Successive UK Governments have used tax reliefs to encourage the direct ownership of shares by employees. An HM Treasury consultation launched on Employee Ownership Day outlines the Government's support for an alternative form of employee ownership, namely, the employee trust (or indirect) ownership of shares on behalf of employees. "Supporting the employee ownership sector", confirms the introduction of two tax reliefs to support indirect employee ownership. It builds on the Budget Day 2013 announcement of support for this type of employee ownership.
The reliefs, which are expected to apply from April 2014, are:
(1) a new capital gains tax ("CGT") relief on the disposal of a controlling interest in a business into an indirect employee ownership structure; and
(2) an income tax and national insurance contributions ("NICs") exemption to allow indirectly employee owned companies to pay their employees a certain amount per annum, free of income tax and NICs.
An article by Graeme Nuttall and Jennifer Martin in Company Secretary's Review (28 August 2013) explains more about these proposals, the background to them and the HM Treasury consultation.
This consultation provides a tremendous opportunity to influence the growth of this form of employee ownership. The responses to the HM Treasury consultation will help design these two important new tax reliefs.
The consultation questions will also help HM Treasury learn more about the employee ownership sector, as well as helping it to decide the detail of the reliefs.
The consultation document acknowledges there are many types of indirect ownership, including hybrid models where direct share ownership is combined with employee trust ownership. Sometimes a charity has a role in the ownership structure. In other cases, share rights may be divided between a trust and employees. It is important that those companies with successful indirect employee ownership models describe them to HM Treasury.
HM Treasury needs to understand the circumstances of typical employee buy outs ("EBOs"), how they are structured and what happens after the buy out in order to finalise how the tax reliefs will best operate. For example:
- in our experience, although there may be an individual founder of a company, with a controlling shareholding to sell, there are usually other, possibly, unconnected vendors. On this basis, the new CGT relief will clearly be of greatest benefit if it can operate flexibly and apply to any number of vendors who, acting together, transfer a controlling interest. Unless HM Treasury hears this, the relief may remain focussed around a disposal by a single individual of a controlling shareholding.
- also, EBOs are normally arranged via an employee trust. It is easier this way. This avoids asking individual employees to sign a share sale and purchase agreement. The CGT relief can probably therefore by targeted at disposals to an employee trust. But the qualifying conditions will need attention because of the variety of employee ownership models that can follow. In some companies the plan is that all the shares will remain in the trust, so they are forever held on behalf of successive generations of employees. In other companies, the idea is that employees will acquire shares from (and sell them back to) the trust over time, perhaps with the trust retaining some level of permanent shareholding, or possibly the trust only retains shares carrying economic rights (with limited votes) and the employees receive shares carrying votes (with limited economic rights). Should the CGT relief apply in all these situations? And should the income tax and NICs relief apply to payments to employees, if an employee owned company is also operating a tax advantaged share plan for those employees?
- The move to employee ownership may be gradual. A business may start with a small percentage of a company's shares held in an employee trust, perhaps with the founders as the trustee directors. As confidence grows so this arrangement may develop to involve, say, staff elected directors and a significant shareholding. There are also many forms of employee trust in use in employee owned companies. It can be difficult to amend the terms of some existing trusts without a Court Order. This makes it problematic to prescribe in too much detail what the employee trust needs to look like if the tax reliefs are to apply.
One of the first organisations to submit a detailed response in support of the proposals was the Employee Ownership Association.
Anyone who has not yet contributed to the consultation must act now. Responses to the consultation must be in by 26 September 2013.
PS There is an idealistic example of how employee trust ownership can work as a neat business succession solution in Table 1 (pages 18-20) in the Nuttall Review.