Government consults on new tax breaks to "encourage and support" indirect employee ownership

Out-Law News | 05 Jul 2013 | 4:22 pm | 3 min. read

Two new tax breaks have been proposed by the Government to "encourage and support" employees taking out shares in the companies that they work for.

It is consulting on the creation of a capital gains tax relief (CGT), which would apply when the controlling share of a business was sold into indirect employee ownership. A second relief would allow employee-owned companies to pay staff an annual bonus free of income tax and national insurance contributions (NICs).

"The employee ownership sector has huge potential and the government wants to support it as much as possible," said Danny Alexander, Chief Secretary to the Treasury.

"Employee ownership is of significant benefit to the wider economy, through increased growth and business success, and this business model will also add greater diversity to our economy. We want to encourage greater use of employee ownership in UK businesses and want to ensure that we provide reliefs that are supportive and effective," he said.

The Government has also published a suite of documents for both employers and employees interested in employee ownership structures. These include guidance on the benefits of employee ownership for employees, and model documentation that employers can use when moving to an employee ownership structure.

Share plans and incentives expert Lynette Jacobs of Pinsent Masons, the law firm behind Out-Law.com, said that the announcements showed that the Government "clearly means business" in its publicly-stated commitment to encouraging greater employee ownership.

"Whilst a relatively small sector, employee-owned companies can be very successful, allowing employees a meaningful stake in the relevant business without requiring them to give up valuable employment rights, as is required under the controversial 'employee shareholder' status," she said.

"Any legislation brought in to facilitate the reliefs will clearly need to be drafted so as to prevent abuse. However, it is hoped that it will not be so drafted as to deter the growth of employee-owned companies - for example, a suggestion referred to in the consultation that the existence of an 'employee council' be a qualifying criterion," she said.

Employee-owned companies are those where the employees have a "significant and meaningful" stake in the company they work for, particularly through the ownership of shares that can amount to a substantial or controlling stake. Companies can be owned directly by employees through the use of employee share plans, or indirectly.

In his independent review of the regulatory burdens surrounding employee ownership, Government adviser Graham Nuttall found that employee-owned companies demonstrated better resilience due to the economic downturn and increased loyalty from staff. He made a number of recommendations, including the creation of 'off-the-shelf' employee ownership documentation and making it easier for employers to 'buy back' shares when employee owners leave the company.

The new reliefs are being targeted at indirect forms of employee ownership, where shares are held collectively on behalf of the employees through a structure such as a benefit trust. During this year's Budget, the Chancellor announced that the Government would provide £50 million annually to support employee ownership from 2014-15.

According to the consultation, the new capital gains tax relief would apply when the controlling share of a business is sold into an indirect employee ownership structure, such as an employee benefit trust. The Government said that this relief would encourage individuals wishing to sell their business to consider an indirect employee ownership structure rather than another buyer. The income tax and NICs exemption would allow indirectly employee-owned companies to pay their employees a certain amount per annum free of income tax and NICs, and would also include an employer NICs exemption.

"The possibility of no CGT applying where a business owner sells his controlling interest to an indirect employee ownership structure should significantly enhance the attraction of a disposal by an owner of some or all of his shares to a trust," said incentives expert Lynette Jacobs.

"The growth of indirect employee ownership structures will be further stimulated if the proposal to introduce an income tax and NIC exemption on certain payments of bonus to employees of such companies' proceeds, making such companies desirable employers. The company's complementary employer NIC exemption will give it a competitive advantage over more traditional ownership models," she said.

She added that the possibility that the exemption might apply to payments made to employees by a trust was "interesting in view of the 'disguised remuneration' legislation, introduced only two years ago". These rules prevent employers from using trusts and other third parties to avoid tax liabilities when rewarding employees.