£50 million fund for Employee Ownership - How should it be spent?
In our Employee Ownership Day article, we advised that the government is now looking to support and encourage companies moving to employee ownership. This includes financial support: the Chancellor, George Osborne, announced in the 2013 budget that, commencing in 2014, the government will set aside £50m to help encourage and sustain employee ownership.
How this £50 million will be allocated will not be confirmed until a later date. The consultation is currently under way however and closes on 26th September 2013. RM2 are currently compiling our response to the consultation and we will keep you updated with developments as the consultation reporting progresses and the draft legislation is published later this year. Meanwhile we thought we would highlight some of our initial observations and invite you to let us know your thoughts too.
About the fund
In summary, the first thing to note is that the "fund" is not going to be operating any form of grant funding. So for those who might have been hoping for an opportunity to apply for funds to subsidise (our very reasonable) professional fee costs for implementing appropriate arrangements to facilitate employee ownership, you will be disappointed. Sadly no such support is on offer from this "fund". Professional fee costs for establishing Employee Benefit Trusts, Share Incentive Plans or other types of employee ownership arrangements e.g. Enterprise Management Incentives and Company Share Ownership Plans are generally tax deductible under general principles but whilst Scottish Enterprise provides some grant funding to support Scottish businesses with such costs it seems our other domestic territories are not so well served and this new initiative is not going to bridge that gap.
Instead it is proposed that £50 million be a sum "earmarked" to provide two new tax reliefs to encourage and support the creation and growth of employee-owned companies. i.e. no money will be paid out from this fund but instead the Treasury are in effect funding additional tax reliefs.
First is a proposed new capital gains tax relief which would apply when the controlling share of a business is sold into an indirect employee ownership structure. This would encourage individuals wishing to sell their business to consider an indirect employee ownership structure, leading to the creation of new indirect employee ownership structures. Broadly this means a sale of shares into an Employee Benefit Trust in circumstances where the shares are retained by the trustees for the benefit for employees but without equity ownership ever passing directly to employees (i.e. there are no employee share schemes operating in conjunction with the EBT.)
The second tax relief being considered is an income tax and national insurance contributions (NICs) exemption. This would allow indirectly employee owned companies to pay their employees a certain amount per annum, typically as a discretionary cash bonus, free of income tax and NICs. There would also be an employer NICs exemption for the company.
Launched on the inaugural Employee Ownership Day on 4th July 2013, this consultation is focused on indirect employee ownership forms only. As noted above this is therefore only currently being considered where shares are held collectively on behalf of the employees and not by employees directly.
Views are sought on the two tax reliefs which the government has decided to introduce in order to encourage, promote and support indirect employee ownership structures.
The CGT relief is expected to encourage individual proprietors of a company to consider selling their interest in the company to EBT trustees who will then have control of the company such that it is indirectly owned by its employees.
Care will be needed to ensure that a shareholder selling shares to an EBT funded out of the company's distributable profits (because yes it is the company that will need to fund the purchase; there is no prospect of Government funding for that part of the transaction!) will not be caught by the transactions in securities rules rendering any CGT exemption worthless. Technical issues also potentially arise in considering the loan to participators legislation and disguised remuneration legislation.
The proposals raise a number of questions (beyond those actually raised in the consultation document) such as:
- What is the appropriate definition of "an employee owned company" for these purposes? What level of interest should the EBT be required to hold? 25%, 51%, 75% or 100% of the issued share capital and over what period of time.
- The practical reality after all is that the EBT funding, and therefore the divesting of interests by current owners, is often transacted over a number of years. Few trading businesses in the current economic climate have sufficient distributable cash reserves to transact in full and immediately in relation to controlling interests.
- Should the CGT relief be available to more than one transferor? At present the Government intention is that only one shareholder would be able to claim the relief. This seems too narrow an audience of taxpayers as most businesses have more than one shareholder and means that the relief would apply only to a single controlling shareholder and not to accumulated disposals by multiple founding shareholders or even associated family members.
- How should payments qualifying for the income tax relief be defined? How can this sit comfortably and free from the abuse that was legislated against in the disguised remuneration legislation of Part 7A ITEPA?
- Is it right that the relief is only available to indirect ownership models and does not consider the more common position of direct or hybrid direct and indirect ownership models?
The consultation seeks more information about the likely extent of the use of the proposed reliefs. Given that only £50 million has been set aside (the suggestion is that this would be annually) to "fund" the reliefs and on the basis that the most obvious claimant for the new income tax relief is the John Lewis Partnership, boasting some 84,000 partners (i.e. employees) one really must conclude that this initiative will provide only very modest benefits to employees of other such indirectly owned companies as a means of providing them with a more tax efficient profit distribution to staff.
If you wish to share your views on the consultation with us and lend weight to the "likely take-up and use" of such reliefs data that we are currently considering for our response then please email Kerrie.Willis@rm2.co.uk with the subject heading EOD consultation. If you wish to learn more about the proposed new reliefs and their relevance to your circumstances please contact Liz.Hunter@rm2.co.uk with EOD tell me more in your email subject heading or call our team on tel. 020 8949 5522.