Tag: Nuttall Review

Employee ownership on agenda for professional advisers

Graeme Nuttall smlA recent CDS seminar saw professional advisers gather in Glasgow to hear from Graeme Nuttall OBE, author of the Nuttall Review of Employee Ownership.

Here, Graeme – partner of Fieldfisher – discusses the growing enthusiasm for the model, the important role played by CDS, new tax reliefs and Scotland’s success stories.

I was delighted to be invited to speak to an audience of professional advisers in Glasgow and was hugely impressed at the level of interest and enthusiasm that exists for employee-owned business structures.

There can be no doubt – the case for employee ownership has been made. A few years ago, a company owner looking to explore employee ownership would likely have been dissuaded from this path by their adviser. Now, advisers are much more likely to present employee ownership as a feasible succession option for their clients.

Co-operative Development Scotland (CDS), under the leadership of Sarah Deas, must take some credit for this achievement. CDS has been instrumental in building the employee ownership community in Scotland, and engaging with professional advisers to help them recognise the role these individuals and firms play in the development of employee ownership.

Advisers will know about the tax advantaged share plans designed to increase individual share ownership amongst a firm’s employees. These have been around for almost 40 years. In the Nuttall Review, I wanted to give greater priority to the trust model of employee ownership.

This is a simple model and gives employees a collective ownership of the company. I was delighted that as a result of the findings of the Nuttall Review a new tax regime for “employee-ownership trusts” (EOTs) was introduced last year. Briefly, there are two main new tax exemptions:

  • From 6 April 2014 there is an exemption from Capital Gains Tax (CGT) on gains on certain disposals of shares in a trading company (or in a holding company of a trading group) that provides an EOT with a controlling interest in that company; and
  • From 1 October 2014 there is an exemption from Income Tax (but not National Insurance contributions) of £3,600 per employee per tax year for certain bonus payments made to all employees of a company or group where an EOT has a controlling interest.

The CGT exemption has attracted attention to employee buy outs as a succession solution. Instead of a sale of shares being taxed typically, for owner managers, at an effective rate of 10% after entrepreneurs’ relief, there is an unlimited exemption from CGT.

The Income Tax exemption means there can also be a tax benefit for staff in this business model. In most cases dividends otherwise payable to the EOT as a majority shareholder are waived by its trustee and are paid out instead as bonuses to all staff – tax free up to £3,600 per employee per tax year.

This is a key concept – instead of external shareholders receiving dividends and staff bonuses being paid simply at the discretion of a board of directors, the EOT model provides staff with an economic stake.

However, tax should not be the driver of employee ownership. It is important that attention is paid to the business case. Scotland has more than its fair share of success stories.

Page\Park Architects, recently appointed to restore the world-renowned Glasgow School of Art Mackintosh Building, is a superb example of a trust owned model of ownership. Stewart Buchanan Gauges, a business where 85% of the workforce live within a five mile radius, represents the hybrid model of trust and direct employee share ownership. There are many more, and increasing all the time.

It’s always rewarding working through a transaction to completion. With an employee ownership transition, there is an additional bonus in that the relationship extends beyond the deal. The average life of a Standard & Poor’s listed company was apparently 60 years in 1958, around 30 years in the 1970s and was down to 15 years by 2014. Obviously businesses have to evolve and markets change but I like the idea that companies I help convert to employee ownership many years ago are still in existence in contrast to their competitors.

It was a real pleasure visiting Glasgow, especially speaking to so many advisers already convinced of the benefits of employee ownership. We do need more champions, and with advisers onside I trust we’ll see even more employee buyouts in Scotland over the next few years.

To read the speech Graeme gave during his presentation at Ernst & Young Glasgow, click here.

2014 is a time for change

Kim Lowe Director John Lewis Partnership

Co-operative Development Scotland recently hosted ‘Embedding a Culture of Ownership’ in collaboration with the John Lewis Partnership – the UK’s largest employee-owned company.

 Kim Lowe, managing director of John Lewis Glasgow, shared insights with an audience of over 30 existing and prospective employee-owned businesses in Scotland. Here she explains why she thinks 2014 is the year for employee ownership.

A new year presents opportunity for change. It is my hope that 2014 will see more businesses adopt the Employee Ownership (EO) model, aided by legislation and by examples of best practice. New legislation will be included in this year’s Finance Act after a period of parliamentary scrutiny and will mean that bonus payments to staff of employee-owned companies will be free from income tax up to an annual limit of £3,600. We hope this will encourage the creation of more employee-owned firms and will also help existing EO businesses – such as The John Lewis Partnership – to thrive. 

Last year, the Government-commissioned Nuttall Review revealed the link between employee-owned businesses and long-term economic success. According to academic evidence, they outperform other companies in job creation, have a lower risk of failure and are more satisfying places to work.

Employee ownership, in my experience, is most often motivated by a desire for a fairer and more responsible form of capitalism. At the John Lewis Partnership, shared ownership means engaging our Partners to deliver more for our customers and the business.  It means adopting a positive culture based on sharing in the rewards of success and creating a business that remains resilient in the face of challenging economic conditions. Giving employees a personal stake in the long-term success of their business is a powerful way of aligning their interests.

While the Government is starting to take forward many of the Nuttall Review recommendations, the playing field is still weighted against employee-owned businesses. The EO model remains relatively rare in Britain, despite evidence to suggest numerous benefits to the economy.

For too many and for too long, ownership has implied the right to sell, when I would contend that good ownership means the responsibility to nurture, develop and sustain organisations for the long term. This requires a change in culture and the way we perceive ownership in the UK. This shift won’t be an easy one to make but if done correctly it could mean a new generation of high-growth businesses, new employment opportunities, greater productivity and an economy better able to cope with the turbulence we will face in the decades ahead.       

Kim Lowe, managing director of John Lewis Glasgow

Kim Lowe, managing director of John Lewis Glasgow

 The article above appeared in The Scotsman on Thursday 9 January 2014.

Why Scotland should take Employee Ownership seriously

Sarah Deas 05Co-operative Development Scotland’s (CDS) Advisory Board recently met to explore ways of increasing take up of employee ownership.

CDS is the arm of Scottish Enterprise (SE) that is charged with promoting employee ownership.

Here, Sarah Deas, chief executive of Co-operative Development Scotland, explains how they invited policy influencers and membership bodies to join the debate.

In order to bring participants up to speed the features and attributes of employee ownership (EO) were first described. Participants heard how Scott & Fyfe, Tullis Russell, Accord Energy Solutions and Galloway & MacLeod came to choose the model and the resulting benefits. With the exception of Accord, these were all long established family businesses that chose EO as a succession solution. Whilst their experiences differed, there was one common and positive result – long term sustainability of the business and its jobs. This offered a clear demonstration of ‘why we should take the model seriously.’

The benefits described by the participants included securing local employment, driving performance and generating socio-economic well-being. We heard that since 1992, the ‘Employee Ownership Index’ has outperformed the FTSE each year by an average of 10%. Also, EO businesses have a significant presence in the ‘Sunday Times Best Businesses to Work For’ – there are three in the top 10. Clearly the model won’t be appropriate in all cases, however, research shows that on balance it out-performs other models.

Scottish paper and board manufacturer Tullis Russell made the transition to employee ownership in 1994

Scottish paper and board manufacturer Tullis Russell made the transition to employee ownership in 1994

It was acknowledged that there is growing political interest in the model, both within Scotland and across the UK. The Nuttall Review generated 28 recommendations that are currently being taken forward. HM Treasury has committed £50million per annum to incentivise uptake and recently consulted on the best way to use this funding. CDS is promoting the model directly to businesses and via the media and professional advisers. 83 professional practices (lawyers, accountants and bankers) have met with CDS over the last year – and two are now even considering the model themselves!

 We also learned that 73% of Scottish businesses are family owned and account for 50% of private sector employment. However, evidence shows that only 9% progress into third generation family ownership. So, what is happening when the family sells out? Answer: trade sale, management buy-out, employee ownership or insolvency. EO is one of the options – but suffers from being little known and understood. It was acknowledged that the number of businesses being sold has reduced due to the recession – which may lead to what some call the ‘succession time-bomb’. 

So, what more could we be doing to position EO as an effective option?

It was now time to reflect on the wider policy and business environment. Who better to kick off this discussion than respected economist, Jeremy Peat? He described two lenses through which we could look at the economy: GDP (output) and ‘economic well-being’. Jeremy felt that there are signs that economic well-being is becoming more important to the Scottish public: ‘There is a change in tone … and EO is part of this’. 

Jeremy Peat OBE

Economist Jeremy Peat

In reflecting on finance, he worried that there is limited understanding of the model by banks resulting in a lack of mutual empathy. In his view, we need banks to take a longer term perspective, new forms of finance (eg patient, crowd) to be created and for equity investors to appreciate that longer term factors matter. On a positive note, Jeremy felt that this is starting to happen. Overall, he felt that more plurality of business models would be helpful in rebalancing the economy. A ‘let many flowers bloom’ approach.

Guests included representatives of the Institute of Directors, Confederation of British Industry and Royal Society for the encouragement of the Arts, Manufactures and Commerce, alongside members of SE’s regional and industry advisory boards. Some shared perceptions of what they had heard. Others focused on the process by which the model could be most effectively introduced to companies. 

Scottish Enterprise and Highlands & Islands Enterprise account managers were seen as crucial in this process. A focused approach was strongly recommended, enhanced by diagnostic tools and support from ambassadors.  An important message was that EO should be presented as one of the options – cautioning against a ‘one trick pony’ approach.

The rich and wide ranging discussion also explored the employees’ view and the role of unions. The model was shown to work well from all perspectives. In summing up, it was felt that the ‘quick buck era has gone’ and ‘people are increasingly questioning values and priorities’. Employee ownership is a model for ‘sustainable enterprise’ and, as such, has an important role to play.