The combination of achieving a more diverse ownership structure and economic benefits such as productivity, innovation and long-term future-proofing has led to employee ownership becoming the fastest growing business model in the UK.
What is employee ownership?
Employee ownership involves employees having a significant stake in the business and this can take a variety of forms:
- direct ownership – where employees own shares in the company
- indirect ownership – where shares are owned by a Trust that is set up and run for employees' benefit,
- or a combination of both
For many businesses people are the most important asset, and if they are also owners increased productivity, efficiency and profitability often follow suit.
Businesses often consider employee ownership for the first time when planning for succession. At such times, the pressure to find a solution that meets the long-term interests of the organisation and enables the departing shareholders to realise value from their investments is considerable. A significant benefit of adopting the model is that shareholders think with the long term in mind, rather than being primarily concerned with what the balance sheet may look like when they come to exit.
Making the transition to employee ownership doesn’t have to happen overnight and can be done in stages or by way of deferred payments in order to alleviate any pressure on cash flow or bank finance available. For example, a proportion of the shares might be purchased initially and placed in an Employee Ownership Trust. The remaining shares could then be purchased at a later date.
Putting the model in place
Although many owners or businesses tend to consider employee ownership as an option when succession planning, the model can be adopted at any point in the business cycle, from the start-up stage to ultimate succession.
The model may not be appropriate for some companies and the majority will still look for a sale. However, for some owners creating a legacy and securing the long-term future of the business can provide the most suitable and appealing option. The new tax breaks can also be used to bridge the gap between what may have alternatively been received if a sale was opted for instead of choosing the transition to employee ownership.
What are the tax breaks?
Capital Gains Tax exemption directly applies to the disposal of shares that represent a controlling interest in a company being transferred into an Employee Ownership Trust. This provides an added incentive for those adopting the model. In addition, the income tax breaks on future profit-related payments add to the tax incentives available – payments can be up to £3,600 each year.
The sector currently contributes in excess of £30 billion to the UK economy each year and the number of employee owned businesses are growing at an annual rate of just under 10%. As a result businesses and employees are both likely to come across and realise the benefits of adopting the model in the future.
Gary Davie is a corporate partner at law firm Shakespeare Martineau