What are the benefits of employee ownership?
This article considers the main benefits, both financial, commercial and social, from transitioning your business to employee ownership.
There are tax advantages to an employee ownership transition for both the outgoing owner and the employees when using a trust structure (for more on the different structures available for employee ownership, see our article 'What structures are available for employee ownership'). When the correct conditions are met using a trust structure, there is no capital gains tax payable on the sale price for the shares to the trust, and employees of the company can be paid an income tax free (but NI contributions still apply) bonus in each financial year (as of the writing of this article, this is up to £3,600 per annum). A simplified version of the conditions required to take advantage of the tax benefits are set out at the end of this article.
A transition to employee ownership still means that the outgoing owners can be paid the market value for their shares.
Where a direct ownership structure is used this can often be structured in a tax efficient manner for the employees if the share ownership is done through a share incentive plan (SIP), a save as you earn options plan (SAYE), a company share option plan (CSOP) or under an enterprise management incentive (EMI).
- Employees can be more engaged, energetic and committed if consulted on decisions. This can lead to greater innovation and entrepreneurial spirit, better retention of talented staff and a greater commitment as a whole to corporate social responsibility.
- A more engaged and more secure workforce can lead to higher productivity and profitability.
- Employees should have a clear shared purpose and collaborative way of working.
- Everyone feels like they have a stake in the business and are therefore more incentivised to work towards its success.
- Employee-owned business tend to be more resilient and stronger during periods of hardship, due to the collegiate atmosphere and greater transparency.
- It allows for ownership and leadership succession to be enacted over a number of years, which preserves both the business and its culture which may otherwise be lost.
- Employee-owned business focus on, and have a commitment to, the longer-term success of the company.
- The transition can be implemented at a speed which suits all parties and can allow the outgoing owner some additional time to wind down in the business, and stay part of it, for a number of years following the transition.
- Businesses can develop a family feel and the employee family can be kept together through a transition to employee ownership.
- Some sales to third parties lead to cost-cutting and movement of the business but not the people to other plants operated by the purchaser. With employee ownership it is more likely to stay local.
- Selling to employees can provide stability of employment and (once the sale price has been paid) the opportunity for greater financial rewards for employees if the business remains successful.
Statutory conditions for obtaining the tax reliefs on a trust structure
We have included a simplified version of the requirements here for information, but note that this can be a complicated area and advice should be taken to ensure the conditions are met in order to obtain the relevant exemptions.
Capital gains tax relief on sale of shares to the trust
- The company must be either a trading company or, where there is a group, the principal company of a trading group (trading in this context does not include investment companies which primarily just owns significant cash, land or other investments).
- The trust must acquire and retain a controlling shareholding in the company, so more than 50%.
- The trust must be set up for the benefit of all eligible employees on the same terms, so no particular advantage can be leveraged in favour of any subset of the employees.
- There is an additional requirement which only applies where the outgoing owner has held an interest of 5% or more in the company in the 12 months before the transfer which is designed to avoid abuse. This requirement is that the number of employees who hold 5% or more of the company must not exceed two fifths of the workforce generally and relatives are included with any such shareholders in this calculation. This will particularly effect companies with few employees.
Income tax-free bonuses for employees
- The company which employs the employees must be a trading company or a member of a trading group.
- A controlling interest in the company (or the principal company if there is a trading a group of companies) must be held by an employee ownership trust for at least twelve months.
- The company should not have more than a ratio of 2/5 for directors (plus any employees related to them) to employees and directors in total.
- There is a maximum limit (as at the date of this article) of £3,600 income tax free bonus per employee per tax year
The payment must not consist of normal salary and must be made under an arrangement under which all employees must be eligible to participate, and they must do so on equal terms (although awards can be determined by reference to pay, length of service or hours worked).