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Employee ownership enquiries on the rise

The employee ownership trust (EOT) legislation is now nearly nine years old so it seems sensible that HMRC has announced it will be reviewing how it works again. This legislation appears to have vastly extended employee ownership in the UK with the number of employee-owned companies more than doubling to 1,300 in the three-year period to December 2022. But, there is always scope for improvement.

Briefly, shareholders selling to an EOT don’t pay capital gains tax (CGT), but the taxable gain is effectively passed on to the EOT trustees, deferred until a sale. The other tax break is that employees could have a tax free (but not NIC free) bonus up to £3,600 each tax year. Both benefits are subject to some tight rules.

It’s clear from recent activity that HMRC is now checking compliance with those rules. We have seen increased enquiries about the transactions giving relief and requesting supporting documentation. It should come as no surprise that HMRC is keen to ensure the relief is claimed correctly. But given this is not an exemption but effectively a deferral, is there an actual loss to the Treasury?

As well as checking the facts of a deal, what areas could be looked at to help tighten up the rules? One place HMRC might start is CIOT’s representations to the government in 2021:

On the other hand, where UK employees receive pay outs following a sale, the tax and NIC rate can be over 60%, a healthy rate for the UK.

What else the consultation may focus on is less clear.

The EOT legislation has been enormously successful in increasing the number of employee-owned companies in the UK, and we see many success stories of the transformational difference employee ownership can make. Making some relatively modest reforms to the legislation could further enhance the policy objective of encouraging successful employee ownership whilst ensuring that all EOT transactions are done for the right reasons and minimising the potential for abuse.

authors:martin-cooper,authors:fiona-bell