Earners or owners? The right type of growth

The leitmotif of the party conferences thus far has been how the UK can sustain its economic growth and ensure that this is an inclusive recovery not one that serves the interests solely of the few. There has been plenty of talk of regulating wages, raising the lowest paid out of tax and capping energy prices.

Given this refrain, it is perhaps surprising that there has been little consideration of more direct ways of promoting inclusive growth. And, a new proposed tax relief – the consultation for which ended this week – for employee ownership suggests an alternative route to achieve these popular aspirations.

The legal structure of a company might appear at first glance a technical issue, so why should we worry about it?

There is strong evidence that the UK economy would benefit from greater diversity of business ownership, in terms of sustainable growth, productivity and inclusivity. While businesses can be owned by a range of stakeholders – shareholders; private equity firms; partnerships; families; government; consumers; or employees – the dominant ownership model in the UK is the PLC. The UK has a similar proportion of family-owned firms to other European comparators, but they are predominantly SMEs compared to larger family-owned firms in countries such as Germany. Meanwhile, the co-operative sector contributes only 2-3% of UK GDP.

Three specific features resonate with the main theme of the party conferences, in particular to the opportunities available in wider employee ownership. First, employee-owned firms are by definition inclusive – with profits being distributed to the workers.

Second, greater diversity of ownership structures potentially brings advantages at an economy-wide level, in terms of resilience, a longer-term outlook and investment in skills. Due to a wider range of financing patterns and risk profiles across different firms, an economy with greater diversity of ownership is likely to display a less uniform response to economic booms, financial crises and recessions. Research from Cass Business School supports this, with employee owned businesses dramatically out-performing other firms during the economic downturn (although only marginally underperforming in the upturn).

Third, evidence from both the USA and the UK suggests that employee ownership can lead to a productivity premium to the firm. This has been estimated as a one-off 4-5% boost which is retained in subsequent years.

Notwithstanding these advantages, business diversity has faltered on a number of rocks, not least existing tax disincentives. Such barriers mean that firms do not always adopt the optimal structure for their business.

The Government is now looking to introduce a £50m pot to spend on a capital gains tax relief for firms selling into an employee ownership structure and on a national insurance and income tax relief for employee owned firms. In designing this new tax a number of aspects should be forefront of mind.

Defining the right eligibility criteria will be vital to the sustainability of the initiative and the outcomes it generates. A similar relief was scrapped in 2003 due to its vulnerability to tax avoidance abuse, and the new scheme must be designed to be defensible against such concerns. Restricting access to the relief to those organisations where the firm’s assets are locked away would go some way to providing this reassurance. It would also make sense to limit eligibility to majority-employee owned businesses (i.e. where more than 50% of the company is owned by employees). Happily such a restriction sits comfortably with evidence that those firms that have more significant levels of employee ownership also benefit most from the productivity enhancement that comes from employee ownership.

Beyond this, the Government could also think about how to steer more firms into popular employee share ownership through the £610m subsidies it currently spends on share ownership schemes, a large chunk of which subsidises share schemes directed only at senior management. And, it could also use the relief as a lever to promote participatory governance structures.

Finally, there remains a danger that the scheme could become a victim of its own success. If the policy is effective, the value of the relief – and therefore the level of the incentive – will decline over time as the number of organisations and employees claiming from the fixed pot expands.

The twentieth century Conservative Party went through a major shift from representing the interests of owners to representing the interests of earners as well. David Cameron might reflect that here is one way of doing both at the same time, and it might just be music to the ears of conference goers.

The SMF is undertaking a wider project looking at business ownership in the UK. The research is sponsred by The John Lewis Partnership.


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