Proposed new tax reliefs for employee owned companies

9th July 2013

On 4 July 2013, the UK’s first Employee Ownership Day, the Government launched a consultation on providing two new tax reliefs to encourage and support the creation and growth of employee-owned companies.

Employee ownership can take the form of direct ownership (where employees hold shares in their employing company), indirect ownership (where shares are held collectively on behalf of employees, often through an employee benefit trust (EBT)), or some combination of the two.

Existing tax advantaged share plans encourage employees to make direct acquisitions of shares in their employer company on an individual basis, rather than encouraging the holding of shares indirectly on behalf of employees.

The first Government proposal is for a sale of a controlling interest in a business to an indirect employee ownership structure (usually an EBT) to be entirely free from capital gains tax (CGT).

The second proposal is an income tax and National Insurance Contribution (NIC) exemption on bonuses paid to employees of companies where a significant proportion of the company is owned by an EBT.

In the course of the consultation, that Government hopes to gather more information about the employee ownership sector and in particular:

  • the nature and number of existing employee-owned companies with an indirect ownership structure;
  • the likely extent to which the proposed reliefs will be used; and
  • the views of interested parties on how the income tax and NIC exemptions can be implemented with minimal complexity for employers.

As announced in Budget 2013, the Government will provide £50 million annually from tax year 2014-15 to finance these new tax reliefs and support employee ownership models in order to incentivise growth of the sector. In our view, there is a risk that this may be insufficient, as John Lewis (to take one example) could use most, or perhaps all, of this budget on its bonus payments in a good trading year.

The Government proposes that the new legislation will include appropriate provisions to ensure that this initiative is not used for the purpose of tax avoidance.

The consultation period will end on 26 September 2013. Subject to that process, the Government intends to publish draft legislation later in 2013 to be included in Finance Bill 2014.

You can find the consultation document at:

https://www.gov.uk/government/consultations/supporting-the-employee-ownership-sector

HM Revenue & Customs has also updated its website to make available employee ownership model documentation, including a model trust deed and a note on tax issues, as well as a note on the tax implications for employees selling shares following the new regulations on share buybacks introduced with effect from 30 April 2013.
The model documents are intended to make it easier and more cost effective for companies to introduce employee share ownership, by reducing the need for them to use legal advisers.

The materials can be found at:

http://www.hmrc.gov.uk/shareschemes/ee-ownership.htm

The Government is displaying genuine commitment to developing the employee ownership sector and we would encourage all those interested in the sector to play a full part in the consultation process so that the outcome is as positive as possible.