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    Tag: EOT

    HMRC launches consultation into Employee Ownership Trusts (EOTs) and Employee Benefit Trusts (EBTs)

    Posted on by Rebecca Campbell

    HMRC launched their consultation into Employee Ownership Trusts (EOTs) and Employee Benefit Trusts (EBTs) yesterday.

    Following the initial announcement that HMRC were planning to consult into the effectiveness of the Employee Ownership (EO) structure, there was some concern that EOTs may have a limited shelf life, however, the consultation makes it clear that EO continues to be encouraged by the Government:

    “The key principles underpinning these reforms are to ensure that the favourable tax treatment remain available to those who use EOTs for the intended policy purposes, whilst preventing tax advantage being obtained through us of these trusts outside these intended purposes.”

    The objectives of yesterday’s consultation process seem sensible and HMRC appear to be focusing on areas where there has been uncertainty and potentially scope for misuse of the reliefs. We welcome these proposed changes.

    HMRC are asking for input from individuals, trustees, business owners, tax advisers, those involved in corporate restructures including business owners and advisers and non-Governmental organisations with an interest in business or tax for their views on:

    Trustee issues

    The Government wish to seek views as to whether there should be a limit on the number of trustees of an EOT who can be made up by former owners of the business (or those connected with them). Their concern is that it can be questionable whether such an arrangement actually delivers ‘meaningful change’ for the employees of the business. The Government is proposing that the former owners should not control the EOT, although it is proposed that they will still be able to be on the trustee board

    This seems sensible in theory, however it will require some careful navigation to ensure that those being appointed will add value and not just be there to make up the numbers thereby allowing the conditions to be met

    Trustee tax residency

    There is currently a potential loophole which could enable an EOT to be located offshore, and thus potentially escape CGT in the event that a “disqualifying event” occurs. Where such an event occurs in a certain period, the EOT can be treated as having disposed of and immediately reacquired its shares, giving rise to a CGT charge.

    The Government are looking at measures to close this potential avoidance loophole and we welcome this proposed change.

    Funding issues

    Often, sellers are paid for their shares using funds generated by the company over a period of time. As the EOT is the purchaser, they typically require the funds generated by the company to be paid to the EOT by the company, to enable the EOT to then pay the seller for their shares.

    As the EOT will be a shareholder of the company, there is a risk that these payments could be treated as dividends in the EOT (and therefore subject to income tax).

    HMRC practice is typically for these contributions to be treated as non-taxable, however this is not in set out in law. HMRC intend to put beyond doubt that the contributions to an EOT will not be taxable. They propose to put this in law. Again, this is welcomed.

    Bonus payments to employees

    One of the benefits of EOTs is that employees (including directors) can be paid tax free bonuses of up to £3,600 per year. There are strict requirements that need to be met here, and failure to meet these conditions can lead to a withdrawal of tax reliefs. One of these conditions is that all employees (including directors) must be treated equally (meaning they must all be able to benefit).

    HMRC wish to consult on these rules, specifically with a view to relaxing them to enable awards to be made to employees, but not necessarily to directors at the same time. Again, this is a sensible proposal and should provide more flexibility to EO businesses who are looking to incentivise their employees.

    Summary

    In summary, the announcements in the consultation appear to be sensible, and should bring welcome change, clearing up areas of uncertainty.

    The consultation process is open for 10 weeks until 25 September 2023.

    We will be participating in this and feeding our views back to the Government and providing updates as and when they arise.

     

     

    23 June is employee ownership day!

    Posted on by Rebecca Campbell

    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.

     

    Government announces consultation into Employee Ownership Trusts (EOTs)

    Posted on by Katie Heaton

    On 27 April 2023, as part of HMRC’s Summary of Tax Administration and Maintenance Policy paper, the government announced that there will be a consultation later this year on the use and effectiveness of the Employee Ownership tax regime.

    Specifically, the government wants to ensure that the reliefs are targeted closely at incentivising EOTs as an employee ownership business model, whilst preventing the reliefs from being used for unintended tax planning.

    Is this the first sign that the tax benefits which are currently available to selling shareholders may be on the verge of being trimmed down?

    The consultation may determine that the tax-free relief on a sale to an EOT is too generous, or that the criteria to qualify for the reliefs need to be tightened (click here for more information on the current benefits of an EOT).

    It is hoped that the consultation will focus on bringing some increased clarity to the EOT rules.

    The EOT legislation can be uncertain in some areas. This is particularly relevant in the context of monetary contributions to the EOT from the company that is being sold. Reliance on the tax treatment of those receipts by the EOT is currently based on HMRC’s “stated position,” rather than on any legislation itself.

    Therefore, if you are contemplating a sale to an EOT, you should be taking advice as soon as possible.

    Is an Employee Ownership Trust (EOT) beneficial for employees?

    Posted on by Rebecca Campbell

    An Employee Ownership Trust (EOT) can offer many benefits for the business owner who is looking to exit their business, where perhaps the traditional methods of sale (e.g. MBO or a trade sale) are not necessarily available. An EOT sale can provide an opportunity for a seller to receive full market value for their shares, without there being a tax charge on the proceeds that they receive.

    In this article, we consider what an EOT structure means for the employees and how they can benefit from being a part of an employee-owned business. We explore some of the specific advantages below.

    1. Tax free bonuses and the ability to benefit from future success of the business

    A significant financial benefit for employees is their potential entitlement to tax free annual bonuses of up to £3,600 which can be paid as a single, annual lump sum, or in smaller amounts throughout the year. Any bonus sums in excess of the threshold will be taxed as normal and NICs will still apply to the full amount of any bonus paid.

    In order to meet the conditions for the benefit to apply, there are a number of conditions that need to be met, one of which is to ensure participation across the workforce, rather than just for select employees.

    The employees must all be able to collectively participate in the economic benefits that would normally be attributed to shareholders. Thus, once the exiting shareholders have been paid out for their shares and the EOT no longer has any debt owing to them, the growth in the value of the company would be reflected in the value of the shares, which will, effectively, be owned by the beneficiaries of the EOT – the employees. Again, all employees must be able to benefit, not just a select few. (It is possible to exclude recent joiners and employees who are subject to disciplinary proceedings).

    2. Employees contribute to how the business is managed

    A typical business will have its vision, goal and direction determined by the existing owners, board of directors, or senior management team, often with little input from the wider employee base.

    When an EOT owns a controlling share of the business, the beneficiaries of the EOT (the employees) can have a say in how the business is run. This can be managed in various ways, including via an employee council or representation on the board of directors.

    Having employee representatives on the board can ensure:

    • that the business is moving in a direction which satisfies and motivates the whole team;
    • that the directors and senior managers can keep track of how the employees feel about the business;
    • that there is long-term engagement with the company and its values.

    According to research, EOTs have been shown to improve productivity, reduce absenteeism and develop more engaged employees through inclusive, transparent, and effective models of corporate governances (1).

    3. Job security

    A further benefit of an EOT is the protection it offers employees from the uncertainty associated with a third-party takeover.

    A business which has been acquired by a third-party, or merged with another group, can lead to redundancy fears and potential changes to job roles – a worrying situation for employees.

    Having an EOT as the owner of the company can alleviate these feelings as an onward sale is unlikely. This can provide employees with reassurance that the new leaders of the business will be existing team members who are similarly invested in the business, who are familiar with how it works and the people that make it up.

    Get in touch

    There are clearly benefits of the EOT structure, and for some, it will provide an excellent exit strategy, enabling shareholders to exit the business and at the same time transferring ownership to the workforce. This can provide a great sense of pride and philanthropy for those exiting.

    A sale to an EOT is not a quick or straightforward process. Our Tax team at PM+M are here to advise you and ensure any transaction is structured in the most efficient way for you. Our Corporate Finance team can talk you through the valuation process, including making introductions to potential funders to finance any potential purchase. Get in touch with Roger Phillips using the button below.

     

     

    The rise and rise of the Employee Ownership Trust (EOT)

    Posted on by Laura Boyd

    The number of companies being sold from private ownership into the hands of their employees, via the use of Employee Ownership Trusts (EOTs), continues to increase.  

    There has been much in the media over the past few years around the increasing popularity in the use of EOTs and there is no slowing in the rate at which sales to EOTs are happening.

    According to the Employee Ownership Association, 1 in every 20 private company sales (as compared to trade sales and sales to private equity) was to an EOT, as at January 2021.

    In fact, at the time of writing there are thought to be over 600 EOT owned businesses in existence in the UK, with HMRC data suggesting that many more are likely to follow.

    The chart below shows how the number of EOTs has increased over the past 8 years – and the rate of increase shows no signs of letting up.

    The EOT structure enables business owners to sell a controlling stake in their company to an EOT in exchange for the seller receiving full market value for their shares.

    The EOT is operated by trustees, and the beneficiaries of the EOT are the employees of the company at any given time.

    One of the key benefits for the seller is that, provided the relevant conditions are met, the proceeds that they receive for their shares upon a sale to an EOT can be received entirely tax free.

    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 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.

    A common EOT based exit strategy sees the owner receiving a share of their consideration on day 1, with the balance of the funds then taken over a period of time (known as “deferred consideration”).

    This deferred consideration could be paid using the future profits of the trade (known as “vendor finance”), or by the EOT borrowing funds externally, for instance, from a bank.

    Assuming there is some element of deferred consideration, the owner would have a vested interest to remain actively involved with the business following sale.

    They will, of course, want to see that they receive their full consideration in a suitable timeframe. In addition, their presence can ensure that the stakeholders of the business, in particular the employees who will be responsible for running it, are well prepared to take it forward post-departure, as it may be the case that they do not come from a management role or they might not feel that they have the commercial experience required of a business owner at the point of sale.

    Whilst the generous tax incentives remain, we anticipate to see continued increase in the popularity of EOTs, and data suggests that more and more EOT related clearance applications are landing on HMRC’s doormat each month. It will, of course, be interesting to see whether the increased attention that EOTs are receiving will result in HMRC looking to restrict some the generous tax reliefs that they currently offer.

    EOTs are well suited to scenarios where there may not be a traditional exit route, such as a sale to a third party or a management buyout (MBO). This may become even more relevant in the coming months if the UK slips into a recession and a possible downturn in activity within the M&A market as is predicted by many. If you have questions you can get in touch using the button below.