Taking the Chance
2015 is proving to be an absolutely pivotal year in what I have labelled for some time now as this decade of employee ownership in the UK.
More people than ever before understand we need more businesses in the UK that are totally or significantly owned by their employees because of the higher productivity, greater levels of innovation and outstanding financial performance employee owned companies deliver. Due to the contribution it makes to growth and competitiveness, employee ownership has a massive role to play in our economic future. This is especially true in the knowledge-based companies on which the UK economy relies. Overall, the number of employee owned businesses is increasing by 9% year on year. The profile of employee ownership has risen to unprecedented levels. It is a growing economic force.
This progress in our sector will continue to be mainly based, as it has been so far, on businesses and entrepreneurs out there in the real economy growing employee ownership. We must never look to Government to build our sector for us. But it is natural ahead of next month’s UK Budget we consider whether there are any new fiscal measures we would like the Budget to include to help to keep the employee ownership sector booming.
The context is important. We remain hugely grateful the major tax incentives the Employee Ownership Association designed and led the campaign for were included in last year’s Finance Act. The 2014 measures are definitely starting to help to accelerate the growth of employee ownership in the UK because they provide additional reasons for companies to move into employee ownership. Indeed I am confident the 2014 measures will in time become the most important fiscal changes relating to employee ownership ever created.
But in the meantime there are still some brutal structural economic realities that we are not making progress on. Levels of employee engagement in UK businesses are, for example, in the lower quartile of international standards. Similarly, we remain on average 20% behind our main industrialised competitors when it comes to many aspects of productivity. And our economy is still blighted by the disproportionately high number of businesses in it that are obsessed with short termism. Employee ownership offers solutions to exactly these economic challenges. So it is legitimate for us to assess what else Government might want to do in partnership with the employee owned sector. What next then?
July’s Budget is an opportunity for Government to carry on playing a supportive role by doing three new things.
Firstly, the upcoming Budget should reduce corporation tax by 3% for employee owned businesses that invest heavily in research and development. Employee owned businesses are not constantly seeking to artificially inflate the short term value of their businesses in order to satisfy external shareholders. Instead they make brilliant investment decisions for the very long term health of their businesses. This should be incentivised beyond the routine tax breaks that businesses can secure for research and development regardless of their ownership structure. This proposal would be self financing.
Secondly, the July Budget should include a commitment to annually increasing by twice the rate of inflation the cash value of the income tax free element of profit related bonuses and dividends that are paid by employee owned businesses to their employees. This would be another powerful incentive for more employee buy outs and for more owners who are interested in ethical reward structures to take their businesses into employee ownership. Again this measure would pay for itself.
Thirdly, the July Budget should create a £15million fund, via the state owned banks, to provide long term loan finance at cost to fund employee ownership transactions. Moving an existing business into employee ownership often relies critically on the ability of the employees and the current owners to access long term patient capital to finance the change of ownership. The businesses that are created through such funding make an outstanding contribution to the economy. Government is ideally placed to quickly improve access to this type of finance.
So, July’s UK Budget is an opportunity for politicians and officials to build on the excellent support given to employee ownership in last year’s Finance Act. They can contribute further to the next surge in the number of employee owned companies and by doing so boost economic growth. Above all this is a chance to be bold and ambitious about the role employee ownership is playing in our economy.
Let us see whether they take the chance.
Iain Hasdell is Chief Executive of the EOA