Capital Allowances to Support Growth Ambitions

Capital allowances allow businesses to claim tax deductions against eligible capital expenditures, generally encompassing plant and machinery. 

Aimed at stimulating business growth, by reducing the net cost of these expenditure and stimulating investment across the supply chain – the policy is a key driver of productivity growth.

In the UK, Full Expensing was introduced in 2023, allowing companies to claim 100% capital allowances on qualifying plant and machinery investments – its success saw it made permanent later that year. 

Ensuring that full expensing can have the maximum effect on key UK businesses has been a key priority for the eoa, particularly given the EO sector’s tendency to invest at an increased rate (50%) compared to other businesses. 

We were pleased that, in his 2024 Spring Budget, the Chancellor announced his intention to extend full expensing to leased assets, reflecting eoa engagement with government alongside partners such as the Federation of Small Business (FSB) and Family Business UK. 

Our Proposal

Reflecting Knowledge Programme findings that employee owned businesses (EOBs) invest at higher rates than other businesses, government should aim to use capital allowances to support these investments and enable a greater number of EOBs to unlock their growth potential. 

There are a number of ways of doing this, including:

  1. A specific advanced capital allowances to be introduced for EOBs and other inclusive and democratic businesses aligning to the evidence of their stronger social and economic impacts, and higher rate of investment.
  2. Existing capital allowances, such as full expensing, could be expanded further to cover a broader range of assets. Further work would be required to understand the cost-benefit of extending capital allowances – we therefore propose it would be appropriate to trial this approach across businesses, such as EOBs, with proven higher rates of investment and, delivery of greater economic prosperity and wellbeing.

Unlocking Capital British Business Bank

The British Business Bank’s core finance programmes play a key role in delivering funding into SMEs and strategically important sectors of the economy.

Through our conversations with our members and the Bank, we are aware some of its finance programme funding has supported EOBs, though it's difficult to determine how much. 

We are pleased with the interest expressed by the Bank to support employee ownership and hope to collaborate on further action on this in the future.

Proposal

  1. We recommend the Bank tracks and report on how much core funding is allocated to EOBs. The eoa is well positioned to support this activity, as the manager of the dataset of all EOBs across the UK alongside our academic partners the WRCEO.
  2. Going further, the Bank could then set a % target for funding that can be directed at EOBs and other inclusive and democratic business models.

Investor Reliefs to Stimulate Investment into EOBs

Investor reliefs play an important role in supporting SMEs and particular business models in seeking external finance to fulfil their growth ambitions.

The tax reliefs for individual investors who invest in new shares of qualifying businesses include:

  • The Enterprise Investment Scheme (EIS)
  • The Seed Enterprise Investment Scheme (SEIS)
  • The Social Investment Tax Relief (SITR)

SITR is focused on Social Enterprises, and so not applicable to businesses operating a legislated EO model, such as the EOT or direct EO using a tax-advantaged share scheme. The scheme does, however, demonstrate that there are ways to harness the tax system to incentivise investment into business models that deliver on prosperity and economic wellbeing.

Proposal

  1. Extend EIS to cover almost all the EO sector by uplifting the allowance to 499 employees, which would align with the threshold for knowledge-intensive companies. It may also be appropriate to review the investment limit.
  2. Commit to understanding lessons learned from SITR and CITR schemes; both from the funding they have unlocked and the flaws in the schemes which limited their impact. 

As the EO sector grows, consider introducing a specific relief that can be applied to EOBs and similar businesses that disproportionately contribute to building a better UK economy.

In the case of EOBs, this would only be appropriate so long as employees (either directly or through a trust) maintain the controlling interest of the company.

A ‘Fair Banking Act’ to Ensure Equitable Access to Financial Services 

Some EOBs are facing difficulties in accessing lending, and in some cases difficulty in accessing financial services more widely. 

This problem extends beyond employee ownership to the wider business community, particularly SMEs. The FSB, for example, has acknowledged and sought to act on, how the use of personal guarantees by banks can significantly limit business growth, “…forcing entrepreneurs to put their homes or other assets on the line when taking out finance.”

Beyond these wider challenges, EOBs do often face their own specific challenges when accessing financial services. The issue of personal guarantees, for example, can be even more problematic for a trust-owned company, whereas asset financing can be challenging for leading industries in the EO sector, such as professional services. 

This issue goes beyond lending, and we have seen cases of banks not understanding the model, even threatening to close down or refusing to open accounts for EOBs. 

While our members have often found ways around this, particularly with the support of a strong specialist business support eco-system, in many cases financial service providers have been unwilling to take simple steps to accommodate EOBs in their processes.

Proposal

The eoa will continue to engage with banks to ensure they understand the model and support both them and our members with appropriate guidance. To go further, we support the calls for a Fair Banking Act. 

This Act would aim to require mainstream banking institutions to disclose their performance on financial exclusion, in a transparent, publicly available, data disclosure framework. This would create a system for clear ratings, showing which banks are doing well and which need to improve. These ratings would, in theory, be improved by:

  • Expanding the provision of affordable and ethical lending to underserved communities, giving fair access to credit regardless of people’s backgrounds or where they live
  • Providing fair services to those who are underserved and excluded, either directly or via a partnership (see below)
  • Creating partnerships with co-operative or other purpose-driven banking institutions to enable these specialised organisations to expand their services and support for financially excluded people and businesses

While this would be beneficial in ensuring that businesses across the board, particularly SMEs, would avoid being excluded from accessing financial services, the Act could have a particular benefit in ensuring that Banks are accommodating a range of business models and structures in their internal processes.

Discover more on our Manifesto page or download the full manifesto directly.