HMRC last month completed a consultation to develop and make changes to the taxation of Employee Ownership Trusts (EOTs), still seeking to continue its initial policy objectives, which are to promote employee ownership and honour the contributions of employees. This consultation is due to the government’s concerns regarding the structure being exploited for purposes beyond these, primarily to gain a tax advantage during the sale of a company.
What is an Employee Ownership Trust?
Employee ownership involves employees having a share in the company they work for, which means when the company succeeds, they benefit as well. The Government supports and promotes employee ownership to help the economy grow, as outlined in the Growth Plan 2022. Individuals who sell shares in a company to EOT trustees receive 100% Capital Gains Tax relief, provided certain conditions are met.
Employee ownership comes in two primary forms:
- “Direct ownership” where employees personally own company shares.
- “Indirect ownership” where a third party holds shares on behalf of employees.
An independent review named ‘The Nuttall Review’ conducted by the Government advisor on employee ownership in 2012, found that companies owned by their employees demonstrate stronger performance, adapt more efficiently to changes, and boast a workforce that is more dedicated and engaged.
In response to the review, the Government introduced measures to raise awareness of employee ownership and support existing and new employee-owned businesses. Part of this initiative was to offer tax benefits for company owners who shift their businesses to indirect employee ownership, with control held by trustees of a qualifying trust known as an Employee Ownership Trust.
HMRC states:
“To qualify for this relief the trustees must hold a controlling interest in the company as a result of that disposal and meet other conditions as set out at section 236H of the Taxation of Chargeable Gains Act 1992. The trustees are then bound by the terms of the trust to apply the trust property for the benefit of all the eligible employees of the company or group of companies. There is no Inheritance Tax charge on the transfer of shares to an EOT, and the EOT itself is exempt from the Inheritance Tax relevant property regime. Additionally, relief from Income Tax is available on qualifying bonuses of up to £3,600 per year per employee of the EOT-owned company.”
Qualifying bonuses are payments other than regular salaries or wages, distributed equally among all employees with some flexibility based on factors like salary, length of service, or working hours.
HMRC Proposed Changes to Employee Ownership Trust
The proposed changes to the Employee Ownership Trust includes:
- Removal of the 50% Ownership Limit – One of the main proposed changes is the removal of the disqualifying condition that currently restricts EOTs from owning more than 50% of the company’s shares. This change is designed to provide greater flexibility in EOT shareholding.
- Flexible Financing – HMRC is considering allowing EOTs to use external financing to acquire shares, thereby easing the financial burden on employees seeking to purchase the business. This could make EOTs a more feasible option for a broader range of businesses.
- Enhanced Reporting and Governance – The proposed changes include improved reporting requirements for EOTs, which would enhance transparency and accountability. Additionally, governance standards are expected to be heightened to ensure the protection of both employees and the business.
- Encouragement of Long-Term Ownership – The introduction of a minimum ownership period for participants is aimed at promoting long-term employee ownership and discouraging short-term speculation.
Potential Implications for Business Owners
The removal of the 50% ownership limit and greater financing flexibility may make EOTs more appealing to business owners considering succession planning options. EOTs are designed to boost employee engagement and motivation.
The proposed changes may strengthen these objectives by encouraging long-term commitment to the business. These changes could lead to a wider adoption of EOTs across various industries and business sizes. A higher number of EOTs may have positive economic implications by supporting local businesses and ensuring long-term stability for employees. While the proposed changes aim to improve EOTs, they may introduce new regulatory challenges. Effective administration will be essential to ensure proper management and governance of EOTs.
Free Consultation with Expert Tax Dispute Lawyers
The proposed changes to Employee Ownership Trusts represent positive steps toward making EOTs more accessible and beneficial for both business owners and employees. These changes could lead to a broader adoption of this ownership structure, potentially resulting in positive economic and social impacts. At present, we are yet to see the results of the consultation which ended on 25 September 2023.
If you have a tax related legal matter, please do not hesitate to contact our expert tax dispute lawyers for a Free Consultation on 0207 459 4037 or complete our booking form below to schedule a call.
