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Labour urged to scale back plans to give workers stake in firms

Richard Partington Economics correspondent
Photograph: Toby Melville/Reuters

Radical Labour plans to pay workers as much as £500 each in dividends, by forcing every large company in Britain to give staff a 10% stake, should be scaled back to focus on profits generated in the UK market, a key architect of the policy has said.

In response to criticisms of the landmark proposal by the shadow chancellor, John McDonnell, the leftwing Common Wealth thinktank said changing the policy to focus on profits made in Britain, rather than globally, would help to address concerns that firms would relocate to avoid the rules.

Such a move would also limit the impact on company investors and pension funds, and counter accusations that the inclusive ownership funds policy would be a stealth tax benefiting the Treasury more than workers, it added.

The refreshed plan comes from Mathew Lawrence, the director of Common Wealth, who was influential in the launch of the original proposal.

The suggestion could give an insight into Labour’s thinking as the party prepares its manifesto, which is expected to include further detail on the funds, which aim to give workers greater control of firms and a bigger share of profits.

A party source said: “Labour will set out its full plans for government and publish its manifesto in due course.”

The original plan, announced a year ago, was designed to force companies with more than 250 employees to transfer shares to an ownership fund controlled by its workers. Firms would hand over at least 1% a year, up to a maximum 10%.

Control of the shares would entitle workers to any dividends a company paid to its shareholders, up to a cap of £500 per employee. In effect a new levy on private business, any payouts above that level would go to the Treasury.

The plan is designed to benefit 10.7 million workers at about 7,500 companies across the UK.

The updated Common Wealth plan would force firms to issue a new kind of company share controlled by workers that would have rights to up to 10% of dividends related to UK-generated profits.

Limiting the scope of the policy to domestic profits would reduce the total value of inclusive ownership funds to about £5.8bn, with about £3.6bn available to workers under the £500 cap. About £2.2bn would be paid to the exchequer.

Analysis published in September by the law firm Clifford Chance said forcing the largest 600 public and private firms in Britain to pay dividends on global profits would mean paying out about £10.7bn. However, it said the £500 cap would mean £1.3bn was paid to workers and £9.4bn to tax authorities.

Common Wealth said the plan would be fairer as UK workers would share in the rewards most closely linked to their work, rather than that of their international colleagues.

The five largest FTSE-100 firms paid out £33bn in dividends last year, which would mean paying £3.3bn to inclusive ownership funds under the old policy design. Those firms only had 60,000 UK workers, who would have been entitled to £55,000 each if there was no cap in place.

With a cap of £500, about 99% of the dividends would go to the Treasury, in effect meaning a significant tax on global companies for being headquartered in the UK.

The thinktank said: “By tying the policy to UK activity rather than UK headquarters, it would significantly mitigate the incentive on firms to relocate, as the policy’s cost would be proportional to UK activity.”

It also said companies would not be able to avoid creating inclusive ownership funds by relocating their headquarters, alluding to a law in France that forces firms to share profits with employees, which is mandatory for companies with at least 50 staff.

“To build an economy that is democratic and sustainable by design, we need to transform how the company operates and for whom,” Common Wealth said. “Fundamental to this must be a deep institutional turn in ownership to redistribute not just wealth and income, but power and control within the firm.”