Government proposes action to support employee ownership

In its response (23-page / 158KB PDF) to an independent review of the sector, conducted earlier this year by adviser Graeme Nuttall, the Department for Business, Innovation and Skills (BIS) pledged to assess whether to establish an Independent Institute for Employee Ownership and promised to create 'off the shelf' models for setting up an employee-owned business.

The Government intends to work with the John Lewis Partnership, one of the country's most prominent employee-owned businesses, to examine barriers to funding for private sector employee-owned companies.

The Government has also published draft legislation and a short consultation, which closes on 16 November, to reduce the regulatory burden for businesses needing to buy back shares from ex-employees when they leave the company.

An implementation group, chaired by the Minister for Employment Relations, will be established to oversee the changes and will hold its first meeting next month. The group will consist of representatives from the Government, business and professional services and the employee ownership sector.

Employment Minister Jo Swinson said that employee-owned companies had proved to be "flexible and resilient" during tough economic times.

"Graeme set us a challenging agenda and our response is equally ambitious," she said. "We will address one of the biggest barriers to take-up of employee ownership schemes: awareness that it exists. We will improve access to the information and help people understand what they need to start up and run an employee-owned business. And we will clarify what practical steps businesses need to take in order to become employee owned, as well as encouraging more businesses to consider it."

Employee-owned companies are those where the employees have a "significant and meaningful" stake in the company they work for, particularly by owning shares that amount to a substantial or controlling stake. Companies can be owned directly by employees through the use of employee share plans or indirectly, where shares are held collectively on behalf of the employees usually through a benefit trust. There were around 250 UK businesses wholly or significantly owned by their employees, with an annual turnover of approximately £30bn and 130,000 employees, in 2011.

In his report Nuttall listed lack of awareness and resources, including finance, as well as the existence of perceived or real legal, tax and regulatory complexities as the main barriers to the creation of more employee-owned businesses. The adviser will produce a "one year on" report next year to assess how the Government has implemented his recommendations.

Following a call for evidence, the Government has decided not to create a statutory 'right to request' employee ownership due to the potential regulatory burden this will create for businesses and employers. Instead, it will work with ACAS and others to develop guidance for employers and employees interested in requesting and agreeing employee ownership, it said.

Tax and incentives expert Matthew Findley of Pinsent Masons, the law firm behind Out-Law.com, said that the new announcements "added to the momentum" behind the Government's ongoing drive for wider employee share ownership. However, he called on the Government to provide more concrete initiatives than "raising awareness and providing guidance".

"If the Government is serious about widening employee ownership it needs to remove a number of the barriers which currently exist, especially amongst SMEs and private companies," he said. "The policy objectives are laudable but raising awareness and providing guidance will not increase employee ownership alone. The Government will also need to simplify the relevant parts of the tax system if real change is to be effected."

He added that business would be pleased that the Government was consulting on simpler share buyback rules, allowing them to do so more easily than through the use of an employee benefit trust.

Although the recommendations in Nuttall's report apply to companies in the private sector, the Government's response is intended to compliment the Cabinet Office's work on mutuals in the public sector. Mutuals provide opportunities for public sector staff to 'spin out' of Government control and establish their own employee-owned businesses.

"We know that employee ownership can drive higher productivity, efficiency and innovation," Cabinet Office Minister Francis Maude said. "Since 2010 the number of public service mutuals has increased six-fold. We know that very few want to go back because they now have much more freedom to do their jobs how they know is best."