Why you should consider employee-ownership

Switching to an employee-owned business model should be considered more readily at times of succession and the proposed tax incentives could make such transitions even more attractive.

The tax incentives and other measures outlined in a recent Treasury consultation on employee ownership, which closed at the end of September 2013, are expected to be translated into draft legislation in the Finance Bill 2014. 

Among the measures included in the latest consultation is a proposal to introduce capital gains tax relief on the sale of a controlling interest in a business into an employee ownership structure.

Changing the structure of the business by transferring a controlling stake over time into an Employee Benefit Trust (EBT) can be an excellent solution for shareholders or business owners planning an exit for a variety of reasons.

The business owners in question may want to protect the long-term interests of the business by adopting an employee-owned business model, rather than pursuing the more conventional succession routes such as a sale to a trade buyer. In a lot of instances, this is likely to involve a staged transfer of ownership, possibly as a result of funding constraints.

Of course, Government proposals to introduce capital gains tax relief for such share transfers could make the decision to switch to employee ownership even more attractive.

The proposals outlined in the Treasury’s recent consultation document are based on recommendations made in the Nuttall Review, entitled ‘Sharing Success’, which was published last year. 

Crucially, however, the proposals need to be applied as widely as possible if they are to be successful in their bid to foster the growth of employee-owned businesses. 

In particular, the staged transfer of shares to an EBT, which is a popular method of transition to an employee-owned business model, needs to fall within the tax breaks and it is not clear at the moment if that will be the case.

Business owners who choose to dispose of their controlling shareholding over time by transferring it into an EBT should not lose out on the capital gains tax relief. 

A possibility here may be to grant relief for each of their disposals retrospectively, once a certain threshold has been reached. For example, the tax relief could kick in once a 50 per cent shareholding or more has been transferred.

Such tax incentives should also be available not just to individual shareholders or to shareholders who are ‘connected in some way’. 

It should be widely available to any group of shareholders who are willing to club together to transfer a majority shareholding, regardless of any connection they may or may not have. It is not clear as yet if the new tax breaks will be restricted in this manner.

Of course, we appreciate that the Treasury might be concerned about the potential cost of such relief but if it is serious about encouraging more employee ownership and achieving the goal of employee owned businesses accounting for ten per cent of UK GDP by 2020, such tax incentives are essential. 

On top of that, we believe that additional funding beyond the £50m is likely to be required if these are to be meaningful measures.

Gary Davie is a corporate partner at Shakespeares and specialises in helping companies make the transition to employee ownership.

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