Ask the Experts from ETC Tax
The benefits of employee ownership
11th June 2019, 8:00 am
Boosted by evidence of the benefits of employee ownership, and a number of high-profile examples including Aardman Animations and Richer Sounds, employee ownership is high on the agenda.
Entrepreneurs and their advisers planning for an exit should consider the sale of the business to employee ownership trust rather than third parties.
HMRC published figures in June 2018 showing that the number of businesses operating some form of share scheme increased by 11 per cent in a single year.
Many of those companies have gone one step further and handed over ownership to their employees.
According to the Employee Ownership Association, more than 350 businesses across a variety of sectors including retail, health, manufacturing and finance have taken that further step.
Why consider employee ownership?
There are at least three reasons to consider employee ownership:
1. Increased commitment
The Nuttall review on employee ownership published in 2012 showed that employee ownership fostered an increased sense of commitment, giving staff a vested interest in driving a company forward.
Such companies may be better at recruiting and retaining talent, be more innovative, and deliver superior business performance.
Further potential benefits are illustrated by the widely publicised sale of Aardman Animations, the creators of Wallace & Gromit, to an employee ownership trust. The founders of Aardman choose this exit route over a sale to a major studio to ensure that the company would not have to dance to anybody else’s tune and ensure the continued independence of the company.
Julian Richer of Richer Sounds similarly cited wanting to reward his loyal, hardworking colleagues as well as guaranteeing the high street chain’s future prosperity and protecting its socially progressive approach being changed by outside investors.
Following the recommendations of the Nuttall report, the Government introduced generous tax reliefs for business owners willing to sell their shares to an employee ownership trust established for the benefit of the employees of the company, provided that certain conditions were satisfied including that at least a controlling interest in the company, that is, 51% or more, was sold and that control therefore passed to the employee ownership trust.
While the rate of capital gains tax applying on the sale of an interest in a company may be as little as 10% if Entrepreneurs’ Relief is due, a sale to an employee ownership trust means that no capital gains tax will be due. Other attractive tax benefits include the ability of employees to receive bonuses of up to £3,600 per annum free of tax (but not National Insurance Contributions).
For entrepreneurs considering their exit route, sale to an employee ownership trust should be on the list of potential exit strategies, especially for those who wish to secure the future of a distinct, business ethos, create a legacy and ensure the ongoing success of the business they have founded.