The consultation was launched on 18 July

On Tuesday 18 July 2023, the government formally launched their consultation on Employee Trusts, which will be open for responses until 25 September. The consultation covers measures on both Employee Ownership Trusts (EOTs) and Employee Benefits Trusts (EBTs). The EOA sees this consultation as an opportunity to represent the interests of our members and the EO sector, and will be engaging with government to do so.

James de le Vingne, Chief Executive of the EOA, commented: “We welcome this consultation from government on EOTs and EBTs. This comes at a critical time of growth for the UK employee owned sector, inreasing the impact of the benefits that EO brings to businesses, employees, the economy and wider society. Its scope is relevant, and we are pleased that the government recognises that the introduction of EOTs has been a significant success, acknowledging the statistics the EOA release in collaboration with the White Rose Centre for Employee Ownership Centre, showing massive growth in employee ownership.”

Since the announcement  from government earlier this year that there would be a consultation on EOTs, we’ve been engaging with our members and advisors to establish a consensus around the sector’s priorities in this area.

Most recently, this was covered in our policy roundtable on 27 June, where we invited members to discuss incentives and tax advantages, the model’s flexibility, protecting the integrity of the model, and technical issues and challenges. This engagement built on existing research and policy development since the introduction of the model in legislation in the 2014 Financial Act.

We will use the information from our engagement with members to shape our response to the consultation, and will work closely with our Specialists Advisor members – Baxendale, Co-ownership Solutions, Fieldfisher and RM2 Partnership – to refine our position further.

Employee Trusts consultation: Government proposals

The consultation is structured around the following proposals raised by government. These are:

• That former owners (and connected persons) should be prevented from retaining control of an EOT, by requiring more than half of trustees be persons who are not former owners or connected persons.
• That a requirement be introduced that either the trustees of the EOT all be UK resident; or that the trustees be a mix of UK resident and non-UK resident and that the former owner was UK resident or domiciled at the date the shares were disposed of to the EOT.
• That it be confirmed in legislation that contributions made by the company to the EOT trustees to repay the former owners for the acquisition cost of the company shares, will not be treated (taxed) as distributions.
• In connection to the above, HMRC proposes to stop providing clearances in respect to company contributions to EOTs.
• Potentially amending the qualifying bonus payment rules so that tax-free bonuses can be awarded to employees without directors necessarily also having to be included.
• Tweaks to the EBT rules, including the conditions of the IHT exemption and treatment of persons connected to the participator.

The EOA welcomes government seeking to engage around these issues and proposals. This content reflects discussions and contributions from the EO sector and other key stakeholders, such as our previous submission to the Office of Tax Simplification’s 2020 call for evidence, and the Chartered Institute of Taxation’s 2021 recommendations on EOTs which the EOA has supported.

EOA insights on the consultation

As described above, the EOA has been working with members to co-produce a set of priorities with members and advisors. The below is not yet a final position, as further work and development is required, but represents how these priorities may be reflected in relation to government’s proposals and the consultation questions.

EOTs: Trustee issues

The EOA welcomes the proposal to prevent former owners and connected persons from retaining control of an EOT. This step would enshrine existing best practice in legislation while affording the flexibility for former owners to have some involvement in the EOT, as is practical in the case of many employee owned businesses throughout the process of transitioning to and embedding employee ownership.

It is positive that, alongside this, the consultation is also considering whether trustee appointments should be defined further in legislation, for example requiring employee trustee or independent trustee appointments. We would expect that, to meaningfully embed employee ownership, at least one employee trustee should be included on the EOT. It is also largely considered best practice for there to be at least one independent trustee, however some voices suggest that this may not be appropriate to make a requirement, as it may place a disproportionate burden on smaller employee owned businesses.

On the question of trustee residence, we echo the recognition in the consultation that there are valid reasons why a business may choose to set up an EOT offshore, and see fantastic cases of best practice employee ownership being embedded in various  businesses owned by offshore EOTs. However, we acknowledge that, although there is not currently evidence that this is widespread, that the offshore option may open the EOT model to unintended use from actors seeking to access the tax advantages without truly embedding employee ownership.

EOTs: Funding issues

The lack of certainty around tax treatment, and need for clearance from HMRC around contributions from an EOT-owned company to trustees to pay former owners has often been raised by the EO sector in the past, and supporters and advisors. Clarifying that these contributions will not be treated as distributions for tax purposes is a positive step that can reduce the onerous processes of seeking clearance and provide more assurances to employee owned businesses.

is onerous, and some representative bodies have expressed concerns over the strength of the technical basis for accepting that such payments are not distributions. HMRC will stand by any clearance given but accepts the uncertainties inherent in the current approach.

EOTs: Employee bonus issues

While the EOA welcomes the consideration that more flexibility in this area may be welcome, we will be working to better understand whether the proposed changes here are consistent with the spirit of the EOT as a model that delivers benefits for all employee owners on equal terms.

We will be working with our advisors around this technical area, and to identify additional relevant consequences and challenges of administering tax free bonus payments.

EBTs

It is positive that the government is considering how EBT rules may be updated. So far, the EOA understands the proposed reforms in this area to be minor and apply to a minority of cases. We will continue to develop our understanding of these reforms and identify additional ways that the tax treatment of EBTs could be enhanced.

Next steps

The EOA will be building on our existing work to submit a written response on behalf of our members and the EO sector. We’ll be co-producing this over the coming weeks with members and EOA Specialist Advisors Baxendale, Co-ownership Solutions, Fieldfisher and RM2 Partnership, with a view of responding to the above proposals and specific questions of the consultation, as well as identifying additional reforms that may enable the EOT tax regime to better support EO. We will publish this submission publicly when drafted.

We suggest members submit their own responses if you wish to, and we invite you to share these with us so to help establish a shared position. If you’d benefit from EOA support with your response to the consultation, wish to discuss the EOA’s response, or have any issues or queries around the consultation, please contact our policy lead, Sam Blakeborough.