The UK coalition government has made the promotion of employee ownership one of its key policies for driving the economic recovery. The UK has a long history of encouraging employee share ownership, both through tax breaks and a permissive regulatory system, but there is now significant support across the political spectrum for employee ownership as a business model. This support is based on evidence that employee owned companies have significant economic benefits, such as higher productivity and growth rates and lower levels of absenteeism.
The indirect employee ownership model
So, what is meant by employee ownership? This is not a straightforward question to answer, as there are many different models in the UK. One phrase coined by the politicians is the ‘John Lewis economy’, which refers to a chain of department stores that is well known for its employee-owned structure. However, employees of John Lewis don’t have direct share ownership – their interest is in a trust which owns the entire business. The financial rewards to employees come through the distribution of the profits of the business in the form of the annual bonus. There is also a democratic governance structure in place which ensures that employees have a genuine say in how the business is run.
This indirect employee ownership model is being promoted through the introduction of tax breaks for structures which involve an employee trust as a controlling shareholder. Shareholders who sell shares to the employee trust will enjoy a capital gains tax exemption, and companies owned in this way will be able to pay tax free bonuses of up to £3,600 to each employee. It is hoped that these tax breaks will make the indirect employee ownership model a genuine alternative when existing owners are looking to exit the business. One can see the attraction of employee ownership for traditional family owned businesses, where the family is looking to exit the business but wants to ensure that the company continues to be run in the right way.
Direct employee equity participation
However, becoming majority owned by an employee trust will not be a viable alternative for most businesses. They will instead be looking to give employees a limited direct equity stake in the company (through stock or stock option awards). There have been a number of recent measures to encourage this form of employee ownership also.
Increase in tax approved plan limits
Firstly, the government recently announced an increase in the limits applicable to the two main tax approved all employee plans, the SAYE plan and the Share Incentive Plan. Companies can now give employees the opportunity to save up to £500 per month over five years in an SAYE plan, thereby giving the potential for very significant rewards. Certain other changes have been made to the UK tax approved plan regime in order to make it easier for companies to operate such plans. See the GEO Blog UK Tax-Favoured Equity Plans – life is full of surprises….
Shares for employment rights
More controversially, the UK government has introduced a new tax break for employees who receive shares in exchange for giving up certain employment rights. The government’s intention was that this would not only further encourage employee ownership but also make it easier and more cost effective to employee people. Anecdotal evidence seems to indicate that the tax breaks are mainly being used to reward more senior employees who are not concerned about the loss of employment rights. See the GEO blog ‘Trading employment rights for equity’.
We will have to wait and see whether the political enthusiasm for all things related to employee ownership continues, but many companies with UK employees will be looking to make the most of it while it lasts.
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