It’s not often one gets to know something before anyone else. This can be a great door opener.
The Employee Ownership Trust (EOT) is, I believe, going to turn out to be one of the biggest changes to UK business for many years. It is a new business ownership model that allows owners to sell at a market value, and for the employees to gain control and access to profit without having to stump up cash. Everyone wins.
The EOT was approved as a scheme by HM Revenue & Customs (HMRC) in 2014. Currently there are only some 320 EOT companies in the UK.
This is a subject which will be of interest to the people advisers want to talk to, that is, business owners and professional connections.
I can’t think of a better moment to take this topic and spread the word. Go and have a coffee with the local accountancy partner, or call up business owner contacts. Hell, why not even hold a seminar and advertise it in the local chamber of commerce.
There is, however, a catch. And, odd as it might seem, the catch is in the tax breaks.
Why tax must not be the driver
I have recently seen a few accountants and corporate finance advisers advertising the EOT as a ‘tax-efficient scheme’. This is really dangerous. Let me explain why.
The EOT is an HMRC-approved trust which owns the shares for the benefit of the employees. This, in simple terms, is how the transition to EOT works.
- The owner establishes the EOT;
- An independent market valuation of the business is obtained;
- The owner sells all or part (but at least a controlling interest) of their shares to the EOT at or below that market value;
- As the EOT has just been established and doesn’t have any money, an agreed repayment plan is put in place;
- The EOT uses the future profits of the business to make the payments;
- Depending on the plan, profits over and above the annual payment may be available for the employees;
- Once the repayments are complete, the profit is available for the employees.
So, the owner gets out and the employees get in. But – and this is a significant but – this means
future payments for the value of the shares will be coming from profits of a company that the owner no longer controls.
Transition to an EOT is therefore about much more than saving some tax. It means building a sustainable business that will continue to be profitable once the owner has left.
(Incidentally, for owners who think this is an impossible task, figures from the Employee Ownership Association suggest that profits of an EOT business increase by an average of 15 per cent one year after the sale. Makes you wonder what those employees were doing when you owned the business!)
Spreading the right message
After I sold Ovation to an EOT, everyone I told about the deal wanted to know more. I barely ever mention the tax relief. I would estimate that around 80 per cent of business owners ended the conversation with a question along the lines of: “Do you think this would work for my business?”
The EOT is generating enormous interest, and accountants and solicitors are starting to hear about it. Some of the more commercial firms will start putting information into their newsletters, and maybe even looking for advice firms with which to hold joint seminars.
As their clients come to them for more information, they will all need to be well versed in the EOT.
This therefore represents the ideal chance to go out and spread the word. But, if you do, please can I ask something? Make sure you focus on succession planning and the importance of building sustainable businesses, in order to leave a legacy and make sure those payments get made. Leave the capital against tax relief as a nice little bonus.
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Today on illuminate: Why employee ownership is more than just a tax break.— Nucleus (@nucleuswrap) October 1, 2018
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