Budget 2014: The decade of Employee Ownership

18^th March 2014

Iain Hasdell discusses how the Budget 2014 can be incorporated into employee ownership

Employee ownership is the model in which a business is totally or significantly owned by its employees. It already contributes more than £30bn each year to the UK economy, equating to approximately 4% of GDP.

The twelve months since the last Budget have been a seminal period in what is undoubtedly the decade of employee ownership in the UK. We have successfully shifted the debate on this agenda away from ideological pleas on to the economic business case for more employee ownership. Consequently, more people than ever before understand that we need more employee ownership in the UK because of the higher productivity, greater levels of innovation and outstanding financial performance it delivers.

Because of the growth and competitiveness contribution it makes, including in the smaller knowledge-based companies on which the UK economy increasingly relies, employee ownership has a massive role to play in our economic future. The number of employee owned businesses is increasing by around 10% year on year. It is a growing economic force. It is a successful business model in every sector of the economy that constantly challenges the conventional wisdom of those who suggest business owners should always share ownership with external investors. The profile of employee ownership has risen to unprecedented levels.

In this encouraging context, it is not a coincidence that the UK Coalition has incorporated in the current Finance Bill all of the tax incentives to encourage employee ownership that the Employee Ownership Association has called for. These hugely appreciated new measures will make a major contribution to the growth of employee ownership in the UK by creating additional reasons to move companies into employee ownership.

But what next, and how does Budget 2014 fit in?

Despite the very welcome recent return to economic growth in the UK there are still some brutal structural realities that we are not making progress on. Levels of employee engagement in UK businesses, for example, are 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. We have not had an overseas trade surplus since 1998. And our economy is still blighted by the disproportionately high number of businesses that operate with a dominant goal of driving near term shareholder value. An economy that is too often structurally obsessed with short termism.

Employee ownership offers solutions to exactly these economic challenges. It should therefore be an important part of UK industrial policy. It deserves to be dealt with in the same high profile way that other high value added sectors of the economy such as pharmaceuticals and aerospace are. It is every bit as important. Only then will even more businesses aspire to be employee owned and move in that direction. Only then will announcements about Government investment in employee ownership move, as in those other sectors, into the hundreds of millions of pounds.

The overall case for employee ownership being a core part of UK industrial policy is overwhelming. But at the moment it does not have that status. Budget 2014 is an opportunity to change that by doing four things.

Firstly, it should endorse the Employee Ownership Association target of 10% of UK GDP being delivered by employee owned businesses by 2020. This would give employee ownership parity of esteem with other growth and high added value sectors of the economy in industrial policy terms.

Secondly, Budget 2014 should reduce corporation tax by 5% 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 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.

Thirdly, Budget 2014 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 to their employees by employee owned businesses. This would be another powerful incentive for more employee, as opposed to management, buy outs and for more owners who are interested in ethical reward structures to take their businesses into employee ownership.

Fourthly, Budget 2014 should announce that the currently state owned banks will each be obliged to provide £10millon per year of long term loan finance to fund employee ownership transactions, for every one of the next five years. Moving an existing business into employee ownership 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 and sustainable contribution to the economy. Government is ideally placed to quickly improve access to this type of finance.

Overall, the momentum behind employee ownership is very good. Budget 2014 is an opportunity for politicians and officials to contribute to the next wave of progress and by doing so to boost economic growth. Let us see whether they seize that chance.