. It is for the employers to decide what elements they wish to put into plans to reward their employees. Proposed new sub-paragraph 5 would remove some of that flexibility for employers. In addition, the amendment would probably not achieve its intended effect if an employee is to participate in an award of partnership shares. In that case, the employee must be eligible as defined in paragraph 13 of schedule 8 to the Finance Act 2000. Under the amendment, the employee will not be eligible at the start of the accumulation period.

Proposed new sub-paragraph 6 is intended to allow employees to signal the intention to join the accumulation period at some time other than at the start. The current rules governing the all-employee share plan already allow some flexibility. Employees may start or stop paying into the plan at any time, and can choose the dates on which to exercise the choice. All they have to do is tell their employer. On that basis, the amendment is unnecessary. However, the heart of the matter is getting the right balance between flexibility for employees versus the cost for the employer in administering the scheme. Last year's Act set the balance at about the right place.

Mr Tony Banks (West Ham, Labour)

Share ownership plans are an excellent incentive for employees. Companies that operate such schemes tend to be more successful in a number of ways. However, share ownership schemes, by definition, can happen only within the private sector. How can the benefits be extended to the public sector? It seems unfortunate, and to some extent unfair, that those economic advantages are not available within the public sector.

Mr Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)

My hon. Friend is right. There is growing evidence of the beneficial impact of such schemes on the performance of private firms that take advantage of them. He will be pleased to note that we listened carefully to representations from the co-ops in the run-up to last year's Finance Act and so have accommodated co-operative organisations as potential beneficiaries from the plans. He is also right that by definition there is no concept analogous to profit or share value in the public sector, and so the benefits are not available to public sector employees. I have had representations from time to time that we should work up something that would be analogous. I have not yet seen anything that looks as though it may do the job. However, if my hon. Friend, or others, had ideas that we should look at, of course we would be happy to do so.

Mr Howard Flight (Arundel and South Downs, Conservative)

The easiest answer to the question is self-evidently privatisation or PFI-isation of the public service. On the basis of the Minister's response, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That this schedule, as amended, be the Thirteenth schedule to the Bill.

Mr Howard Flight (Arundel and South Downs, Conservative)

Hon. Members will be aware that amendment No. 16 has not been selected because, as has been said correctly, it deals with a national insurance issue, whereas schedule 13 is concerned with tax. However, the Government should consider the issue of certainty of national insurance costs, which they have already addressed in relation to unapproved option schemes. At present, an employer's national insurance is charged on all employee share ownership plan shares in two ways. If an income tax charge occurs during years one to three, it is levied on the market value of the shares at the time; during years four to five, it is levied on the original market value of the shares. That can lead to unpredictable cost exposure for employees, which is analogous to the problem that arose with unapproved options.

As the Government have accepted that unpredictable national insurance exposure is a problem and as they duly acted in unapproved option schemes, would it not be sensible to give employers certainty in national insurance cost for share ownership schemes? The Committee should also note that the charging of national insurance is an anomaly and that there is no national insurance exposure on other forms of the plan.

Mr Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)

I will respond directly to the hon. Gentleman's point, which was referred to in the unselected amendment. The all employee share ownership plan is not an option plan; it provides tax incentives to employees and employers when employees take a stake in the company for which they work. They have an interest in the shares from the time that they are awarded, and tax benefits apply if an employee holds those shares for five years. If the shares are taken from the plan within five years and there is an income tax charge, there will be a national insurance liability, because the two charges are aligned.

As the hon. Gentleman mentioned, we have made an exception for share options to give special help for the high-growth sector where options rather than share awards often form an integral and substantial part of remuneration packages. In such cases, the timing and amount of the national insurance liability is uncertain and companies can experience problems with investment strategies and growth plans. However, there is no prospect that national insurance liabilities in the all employee share ownership plan will have the same consequences. We do not want employers to pass national insurance liabilities in the plan to employees in this case, because that would act to discourage employees from taking part. The scale is different, and it would not be appropriate to make a change in the schedule analogous to the one that we made with share options.

Question put and agreed to.

Schedule 13, as amended, agreed to.