With Danny Alexander MP set to make a major speech on employee ownership, SMF Deputy Director and author of a recent report on employee ownership Mutually Assured Growth, Nigel Keohane, sets out four policies that he hopes the Chief Secretary might take on.
As the SMF’s recent paper argued, there are compelling reasons for the Government to be proactive in encouraging more employee ownership. The UK economy is currently very short on business ownership diversity: family firms are large in number but employ a smaller proportion of employees than their European comparators; the co-operative sector contributes only 3 percent to UK GDP; evidence suggests that the number of firms offering share schemes has declined markedly and that the number of firms offering tax-advantaged schemes to all their employees has also fallen in recent years.
Set against this, the evidence shows that an economy with greater diversity of ownership is likely to display a less uniform response to economic booms, financial crises and recessions. Research also shows alternative business forms can generate a productivity premium at the firm level, estimated at between 2 and 5 percent.
In his Autumn Statement, the Chancellor made the rare move of being more generous than his initial promise and pledged £75m to support the sector through tax incentives.
Along with the reforms initiated following the Nuttall Review, it would be right to acknowledge the contribution of the Government in this parliament to the employee ownership sector as significant. That said, with one eye to the 2015 election, here are a number of additional policies that the Coalition or its successor should think seriously about:
- Setting up an Employee Ownership Lending Bank so that firms that would like to morph into an employee-owned or employee owned firms that want to expand can access the necessary finance. This would help address the shortage of finance that employee owned firms have complained of.
- Scrapping three of the Government’s existing share incentive schemes and consolidating them into the Share Incentive Plan. The evidence suggests that share schemes that are open to all employees rather than just senior managers are more successful at delivering productivity improvements. However, two of the four tax incentivised schemes (Enterprise Management Incentive scheme and Company share Option Plans) are not all-employee schemes; a third (the Save As You Earn) allows employees to sell out their shares immediately.
- Incentivising firms to offer shares to new recruits. This could be done by guaranteeing relief from employer National Insurance Contributions for a five year period to all firms that provide shares to new hires. This could be introduced in April this year when the Government introduces its NI relief for new hires.
- Winning external investors over to the wisdom of employee ownership by offering a capital gains tax relief to new investors who invest at the same time as employee ownership is introduced.
Nigel Keohane, Research Director, is available to comment:
020 7227 4401 (SMF landline)
07906 778 516 (mobile)