Growth and Infrastructure Bill — Commons Amendments

Part of the debate – in the House of Lords at 6:45 pm on 24 April 2013.

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Photo of Lord Adonis Lord Adonis Shadow Spokesperson (Treasury) 6:45, 24 April 2013

My Lords, I said at the outset of our debates on this shares-for-rights scheme that it makes the back of the envelope look like Magna Carta. As a result of our deliberations, the envelope is somewhat more neatly addressed, and for that at least we should be grateful. I join other noble Lords in paying tribute in particular to the noble Lord, Lord Pannick, who has pursued the Government tirelessly on this scheme and, if I may say so, has become something of the constitutional conscience of the House, with large numbers of Members being dragged along or tagging along with him but none the less getting to the right place in the end.

I also acknowledge the important role played by Conservative and Lib Dem Peers on this issue, notably the noble Lords, Lord Forsyth and Lord King, and the noble Baroness, Lady Brinton, who have been indefatigable in raising the issues that we have had to address and in ensuring that we have secured at least some safeguards in the Bill and made the proposal at least somewhat less objectionable than it was when it was introduced.

There have been some safeguards and the Bill is somewhat less objectionable, but the reality is that this shares-for-rights proposal is still fundamentally flawed and fundamentally wrong. It is not the details that are wrong; like the poll tax, the basic idea is wrong. The idea that fundamental employment rights granted by Parliament to ensure that employees are treated fairly can or should be traded for shares, let alone shares worth as little as £2,000, is fundamentally objectionable. We are talking about basic employment rights which, as the noble Lord, Lord Forsyth, pointed out in our deliberations, have been granted by Governments, including Conservative Governments, over recent decades: the right to redundancy pay; the right not to be dismissed unfairly; the right to request flexible working in order to look after dependants; and the right to request training. These are basic rights and, as the noble Lord, Lord Bilimoria, said, there is a fundamental confusion at the heart of this proposal between employment rights on the one hand and enhancing wider share ownership on the other. We are all in favour of wider share ownership. Indeed, the Government commissioned the Nuttall review, which reported only six months before this proposal came out of the Chancellor's bath in favour of a whole set of measures to widen share ownership. Not one of them was the proposal before your Lordships this evening and indeed it was not even considered by Nuttall, so absurd would it have been to the Nuttall advisers.

Therefore, we are in a situation now where we have some safeguards, particularly respecting the most vulnerable members of the community who might be faced with signing shares-for-rights contracts without the knowledge of what is in them, and for that we should be grateful. However, we still have fundamental objections to this proposal, and it comes to us as a revising Chamber with the weakest possible mandate: it was in no one's manifesto; it was not in the coalition agreement; it was not recommended by any independent review of any kind; the majority which came to us from the Commons was below the Government's normal majority; and it has been opposed by business, and so on. Therefore, as I said, it comes to us with an extremely weak mandate.

Even with the safeguards in the Bill, this proposal is still unacceptable, and not just in principle, as I said a moment ago, but in practice too-in particular, in respect of the tax status of these shares and the huge opportunities which this proposal gives for tax avoidance, as my noble friend Lord Myners stressed. Of course, I understand that discussions have taken place between those who were opposed at an earlier stage and the Government, and that a way forward has now been reached, but the noble Lord, Lord Forsyth, can never contain his real views. He is always commendably frank. His exchange with the noble Lord, Lord Flight, could not have been more telling. We are now just hoping that the Government, after we have enacted this legislation, will deal with the huge potential for tax avoidance which is not just theoretical but which the independent Office for Budget Responsibility stated, as my noble friend Lord Myners noted, is a potentially massive vehicle for efficient tax planning in a way that will lose the Treasury money. The OBR said that,

"the cost is expected to rise towards £1 billion"-

I repeat: £1 billion-

"beyond the end of the forecast horizon ... it is hard to predict how quickly the increased scope for tax planning will be exploited; again this could be quantitatively significant".

We are expected to pass this legislation this evening in the hope that this will be resolved when I had always thought that it was the job of Parliament not to enact legislation until we were clear that the possibly unacceptable effects of that legislation had been addressed. Paul Johnson, the director of the Institute for Fiscal Studies, said:

"Just as government ministers are falling over themselves to condemn", tax avoidance,

"that same government is trumpeting a new tax policy which looks like it will foster a whole new avoidance industry".

And in my discussions with tax lawyers this afternoon, which I assure your Lordships made the last debate that we had in the House look like a bundle of laughs, they pointed out to me a whole string of potential loopholes raised by this provision that will not be easily dealt with at all. Matthew Findley, a partner of the lawyers Pinsent Masons and a member of the Share Plan Lawyers group and the Share Schemes Expert Group, says:

"The Government has ... sought to limit the scope for major shareholders to become 'employee shareholders' ... It has barred those who own 25% or more of a company from becoming employee shareholders".

However,

"there remains considerable scope within SMEs and unlisted companies for senior management to be provided with very tax-efficient equity in return for giving up employment rights which they probably don't value or need".

Richard Murphy, a chartered accountant and tax expert who is a member of the General Anti-Abuse Rule interim advisory panel that drafted the guidance on anti-abuse for the Treasury, says that the rules in respect of employee shareholders to prevent tax abuse are weak and likely to be open to considerable abuse. For example, while it is suggested that an employee shareholder may not hold more than 25% of the shares in a company and qualify for this scheme, this would be all too easy to manipulate, especially in the case of a new company where any share ownership might be extremely flexible. In addition, given the ingenuity shown by many lawyers in their structuring of share capital, it would be all too easy to attribute value of much more than 25% to shares issued to any employee shareholder if that was desired. Furthermore, when there are no clear rules laid down on how valuations are to be agreed, and when these are exceptionally difficult to determine objectively in the case of small start-up companies whose owners might be tempted to make use of this arrangement, then the scope for tax avoidance exempting large swathes of future profits from the sale of SMEs is all too easy to envisage.

That is just the beginning. I have pages more like that which I am not going to detain the House with, all of which will need to be resolved if we are not to face, as the OBR said, a potential tax leakage of £1 billion or more in respect of a scheme which was entirely designed to promote growth and more entrepreneurial activity and not to give a big handout in terms of capital gains tax to those who are able to organise their tax affairs accordingly. In short, this shares-for-rights scheme is like the Hydra: every time you cut off one head, another two appear. As the noble Lord, Lord Forsyth, put it when we first debated this:

"The scheme is ill thought through, confused and muddled".-[Hansard, 20/3/2013; col. 597.]

We agree; this scheme is ill thought through, confused and muddled. It will do nothing to promote growth and we will not be supporting it this evening.