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Labour’s ‘inclusive ownership funds’ proposal: is there a better way?

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The Labour Party has proposed that all companies with more than 250 employees should, over a ten-year period, put up to 10% of their share capital into an employees’ trust. Of the dividends paid on such shares, employees would benefit from tax-free distributions of up to £500 per year, with the balance going to the government by way of a hidden form of advance corporation tax. This idea has met with derision from many companies and advisers – and rightly so.

Yet hidden within that proposal lies the seed of a perfectly good idea which might be of real attraction to many companies of whatever size.

A more balanced proposal?

I refer to the concept – first put forward in the context of ‘employee ownership trusts’ – that dividends on collectively-held shares in a company could be paid out to qualifying employees, on an ‘all-employee/similar terms’ basis, and that, provided such dividend income of the trust was so distributed to employees within a period of, say, three months of receipt:

  • it would be exempted from tax in the hands of the trustees; and
  • fall to be taxed as dividend, not earned, income in the hands of the employees.

Such an arrangement would be voluntary and, to an extent, ‘self-policing’ in the sense that, if there were no profits, there could be no dividends. Likewise, to the extent that all shareholders are paid dividends, so too would the employees – without individual employees needing to buy, or pay tax on the acquisition of, an actual holding of shares. The £2,000 dividend tax exemption would mean that most employees would not pay tax, and if, exceptionally, the individual distributions exceed that sum, it is surely fair and reasonable that tax (but not NICs) is paid on the amount of the excess at the employee’s marginal rate.

The shares in question would need to be of the same class as that held by the majority or controlling shareholders or, at least, have rights to receive payment of any dividends which are no less favourable than those attaching to any other class of share in issue.

To qualify for such favourable tax treatment there might be a threshold percentage level of shareholding which must be so held collectively – but this could equally be left to the determination of existing shareholders. Such a collective holding – through a trust – would also afford the opportunity for the votes attaching to such holding of shares to be cast by the trustees in a manner which they determine to be “in the best interests of employees”, and for the company to establish a corporate governance structure for the selection and appointment of trustees. That said, perhaps the principal objective of the collective ownership of shares would be best served by allowing any voting rights on such shares to be restricted or suspended.

Provision would be needed to address the question of how the proceeds of sale of the collective holding should be applied if the company were sold. This is a conundrum facing The John Lewis Partnership and other such ‘employee-owned companies’ (being not in fact ‘owned’ by individual employees): who ultimately derives benefit from the growth in capital value of such shares? It would surely be unfair for only those in employment at that time to derive such growth. If the idea is merely to encourage dividend distributions to employees, the shares so held could perhaps be redeemable at par, or for a nominal sum, in the event of a sale of the company, so that capital value is retained by other shareholders.

This is merely the seed of an idea. It will be interesting to see if the Conservative government might germinate it into a fully-developed structure for enabling employees (as opposed to the government) to share in annual profit and thereby afford incentive to work for the success of all shareholders.