What’s next for EOT’s?

As we approach the 11th Employee Ownership Day on 23rd June 2023, we look back at how the employee ownership trust (EOT) model is being used and what the future looks like for employee-owned companies and companies looking to move to an EOT.

Earlier this year, as part of HMRC’s Summary of Tax Administration and Maintenance Policy paper, the government published various consultations and proposals on tax measures which included an announcement that there will be a consultation later in the year on EOT’s. The aim of the forthcoming consultation is in line with the government’s more general objective of ‘simplifying and modernising the tax system’.

This consultation is said to look into “the use and effectiveness of the Employee Ownership Trust (EOT) tax regime, to ensure that the reliefs are targeted closely at incentivising EOTs as an employee ownership business model whilst preventing the reliefs from being used for unintended tax planning”.

Why is a consultation needed?

The purpose of the EOT regime was to encourage and promote employee ownership within UK businesses. Reports by the Employee Ownership Association have shown that various EOT companies have experienced an increase in sales and productivity following the move to the EOT regime with strong evidence that such companies show a happier workforce, lower absenteeism and more resilience through tough times.

Unlike other exit strategies, a shareholder selling to an EOT can, if the specific details conditions are met, receive their sale proceeds free from capital gains tax (CGT). The potential tax savings are therefore significant and many are taking advantage of, and possibly abusing the regime because of this.

The rules are complex and the long-term operation of an EOT business must be carefully managed to ensure the company stays within the framework of the legislation. The move to an employee-owned model is a cultural shift for all involved and should be handled as such, rather than a way of enabling a tax-free exit.

What can we expect from the consultation?

Without a crystal ball, it can’t be known what the government will do (if anything) as part of their consultation. The rules around the tax regime are complex and must be met both at the point of sale and for the duration of the company’s existence as an EOT business. It could therefore be that the government will look to clarify these complex rules and in particular the tax treatment of the contributions made by the target company to the Trust which is currently based on HMRC’s ‘stated position’ rather than legislation.

Another obvious option would be to curtail the current CGT exemption. At the moment this is a 100% exemption with no cap, with many sellers receiving significant tax reliefs relative to a trade sale. A cap could be introduced so that there is a maximum that sellers could receive in tax relief to bring the focus back to the cultural shift to an employee-owned business as opposed to a tax free exit.

As it stands, the minimum percentage of shares that must be sold to the Trust for a company (or its group) to claim the EOT tax reliefs, is 51%. This means that a shareholder can sell 51% of its shares, free of CGT. With 51%, the Trust does have a controlling stake over the company but the ‘exiting shareholder’ manages to keep hold of a large chunk of the equity, which could be argued as not conducive to a true exit and move to an employee ownership structure. An increase to this 51% threshold could therefore be on the cards.

How can Wilkes help?

If you are interested in moving towards an EOT structure, would like to know more about the transition or life of the company after implementation of the structure, or are thinking of selling to an EOT, please get in touch with either Gareth O’Hara or Christie Nelson from our Corporate team.

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