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Employee Ownership Trusts – a friend with benefits?

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employee ownership trusts

The latest statistics published by the Employee Ownership Association showed that between 2020 and 2022, the employee-owned sector more than doubled in size to over 1,000 employee-owned businesses. But what are the benefits of Employee Ownership Trusts (EOTs) and why should you make the transition?

Last year alone saw a total of 332 new employee-owned businesses and, by June 2023, the total number of employee-owned businesses stood at 1,418. It’s pleasing to see that an initiative introduced over eight years ago has now generated some momentum. And it means that there are many thousands of employees in the UK that now have an interest in the business where they work. Surely a good thing?

HMRC take note

The exponential increase in numbers has certainly grabbed HMRC’s attention, though – at BHP, we’re now seeing the first enquiries into tax returns that include a disposal of shares to an EOT, with very detailed questions on the stringent conditions surrounding an EOT. Heaven forbid the Trustees fall foul of an inadvertent disqualifying event.

At the same time, HMRC have just opened their consultation focused on ensuring that the reliefs are closely targeted at incentivising EOTs as an employee ownership business model, while preventing the reliefs from being used for unintended tax planning.

Which brings me nicely to my point – without being vulgar, an Employee Ownership Trust should very much be like a friend with benefits. A disposal to a properly constituted Employee Ownership Trust very quickly delivers a number of tangible “friends”:

  • The sales process is more straightforward, without the levels of due diligence that an external sale would involve. This allows the management team to concentrate on running the business, free from distraction.
  • It avoids the involvement of third-party institutional investors with little knowledge or experience of the business.
  • It provides for greater employee engagement and commitment resulting in improved business performance generally. The empirical data confirms this – employee-owned businesses perform better.
  • It provides for goal congruence throughout the business focused on longer term objectives rather than normal short-term employee objectives.
  • It can attract and retain key employees.

The “benefit” that follows all this good stuff (with the key word being follows) is the tax exemption on the disposal proceeds and the ability to pay tax free bonuses to employees.

Do it for the ‘right reasons’

If the motive for entering into a transaction with an Employee Ownership Trust is simply to get the tax break, then I would suggest that you seriously reconsider. It seems to me that many business owners have jumped to the “benefit” part of the relationship without actually considering or engaging with the “friends”. The direction of travel from HMRC very clearly shows that they think the same.

So, if you’re going to do it, do it for the right reasons with full employee engagement and transparency. Remember that it doesn’t solve your succession issue – you will still need to identify those key individuals that are going to drive the business forward in your absence and reward them with either direct share ownership or share options.

Don’t manage by committee – it never works. I’m a partner in a partnership…. trust me. Be clear that it’s not a one-time transaction – an EOT is a living, breathing animal where governance is key. And finally, embrace all the “friends” because the “benefits” will surely follow.

For more information and advice on EOTs, get in touch with BHP’s experts on 0333 123 7171 or visit Business Taxes – BHP, Chartered Accountants.