Carole Leslie

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If employee owned companies do so well, why the need for government support?

November 30, 2012

The Westminster politicians have been very vocal on employee ownership over the past two years.  We have seen the Cabinet Office push the idea of employee led mutuals for services spinning out of the public sector, and the Deputy Prime Minister stating his intention to “drive employee ownership into the bloodstream of the UK economy”.  In recent months, the Chancellor has proposed a new employment status of “employee shareholder” and the Government is now reacting to the recommendations of the Nuttall report.  While the politicians deliberate, UK employee ownership, particularly in Scotland, continues to grow. This begs the question, do we need this political intervention?

The US experience suggests fiscal support does make a difference.  In 1998, the US Government introduced a suite of measures to promote equity ownership by employees.  Due to the federal tax incentives, the most common form of employee ownership is the Employee Stock Ownership Plan (ESOP) model—a regulated employee benefit plan.  In addition to corporate tax concessions depending on the proportion of shares held by the ESOP, business owners selling to an ESOP can defer certain tax liabilities and deduct contributions.   Employees pay no tax on stock allocated to their ESOP accounts until they receive distributions, and then, at potentially favorable rates.  100% ESOPs, registered as S Corporations, pay no federal income tax.  The impact of these policies have been significant. The number of participants in ESOPs doubled from 1999- 2010 and the number of ESOPs is expected to triple from 2012 to 2020.

Of course, one effect of this in the US has been a dramatic increase in the number of specialists; lawyers, accountants and consultants who are expert in this area. The Nuttall report identified the complexities of the process and the model, the lack of knowledge  amongst advisers and the low levels of awareness within the business community.  If such an incentive is on offer, advisers would make it their business to sharpen up their knowledge of employee ownership which would better equip them to guide their clients through the transaction, and thus raise the profile. In one fell swoop, these obstacles are removed.

As we anticipate the Autumn statement, will the Treasury make such a bold move to follow through from the loud words?  The government itself says the case for employee ownership is proven; they have the power to make it happen.

Posted in: General