Tax breaks could bring a new wave of employee owners, says report

The Equity for All report says its recommendations could bring the largest redistribution of wealth in a generation

Tax incentives could be used to encourage a new wave of employee-ownership transfers – creating 1.5 million employee owners by 2030 and bringing the largest redistribution of wealth in a generation, a report argues.

The Equity for All report, from thinktank Ownership at Work – a partner of the Employee Ownership Association – says the creation of tax-advantaged employee ownership trusts (EOTs) in 2014 doubled the rate of growth in the sector. EOTs are now increasing at a rate of 30% a year, accounting for half of the UK’s £30 billion-plus employee owned sector.

Now, report author Nigel Mason recommends a new range of tax incentives to encourage more business founders to follow the likes of Richer Sounds’ Julian Richer, Aardman Animation’s David Sproxton and Peter Lord, and Riverford Organics’ Guy Singh-Watson. They all made the move to employee ownership by transferring a majority ownership stake in their firms to staff in preference to a trade sale or management buy-out. 

Citing recent estimates of a notional equity value of £175,000 per employee stake in an EOT – typically pooled in a collective holding at present – the report shows how reform could distribute some of that wealth directly to employees without undermining the model.

The report says government should build on the success of EOTs through four reforms which have the potential to ‘transform the economy and society’. They are:

  • Making contributions from a company to its EOT tax deductible, in order to pay back debt more quickly and make the transaction more attractive to exiting owners
  • Making so-called vendor loans to EOTs – where departing owners accept delayed payment for their stake – exempt from inheritance tax
  • Allowing EOTs to allocate their shares to individual employees on an equitable basis, as with the current Share Incentive Plan, instead of – as now – all stakes being pooled in a single trust
  • Allowing firms to make extra pension contributions by crediting company shares to employees’ pension accounts (like the US).

These reforms would make EO transfers more attractive to company owners and founders, and to external investors, and allow employees to build their own capital stakes, says the report.

Related: Interview with Guy Singh-Watson on Riverford Organics’ EO switch

Mr Mason, of advisors RM2, said: “As well as spreading wealth, combining employee ownership with pension savings could help close the UK’s pension gap, with current auto-enrolment rates unlikely to generate enough savings for those reaching retirement age.”

The foreword to the report was written by Julian Richer of Richer Sounds, who transferred ownership of his company to staff earlier this year. He says the move was “the obvious and most sensible thing to do”, adding: “No one knows my business better than the people already in it, so why hand its future to someone who doesn’t know it and whose main concern may be to just run it for cash or resale?”

Related: Aardman, the home of Wallace and Gromit, transfers control to workers

He added: “To sell my business to the highest bidder would have created wealth for one or two people, instead using the EOT model we will sustain the value we create for the individual, the business and the economy for the longer term.

“The EOT paper is exciting as it takes forward an already successful idea to drive forward the spreading of wealth to potentially millions of people, which has to be a good thing.”

Deb Oxley OBE, chief executive of the Employee Ownership Association, said: “The employee-owned sector is now a key player in the UK economy, and it’s growing every day so we are delighted to see Ownership at Work launch this new thinking that will stimulate more national conversations on employee ownership.

“Research continues to show that the employee ownership sector is perfectly placed to address many of the challenges currently facing the UK economy. We are calling for cross party support to look at this compelling bank of evidence. Now is the time for government to work with the EO sector and create a new national strategy for employee ownership that fosters and promotes the growth of EOBs.”

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