Employee Ownership is here

As we predicted 2019 is the year in which employee ownership becomes mainstream.

Last weekend saw an unprecedented level of media coverage on employee ownership.  We look at what the BBC, Times and Financial Times have been saying and give our view on why employee ownership is capturing such wide attention.

The decision of Julian Richer to transfer the ownership of his successful hi-fi and television stores to an employee ownership trust has clearly caught the media’s attention.

 

Each of the following was published on Saturday 18 May:

 

The BBC, in an online feature entitled The firms turning their workers into owners, describes how 60% Richer Sounds has been transferred to an employee ownership trust.  This will enable Julian Richer to save CGT on his £9.2m sale proceeds, although he is more than giving back the tax saving by paying a £3.5 million bonus to employees.  From now on, they will also be able to receive an annual bonus free of income tax (maximum £3,600 per employee).

 

The Financial Times devoted an editorial to employee ownership.  Injecting the right note of realism (employee ownership does not suit all circumstances), it recognises that it can raise productivity and growth, create a healthy longer-term business perspective and build a more inclusive capitalism.  The FT’s view is that employee ownership should be voluntary and it has little time for the coercive version which has been advanced by Labour, under which all companies with more than 250 employees would build up to a 10% holding from which dividends would be shared between employees and government – a hybrid of employee ownership and nationalisation.

 

Then we had The Times, who have also given over premium editorial column inches to employee ownership.  Their view is that the “greed is good” approach to business (as voiced by the fictional corporate raider Gordon Gecko in the film Wall Street), is plain wrong. The Times cites with approval Mr Richer’s view that the more rapacious brands of capitalism are toxic, that a good company does a lot more than simply provide profit to investors and that employee ownership will often both be good business and a great way for businesses to make a wider contribution to society.

 

The CGT and income reliefs that come with transferring your company to an employee ownership trust are attractive and are sometimes the initial reason why business owners look at this route to succession.  But other reasons tend to emerge and take precedence:

  • Employee ownership will create a strong platform for further growth
  • The business owes much of its success to date to its employees, and will continue to do so
  • Employee ownership is a fair way to reward commitment and talent
  • A well-led employee owned company is able to think longer term, enjoy greater productivity and show resilience when times are harder

For more evidence The Ownership Dividend report explores this in more detail.

We welcome the attention employee ownership is receiving.

For more information about employee ownership click here

Important reminder HMRC annual returns for share schemes due by 6th July

 

 

If you have granted options or awarded shares to any employees or directors (even if the scheme has been inactive during the year) you are obliged to file an annual return for the tax year ending 5th April 2019.

 

 

This will need to be lodged with HMRC by 6th July 2019 in respect of any type of share or option scheme including any taxable share awards to directors or employees.

HMRC do not issue any reminders but will impose penalties if Returns are not submitted by this date, and a series of further penalties if they remain outstanding.

You can use the HMRC online service to lodge the Return.

The form for EMI options can be found here

The form for CSOP options can be found here

The form for SAYE options can be found here

The form for SIP can be found here

The form for any other awards of options or shares can be found here

 

 

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