Despite increasing awareness of the long-term economic benefits of the employee-ownership business model, we have been devoid of any distinct tax incentives to promote employee ownership in the UK, until now. The most recent Finance Bill, which is expected to receive parliamentary assent this summer, will formally launch a range of tax incentives to stimulate employee ownership.
There will be an exemption from income tax of £3,600 for certain payments made to employees of qualifying employee-owned companies like John Lewis, and the introduction of a relief from capital gains tax (CGT) for owners selling a controlling interest to a trust which operates for the benefit of all employees.
The tax incentives headline what has been a very busy 18 months of UK policy development in this area, stimulated in the main by the recommendations in the 2012 Nuttall Review of Employee Ownership, ‘Sharing Success’. Much of this policy development underpins a vision set out by Nick Clegg in 2012 for a ‘John Lewis economy’, a model predicated on the concept of ‘responsible capitalism’.
To us at the Wales Co-operative Centre, employee ownership is an economic no-brainer. Giving employees an ownership stake changes their relationship with the business and encourages them to take a positive and proactive role in helping their company grow. Recent research carried out by the Cass Business School supports this by showing that employee-owned businesses are more stable and more resilient as a direct result of the employees gaining a real stake in their success.
The CGT relief is of particular interest to us in Wales. We see employee ownership as a crucial business succession option which can help keep jobs, business and skills in Wales. Too often we hear stories of transfer failure, profitable companies going down the pan because of poorly planned succession or failed third-party purchase. In these cases we always question why employee ownership wasn’t considered. Frustratingly, employee ownership is not actively promoted by mainstream business advisers who feel it’s a little too unconventional, and is misunderstood by mainstream funders who can’t seem to get their heads around a multi-owner business model.
I don’t think anyone can argue that a ‘John Lewis economy’ isn’t a welcome ideal in light of the capitalist-driven banking crisis that has plagued our economy for the last six years. But the John Lewis model is just one form of employee ownership, an indirect ownership model, and we are disappointed that direct forms of employee ownership, such as the worker co-operative model, have not been recognised in the Finance Bill. We only have to look at the successes of worker co-operatives, such as Suma Wholefoods, to recognise the value that direct ownership, supported by co-operative principles, can afford companies.
In our view, tax should not be the sole driving factor to consider employee ownership. Many of our clients in Wales are driven by legacy, and see employee ownership as an approach that engages employees and puts them in charge of their own futures, allowing for continued local business ownership and growth. However, having an additional incentive to help promote the employee ownership exit route is never a bad thing and we’ll be working hard to promote the new relief available to business owners here in Wales.
Let’s just hope those clever tax specialists don’t find some loophole which allows companies to abuse the incentive for purposes other than employee ownership – otherwise we could see it withdrawn from the market as quickly as at arrived.
- Rhian Edwards is manager of the Business Succession project at the Wales Co-operative Centre. The Wales Co-operative Centre has received support from Welsh government and European Union Regional Development funding to promote employee ownership in Wales. Rhian’s team works with micro-businesses and SMEs across Wales to develop employee-ownership approaches and employee-ownership-based succession planning.