By Daniel Hunter
The government has launched a consultation on £50 million worth of tax breaks for employee-owned companies.
They [the government] want to make it easier for entrepreneurs to hand ownership of their companies to employees amid evidence that businesses owned and influenced by workers have proved more resilient during the economic downturn.
Chancellor George Osborne announced in this year's budget that the government would provide £50m in 2014, and the same amount in 2015, to support employee ownership. Alexander will say on Thursday that the government will provide tax relief that is "supportive and effective".
The Treasury will consult on offering capital gains tax relief when a controlling stake in a business is sold to employees collectively, rather than to individual shareholders.
A second tax break would allow employee-owned companies to pay staff a tax- and national insurance-free bonus each year.
“It will be interesting to see these proposals when they are finally published. So far all we have seen is the press comment fed by the Government’s spin machine," Cormac Marum, former inspector of taxes and head of tax advisory at UK200Group member firm Harwood Hutton, said.
“All the evidence suggests that, where employees have a stake in the business in which they work, results improve all around. Any measures which encourage wider employee ownership should be welcome.
“Currently, if owners of a family company transfer ownership to its employees, the departing owners usually pay capital gains tax at just 10%. If they pass majority ownership to an employee trust, the transfer is tax-free. It is hard therefore to see what a new improved capital gains tax relief will be. Presumably, it will allow a tax-free transfer of a controlling stake directly to the employees collectively?
“Hopefully, the new measures proposed will not be burdened by reams of anti-avoidance regulations designed to prevent ‘abuse’. Either transferring a controlling stake to employees collectively is a good thing or it is not. Set some simple rules and allow people to use them. Smothering them in masses of anti-avoidance tests will simply weigh down a promising idea before it gets off the ground.
“Will these new rules help with management buy-outs? Such MBOs have been a common way for businesses to be passed on to new owners. To date, the MBO team has often been narrowly drawn and funded by venture capital finance. This has been criticised for encouraging a short-term strategy as the venture capital fuelled MBO seeks a short burst of growth followed by a quick exit. While such strategies, if successful, deliver big financial rewards for the few in the MBO team and their financial backers, they don’t necessarily benefit the majority of the workforce.
"Will these new measures encourage MBOs where employees collectively receive a majority stake in the business? Could this temper the normal short-termism and allow the wider workforce to enjoy the fruits of more sustained success over a longer time? Probably not, if venture capital money has still to be relied upon to finance the business and insists on its quick return. Probably yes, if longer term finance was available to such businesses.”
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