We are delighted to celebrate the 11th annual employee ownership (EO) day!
Introduced by the government in 2014, EO enables companies to become owned by their own employees via a trust structure, with an employee ownership trust (EOT) retaining a controlling interest in the underlying company.
The Employee Ownership Association (EOA) has marked this year’s EO Day with an update on the sector, stating that 332 businesses had transitioned to employee ownership in the 2022 calendar year alone, and that as of June 2023 the total number of companies owned partially or fully by their employees has reached 1,418. This means another record year with 37% growth of the sector in just 12 months.
But why is EO so popular?
One of the key benefits for the seller is that, provided the key conditions are met, the proceeds they receive for their shares upon a sale to an EOT can be received entirely tax free.
The tax rules mean that to obtain the tax free sale, the EOT must acquire a ‘controlling stake’ in the business (i.e., more than 50%), however, the owner can still remain engaged with the business – in fact they can remain a full time employee and receive a commercial salary for their role whilst they remain employed.
There are benefits for the employees too. The EOT structure enables employees to receive tax free bonuses each year of up to £3,600. In addition, research has shown that EOT owned businesses can be more productive and profitable as a result of increased employee engagement.
The government have recently announced that they will be consulting into EOTs later this year. They have stated that they plan to ensure that the reliefs are targeted closely at incentivising EOTs as an employee ownership business model, rather than as a method for unintended tax planning. The generous tax reliefs may therefore have a limited shelf-life…
If you are contemplating a sale to an EOT, it would be wise to take advice as soon as possible.
Contact a member of our tax team by emailing enquiries@pmm.co.uk to discuss your situation in more detail.
