Chartered Institute of Taxation calls for action to improve effectiveness of employee ownership regime

Tax institute calls for action to improve effectiveness of employee ownership regime
The Chartered Institute of Taxation (CIOT) is calling on the Government to review the tax regime for Employee Ownership Trusts to encourage take-up and discourage their abuse.

Employee Ownership Trusts (EOTs) are used by UK businesses to convert to employee ownership. The Government promotes employee ownership, by removing the tax charge for selling a company to an EOT, as research has shown the employee owned businesses are more profitable and have happier, more engaged and more productive workforces.

In a representation ahead of this month’s Budget the CIOT calls on the Government to consult on options for changes to the tax regime to:

eliminate unnecessary costs in transferring to employee ownership

  • remove a potential exchequer risk where the tax breaks are used to save tax
  • without real commitment to employee ownership, and
  • to achieve the policy objectives of promoting employee engagement more effectively.

Pete Miller, Chair of the CIOT’s Owner Managed Business Committee, commented:

“The Employee Ownership Trust model allows shares in a company to be held collectively on behalf of its employees.  There is clear support for the principle and the broad outline of the EOT tax regime to support this model but there are certain aspects that do not work as well as they could and should do.

“Removing unnecessary costs from the process of transferring a company into employee ownership should be a priority.

“When a business owner sells a company to an EOT, it is usually necessary to approach HMRC to obtain agreement for the way the trust is put in funds to pay the sale price to the seller out of the future profits of the company it now owns. Seeking and obtaining clearance involves unnecessary costs for taxpayers and for HMRC – costs that could be eliminated by confirming in legislation that the contributions paid by the target company to fund the acquisition do not suffer a tax charge. Putting that treatment on a firm statutory footing would provide certainty and save everyone time and expense.

“We are also concerned that some advisers seem to be recommending EOTs as a tax planning measure without any real commitment to employee engagement.

In particular, we have heard of advisors recommending EOTs simply as an interim tax-saving step where the intention is, in the relatively short term afterwards, to sell off or float the company. This suggests a lack of genuine commitment to employee engagement. We think it is worth exploring ways to guard against this outcome – and the consequent loss of tax revenue. One option would be to require EOTs to be resident in the UK as a condition of accessing the favourable tax treatment.

“Fundamentally, promoting employee engagement is at the heart of the purpose of EOTs, achieved mainly through the trustees’ and directors’ abilities to influence the company’s conduct. More could be done to enhance that engagement through options such as requiring a majority of trustees to be independent of the original owner.

“Overall, we think it is the right time for a review of these provisions.”