Given the pivotal role that EOTs have had in the growth of employee ownership across the UK in the last decade, we wanted to ensure that the government understands and acts upon the views of the sector.
Member-led Response
Many eoa members and supporters of the sector have used our information and guidance to submit their own response.
Our suggested response is based on the views and input that we have gathered from engaging with our member and advisor network over the past year, including at our roundtable on EOTs on 27 June 2023. We would particularly like to thank our Specialist Advisors Baxendale, Co-ownership Solutions, Fieldfisher and RM2 Partnership for their contributions.
Things to Remember if Using the eoa Response Template
In many cases, there has been general agreement across members and advisors on the issues in the consultation. However, there will always be some diversity of opinion.
We therefore strongly advise that members using our suggested response review it carefully, to ensure that it reflects your own views and as far as possible to add your own experience as an employee owned business.
We recommend members particularly pay attention and bring your own experiences and perspectives to the suggested response to the following questions:
Question 2: Should the government go further and require that the EOT trustee board includes persons drawn from specific groups, such as employees or independent persons? If so, how should these groups be defined?
Question 8: In addition to the reforms proposed at Chapters 4 to 6, do you have any views on ways the EOT tax regimes could be reformed to better support employee ownership?
A quick guide to the eoa response:
Proposal 1 to prohibit former owners and connected persons from retaining control of an EOT-owned company post-sale by appointing themselves in control of the EOT trustee board
eoa supports that former owners and connected persons should be prevented from being the majority of a Trust Board therefore aligning legislation with existing best-practice.
Proposal 2
Make it a requirement that the EOT trustee board includes persons drawn from specific groups - (1) employees trustee and (2) independent trustee
- eoa supports (with caveats) making it a requirement to have at least one Employee trustee on the Trust board but offering a grace period (a) to recruit and train first employee trustee (eg by end of first year as EOT) (b) recruit and train replacement if they leave before any stipulated timeframe in the role to avoid any unintended non-compliance.
- eoa does not support making it a requirement to have an independent trustee. This is because there is a financial cost that may be restrictive for smaller businesses looking to become employee owned. The cost burden for making it a rigid requirement would place a disproportionate burden on SMEs. We do however advocate having an independent trustees as best practice – they offer a great deal of experience and expertise to the trust board and bring a different prospective to embedding EO and acting on behalf of the employee owners.
Proposal 3
Require that the trustees of an EOT are UK resident as a single body of persons?
The eoa supports (with suggested conditions) requirement that EOT trustees to be UK resident as a single body of persons in the interest of maintaining the EOTs integrity – for new EOTs (not historic).
The eoa also welcomes the scope this proposal allows for non-UK resident trustees to be appointed alongside UK resident trustees – there are many EOTs who benefit from this type of trustee and adopted this at set up with the best intentions and deliver best practice EO.
Proposal 4
Confirm in legislation the distributions treatment for contributions made by a company to an EOT to repay the former owners for their share
The eoa supports (with condition) legislation should confirm that such contributions would not be treated as distributions for tax purposes, provided that the consideration does not exceed the open market value for the shares.
Proposal 5
HMRC stops giving clearances on the application of section 464AA of the Corporation Tax Act 2010 to the establishment of EOTs
The eoa supports - no objections.
Proposal / Question 6
Should EOT bonus rules be eased so that tax-free bonuses can be awarded to employees without directors necessarily also having to be included or would this undermine protections which ensure that bonus payments are not abused or weighted towards some employees.
The eoa response – we supports the aim of being easier to administer but also the all-employee spirit, more clarity is needed.
Proposal / Question 7
Do the EOT bonus rules create any other unintended consequences or challenges in administering the tax-free bonus payments
The eoa response – we are not aware of any
Question 8
Do you have any views on ways the EOT tax regimes could be reformed to better support employee ownership?
The eoa response 8.1 – explore aligning the parameters by which ‘participants linked to share class’ are excluded from any benefit on a future sale of an EOT owned company to the percentage of the company’s total share capital rather than a percentage of their share class.
The eoa response 8.2 – review and future proof the EOT tax free employee bonus incentive – set at £3,600 10 years ago and was not reviewed as intended after 5 years. Action one uplift the tax free bonus threshold to £4,600 to meet inflation/match the same value today. Action 2, set a regular review date to make sure it remains a valuable incentive for employee owners to drive great business performance.