Over the past few years Employee Ownership Trusts (EOTs) have proved to be a popular vehicle for restructuring ownership. For many employees, businesses and business owners it offers an attractive future, combining as it does:
- a move to all-employee ownership as a means of incentivising, retaining and rewarding staff
- the potential for shareholders to realise the value in their shares without losing independence to a trade buyer or financial investor
Various tax reliefs were introduced in 2014 (both for employees and exiting shareholders) to encourage people to consider this model of ownership. Now that the rules have been in place for nearly a decade, the Government is consulting on some changes which may result in the rules being tightened. Some of the proposals are more technical in nature, or to cut off specific avoidance arrangements, whereas some are likely to have a broader impact on EOT restructurings, particularly for smaller companies. There are also some ancillary proposals in relation to employee benefit trusts more generically.
The two most notable proposals focus on the identity of the trustees themselves. The trustees have an important role as both the party contracting with the sellers for the purchase of the shares, and as the party which must oversee the business in future and act as guardians of its value for the benefit of employees. The Government is proposing the following new requirements:
- that the trustee body must be UK-resident, to ensure that capital gains tax is payable if the EOT should ever sell shares in the company
- the trustee body cannot be controlled by former owners of the business
The terms of the consultation suggest (but do not definitively confirm) that these would be requirements for newly created EOTs rather than rules which will apply to EOTs that are already in existence.
The first change seems ostensibly sensible and would certainly eliminate some kinds of abusive planning. What it does mean however is that the employees will face a high level of effective double taxation in the event of any future sale, no matter how desirable such sale might be for the employees. The combination of CGT and PAYE/NICs means that - in the absence of planning - employees might receive as little as 40% of the gross sale proceeds after tax even if the company enjoyed many years of productive employee ownership before a compelling offer came along. This is a long-standing issue and a big driver behind why many employee benefit trusts are still set up off-shore. The Office for Tax Simplification made recommendations back in 2013 for a new (UK resident) employee share ownership vehicle that - subject to meeting conditions - would eliminate this double taxation. The proposal was rejected. This consultation could be another opportunity to draw the Government's attention to the issue and encourage a step back to assess whether the overall scheme of taxation for employee trusts makes sense.
The second change seems sensible for a large organisation able to draw on a wide talent pool. The concern might be more at the small company end where existing flexibility has allowed such companies to create a trustee body which suits their particular needs (and which can evolve over time).
The consultation will remain open until 25 September 2023.
HM Revenue and Customs is consulting on: - proposals to ensure that the tax reliefs associated with Employee Ownership Trusts meet the policy objectives underpinning those reliefs - proposals to reform the Inheritance Tax treatment for Employee Benefit Trusts