Employee ownership in companies has been in the air for a long time – employee directors on company boards were a European Union objective which gained traction in parts of the Union (especially Germany – not such an economic failure). In the UK, this has taken a lot longer to take hold. However, in 2014 employee ownership was facilitated during the time of the Coalition government, by creating positive benefits both for owners looking to sell on some or all of their business - and for the employees hoping to benefit from ownership.
By selling to an Employee Ownership Trust, so long as the rules are followed, owners can gain full capital gain tax relief – a really substantial benefit. This will be at full value, so it’s not an act of philanthropy by the owner – it makes business sense, and is therefore actively incentivised by government. It’s not a scam or a scheme which HMRC will be after – it’s policy.
The Employee Ownership Trust which will hold not less than 50% of the shares in the business will also be able to benefit the employees by giving annual tax-free bonuses of up to £3600 – to every employee (there can be certain exceptions and opt outs). And if the company as a whole is eventually sold, the employees as a whole will benefit.
With the sacrifices and dislocations brought about by Covid, as companies are gaining a fresh appreciation of their employees’ crucial roles, Employee Ownership Trusts and the issue of employee ownership has gained fresh traction, and the number of transactions has increased considerably.
In May 2019, the sale of 60% of the shares in his business by Julian Richer of Richer Sounds attracted attention. He didn’t give the shares away; he sold them. No act of charity, though he will have taken on some risk by accepting payment over a number of years – this isn’t uncommon in a management buyout (which this is equivalent to), but it is in a commercial “trade” sale. Either payment can be deferred, or the Employee Ownership Trust can raise funds commercially. If commercial funds are raised, then the funders will be looking to the usual securities and repayments. The outcome though is employee ownership, across the broad spectrum of the employees, not just a management team.
Potentially, everyone gains through this – the owner sells, as he/she would intend to do anyway, and achieves real tax benefits. It might encourage that to happen sooner than would otherwise be the case – and he/she can retain a fair element (as long as it’s less than 50%) of the business. The sale is to existing employees, with the senior management taking the lead; this reduces the risk of a new owner messing it up; and these are people in whom the seller already has a commitment and a trust. There are tax incentives for the employees, too. In many ways, employee ownership is not a high-minded aspiration, but an incentivised policy.
Employee ownership has, it seems, come of age.
Paul Berwin is Senior Partner at Berwins. He has over 30 years' experience advising businesses on structure and ownership.