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Employees running the show!

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13 December 2017

We are all well aware of the John Lewis model, whereby, the employees are also the owners of the business. Until recently, not many other companies have followed suit, as passing the running of the business over to your employees can be a daunting prospect.

It is, however, possible to sell some, or all, of your shares to an employee ownership trust (EOT) at full market value without a capital gains tax charge. It can also help to incentivise staff and form part of their remuneration package.

Providing employees with a say in how the business is run and linking performance to rewards can be one of the most powerful tools to grow and improve the performance of a business.

Statistics relating to employee owned companies are also very compelling. They suggest improved employee engagement, increased productivity and higher turnover and profit figures.

All of these factors have resulted in more and more employee owned structures in recent years.

Type of business

Employee owned businesses could be established at start up to encourage quick growth and performance or could be implemented for long established businesses without a clear succession plan in place.

They can be suited for a wide range of sectors and can be flexible in terms of structure. Similarly, they can be used in businesses of all sizes from just a few employees, to companies with thousands.

Structure

There are three main types of employee ownership:

  1. Indirect employee ownership – this is the most common structure where the shares are held collectively on behalf of employees, normally via a trust. This structure allows for the employees to indirectly acquire a stake in the business without needing the cash upfront to do so. We focus on this type of ownership for the remainder of this article. 
  2. Direct employee ownership – employees directly own the majority of shares in the company normally via a HMRC approved share scheme such as a Share Incentive Plan (SIP) which are tax advantageous. 
  3. Combined ownership – a combination of the above two structures i.e. some shares held directly and some via a trust.

How much of the company must the employees own?

There are a number of different ways an employee owned business can be implemented, however, it may be a gradual process to transition.

Under the John Lewis structure 100% of the company is owned by its employees. However, the company does not have to be wholly owned by the employee for the structure to be effective. For established companies, the preferred route may be to establish a trust which then purchasing the shares from the existing owners over a number of years. Providing the trust has a controlling stake in the company and for the benefit of all the employees on an equal basis, the tax advantages can still be enjoyed.

The directors do not need to exit the business and can still receive competitive remuneration packages following disposal of their shares.

Tax advantages

The two main tax exemptions are:

  • No capital gains tax will be due when a controlling interest in a company is sold into an employee ownership trust (compared to 10% capital gains tax if selling shares via a standard sale)
  • An annual bonus of up to £3,600 can be paid to employees without being subject to income tax. 

Case study

We have recently advised on, and implemented, an employee ownership structure for one of our clients in the transport sector with a transfer value of £3m. 

Our assistance included; advice on the most appropriate structure and implementation steps, obtaining clearance from HMRC, liaising with lawyers, company secretarial support, completion and filing of stamp duty returns and valuation assistance.

If you would like any further information on how an employee ownership structure or if you would like advice on other employee share rewards and incentives, please contact Tom Woodcock on 01242 237661 or tom.woodcock@hazlewoods.co.uk

You can also find out more about Employee share schemes and incentives here.