FINANCE
BY ROSS PARSLER , TAX DIRECTOR , AZETS ORPINGTON
Employee Ownership Trusts
What is an Employee Ownership Trust ( EOT )?
An EOT is a special form of employee benefit trust , introduced in September 2014 to encourage more companies to set up an ownership structure similar to the well-known “ John Lewis ” model .
EOTs can create an effective means of succession planning and an alternative to the more conventional exit routes for shareholders , such as a trade sale or an MBO . With appropriate preparation and employee engagement , the EOT model can help deliver a robust , diverse and employee-centred business structure , while affording attractive tax savings to shareholders .
How does an EOT work ?
The idea is that the existing shareholders sell a controlling stake (> 50 %) of the company to the EOT , which holds the shares on behalf of the employees .
The sale takes place at market value , and funding may either be by the provision of external finance or internally through the company generating the funds to repay the exiting shareholders over a period of time .
There is an “ all employee benefit ” requirement for the EOT , with no scope for anyone except those with very minimal service to be excluded .
There will generally be some form of ongoing employee representation at both trustee and board level .
What are the benefits ?
When shareholders sell the controlling interest in a company to an EOT that meets certain qualifying conditions , they should be able to claim a 100 % CGT exemption – i . e . no CGT charge should arise with a successfully implemented EOT structure .
Employees can receive a bonus of up to £ 3,600 each year tax free , and the company gets tax relief on this .
Encouraging employees to see themselves as business owners can be a powerful tool for recruitment , motivation and retention .
Areas to consider
Careful thought needs to be given to the impact the EOT may have on the running of the business – too little genuine representation for the employees at a senior level may contradict the point of collective ownership , while too much may complicate the decision-making process .
An EOT requires a genuine appetite to do something positive for the employees , rather than just to achieve a tax efficient exit , and the time and costs involved will reflect this .
Employee ownership examples
The Employee Ownership Association ( EOA ) notes that more than 350 businesses have now adopted the EOT model , with at least 50 more preparing to follow suit . Recent converts include Riverford , the organic vegetable box company and Aardman , the Bristol-based
animation studio behind Wallace & Gromit . They join wellknown names including John Lewis , Richer Sounds and ‘ Tiptree ’ jam maker , Wilkin & Sons , in becoming employee owned .
How can Azets help ?
Azets has worked closely with a number of businesses in establishing Employee Ownership Trusts and is well placed to provide advice across the full range of key areas such as taxation , independent valuations , funding options and practical transactional support .
If you feel the idea of collective ownership might suit the ethos of your business or would like further information on any of the areas raised above , please get in touch .
E : ross . parsler @ azets . co . uk
Local offices : Ashford : 01233 629 255 / Canterbury : 01227 454 861 Maidstone : 01622 690 666 / Orpington : 01689 827 505 Sandwich : 01304 249 997
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