Never knowingly undersold: employee ownership tax breaks work

This post is part of our Entrepreneurial team’s regular series of blogs.

Employee Ownership works. It works for the employees; it works for the previous owners; and it works for the customers.

The premise is straightforward – if all employees participate in ownership, they will work harder, be more productive and share in the benefits.

The model on which Employee Ownership Trusts (EOT) were based is the John Lewis Partnership. Admittedly, John Lewis appears to be struggling recently, but for over a century has been at the forefront of customer service and employee ownership. I have more insight than most in this assessment, having spent 5 years working in their Edinburgh branch in my youth. I recall, with more than a little guilt, being told off – not by my managers, but by my peers – for not pulling my weight. “That’s my bonus you’re wasting” was a regular put-down. This sense of collective responsibility resulted in better staff who provided (in my opinion) better levels of customer service than competitor shops and, in turn, earned a greater level of customer loyalty.

It works. Plain and simple, it works.

“So what?” you may ask. Which brings me to my point… I fear that EOTs may not survive a spring tax hike.

When EOTs were introduced in 2014, a coalition government was in power. It was the Liberal Democrats, Vince Cable specifically, who heralded their use. I worry that, in a time when commentators are unanimous in their belief that taxes will rise next year, their removal might be an easy grab.

EOTs offer exceptionally generous tax breaks:

  • a Capital Gains Tax (CGT) exemption for the owners of the business who sell their shares into an EOT; and
  • annual bonuses of up to £3,600 tax free for the employees.

We have seen a notable increase in clients asking about EOTs recently. Underpinning this is a common desire to enable their long-serving staff to benefit in their succession planning. In many cases, it is the tax benefits offered through EOTs which are making this opportunity, as opposed to a more traditional MBO, highly attractive. There are also a range of ways the business can fund the EOT to acquire the shares, so it doesn’t require employees to put their hands in their pockets to buy the shares off departing shareholders.

I might be wrong. They might continue indefinitely. But I might be right and, if so, the tax differential for owners could be huge. If the government follows the advice of The Office of Tax Simplification in their report of November 2020 – and pushes CGT rates to 40% in March and at the same time removes the EOT tax breaks – then an individual selling a business for £10m in April could pay £4m in CGT, as opposed to nil on a sale into an EOT right now.

If you are thinking about succession; if you are thinking about selling your business; if you are thinking about your employees, then now might be the right time to explore Employee Ownership. We are here ready to support you in this.