We are busy working with a wide range of businesses to deliver their employee ownership strategy, whether that involves becoming an employee owned entity and utilising the tax reliefs introduced in FA 2014, operating HMRC tax-advantaged schemes or more bespoke arrangements to reward and retain employees. In particular, we are seeing a notable increase in shareholders exploring the use of employee ownership trusts (EOTs) as an alternative to more traditional exit routes.
Employee ownership continues to be at the forefront of the political agenda, as highlighted by Labour’s recent announcement that its government would introduce legislation requiring all companies with more than 500 employees to give shares to their staff worth up to £500 a year (along with the establishment of inclusive ownership funds over at least 1% of a company’s shares).
If you could make one change to tax, what would it be?
I would rewrite ITEPA. At present, the anti-avoidance legislation in relation to the taxation of employee benefits is over-complex and not fit for purpose. There needs to be a clear distinction between the rewards provided for employment, which should be taxed as income and the benefits of true equity ownership, which should be taxed as capital. The disguised remuneration rules, which were unnecessarily all-encompassing with unclear exemptions, should be simplified and amended in light of the Rangers decision.
Are there any new rules that are causing a particular problem?
Whilst the tax rules introduced to promote EOTs, have been in force since 2014, so are not new, their practical use and application is still developing. Sales of private companies to EOTs will often involve the payment of consideration over time, from the future generation of profits. As distributions of profit to a controlling shareholder are generally taxed as income, there should be a specific carve-out for distributions made to EOTs to fund consideration payments. Similarly, contributions made to EOTs from close companies are transfers of value for inheritance tax purposes. Whilst there is a relief for contributions made in the year that the EOT becomes a controlling shareholder, there is no specific EOT exemption for subsequent contributions. These issues lead to continuing uncertainty for companies wishing to use EOTs as business structures.
Is there a recent case which has caught your eye?
The decision in South Downs Trustees Ltd v GH, IJ & KL [2018] EWHC 1064 (Ch) (16 May 2018). Here a controlling entity in a company (referred to as ‘Utility’) was held by an employee benefit trust. The terms of the trust prevented the trustee from disposing of its shares if it resulted in a loss of control of Utility. The trustee applied to the court to override the terms of the trust deed and sell its shareholding, relying on s 57(1) of the Trustee Act 1925 and the principles in Public Trustee v Cooper [2001] WTLR 901. The court found in favour of trustee and granted permission for the sale. It was interesting that the under the test in Public Trustee v Cooper, the trustee was held not to be surrendering its powers to the court, but was seeking its blessing to what could be considered a reasonable course of action. Some vendors are keen to ensure that employee trusts will own the business in perpetuity. The case highlights the risks of this approach and the challenges this poses to trustees, who have an overriding duty to act in the best interests of employees. A better approach would, perhaps, be to ensure that future sales are subject to the consent of a majority of the employees.
Finally, you might not know this about me but…
At heart, I am a frustrated interior designer. Three years ago, I completed a design course with the Interior Design Institute in London and would love to be designing or renovating homes or offices. Maybe one day after tax…
We are busy working with a wide range of businesses to deliver their employee ownership strategy, whether that involves becoming an employee owned entity and utilising the tax reliefs introduced in FA 2014, operating HMRC tax-advantaged schemes or more bespoke arrangements to reward and retain employees. In particular, we are seeing a notable increase in shareholders exploring the use of employee ownership trusts (EOTs) as an alternative to more traditional exit routes.
Employee ownership continues to be at the forefront of the political agenda, as highlighted by Labour’s recent announcement that its government would introduce legislation requiring all companies with more than 500 employees to give shares to their staff worth up to £500 a year (along with the establishment of inclusive ownership funds over at least 1% of a company’s shares).
If you could make one change to tax, what would it be?
I would rewrite ITEPA. At present, the anti-avoidance legislation in relation to the taxation of employee benefits is over-complex and not fit for purpose. There needs to be a clear distinction between the rewards provided for employment, which should be taxed as income and the benefits of true equity ownership, which should be taxed as capital. The disguised remuneration rules, which were unnecessarily all-encompassing with unclear exemptions, should be simplified and amended in light of the Rangers decision.
Are there any new rules that are causing a particular problem?
Whilst the tax rules introduced to promote EOTs, have been in force since 2014, so are not new, their practical use and application is still developing. Sales of private companies to EOTs will often involve the payment of consideration over time, from the future generation of profits. As distributions of profit to a controlling shareholder are generally taxed as income, there should be a specific carve-out for distributions made to EOTs to fund consideration payments. Similarly, contributions made to EOTs from close companies are transfers of value for inheritance tax purposes. Whilst there is a relief for contributions made in the year that the EOT becomes a controlling shareholder, there is no specific EOT exemption for subsequent contributions. These issues lead to continuing uncertainty for companies wishing to use EOTs as business structures.
Is there a recent case which has caught your eye?
The decision in South Downs Trustees Ltd v GH, IJ & KL [2018] EWHC 1064 (Ch) (16 May 2018). Here a controlling entity in a company (referred to as ‘Utility’) was held by an employee benefit trust. The terms of the trust prevented the trustee from disposing of its shares if it resulted in a loss of control of Utility. The trustee applied to the court to override the terms of the trust deed and sell its shareholding, relying on s 57(1) of the Trustee Act 1925 and the principles in Public Trustee v Cooper [2001] WTLR 901. The court found in favour of trustee and granted permission for the sale. It was interesting that the under the test in Public Trustee v Cooper, the trustee was held not to be surrendering its powers to the court, but was seeking its blessing to what could be considered a reasonable course of action. Some vendors are keen to ensure that employee trusts will own the business in perpetuity. The case highlights the risks of this approach and the challenges this poses to trustees, who have an overriding duty to act in the best interests of employees. A better approach would, perhaps, be to ensure that future sales are subject to the consent of a majority of the employees.
Finally, you might not know this about me but…
At heart, I am a frustrated interior designer. Three years ago, I completed a design course with the Interior Design Institute in London and would love to be designing or renovating homes or offices. Maybe one day after tax…
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