According to the Employee Ownership Association (EOA), the Employee Ownership (EO) sector has grown by 10% a year since 2014 and now represents 200,000 employee owners in approximately 350 businesses.
Birketts has been a member of the EOA and worked on employee incentives for many years, but the recent appetite for EO models has noticeably increased. Perhaps this is because productivity in the top 50 employee-owned companies has risen year on year, compared to a fall in overall UK productivity. Advisors and business owners alike are beginning to see the benefits of EO as an alternative business structure, assisted by the construct of the employee-ownership trust (EOT) and its tax advantages.
An EOT is a specific kind of employee benefit trust (EBT) which creates a form of indirect employee ownership and provides generous tax reliefs. Qualifying shareholders can transfer their shares into the EOT and enjoy the gains arising free of Capital Gains Tax charges. Furthermore, companies controlled by EOTs can pay qualifying employees tax-free bonuses of up to £3,600 per employee per annum.
Practically, an EOT can help your business create a succession plan in a tax efficient way, without creating a minority interest or voting conflicts. Employees are not directly gifted shares or granted options. Instead, the controlling interest of the company is held on trust for the employees collectively as beneficiaries. Being an employee-owned business can also be used as a recruitment and procurement tool. In particular, research has shown that the EOT structure appeals to the values of a millennial workforce.
The EOT model will not be appropriate for every business type, however if EO as a concept fits your business there are other hybrid models to consider that can provide a multitude of benefits beyond just tax relief:
- nurturing high behavioural standards, improving clarity of organisational communication
- improving employee engagement and fulfilment by including staff in decision-making processes and aligning staff with meaningful values
- resilience to socio-economic changes
- increased job satisfaction.
Whilst an EOT has the potential to provide long-term financial and soft benefits to your organisation, the transition process is legally complex and should be intricately planned with the benefit of professional advice. Questions about trusteeships, corporate governance, share valuations and funding share purchases should be considered at an early stage.
If you are contemplating EO or an EOT model and would like to discuss next steps, or you are interested in finding out more about the benefits of EO for your business, please contact Lisa Hayward, Head of Employee Incentives at Birketts.
This article is from the spring 2019 edition of HR Matters, our annual newsletter covering key issues for HR professionals. To download the latest issue, please visit the newsletter section of our website. Law covered as at April 2019.
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The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at April 2019.