Guest blog - Employee Ownership: hardwiring wellbeing and prosperity into our economy through an effective tax regime

The eoa is a membership organisation that supports and promotes employee ownership in the UK.

Tax regimes can be pretty complex, especially if, like me, you don't have a specialist background in tax.

In fact, it’s a subject many people think has nothing to do with them, other than what comes out of their paycheck or the amount of council tax they’re paying.

For us at the eoa, and in the partnerships in which we work to drive better impacts for people, planet and place - we know that tax can and should be focused on achieving human wellbeing and prosperity across the economy.

It’s the only return on investment that should really matter when you're considering revenue and the public purse.

With the UK still deep in the cost-of-living crisis, facing ever-rising inequality, suffering stagnated productivity and growth, and struggling to translate growth into wealth retained across the country, it’s time to really think holistically about how tax can enhance economic wellbeing and prosperity.

A tax regime that supports the growth and impact of employee ownership (EO) is a vital part of achieving those aims and forms part of the eoa’s manifesto, which we launched on May 14 to provide decision-makers with a clear path forward to unlock EO's full potential for the UK economy.

Employee Ownership and Why it Matters

With cross-party support, the UK government has long accepted the positive impact that EO has on employees, businesses and our wider economy.

In 2014, the government took the first step in unlocking these impacts by introducing the Employee Ownership Trust (EOT) into legislation. This tax-advantaged model simplifies broad-based ownership of a business by its current and future employees and enables straightforward profit-sharing across employee owners.

The model incentivises business owners to sell their shareholding to their employees through a capital gains tax relief.

The EOT has been rocket fuel for the EO sector (precipitating growth of more than tenfold) and is widely regarded as a world-leading model, which other countries are now seeking to emulate.

As the sector grew way past the 1,000 mark, more research into their behaviours has been conducted, most notably as part of the EO Knowledge Programme in the performance report ‘People Powered Growth’ which details a broad range of impacts, including:  

• Employee owned businesses (EOBs) pay higher basic wages and share profits. In 2020, EOT payments put £2,729 in the pocket of each employee.
• EO drives up economic productivity. EOBs are found to be 8%-12% more productive per employee than other businesses.
• Most EOBs see profits grow after becoming EO. They are 25%+ more likely to have seen profits grow over the last five years.

Moreover, the UK is in a situation where thinking about ownership is vital for resilience and sustainability.

Last year, the independent think tank Ownership at Work published research with support from the eoa showing that more than 51,000 SMEs risk closure in the next decade due to retiring owner-founders, other ownership changes and a lack of succession planning.

These are commercially successful businesses contributing to our growth and prosperity that EO, as a proven succession route, can keep anchored in the UK economy for the longer term.

In their consultation on EOTs last year, the government reaffirmed its support for EO and Kevin Hollinrake, minister of state for business and trade, has been vocally supportive of our manifesto, stating:

“It’s fantastic to see that employee owned business are thriving, they represent a unique and valuable part of our economy and by working with passionate advocates like the eoa, I know that they’ll continue to go from strength to strength.”

A Comprehensive Tax Regime to Support Employee Ownership

We've called on the government to publish the outcome of last year's consultation on taxation of employee trusts. The eoa has welcomed the proposals that the government initially put forward in the consultation as positive measures needed to protect the model from misuse.

But since then, there’s been a deafening silence creating a vacuum now filled with speculation as to the future of the EOT.

Confidence that the legislative framework around the EOT will continue to support businesses considering the transition to EO is crucial to sustain and grow the sector.

We also urge the government to go further to futureproof this world-leading model by making sure the advantages for employees are reviewed to uplift the cap on the income tax free employee bonus - the primary vehicle of profit share to employee owners through the model - in line with inflation and that a review period is enshrined in legislation to have further review points.

The cap, which currently stands at £3,600, is at the same level as when introduced a decade ago but is worth more than £1,000 less due to inflation.

When considering potential increases in tax exemptions of this nature, it's correct to be concerned about potential revenue constraints that may arise.

But, while the evidence HMRC have made available on the revenue impacts is shaky (another area which we strongly encourage the government to take straightforward steps to act on) it’s clear that an uplift in tax free bonus cap would have minimal revenue impact, while allowing the EOT to retain its significance in incentivising employee ownership and unlocking its potential for wellbeing and prosperity.

Beyond the EOT, we're also calling on the government to explore how it can use the tax regime to support maturing EOBs to fulfill their growth ambitions and, in doing so, further unlocking the benefits the model offers.  Additionally, we’re urging a review of how capital allowances can be used to promote ownership models that are found to deliver on the country's economic strategic priorities - as is done with industries and sectors that do the same.

What Else?

Looking further than the tax regime, we encourage the government to act on several priorities to continue incentivising EO, building the sector, and support existing EOBs.

These proposals present a realistic and practical set of opportunities that the government can take forward to unlock the potential of EO – more sustainable, resilient businesses, innovating and investing in regional economies for the longer term.

The manifesto sets out how the government can enable access to capital for EOBs, utilise the business support eco-system to promote succession planning, leverage public procurement strategically, and show clear political leadership through engaging with the sector.

With an election round the corner, the eoa is engaging with all the major political parties to ensure that employee ownership is understood as a non-political, common-sense path towards growth, productivity, and wealth creation across the UK. 

Want to hear more or work with us? Contact me on [email protected] to discuss our policy drive.

The views expressed in guest blogs are those of the writer and are not necessarily shared by CIOT.