Our Prediction: Employee Ownership becomes mainstream in 2019

Since tax reliefs for selling shareholders and employees were introduced in 2014, there has been a steady, gradual increase in the take up rate of employee ownership trusts (“EOT’s”) by UK SMEs.  However, until recently employee ownership has continued to be something of a well kept secret, unknown to the majority of company owners and their advisers.

We see signs that this is changing.  Recently a number of well known companies, including Aardman Animations (Wallace & Gromit), Riverford Organics and TensCare (drug free pain relief), have become employee owned, joining existing companies such as John Lewis and Arup.  This has got people talking, and we are seeing increased interest among companies of all sizes.

For many company owners exploring succession, the traditional choices are rather limited and often unavailable. In many sectors (for example construction) there are few trade buyers.  Senior leadership team members and finance providers are often unwilling and/or unable to invest in a management buyout.  A company owner wishing to realise the value built up in their business will therefore need to look around for alternatives.

This is where an employee ownership trust can come in. It can buy the company, paying the retiring owner in instalments funded out of company profits with no capital gains tax payable. Employees can then be paid income tax free bonuses (up to £3600 each per year).

But employee ownership should not be seen as a fallback position.  It will often have positive advantages in its own right. In a company with the right culture and leadership (or which has the potential to put these in place), it can be the foundation for further growth and increased productivity. It can also provide long term improved performance, maintaining independence and jobs, sharing the rewards of success with employees.  As the Ownership Dividend reported in 2018, employee owned companies outperform their counterparts in a number of ways.

Advisers to SMEs, in particular accountants and solicitors, are far more aware of employee ownership trusts than previously. Banks and other lenders have woken up to the fact that this creates new lending opportunities and are actively seeking them out.   Company owners are open to employee ownership for succession to a degree we have not previously seen.  And government policy makers of all political shades are keen to encourage forms of business ownership in which employees have a stake, addressing the income and wealth inequalities that many argue are a blight on society.

As employee ownership trusts approach their fifth birthday this spring, we believe 2019 will be the year they become part of the mainstream.

If you or your clients would like to discuss this subject in more detail please contact:

Robert Postlethwaite rmp@postlethwaiteco.com

David Reuben dgr@postlethwaiteco.com

or call us on 020 3818 9420

 

Employee Share Schemes 2018 The Good, The Bad & The Future

 

 

 

 

 

 

 

 

 

Despite Government taking its eye off the ball on EMI options, in other ways 2018 has seen major steps towards increased employee ownership.

The EMI story

This was a desultory one but with a satisfactory ending – for the time being.  Our concern is that a similar problem may come around again in 2019 but this time with no solution in sight.

EMI tax reliefs are regarded as State Aid under EU rules, requiring EU Commission approval which needs to be renewed on a regular basis.  The previous approval was set to expire in April 2018 but the UK Government only became aware of this days before the expiry, resulting in the tax reliefs ceasing to apply and worries that amidst Brexit negotiations renewal would not be a priority for the EU Commission.

In the event, the Commission did come through with renewed approval and no damage was done.

But there could be a new, final chapter in this short story.  Under an agreed Brexit withdrawal it will be necessary, if EMI is to continue, that State Aid approval also continues, and currently it is not clear that this has been provided for under any withdrawal terms.  A no-deal withdrawal does not present this problem but of course would throw up wider issues on a wholly different scale.

But aside from the EMI lash-up, 2018 has been otherwise been a positive year, particular for all-employee ownership and ownership succession through employee ownership trusts (EOT).

 

Employee ownership

In June, the Ownership Dividend inquiry into employee ownership was published http://theownershipeffect.co.uk/, finding amongst things that increased employee ownership in UK business has the potential to:

  • Increase productivity and performance
  • Support the development of regional economies, and
  • Foster more engaged employees

A growing number of companies have seen the benefits of becoming employee owned and transferred ownership to an employee ownership trust.  In 2018 these included household names such as Riverford Organics www.riverford.co.uk and Aardman Animations www.aardman.com  and others including orms (architects) www.orms.co.uk and Blue Chip Technology (computer design and manufacture) www.bluechiptechnology.com

The Scottish government announced financial support for extending employee ownership, and the Labour Party announced its own radical plans to increase the number of employee owners in the UK.

The record 750 delegates at the November annual conference of the Employee Ownership Association www.employeeownership.co.uk showed an unprecedented level of interest in employee ownership. With EOTs becoming an increasingly attractive exit route for business owners, and with professional advisers increasingly aware of this, we predict that 2019 will be the year in which employee ownership comes into the mainstream.

If you would like to explore how employee ownership or an employee share scheme might be introduced in your company, please contact us for an initial discussion.

We are happy to meet at our offices without charge or commitment and will be very pleased to hear from you.

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Don’t Throw Our EMI Baby Out With The Brexit Bathwater

In case you haven’t had enough of Brexit…

Some of you may remember that there was a hiatus earlier this year when the UK government failed to renew state aid approval with the European Commission for enterprise management incentive (“EMI”) options, the most popular and tax-efficient scheme for smaller companies.

For around 6 weeks it was unclear whether EMI options could be granted, until the following announcement was made in May:

the Commission concluded that the measure [ie EMI] is in line with EU State aid rules. Without prejudice to any provisions of the Withdrawal Agreement, which is under negotiation, this Commission decision only applies until the UK ceases to be a Member State

So what will the position be after Brexit day, currently scheduled for 29 March 2019?

The position of already-granted options is fairly clear – the state aid was deemed given at the date of grant, so tax relief will be honoured.

But will new grants be possible?

HMRC has indicated that in the case of a hard Brexit (essentially, one where the UK no longer had to pay heed to EU laws relating to, eg, State aid), EMI will continue for the foreseeable future.

But if we continue to be bound by State aid rules, which seems likely in the case of most “deal” and even “managed no deal” scenarios, it seems likely the UK will need Commission approval to continue to operate EMI.

This would either be part of the withdrawal agreement or a separate decision as in May.

We will be adding our voice to those calling for the government to deal with the matter in good time to avoid the issues that arose in the Spring.

We would encourage other affected parties to do the same.

In the absence of any final decision, if you are considering establishing an EMI plan, or making further grants under an existing EMI plan, you might want to consider implementing it, or accelerating some grants so that they are made before 29 March Brexit.

And if you want to agree a share value with HMRC in advance, you should aim to get your submission in by mid-January at the latest, and ideally before Christmas.

Note that only EMI is affected of the tax-advantaged share schemes, as it is the only one limited to a size of company. CSOPs, SAYE schemes and SIPs

 

If you would like to discuss this in more detail please contact David Reuben  dgr@postlethwaiteco.com or Robert Postlethwaite  rmp@postlethwaiteco.com

Important Changes to Entrepreneurs Relief

 

Autumn Budget 2018

Changes to entrepreneurs relief may affect shareholders in companies with more than one class of share, for example growth or preference shares

Background

Where entrepreneurs relief (“ER”) applies, capital gains tax is payable by a shareholder at 10% rather than the usual 20%. Pre-Budget, ER was available where

  • a holder disposes of shares in his personal company; and
  • the shares were held for a year or more

A “personal company” was a company where the holder held 5% or more of the voting rights and nominal capital. Shares acquired on the exercise of EMI options also qualify for ER, irrespective of the size of shareholding.

Budget changes

If the Budget proposals are passed EMI will continue to apply, but with two particular changes:

  • with immediate effect, to be a personal company, the holder, in addition to the previous requirements, has to hold shares with rights to participate in at least 5% of the distributable profits, and 5% of the assets on a winding-up; and
  • for disposals on or after 6 April 2019 the minimum holding period is now two years rather than one year

For EMI optionholders, the main consequence will be that ER will apply only where the underlying shares are disposed of at least two years from the date of grant of the option. Other shareholders will need to examine the Company’s articles carefully to ensure that they have the requisite entitlements, especially where there is more than one class of share.

For example, many private companies have two classes of share, which rank equally except that the board has the discretion to pay differing dividends on each class. On a strict reading of the new rules both classes of share might fail the ER test – neither has an entitlement to at least 5% of distributable profits, because dividends could be declared on the other class of share only.

The position is complicated further because the draughtsman has imported terms from the corporation tax regime into the capital gains tax legislation, where it does not fit comfortably. This also means that there are some possibly unintended consequences, for example bringing certain types of preference shares into reckoning in calculating the 5% threshold.

What can you do?

If you are affected by these changes, and in particular if you are a shareholder in a company with different share classes, you should make it a priority to consider whether you are still eligible for ER, and if not, whether anything can be done to rectify the position.

Please contact Robert Postlethwaite  or David Reuben if you would like to discuss further.

 

Today Is Employee Ownership Day

Employee Ownership Day (EO Day) is the national celebration of employee ownership and a major opportunity raise awareness of the economic benefits and positive impact the sector has on the UK economy.

EO Day takes place in the same week as the launch of the findings and recommendations of a major new independent inquiry into the potential for increased employee ownership in the UK: the Ownership Effect Inquiry 

The employee ownership sector accounts for more than £30 billion of the UK economy.  Whilst employee owned companies include a number of substantial businesses including John Lewis, Arup and Riverford Organics, a growing number of SME companies are moving to employee ownership, spanning a range of sectors including construction, architects, manufacturing and information technology,

The Ownership Effect Inquiry reveals new evidence that there is a significant and valuable Ownership Dividend to be gained from having more employee ownership in the UK economy, which the Inquiry believes would deliver a more productive and inclusive economy in a number of ways, including:

  • Improving UK productivity
  • Resilient regional economies
  • More engaged employees

The Inquiry is both authoritative and rigorous.   Chaired by Baroness Bowles, it has been sponsored by the John Lewis Partnership, the eaga Trust and the Employee Ownership Association, and has supporters including the Cass and Manchester Business Schools.   Members of its panel have included representatives of the Institute of Directors, the Institute of Chartered Accountants in England and Wales, the Federation of Small Business and the Chartered Institute of Personnel and Development

It has made a range of recommendations, including:

  • Investing in government agencies to build awareness of how to businesses can introduce employee ownership and practical help to make it happen
  • Development of a new national strategy for business ownership
  •  Consider further incentives to encourage growth of employee ownership, including tax incentives
  • Wider education about employee ownership

The Inquiry’s report and findings can be read in full here

The Ownership Dividend – The Economic Case for Employee Ownership

If you would like to explore how employee ownership might be introduced in your company, please contact us for an initial discussion.

We are happy to meet at our offices without charge or commitment and will be very pleased to hear from you.

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