In his budget in April this year, George Osborne announced that, with effect from 2014, the Treasury would set aside £50m in tax reliefs for the employee ownership sector.
On top of this, in yesterday’s Autumn Statement George Osborne put the Government’s money where its mouth is, pledging a further £25m in support of this fast-growing sector of the UK economy.
In a move that goes beyond simply throwing money at the sector, Osborne set out in more detail how these reliefs will work for UK businesses. There are to be two reliefs. The first is a capital gains tax relief for non-employee owners selling into an employee ownership structure. Such sellers will receive their gains on the sale tax free. The second will allow certain employee owned businesses to pay bonuses of up to £3,600 per employee each year free from income tax and national insurance contributions.
For years, the evidence base has been growing that employee owned businesses have significant advantages when compared with non-employee owned businesses. They are typically more productive, flexible and sustainable with lower staff turnover when compared to their industry peers. The sector, by some measures, now represents more than £30bn of UK turnover.
But if employee ownership is so successful, why are more businesses not employee owned and why is the government offering special tax reliefs?
The Nuttal Review in 2012 highlighted a number of obstacles that the sector faces that other businesses do not.
The largest of these is often ignorance among advisers and institutions. When entrepreneurs and business owners speak to their accountants, lawyers and financers about ownership options, employee ownership is rarely mentioned. When it is, it is often subject to misconceptions (“it will mean management by committee”) and ignorance (“it’s too complicated”). The new tax reliefs will force the advisory sector to increase its level of understanding of how employee ownership actually works, so that businesses in the UK can be given a genuine choice about how they structure their ownership.
The new tax reliefs are aimed at a very particular form of employee ownership: where all or most of the ownership in the organisation is held in a special employee benefit trust that holds the ownership on behalf of all the employees in the business. This is the basis on which businesses such as John Lewis Partnership, Make Architects and indeed ourselves, Baxendale, are owned.
The most stable and long term employee owned businesses are typically those where all or most of the ownership is held in such a trust. This is primarily because ownership can be held, in effect, in perpetuity, without the disruption of ownership succession as each generation retires.
However, holding ownership in a trust means that profit cannot be shared with the employee owners through dividends as the employees do not directly own any shares. This is what the second tax relief seeks to address; it enables trust owned businesses to distribute profit to employees in the same way as other companies do with dividends. This helps level the playing field between employee owned businesses and non-employee owned businesses in how they can share profits with their owners.
The incentives are also about an issue that faces most SMEs: ownership succession. When ownership succession involves a trade sale, it usually results in a sale to a competitor. Such a sale can lead to the business, skills, employment and indeed taxes (another reason for the government’s interest) leaving the UK and their local communities. A sale into employee ownership can retain these elements while also allowing an owner to exit at a fair price.
£75m will not go that far and it is unlikely that many organisations and business owners will choose to go down the employee ownership route just to secure these new tax reliefs. But if they lead to a wider awareness among business owners and their advisers of employee ownership as a legitimate option with unique advantages, then that will be a good result.
Ewan Hall is an adviser with Baxendale Ownership, an employee owned consultancy that specialises in advising employee owned businesses and businesses transitioning to employee ownership.
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