One of the criticisms of Entrepreneurs’ Relief (ER) has been its broad use to reward key employees in a business rather than just benefiting those who might be more reasonably regarded as true entrepreneurs. It also misses the fact it can drive entrepreneurial behaviour across a company.
The mechanics of how ER works have undoubtedly driven how certain companies have structured their shareholdings and how many employees have been invited to become shareholders in the company (other than through an enterprise management incentive scheme (EMI)). It has also influenced business owners and their families to be wary of relinquishing control of the company and be slow to consider succession opportunities.
However, governments have already provided a mechanism which gives entrepreneurs an exit route, encourages business succession planning and creates an entrepreneurial mindset among employees, with the opportunity to share in the profits – Employee Ownership.
Richer Sounds and Aardman Animations are recent members of the employee ownership club, joining the likes of John Lewis, that show this can be a sustainable and ultimately, more profitable route for companies.
ER may promote entrepreneurial behaviour in a few key employees, but it also encourages short-termism with exit strategies at the forefront. Various reports, such as the Social Market Foundation, ‘Strengthening Employee Share Ownership in the UK’, suggest employee-ownership encourages the owner mentality and entrepreneurial attitudes in all members of staff, leading to long-term planning and better staff retention.
The take-up of an employee-owned business model is increasing but remains limited compared to more traditional routes. The Nuttall Review on employee ownership, led to changes in legislation in 2014 and the introduction of a package of tax reliefs to incentivise more businesses to take up the model. This included a zero per cent capital gains tax rate where a controlling stake is sold to an Employee Ownership Trust (EOT) and the ability to give staff a tax-free annual bonus of £3,600.
Despite these favourable tax incentives, it seems ER has remained the familiar option, following its predecessors of retirement relief and taper relief. Its abolition may make more people aware of the employee ownership model leading to a 21st century approach to entrepreneurship, patient capital and the opportunity to establish sustainable business structures.
In light of the anticipated windfall in tax revenues from scrapping ER, perhaps some of those funds could be put towards to removing remaining barriers to employee ownership, such as charges on company loans to employees or employee trusts to acquire shares and help drive wider entrepreneurial behaviour in the UK workforce.