Labour – Inclusive Ownership Fund and Employee Ownership Trust

Last week we wrote about the Labour Party’s planned changes for capital gains tax and the potential impact on employee share schemes. Caveat – this blog is not intended to be a political broadcast on behalf of any particular party – it’s simply that Labour’s manifesto and policy papers happen to contain stuff on employee share ownership.

With less than a week to the election, we took another look at a recent Labour policy paper on corporate governance, where there’s more information about Labour’s controversial Inclusive Ownership Funds (IOF) and how they might operate in the context of the pre-existing Employee Ownership Trust (EOT) arrangements. In particular there is discussion of how “exemptions” might operate for companies with EOTs.  Very broadly, the concept of the IOF involves larger companies (with more than 250 employees) having to transfer up to a maximum of 10% of shares over time into an “inclusive ownership fund” for their employees. The shares would carry votes, and pay dividends up to an amount of £500 p.a. for each employee. The immediate and obvious arguments against the IOFs is that they’re effectively forcing companies to transfer share ownership to employees, plus the fact that the £500 dividend payment isn’t actually that high, and any surplus goes to the government.

Labour have stated in their paper on corporate governance that the Employee Ownership Trust is “the most similar existing employee ownership scheme” to an IOF — although I’m not sure I quite agree with this. An EOT will commonly hold much more than 10% of the shares for employees and many – though not all – have a controlling interest in the company.

Where companies are majority owned by an EOT, the trust may not deliver “voting rights” as such, but employees as a group would have a much greater level of ultimate control than individual employee shareholders with a 10% stake. Furthermore, companies controlled by an EOT can pay tax free (not NICs free) bonuses of up to £3,600 per employee each year – much more generous than the dividend that might potentially be offered under the IOF – and still with a NICs slice available for the government pot.

Labour seem to be proposing exemptions from IOFs for companies with EOTs in situations where the EOT “benefits all employees” (which an EOT does by definition) or where “greater than 10% of equity is vested in employees” (again, which many EOTs do – depending on what you mean by “vested”, of course). So it’s really not clear to us what the intention is here.

Alternatively there is a proposal for a profit sharing scheme for smaller private companies delivering 10% of post-tax profits to employees, plus “voice rights”. The frustrating thing for share plans practitioners is that there is already in existence a perfectly good all employee share scheme that delivers something very similar to the proposed IOF (but without the enforcement envisaged) – the Share Incentive Plan (SIP):

• Can you transfer up to 10% of the equity in your company to the SIP over time? – Yes
• Are the shares held for all employees? – Yes
• Can dividends be paid? – Yes
• Can employees vote their shares? – Yes
• Can a SIP operate alongside an existing EOT? – Yes

Needless to say, as share schemes practitioners, we would be more than delighted if a government made it a legal requirement for every company with more than 250 employees to implement a SIP! More seriously, the devil of any proposals would be in the detail. However, we do hope that (in the event of a Labour majority or other role in government) Labour’s team would review carefully existing share plan legislation to avoid throwing out any babies with the bathwater. If you’d like to find out more about employee share schemes, including the Employee Ownership Trust and the Share Incentive Plan, call us on 0208 949 5522 to speak to one of our consultants, or email us on enquiries@rm2.co.uk.