Need to know:
- Employee ownership trusts (EOTs) are an indirect form of ownership whereby the majority shares of an organisation are held in a trust on behalf of staff.
- Organisations controlled by an EOT are able to provide a tax-free cash bonus of up to £3,600 per employee per year.
- Moving to an EOT rather than going through a normal trade sale allows businesses to maintain their existing culture, while increasing employee engagement.
It has been seven years since the Department for Business, Innovation and Skills (BIS) published Graeme Nuttall’s review on employee ownership in July 2012. As a result of the recommendations put forward in Sharing success: The Nuttall review of employee ownership, employee ownership trusts (EOTs) were introduced in the Finance Act 2014.
The business model continues to grow in popularity, and its benefits are clearly evidenced: in 2019, like-for-like sales at the UK’s 50 largest employee-owned businesses increased by 3.5% to £19.2 billion in one year, according to The Employee Ownership top 50 2019 report, published by the Employee Ownership Association (EOA) and RM2 Partnership in June 2019. The research also showed a mean increase in productivity of 7.7% at these organisations since 2018.
Matthew Emms, partner, share plans and incentives at BDO, says: “When the legislation was first introduced, a lot of shareholders were nervous around moving to a new form of exit structure. People want to see that it works and that it’s a good structure, and [would] not cause them problems going forward.
"More and more [organisations] now are starting to hear about others that have moved across to an EOT, and they’re seeing the great press and the benefits associated with [it].”
Ownership structure
EOTs are an indirect form of employee ownership whereby a trust is set up, shares of at least 51% are sold by the original owners or shareholders into the trust, and these shares are then held on behalf of employees, creating employee owners.
Liz Hunter, director of equity reward, people services and tax at KPMG, says: “The advantage of the structuring that the vendors get is tax exemption on a qualifying disposal into the trust.”
Businesses controlled by EOTs are also able to pay all staff an income tax-free cash bonus of up to £3,600 per employee per year.
Why become employee owned?
For employers, the benefits are clear. “There has been a lot of statistical data out for many years saying [businesses] that are owned to an extent by their employees tend to outperform in the market, they tend to have a more long-term thought process around shareholders’ interests, they tend to be more innovative and robust businesses,” says Emms. “Also, they tend to be more productive and profitable.”
Employee ownership also brings the benefit of creating a succession strategy and ensuring the sustainability of the organisation, says Neil Palmer, corporate partner at law firm Fieldfisher: “Employers, founders and owners are saying this is a good way of operating a business, and a good way of succession or transitioning to the new generation.”
This business model also allows for an organisation to maintain its existing culture, rather than undergo the uncertainty and change that can come with a normal trade sale. There is not the need to merge different groups of employees, cultures or even IT systems; fundamentally, apart from the ownership structure, everything remains largely the same.
“That’s really important to a lot of directors and owners of businesses that they maintain the structure and culture of the business, so that the business will continue for the long term,” says Emms.
Benefits for employees
Becoming one of the owners of the organisation through an EOT can bring many positives, starting from the moment the transaction is complete.
Tamsin Nicholds, senior associate, tax and structuring at Fieldfisher, explains: “There are clear [perks] such as the income tax-free bonus, and there are others such as [that] the whole business is being run for the benefit of employees.
"[We] would expect the environment, as that [organisation] develops its idea of employee ownership, to change so that there is more inclusion of all employees in decisions.”
Clear understanding
The value of an EOT should be clearly communicated to employees; It is key that staff understand that the change is intended for their benefit and to help secure their future employment, explains Hunter.
Positioned and communicated well, this ownership structure lends itself to greater employee engagement and motivation; employees can see that they play a vital part in creating a productive and profitable business.
Hunter concludes: “By becoming one of the owners, it gives [individuals] that immediate vested interest in thinking about efficiencies and growth innovation, and that’s one of the key messages to convey, that many workers will appreciate, and therefore feel that this is a very positive move for them. They understand why they would contribute discretionary effort."
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