IT IS not surprising that the government is trying to encourage more employees to take a significant stake in their company. Firms with employee shareholders tend to have higher productivity, greater levels of innovation and better employee engagement. But while it is good that the government is recognising the benefits of the model, the measures it proposed this week don’t go far enough to making employee share-ownership an easy option for companies to follow.
The government’s proposals involve creating an off-the-shelf model for setting up an employee-owned business, a partnership with the Institute for Employee Ownership to publicise this, and setting up an implementation group to act as a sounding board to ministers. While these are all positive moves, they mostly serve the purpose of raising awareness.
We’re missing practical solutions to the question of why more businesses do not offer employees the opportunity to become shareholders. And for those that already do, the process is still too complex – involving copious amounts of management time.
While a variety of businesses may be interested in adopting an employee share ownership model, tax legislation could be a deterrent for many. If the government really wants to encourage more businesses to increase their number of employee shareholders, there must be more action aimed at simplifying and streamlining the tax system.
For private companies, for example, offering shares can be complex and may involve protracted negotiations about tax valuations. This can sometimes lead to employees receiving unexpected tax bills many years later. Putting in place an approved plan to offer shares to employees may also take months to agree with HM Revenue and Customs. This may change, however, if recommendations by the Office of Tax Simplification are followed. But until the tax and operational barriers are dismantled, I doubt the government will see the levels of employee share ownership it hopes for.
The issue is confused further by another idea that has recently come out of the Department for Business, Innovation and Skills – the new employee owner contract. This is where an employee gives up some of his or her employment rights, like their right to unfair dismissal and statutory redundancy pay, in return for shares. But there are now concerns that the two separate proposals could be confused. This creates the risk that employee ownership in general could become tainted by the perception that it always includes a loss of employment rights.
Simply raising awareness of the employee ownership model will not be enough. We need to see real action aimed at simplifying the tax system and improving the wider operational environment. Hopefully, this action will be provided by the chancellor in his December Autumn Statement. Until then, we need a little less conversation, and a little more action.
Carol Dempsey is an employment tax partner at PwC.