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Employee Ownership: One Year On

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United Kingdom

The Deputy Prime Minister, Nick Clegg, launched a drive to put employee ownership into the mainstream of the UK economy in January 2012.

First appeared in the LexisNexis Company Secretary's Review, Volume 37 Number 30

“I have every expectation that when we look back at 2013 we will recognise it as having laid the foundations for a thriving and growing employee ownership sector in the UK.” (Jo Swinson, Minister for Employment Relations and Consumer Affairs). Graeme Nuttall and Jennifer Martin from Fieldfisher explain more.

Introduction

The Deputy Prime Minister, Nick Clegg, launched a drive to put employee ownership into the mainstream of the UK economy in January 2012. Since then the sector has received more attention than ever before. The Nuttall Review was published by the Department for Business, Innovation and Skills (“BIS”) in July 2012. One year on from the Government’s formal response to the Nuttall Review, BIS has reported on the progress made. Initiatives to promote employee ownership continue, with the publication by BIS in November 2013 of a call for evidence on amending the rule against perpetuities and further reducing the complexity of employee ownership.

One year on report

The overarching conclusion of the Nuttall Review was the lack of awareness in the UK of the employee ownership concept and its benefits. The John Lewis Partnership is the best known example of an employee-owned company, but evidence showed that beyond this, awareness of employee ownership was severely lacking in the business community. The Nuttall Review called on the Government to build on its support for public service mutuals and to promote employee ownership in the private sector.

Following 18 months of support from Jo Swinson (Minister for Employment Relations and Consumer Affairs), a team at BIS and sector bodies such as the Employee Ownership Association, there is greater awareness in the UK of the concept of employee ownership. Supporters of employee ownership will be encouraged that all 28 recommendations put forward in the Nuttall Review have been acted upon to some extent and that, on over half, progress has been assessed as significant. Space constraints mean that only some details are highlighted below.

Company law changes

Important changes were made to the company law rules on share buybacks and treasury shares in April 2013. It is hoped these changes will encourage businesses to adopt employee ownership by making it easier to maintain an internal share market.

Model documents

A key area where there is a gap in awareness is in relation to indirect (or trust) employee ownership. Many advisers are used to using employee benefit trusts (“EBTs”) to achieve tax advantages. The focus of advisers has been so skewed that they can forget there are sound commercial uses for EBTs: as market makers and, in particular, as trusted long term owners of shares in a company for the benefit of all its employees.

The Government has now taken steps to promote the indirect employee ownership model and has published a tool kit for employee ownership on its website. This deals with setting up an EBT and trustee company. HM Revenue & Customs has published accompanying guidance.

New tax reliefs

Last year HM Treasury consulted on two new tax reliefs to promote the trust model of employee ownership. These tax reliefs were confirmed by the Chancellor in the 2013 Autumn Statement and an existing inheritance tax relief was also extended. The Government has increased the money available to finance these reliefs, which will provide tangible financial incentives to the adoption of employee ownership as a business model and succession solution.

Draft legislation was published on 10 December 2013 and is subject to further consultation until 4 February 2014.  The draft legislation and accompanying information provides clarity on the type of trust required, an employee ownership trust, and when the new reliefs will apply.

Next steps

Maintaining momentum

There is greater awareness of employee ownership through, for example, the first national Employee Ownership Day on 4 July 2013 and the Robert Oakeshott Memorial Lecture, and there are additional resources to support those who want to adopt employee ownership. But the one year on report explains that the momentum to promote employee ownership must be maintained.

Health check

The one year on report contains a checklist from Graeme Nuttall, author of the Nuttall Review, to help determine if everything is in place to ensure employee ownership in the UK will flourish. BIS will hold regular stakeholder meetings over the next twelve months in order to assess where matters stand against this health check and to determine what further work is needed.

The one year on report health check: how well can these questions be answered?

  • Is the meaning of employee ownership sufficiently clear?
  • Does the expertise and experience exist among professional advisers and more generally across the business community to support employee ownership?
  • Are the benefits of employee ownership understood and are they demonstrated by success stories, backed up by research?
  • Are there practical tool kits in use to implement every form of employee ownership?
  • Is there Government support for employee ownership backed up by incentives and a commitment to remove obstacles?
  • Do we have the necessary champions of employee ownership?
  • Is there an ambitious target against which we are measuring success?

Call for evidence

The Government continues to show a commitment to removing obstacles. On the same day the one year on report was launched, BIS published a call for evidence seeking views on amending the rule against perpetuities for employee trusts and whether anything can further reduce the complexity of employee ownership.

Amending the rule against perpetuities

The Nuttall Review recommended that EBTs should last forever and should not be subject to the rule against perpetuities. The current rule is that any new EBT under the law of England and Wales can only last for 125 years.

The rule has its origins in 17th century common law and was developed in order to restrict a person’s power to control perpetually the ownership and possession of his property after death and to ensure the transferability of property.

The 1998 Law Commission Report on the rule against perpetuities and excessive accumulations made two recommendations. It recommended that:

  • the scope of the application of the rule should be reduced so that for the future it should only apply where statute provided that it should (this would helpfully exclude a wide range of commercial transactions from the rule); and
  • where the rule continued to apply, a fixed perpetuity period of 125 years should be introduced (increased from 80 years).

At the time, the Law Commission considered that the rule against perpetuities should continue to apply to EBTs. Other types of trusts (e.g. certain pension trusts) are excluded from the rule.

Evidence received during the Nuttall Review suggested that law and practice has moved on since the Law Commission’s report and so it is appropriate to make a change now in relation to EBTs. Other jurisdictions have adopted a different approach when reforming their trust law. Since 27 October 2006 a Jersey trust may continue in existence for an unlimited period and Guernsey law has similarly changed.

Those creating new EBTs, as part of a permanent employee ownership solution, want their trusts to last forever. In practice, founders work on the basis that either the law will have changed or a solution will be found by the time the fixed perpetuity period is reaching its end, to enable shares to be put in trust for another 125 years. There are such solutions available but the Nuttall Review concluded that this is an unnecessary risk and complication and that EBTs should be excluded from the rule against perpetuities.

Further reducing complexity

Progress has been made in terms of reducing the actual (or perceived) complexities of employee ownership. As part of the call for evidence, BIS is seeking views from employee-owned businesses and other stakeholders on whether it is possible to further reduce the complexity of employee ownership. In particular, BIS would like comments on any remaining (non-tax) regulations that have a disproportionate impact on employee owned businesses.

Any readers with comments on either the exclusion of EBTs from the rule against perpetuities or ideas to further reduce the complexity of employee ownership are urged to respond to the call for evidence by 19 February 2014.

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