The latest feel-good story from the progressive think-tank circuit has arrived: a business owner ‘sold his company to his staff’, and this is being hailed as the future of capitalism. Forgive me if I don't join the standing ovation just yet. In my 20 years watching the City, I’ve learned that when something is marketed as a panacea for capitalism’s ills, it usually comes with a hefty price tag for the taxpayer.
Let’s look at the numbers. The model, championed by the Employee Ownership Trust (EOT), allows owners to sell a controlling stake to a trust for the benefit of employees, often without requiring workers to fork out their own savings. Tax reliefs are generous: capital gains tax is effectively waived on the sale, and employees get tax-free bonuses.
Sounds wonderful for the sellers and the staff, but who picks up the tab? You guessed it: the Treasury. HMRC estimates that EOTs cost the public purse over £1.
4 billion in forgone tax revenue since 2014. That is money not spent on schools, hospitals, or potholes. It is a subsidy to business owners to exit their companies on favourable terms, dressed up as worker empowerment.
Meanwhile, inflation remains stubbornly above target at 3.2%, and gilt yields are edging up as the market worries about fiscal discipline. The government is borrowing to cover its spending, and this tax break for employee ownership is just another claim on the nation’s credit card.
Capital flight is a real risk if we continue to signal that business ownership is a charitable act rather than a wealth-creating engine. Of course, the enthusiasts will point to John Lewis as the poster child for employee ownership. But even that hallowed institution has struggled: profits vanished, bonuses were suspended, and they are now cutting costs.
The EOT model works best when the business is already profitable and stable. For a struggling enterprise, it can be a slow-motion car crash. Employees become owners, but they are also the ones who will face the brunt of restructuring if the market turns.
And turn it will. The Bank of England’s rate hiking cycle has yet to fully filter through to the real economy. Higher rates mean higher debt service costs for leveraged EOTs, which typically borrow to fund the purchase.
That debt must be serviced from profits, leaving less for reinvestment or wages. So much for the productivity miracle. Let’s be clear: I am not opposed to profit-sharing or employee participation.
But the rhetoric that this model is ‘capitalism’s future’ is dangerously naive. The future of capitalism lies in improving total factor productivity, encouraging risk-taking, and maintaining a competitive tax environment. Instead, we are creating a two-tier system: a privileged caste of employees who get to enjoy tax-free bonuses, while the rest of the workforce pays full whack and watches the public services they rely on crumble.
The market efficiency argument is simple: if selling to staff were truly superior, the market would have gravitated towards it without a tax inducement. The fact that the government had to bribe owners into doing it tells you everything you need to know. It is time to stop romanticising employee ownership and start demanding fiscal realism.
The bottom line is this: the nation cannot afford to keep subsidising feel-good business experiments. If the EOT model is so wonderful, let it stand on its own merits without special tax treatment. Otherwise, it is just another case of the state picking winners and losers, and we all know how that ends.
