A share ownership plan that's more about tax
The Labour Party has recently proposed a new scheme for creating wider share ownership, the Inclusive Ownership Fund. Companies with over 250 employees would be required to put up to 10% of the shares of the company in a trust for the benefit of employees. Employees would be entitled to dividends on the shares, up to £500 per annum each, with the rest going to the Government. What some would call a “social dividend” and others “confiscatory taxation” could raise up to £2 billion a year for the Treasury.
As someone who works in the area of Employee Share Ownership and Employee Share Option Schemes there is, in my opinion, a major flaw with the blanket imposition of such a scheme.
The proposal of the scheme plays to the general consensus that wider share ownership is a good thing with broad support. This has manifested itself in many forms. They include the Thatcher government’s privatisations, the coalition government’s “shares for rights” scheme (a horse designed by a committee turning out to be a camel, if ever there was one) and the growth in the number of employee-owned businesses in recent years.
Employee owned businesses may well be a good model. Statistics produced by the Employee Ownership Association say that employee owned businesses increased productivity by an average of 4.5% year on year at a time when the productivity growth in the UK economy as a whole is flat and that the number of employee-owned businesses is growing at an annual rate of just under 10%.
As well as wholly employee owned models of ownership there is already a wide range of share option schemes available. The share option scheme generally acknowledged as the best for small to medium companies is the Enterprise Management Incentive Scheme or “EMI”. This was introduced by the last Labour government and has been widely adopted. It provides tax advantages for both company and employee and is extremely flexible. It is designed to attract, retain and incentivise key employees. It works best when implemented early in a company’s growth curve, because any capital gain for the employee on the shares is taxed at the lowest Capital Gains Tax rate and is not subject to income tax.
By comparison the “Shares for Rights” scheme has been a failure, largely because it involves workers giving up certain employment rights in exchange for some economic rights, which are two things which have nothing to do with each other.
The new scheme proposed by Labour is also flawed in many regards. It will lead to a sudden increase in companies with 249 employees and also, as with the “Shares for Rights” scheme, confuses two more completely different things, in this case employee incentivisation and taxation.
But the biggest problem with it as a credible scheme is that experience tells me that one size does not fit all. You cannot impose one single type of share ownership scheme on thousands of different businesses and expect that ownership to deliver consistent benefit to those businesses.
Indeed, the right advice to businesses looking at wider share ownership is sometimes that it will not address their needs and they should look at something else. One of the range of schemes available may well be beneficial, but they need to be chosen and implemented with a detailed knowledge of the business’s ethos and objective.
Labour’s proposed “inclusive ownership” does not recognise this which is why, for me, it is all about the tax raising opportunities and not about the genuine benefits that can flow from wider share ownership
Jonathan Oxley, Northern Powerhouse Ambassador and former regional chairman, Institute of Directors