A Decade of EOTs

The employee ownership trust (EOT) was introduced into legislation in 2014 offering a tax-advantaged way for owners to hand the business over to employees to collectively own the business they work for. It offers:

  • A way to share profits through an income tax-free bonus payment – currently set at a maximum of £3,600 per year with bonuses (if bonuses are higher, the rest of the payment would incur the full taxation)
  • A tax incentive for business owners sell their controlling interest (51% or more) to their employees by making the sale exempt from Capital Gains Tax.

The models’ simplicity and incentives have acted as rocket fuel for the EO sector with 90% of existing becoming employee owned businesses (EOBs) in the decade since the legislation.

The government launched an EOT and employee benefit trust (EBT) consultation mostly focused on the rules around EOTs, which closed in September 2023 (you can read our views and responses on the proposals here).

Our Proposal

We strongly urge the government to publish a response to the EOT and EBT consultation and act on the proposals to protect the model and ensure it reflects the objective of encouraging EO. 

Of particular importance is the proposal around offshore tax residency and complete clarity on any requirements around trustee board composition.

The government should also go further to future-proof the model as a world-leading vehicle to embed EO in British business by reviewing the £3,600 cap on the tax-free bonus.

The bonus is a key mechanism for enabling EOBs to deliver profit sharing and financial wellbeing for employees; it is also a powerful incentive to encourage business transitions, and an incentive for high-growth, high-productivity economic activity.

The current cap has been in place since the model's introduction into legislation in 2014. If adjusted for inflation, this would now be worth more than £4,700.

  1. We urge that the cap might firstly be uplifted in line with inflation
  2. We urge that a review period of five years is introduced to ensure that the advantage continues to be relevant in the future

Share Schemes for EO

'Direct EO' is where employees own a business by directly holding shares in that business. This most often occurs through a non-discretionary tax-advantaged share scheme – typically a Share Incentive Plan (SIP). 

Direct EO makes up a much smaller proportion of EO models, but often these are well established businesses operating in strategically vital industries. However, some employee owned businesses use a hybrid of direct and indirect employee ownership.

For example, Enterprise Management Incentives (EMIs) are sometimes used to provide additional incentives to key personnel in direct named shares, alongside the indirect controlling interest held in trust for all employees.

Our Proposal

Government must act on the recent call for evidence on non-discretionary tax advantaged share schemes to ensure that:

  1. The advantages remain relevant in the future
  2. The schemes are fit for purpose
  3. They are well understood

Similarly, Government could revisit the call for evidence on EMIs and the measures proposed at that time by respondents.

Public Spending and the Potential for Change

Procurement is one of the most important ways that Government, public bodies, and anchor institutions can directly leverage support for key sectors of the economy. 

The public sector spends well over £300 billion a year on buying goods and services from the private sector. A small fraction of this being directed at EOBs and other inclusive and democratic business models would lead to a massive transformative change in the UK economy, supporting the growth of these businesses and multiplying the evidenced social and economic impacts they deliver.

The UK has made good progress on embedding social value in public procurement processes – prioritising the commercial delivery of a contract alongside the wider social and economic impacts of procurement choices - but there's still a long way to go. 

Our Proposal

Decision-makers should explore how procurement processes can be weighted to ensure EOBs are advantaged proportionately to the significant impact they make on economic prosperity and wellbeing for all. 

This may be accomplished by reviewing relevant legislation – such as exploring ways to expand the mandate of the 2012 Social Value Act to not just consider social value, but evaluate it within contract awards, as well as publishing evidence of social value delivered. 

Government should also invest in systems, language, and guidance required to deliver on this. It will be important, for example, to work with relevant stakeholders (such as Social Value Portal, the LGA Social Value Task Force, etc.) to further develop statutory and non-statutory guidance around procuring goods and services and relevant frameworks, such as the national TOMs which public bodies use as a baseline for measuring social value.

Going beyond social value, we believe that employee owned businesses, based on their increased productivity and rates of investment into improving their own goods and services, are well placed to deliver the best value-for-money public goods and services. 

We see this often our member case studies and, in the future, we'll be seeking to build a robust evidence base to inform how government can use ownership as an indicator of quality of outcomes from procuring goods and services.

Discover more on our Manifesto page or download the full manifesto directly.