Phasing Out of Relief for Profit-Related Pay

Orders of the Day — Finance Bill – in the House of Commons at 4:35 pm on 22nd January 1997.

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Photo of Dawn Primarolo Dawn Primarolo Shadow Spokesperson (Treasury) 4:35 pm, 22nd January 1997

I beg to move amendment No. 4, in page 56, line 19, at end add—

  1. '(4) The Treasury shall produce a report each year on the companies which had schemes registered under that Chapter.
  2. (5) The report mentioned in (4) above shall analyse the actions taken by companies in relation to profit related pay after 1st January 1998.
  3. (6) The report mentioned in (4) above shall also describe separately the impact of the removal of tax relief for profit related pay on employees paying income tax at both higher rate and basic rate.'.

Photo of Miss Janet Fookes Miss Janet Fookes , Plymouth Drake

With this, it will be convenient to discuss amendment No. 5, in page 56, line 19, at end add— '(4) That Chapter shall not have effect in relation to any payment made by reference to a profit period beginning on or after 1st April 1997 if the primary purpose of the scheme under which the payment is made is the avoidance of tax.'.

Photo of Dawn Primarolo Dawn Primarolo Shadow Spokesperson (Treasury)

The clause deals with the Government's proposals for the phasing out of the tax relief on profit-related pay. Over a period of 10 years, the Government have spent £4 billion on an experiment to find ways to encourage a closer relationship between the remuneration of employees and their company's profits. Given the proposals in the clause, it is fair to ask certain questions. Was that £4 billion wisely spent? What were the Government's objectives and have they been met? When the tax benefit is removed, will employees still be happy for 20 per cent. of their pay to remain in the schemes? What is likely to be the companies' reaction to the withdrawal of the relief?

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Only yesterday, the Deputy Prime Minister argued that the Government understood business very well—indeed, he claimed a monopoly for the Conservative Government in that respect. I am sure that hon. Members will agree that any business that invested £4 billion should monitor that investment and, at the end of the experiment, assess the effectiveness of the investment and whether the objectives had been achieved.

The original objectives of the profit-related pay scheme were set out by the then Chancellor of the Exchequer, now Lord Lawson, in his 1986 Budget. It was floated as a potential cure for unemployment. He said that if "a significant proportion" of wages were more flexible and rose and fell according to the company's profitability: This would not only give the work force a more direct personal interest in their company's success … it would also mean that, when business is slack, companies would be under less pressure to lay men off; and by the same token they would, in general, be keener to take them on."— [Official Report, 18 March 1986; Vol. 94, c. 172.] That does not appear to have been the result of this particular tax relief.

The initial take-up rate was slow, with most companies taking advantage of the tax concession to continue their existing schemes. The original hope was that profit-related pay would reduce pay demands and prevent redundancies, but that has not happened. The evidence is that companies registering schemes are motivated more by a desire to secure extra tax relief for their employees than by a desire for flexible pay. The amendments seek to address that problem.

In justifying the changes, the Government have identified the enormous cost to the Treasury and the abuses that now occur in the scheme. It is somewhat surprising that their discovery of abuse has come so late. In the 1993 Budget, the Chancellor asserted that £100 million would be saved in 1994–95 from closing down what was then identified as a loophole in the profit-related pay rules. The loophole was closed and employers were then unable to offer profit-related pay without some degree of risk that payments made under the regime might vary with profits.

However, the Chancellor did not prevent the problem to which the Government are now returning—that of employers constructing schemes that expose employees to only a negligible risk of loss of earnings. Therein lies the problem. Employers typically guarantee to pay out 80 per cent. to 90 per cent. of the profit-related element of the pay, leaving only the remainder to vary with profits. Ernst and Young has estimated that 75 per cent. of the current schemes are an abuse of the objectives and says that it can clearly identify that the primary reason for implementing profit-related pay has been to contain costs, rather than to motivate employees.

Effectively, 80 per cent. of employees must vote in favour of the scheme, so it is unlikely that a majority of employees will vote for a scheme in which there is a material risk to their pay—where they are likely to suffer a loss. The overwhelming majority of schemes have been converted into the guaranteed pay type where 20 per cent.

is the risk element of the payment. That reasoning has been supported by a survey of evidence from the income data studies report, which was produced in June 1996 and which suggested that the major part of the millions of pounds cost to the taxpayer of profit-related pay was funding schemes which provide tax-free pay rises rather than performance-related pay.

The Government published a research report on profit-related pay in May 1995, commissioned by the Inland Revenue, the Department of Employment and the Treasury. Its main conclusions were that the tax relief had stimulated a significant take-up of PRP because companies and employees were sharing the relief and that from an employer's point of view the main benefits of the relief were in tax efficiency. The report went on to say that employee involvement had been created, although it did not substantiate that claim. It did not provide conclusive evidence that the cost to the taxpayer of performance-related pay was justified by improved economic performance.

The arguments against the Government's case are clear and the Government now have an obligation to justify the expenditure. In 1986, when the then Chancellor—now Lord Lawson—introduced that tax relief, he said: There is considerable inertia to overcome, so it might make sense to offer some temporary measure of tax relief. Ten years later, the present Chancellor of the Exchequer said: I can no longer justify the ever increasing cost of the tax relief to the 22 million taxpayers who are not in profit-related pay schemes. We cannot permanently divide the work force into groups of people who pay different levels of tax on the same earnings depending on whether the firm that they work for is in a scheme or not."—[Official Report, 26 November 1996; Vol. 286, c. 165.] That is absolutely right: it is only surprising that it has taken so long for the Government to discover that. Some 3.7 million workers now in those schemes are threatened by the proposals to phase out the tax relief, possibly with dramatic drops in their take-home pay. What do the Government expect to happen once the tax break is removed? What consultation has taken place? Will pre-tax earnings rise as companies compensate employees, or will employees—particularly the low paid—suffer a loss of earnings?

Although the abolition of profit-related pay is partly due to the mounting cost to the Exchequer, another factor must be that the scheme is being abused. There are a growing number of so-called "salary sacrifice" schemes, under which employees exchange part of their salary for profit-related pay. The tax saving is shared between employees and the company, which means that the employer's wage bill is reduced. The employer and the employee share the relief. One of the water companies with a profit-related pay scheme has notified its employees that that was exactly the purpose of its scheme: when the relief is removed, the scheme will be cancelled.

The Government must explain why they did not prevent those abuses at an earlier stage. In many schemes there is little risk of employees' pay falling because employers gave an undertaking that if the Government changed the regulations the employees would be returned to their previous status. I will give examples of just a couple of schemes. Information circulated by the National Westminster bank, Lloyds, TSB, Barclays and the Midland was intended to explain profit-related pay to employees in advance of the ballot on whether the scheme should be established. The documentation, which was not secret, made it absolutely clear that the proposal was to share the tax relief—which cuts straight through the Government's argument that it should be about giving employees a stake in the company's profits.

A letter about the National Westminster bank scheme, which was started in January 1996, says: The Revenue regulations will not allow these payments to be guaranteed"— that is the 20 per cent., the part that is supposed to be at risk— but the Bank has stated that if, during the period the scheme is in operation, it believes it is falling dramatically short of its projected performance it will cancel the scheme, revert people back to their original salaries and ensure that individuals are in a no loss situation with regard to tax.The Bank is proposing a one year scheme which it believes would be protected from any changes in revenue arrangements for its duration. The Barclays bank document explains how employers and employees would share the tax profit. They did so on a 40:60 split. The number of employees in the PRP scheme meant that employees, who received 40 per cent., benefited to the tune of £20 million—that is loss of revenue to the Government—and the bank benefited by £30 million. They were sharing the tax relief in that case. Other banks had different schemes. Some operated a 50:50 split, for example, and the TSB scheme was intended to benefit the bank to the tune of £6 million in the first year.

Those documents are freely available and it is beyond belief that the Inland Revenue did not discover them and see that this important measure, which was supposed to establish stakeholding for employees—employees would be given a share of their company's profitability—was being widely abused. Depending on what happens during the period of phasing out the relief, there will have to be a great deal of negotiation between employees and employers to restore employees to their original position.

Even worse, having allowed the scheme to be abused, the Government have allowed good, genuine schemes also to be damaged in the process. The John Lewis partnership scheme is a prime example. A true sharing of profits is being undermined and disturbed by Government action in this area.

The Labour party believes that it is right to reward success. We want employees to be involved in their companies and to benefit from their profits. We also want the Government, first, to state clearly—the amendment advances this case—that they will monitor the schemes so that we can see how many continue to exist once the tax relief is removed. Secondly, it should be a clear objective that any future arrangements for sharing profitability, however they may be constructed, are not allowed to degenerate into abuse and loss of revenue to the Exchequer, as the current scheme has.

Through the amendments, we seek to press the Government for a post-investment audit. Employees who will now have to renegotiate their arrangements with their employers and who may lose out deserve an explanation, as does the Committee, of why an experiment was allowed to go on for 10 years and consume £4 billion of revenue when the Government could clearly see that abuse was occurring and that they would have to act against it.

Photo of Peter Bottomley Peter Bottomley , Eltham 6:30 pm, 22nd January 1997

I note in passing that the Opposition seem to be allowed by their Treasury spokesmen to ask for reports, but not for anything else. No doubt that will change in time, whether they remain in opposition or not.

The hon. Member for Bristol, South (Ms Primarolo) properly set out the purpose of the temporary measure. She described how, during the past year, there has been a great rush to take advantage of it in ways that produce no worthwhile effect, except to the employer and employees concerned. She drew attention to the position of people who work in the John Lewis Partnership, which is one of the best examples of co-ownership in Britain. It was set up 70 years ago as a result of an apparently eccentric decision, and its history should be better known. People who work in the group's stores are not employees, but partners.

For people who are paid significantly more—perhaps those who are partners in firms of accountants or solicitors—the tax system provides all sorts of arrangements for income sheltering. If one took an average of the difference between the actual earnings of partners in top accountancy firms, established what proportion of those carry a direct burden of tax, and applied the same proportion to those working in the John Lewis Partnership, one might find that they could do better than under the existing scheme.

I shall go a stage further than the hon. Lady and ask my hon. Friend the Financial Secretary what representations have been received at the Treasury from the John Lewis Partnership, what response has been made and whether meetings have taken place with the partners or the senior people in the partnership. My hon. Friend could respond when he replies to the debate or by letter afterwards. Will the Government consider over the next two or three years what changes might appropriately be made to reward those in genuine co-ownership and profit sharing? Of course, that is not the reason why the Chancellor introduced the scheme in 1986; he introduced it for flexibility, which is a by-product of co-ownership.

I would advise my hon. Friend, and it would be in keeping with the mood on both sides of the Committee, to open up that prospect over the next year or so. In the case of the John Lewis Partnership, we are not dealing with megabucks—the tens of thousands of pounds that might be at stake for highly paid individuals. We are speaking mainly of people for whom £1,000—an extra month's pay—is roughly the reward for success and, for that matter, for expansion.

During the next year the limit comes down from £4,000 to £2,000, and the following year it comes down from £2.000 to £1,000, before being eliminated—a millennium prize. Will my hon. Friend consider the mechanics of a scheme allowing one month's extra pay as a bonus or profit-share for companies that cannot offer a share ownership incentive? The John Lewis Partnership has no shares that can be given out to employees because they already own all the shares. Such a scheme would be in keeping with what many of us want to encourage.

My hon. Friend may reply that the John Lewis Partnership is a deadweight issue. I should explain to those who have not had discussions with the Treasury that every reasonable suggestion must get over the hurdles of deadweight, substitution and displacement. In this case it is a matter of deadweight. The Treasury might argue that the John Lewis Partnership has had profit-sharing or surplus-sharing for 70 years and did not introduce the practice because of the tax break allowed in 1986. I accept that, but the tax break was supposed to encourage the attitudes exemplified in one possible way by the John Lewis Partnership.

I ask my hon. Friend gently whether he has had meetings with the John Lewis Partnership. Would he or his advisers be prepared to talk to the partnership and to others who may be interested in this subset of issues? Will he reflect on the possibility that in the Finance Bill next year or the year after it might be in the public interest to find a way of protecting those who benefit at low levels?

Photo of Andrew Miller Andrew Miller , Ellesmere Port and Neston

The hon. Member for Eltham (Mr. Bottomley) addressed a request to his hon. Friend the Financial Secretary. I shall pose the same question to my hon. Friend the Member for Bristol, South (Ms Primarolo), in the expectation that she will shortly be on the Government Benches and have to decide on matters arising from the Bill.

Unusually, I was away from the House on Budget day. I was in a mock-up television studio in Wirral, South, listening to the Chancellor's statement. Among the people on the panel were ordinary constituents from Wirral, South. After listening to the Chancellor, one lady said, "Bang goes my new car," and her husband said, "There goes my profit-related pay." He was worried that a scheme that was on the verge of being signed would disappear. Part of the argument that had been put to him and his fellow workers in an engineering company was the incentive, to be part of that commonhold and to have a stake in the operation.

Like the hon. Member for Eltham, I have carefully studied John Lewis and other enterprises, such as Scott Bader—an unusual company with an equally odd history. In his will, Ernest Bader left the stock of the company to his employees. The company has survived through several recessions in a difficult area of chemical manufacturing. It should be regarded as a model operation.

Unusually in the chemical sector, which I know well from my constituency, the company is situated in one of the most beautiful locations in the country, in Northamptonshire. It is difficult to see that the factory is there. The ethos has survived in an attractive environment and the company has quietly got on with its job, competing effectively in a complex market. Through most of the 50-odd years since Ernest Bader's death, the attitude of the employees has been a determination to succeed. I think that employee stakeholding is an important element in that company's success. My hon. Friend the Member for Bristol, South described the exercise as a £4 billion experiment. According to the 1986 Lawson Budget, it was a potential solution to some of our unemployment difficulties and, by that measure alone, the experiment has not proved terribly successful. If it were properly utilised and generated a feeling of ownership among employees of an enterprise, the scheme could be termed a qualified success. However, we do not know whether that has occurred.

We are about to phase out tax relief on the basis of some new-found Treasury interpretation of fairness. The Chancellor claims that we cannot divide the work force permanently into groups of people who pay different levels of tax on the same earnings, depending on whether the firms for which they work are members of the scheme. Fairness has been cited as part of the reason for the Treasury's withdrawal of tax relief, but the Treasury does not reflect upon the success or failure of other aspects of the scheme: first, has it had an impact on employment; and, secondly, has it improved relations between employers and employees in the sort of enterprises that the hon. Member for Eltham and I described? We referred to model situations, but there are many other lesser examples elsewhere. The experiment should be evaluated much more seriously.

The scheme is somewhat muddled, and it is undoubtedly widely abused up and down the country by companies that view it as a convenient way of paying less tax rather than as a genuine measure that would achieve the objectives that the Chancellor set out when he introduced it. It is unfortunate that no one has tried to deal with those abuses. My hon. Friend the Member for Bristol, South referred to several highly publicised schemes whose raison d'être appears questionable in the context of the issues raised in the debate. The scheme has been poorly monitored.

If we are to make any progress in this area, we must encourage a culture whereby employees have a greater sense of ownership in their companies. I have been party to a number of discussions about employee share option schemes over the years, and there is no doubt that such schemes have the potential to change attitudes in very difficult circumstances. It is a pity that we cannot evaluate whether that has occurred in this instance.

I support the amendments spoken to by my hon. Friend. Against that background, I hope that the Minister will reflect a little more on the subject rather than simply ending the scheme apparently for reasons of fairness, which may be perfectly justified but which do not necessarily take account of the issues that hon. Members have raised today.

Photo of Denis MacShane Denis MacShane , Rotherham 6:45 pm, 22nd January 1997

I hope that the Minister will accept the amendments spoken to by my hon. Friend the Member for Bristol, South (Ms Primarolo) as it would be no bad thing to build into the Finance Bill a commitment to survey and examine thoroughly the workings of profit-related pay before the proposed phase-out, which would be discharged by another Government—I hope and expect that it will be a different Government.

My hon. Friend pointed out that Lord Lawson proposed the original changes to the tax law. I am extremely interested in this subject, but I did not know the extent to which profit-related pay in the context of British tax legislation was Lord Lawson's baby. It is remarkable how much of our catastrophic economic inheritance this decade is the result of that noble Lord's innovative decisions—whether it is the business expansion scheme, which led to widespread abuse, or the various other problems that have been set right in the past three or four Finance Bills. Many of our problems can be traced to the chancellorship of Lord Lawson, who I think is sinking down the league table of Chancellors—if there is such a thing. With each Finance Bill, he descends further down the historical ladder. I do not know what he is losing faster: his weight or his reputation. Although he has spawned some wonderful children who write eloquently about many subjects in our national newspapers, Lord Lawson's historical reputation now lies in tatters.

The question of profit-related pay is very important. The Government cannot simply write out 3.7 million taxpayers who have a stake in it: it is a significant part of their pay arrangements. We must consider the matter carefully and examine my hon. Friend's amendments. The earnings question is becoming more and more crucial in our modern society, as I was reminded over Christmas. A 17-year-old relative had secured holiday work in a restaurant and I asked whether she would be working on new year's eve. She replied, "No. The owner won't pay us double time, so none of us are turning up." I do not know whether it was a strike, but it was interesting that that 17-year-old and her fellow student workers had an idea of pay equity. When it was denied, they chose to do something else with their time.

A disturbing aspect of the debate about profit-related pay is that the notion of fair pay rates has been thrown out the window as a result of various economic and fiscal policies that the Government have introduced in the past 18 years. It is no longer a case of a fair day's pay for a fair day's work—the Rotherham job centre now advertises pay rates of £1.50 an hour. As the Organisation for Economic Co-operation and Development never ceases to remind us, Britain has the widest—and most rapidly widening—gap between incomes and pay of any European or east Asian economy. People are desperately worried about how they are paid and about how their earnings reflect their efforts.

Lord Lawson introduced the scheme in 1987 at the height of fascination with the Japanese economy. Dame Janet, you will recall from your visits to that wonderful country that the salaries of Japanese workers consist, in addition to monthly pay, of two annual bonuses that are supposed to be related to profits. At least, that was the myth. Anyone who speaks Japanese or who studies the complicated structures of the Japanese pay system soon learns that those bonuses are pre-negotiated and are not dependent on company profits. But the Government bought the myth that Japanese pay was profit-related and introduced it as a scheme to be encouraged in the United Kingdom. As we have seen, there has been a large increase in the use of it and nearly 3.7 million employees are involved.

The irony in Japan is that many Japanese companies are moving away from the payment of bonuses, whether negotiated or based on profit. Japanese firms are finding that what really counted in the Japanese labour market was job security. As that has disappeared in Japan, firms are beginning to find that they must negotiate much harder with their employees on the basis of normal wages. It is in that area rather than linkages to profit that the real issue of pay has to be discussed.

We know that the maximum annual tax-free payment under profit-related pay is £4,000 or 20 per cent. of salary, whichever is the lower. That can provide for a higher-rate taxpayer a tax saving of £1,600 a year. This debate raises questions that Ministers in the Treasury and other Departments will have to answer in 12, 24 or 36 months' time. Will the abolition of PRP lead to an impetus to pay-driven inflation as unions and employees seek to negotiate pay rises to compensate for the loss of tax relief?

The figures are startling. Higher-rate taxpayers would need to obtain a pay rise of £2,666 a year merely to compensate for the loss of PRP if companies did not make fair adjustments. My hon. Friend the Member for Bristol, South was right to stress the Treasury's responsibility to examine the issue in some depth and to send out messages or signals to ensure that companies do not cheat on their employees' pay. As I said, an extra £2,666 would need to be paid each year to compensate for the loss of PRP. It is a sizeable sum. We have been told that abolition stems from the cost of relief, which is running at about £1.5 billion a year.

There seems, however, to be some intellectual dishonesty. If PRP had been introduced in all sincerity—in other words, had the Treasury wanted the scheme to work and wanted companies to move to paying partly on the basis of profits—it cannot be assumed that it would cover only 1, 2, 3 or 4 per cent. of the taxpaying population and the companies that employ taxpayers. It would have to cover the entire taxpaying population. Thus a level of tax relief ought to have been built into the planning of such a scheme, covering everyone.

The real reason for abolition—strong evidence has been put before the Committee this evening—is that PRP has been abused. My hon. Friend the Member for Bristol, South quoted figures from Ernst and Young. I have seen an unpublished study produced by two young academics working on their masters dissertation at City university, which was sent to me a couple of weeks ago. They have examined different forms of share save, PRP, employee share ownership plans and share option schemes.

The section on PRP in that report was extraordinary. It showed clearly that the vast majority of companies use PRP only as a tax fiddle and that if tax relief was removed, they would kill it stone dead. It was shown that PRP was not built in, as Lord Lawson had hoped, to encourage a relationship between the employee and the output of the company as expressed in terms of profit, but to avoid tax.

Thus there is a growing number of so-called salary sacrifice schemes, where employees exchange part of their salary for PRP. Often there is little risk to employees that their pay will fall. In a sense, the scheme was not related to cyclical profitability because it became a tax abuse scheme.

Service companies, and especially professional partnerships, will regularly use PRP vehicles, where it is relatively easy to engineer the required profit level. In an earlier debate, there were references to wings and fuselages of aeroplanes being separated for tax accountancy purposes. Similarly, accountants can separate out the earnings and profits of employees and companies, park them in different companies and ensure that a scheme that was started with good intent becomes a tax avoidance fiddle.

In certain schemes, it became clear during the year that if the profit target for PRP purposes would not be met, the scheme would be suspended, with employees keeping the PRP that they received up to that point. Again, we find abuse of the scheme, there being no relationship to profit. Employees at all levels, from managers down to apprentices, do not accept such variation in their pay. The concept is spreading to quasi public sector areas such as higher education, where we are almost drifting into abuse. Lecturers are paid on throughput rather than on quality and the raising of education standards.

Instead of abolishing PRP so brutally and coldly in the Budget, perhaps it would have been better to tighten the rules so that relief applied only to genuine schemes in which a part of employees' pay would fluctuate in line with employers' profitability.

The John Lewis scheme has been mentioned, under which 36,000 employees receive pay on the basis of the company's profitability. That is not the result of Lord Lawson's intervention 10 years ago. The John Lewis scheme has been in operation for more than 70 years. Many of us who shop at John Lewis and Peter Jones, or different partnership stores such as Waitrose, believe that, like the motto, "Never Knowingly Undersold", the Government should not so knowingly undervalue the contribution that is made by John Lewis employees. Those employees are now to see a very good system for them thrown out the window.

There will be a move to another tax relief benefits scheme, perhaps a miniature version of the fat-cat package, which has caused such scandal in recent years. The most obvious candidate is an approved profit-sharing scheme under which employees might be given shares. The employer will be exempt from tax on the distribution of shares, provided that they are held by employees for three years. That, however, will not be fair on firms such as John Lewis—because, as with many other firms, John Lewis does not have marketable shares. It will not be fair on partnerships, co-operatives, trusts and many small firms that cannot gain advantage under an approved profit-sharing scheme that is based on employee share distribution.

I support the amendments and I hope that the Minister will accept them. I hope also that he will understand that we want a serious examination to take place. One weakness of the current rules is the lack of an obligation imposed on employers to disclose to their employees the profit target for PRP purposes. In other words, employees do not know what they are meant to achieve by their extra work, diligence, innovation and imagination in making the company more successful, and, of course, there is the question of what profit is eventually achieved, be it within the firm as a whole or in its different component parts.

Employers should be required to disclose that information and put it in an historic and more general context. Opposition Members do not want to see profit-related pay thrown out the window with quite the casual indifference proposed by Conservative Members who are seeking to bury Lord Lawson. We believe that PRP could become more effective in motivating staff, involving them in the business.

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In relation to quoted companies, it could be argued that the disclosure of profit targets to staff constitutes price-sensitive information, but that is no more significant than the profit estimates that are routinely issued and updated by brokers as a company's accounting period progresses, which anybody who deals in shares can get from the many consultants in the City, or even from the Internet, where they are widely available.

One of the fascinating aspects of profit-related pay—I, of course, would be the hon. Member to bring this up, Dame Janet—is that it is now becoming a European issue. The European Commission, inspired by the take-up of PRP in Britain, is now examining the idea of profit-related pay and, indeed, seeing whether a directive could be crafted to encourage it in other European countries. It seems a shame that the Government are throwing profit-related pay out the window just at the moment when Europeans are adopting what is, at its kernel and with reforms, a sound British idea.

Photo of Paddy Tipping Paddy Tipping , Sherwood

I shall speak briefly and compare and contrast two schemes that have been brought to my attention recently in the Nottingham area, one of which shows the positive values of profit-related schemes; the other can be described only as an abuse.

I shall start with the abuse. In the autumn, some people employed at Nottingham university came to see me to suggest that the university was to have a "salary sacrifice" scheme. They were somewhat bemused in that they wondered how an institute of higher education could produce profit in the true sense of the word. They were also keen to point out to me that profit-related schemes have traditionally come from the private sector, and that the university, although no longer clearly in the public sector, was not a private sector animal in the true sense of the word.

Those people were not just academics. The people most concerned were technicians who had worked at the university for many years. One of them, Graham Tomlinson, is a stalwart of the local community. He described the scheme as a scam. He said that it is about making money for the university and about tax avoidance. He said that they had been given assurances that they were not at risk. He pointed out that the whole point of the exercise was for the university to save money. He is a man of some integrity. He took the view that he did not want to avoid paying taxes, because he could see the irony of a situation in which his taxes allowed education to continue. In effect, taxes funded the university. I am pleased to say that the scheme at the university has not gone ahead.

I contrast that scheme with the one at Philip A. Minson, a manufacturer and distributor of net curtains in the Nottingham area. Again, the directors and employees contacted me to say that theirs is a profit-related scheme in the true sense of the word. Its employees take risks. Their salary is dependent upon how the company performs. They pointed out to me that now that the scheme has come into effect, they are all stakeholders in the company and that performance has improved.

I am concerned about what appears to be real abuse, and 3.6 million people are affected. There are about 13,000 schemes. In 2000, £1.7 billion will be saved. There is a real issue here.

I am keen to support the amendment because it looks to the future, to a situation that I am keen to see—people adding value to their company, the company valuing them, and people becoming stakeholders in companies. There is abuse, as at Nottingham university, but there are examples of excellent practice, as at Philip A. Minson. That is why I am very pleased that the amendment calls for reports to be made in future.

I do not think that this is the end of the line for the issue. I very much hope that, in future, we will introduce measures and policies that really will ensure that people who work for companies are part of that company, that they are valued by that company and that in effect they become stakeholders, who get a payback from the company.

Photo of Ian Pearson Ian Pearson , Dudley West

I begin by paying a warm tribute to the Chancellor of the Exchequer for taking the decision to phase out profit-related pay schemes. That was described in the magazine Taxation as being "politically courageous". That is right. Politics is about taking hard decisions. Undoubtedly there are a number of genuine profit-related pay schemes, but it is clear from all the survey evidence that has been published that there have been widespread abuses.

If you will excuse me, Sir Geoffrey, I shall be self-indulgent and quote myself. I have never done that before. In the Standing Committee that considered the Finance Bill last year, I said: all too often PRP schemes have been abused and used by companies as a tax dodge."—[Official Report, Standing Committee E, 15 February 1996; c. 351.] I pointed to the significant level of programme dead weight and the lack of additionality of the vast majority of PRP schemes. I also highlighted the fact that it was very much a get rich scheme for consultants, who were visiting companies and telling them, "I know how I can save money on your wages bill," and making a very easy sale because the tax man was picking up the cost.

I feel sorry for those who have been operating genuine PRP schemes. I recognise that there might be some danger that the Chancellor has, as one of the directors of the CBI pointed out at the time of the Budget, thrown the baby out with the bath water, but I do not see any practical alternative when legislating in this area.

I have particular sympathy for the John Lewis Partnership, which was mentioned earlier. Last year, it paid out more than a third of its £150 million profit in profit shares. The company chairman said: No doubt some clever accountants and lawyers have run rings around the PRP rules, but the John Lewis scheme was a genuine sharing of profit from top to bottom of the company. I believe that to be correct. I have sympathy for any employees who will lose out as a result. I do not think that we can ignore the widespread abuses of the scheme. That is why the Chancellor was fundamentally right to take his decision.

I must disagree with my hon. Friend the Member for Rotherham (Mr. MacShane) when he put the blame on Lord Lawson for the abuse of the PRP scheme. I think that any blame should be placed on another former Chancellor, the right hon. Member for Kingston upon Thames (Mr. Lamont). Until March 1991, fewer than 300,000 people were covered by PRP schemes; it was the March 1991 Budget, which doubled PRP relief, that led directly to the widespread abuse of the schemes that has occurred since then. In less than five years, membership of PRP schemes has grown from 300,000 to 3.7 million.

It is worth reiterating the statement made by the Chancellor in his Budget speech, when he spoke of the 3.7 million people who would be affected by abolition of the scheme. He said: I can no longer justify the ever increasing cost of the tax relief to the 22 million taxpayers who are not in profit-related pay schemes. We cannot permanently divide the work force into groups of people who pay different levels of tax on the same earnings depending on whether the firm that they work for is in a scheme or not. The aim … of widespread use of PRP—has been achieved. and I would rather make faster progress on lower taxes for everybody."—[Official Report, 26 November 1996; Vol. 286, c.165.] I know that intellectual consistency is not normally the remit of politicians, but if what the Chancellor said, rightly in my view—I refer to the words We cannot permanently divide the work force into groups … who pay different levels of tax on the same earnings depending on whether the firm that they work for is in a scheme or not"— applies to the 3.7 million people who currently benefit from PRP schemes, it applies equally to the 700,000 or so people who are participating in profit-sharing schemes, the 500,000 participating in "save as you earn" share option schemes and the 100,000 or thereabouts participating in company share ownership plans, which used to be described as discretionary share option schemes.

If the Chancellor is intellectually consistent, he is clearly indicating that he wants to abolish tax relief on "save as you earn" share option schemes, company share ownership plans and profit-sharing schemes. If that is indeed the Government's intention, perhaps the Minister will tell us so in his reply.

Photo of Michael Jack Michael Jack , Fylde

The amendment invites us to spend up to £150,000 on a report. That is unnecessary public expenditure. The details will be recorded in the Inland Revenue statistics, and I see nothing in the arguments that we have heard that commends the amendment.

The second amendment confirms that profit-related schemes can save costs for companies. The job that Lord Lawson set out to do with the profit-related pay schemes—encouraging the establishment of such schemes—has now been done; my right hon. and learned Friend the Chancellor now believes that the relationship of profit to pay can be sustained, but without the need for further support from the tax system. I am therefore confirmed in that line of argument in the substantive part of the relevant clause.

My hon. Friend the Member for Eltham (Mr. Bottomley) mentioned John Lewis. I have received a letter and a telephone call from my hon. Friend, and I will consider carefully what he has said; but I remind him that John Lewis has made it clear that it wishes to continue its scheme although, on this occasion, the profit-related pay scheme and the tax relief associated with it have been withdrawn.

I invite the House to reject the amendment.

Photo of Dawn Primarolo Dawn Primarolo Shadow Spokesperson (Treasury) 7:15 pm, 22nd January 1997

That was a rapid speech from the Financial Secretary. I think that he was spoken to about the length of the answers that he was giving. It is a shame that he could not be a little more forthcoming about the Government's assessment of the success of the profit-related pay scheme. It was breathtaking to hear him say that the Government balk at spending £150,000 on a report, when they have just spent £4 billion on a scheme that did not work. Let me add, just in case anyone thinks that that is a spending commitment, that we think that it could be done with the current resources.

There are genuine schemes. I am sorry that the Financial Secretary could not be more helpful to his hon. Friend the Member for Eltham (Mr. Bottomley), who made some very fair points about how we could assist in the future and continue to pursue the Government's stated objective. We have supported that objective—enabling employees to share in the profitability of the companies that employ them, which would encourage greater participation and more understanding of those companies.

We entirely agree with the Government that they could not and should not continue to preside over a scheme that was being so widely abused, but we are entitled to a fuller explanation of the likely impact of the removal of the relief than "The Chancellor believes that it will be OK". I think that—to quote the Chancellor—hell will freeze over before we believe what the Chancellor has to tell us, if it is not substantiated.

The Financial Secretary has behaved in a cavalier fashion this evening. There is a substantial amount of expenditure that he is not prepared to justify. The Government were prepared to squander taxpayers' resources without explaining why. The scheme that we are discussing was a clear abuse—an abuse that they knew was going on—and they have now left 3.7 million people high and dry in schemes that are to be wound up.

We will pursue the matter on another occasion; but, as the Committee wants to make progress, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 62 ordered to stand part of the Bill.