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Indirect Employee Ownership



United Kingdom

Following the findings of the Nuttall Review, the Government has decided to introduce two tax reliefs to encourage, promote and support indirect employee ownership.

Article first appeared in the Company's Secretary Review, 28 August, Volume 37 Number 10

Following the findings of the Nuttall Review and in order to support this sector, the Government has decided to introduce two tax reliefs to encourage, promote and support indirect employee ownership” (HM Treasury, 4 July 2013). Graeme Nuttall and Jennifer Martin explain more.


Successive UK Governments have used tax reliefs to encourage the direct ownership of shares by employees. An HM Treasury consultation launched on 4 July 2013 (Employee Ownership Day) outlines the Government’s support for an alternative form of employee ownership, namely, the collective (or indirect) ownership of shares on behalf of employees.

The consultation document, “Supporting the employee ownership sector”, confirms the introduction of two tax reliefs to support indirect employee ownership. These reliefs will increase awareness of this business model and will encourage its take-up. The reliefs, which are expected to apply from April 2014, are:

  • a new capital gains tax (“CGT”) relief on the disposal of a controlling interest in a business into an indirect employee ownership structure; and
  • an income tax and National Insurance contributions (“NICs”) exemption to allow indirectly employee-owned companies to pay their employees a certain amount per annum, free of income tax and NICs.

The Nuttall Review

The Nuttall Review (“Sharing Success: The Nuttall Review of Employee Ownership”) identified the need to raise awareness of employee ownership if this business model is to become a mainstream part of the UK economy, the need to increase the resources available to support it and the need to reduce its complexity. A total of 28 recommendations were made to address these obstacles, including changes to company, tax and trust law (see “Review of Employee Ownership” by Graeme Nuttall (CSR Vol 36, p 62)).

Company law changes to share buyback rules were implemented on 30 April 2013 as a result of the Nuttall Review (see “Reform to Share Buybacks” by Laurence Lumb (CSR Vol 37, p 1)). These changes help direct employee ownership.

In Budget 2013, the Government announced £50 million annually from 2014/15 to provide the new CGT relief and further incentives, including measures targeted at indirect ownership models. The HM Treasury consultation builds on this Budget 2013 commitment.

Employee trust ownership

The Government recognises that all forms of employee ownership produce economic benefits. But the Government’s express support for employee trusts is notable given the emphasis of previous Governments on direct ownership.

The indirect ownership model usually involves the permanent holding of shares within an employee trust. This avoids some of the complications associated with direct share ownership such as buying back shares when employees leave the business. The employee trust model can provide:

  • a more stable and long-term structure;
  • a vehicle for employees to make their collective voice heard and to act as “custodian” of the company’s employee ownership ethos; and
  • a more straightforward tax situation (because there is no acquisition and disposal of shares by individual employees).

HM Treasury consultation

HM Treasury’s consultation document asks for comments on the proposed reliefs and for information on the nature and number of companies with indirect employee ownership and the likely use of the new reliefs. John Lewis Partnership plc is the best known example but HM Treasury wants to hear from all UK trustowned companies.

Businesses that do not want any direct employee ownership cannot benefit from existing tax-advantaged share plans. Part of the rationale for the new reliefs is that they complement the existing tax reliefs for direct employee ownership.

The aim is to keep the new reliefs as simple to understand and use as possible. The usual obstacle to this is preventing abuse. HM Treasury helpfully confirms that “the use of an employee benefit trust in its own right does not constitute avoidance”. Nevertheless the Government will not want any unacceptable tax avoidance and so the reliefs will contain appropriate safeguards.

The consultation document should be referred to for the full detail of the Government’s proposals for the two new reliefs. Following are comments on particular points.

The qualifying structure

Although the consultation document discusses possible variations the focus is on relating the tax reliefs to an employee trust that:

  • operates for the benefit of all employees (subject perhaps to a short qualifying period of employment); and
  • which has a majority shareholding interest.

Companies with, say, five or fewer employees may be excluded because of the risk of abuse.

The qualifying criteria are likely to require the employee trust’s shares to have a minimum level of voting rights and rights to a specified fraction of assets on a winding-up or liquidation.

Companies with employee ownership also have arrangements that underpin employee engagement, such as elected trustee directors or employee councils. The Government will probably rely on the shares in the trust to give sufficient weight to the employees’ voice, rather than require any additional form of employee engagement.

CGT relief

Subject to certain conditions, the gain on the disposal of a controlling interest by an individual (or a deceased shareholder’s personal representatives) to an indirect employee ownership structure should be wholly exempt from CGT. Whether or not trustees can also claim the relief may depend on the strength of representations on this point.

It is unlikely the relief will apply to gradual disposals and that the employee trust will need to get the controlling interest as a result of the tax-relieved disposal.

The Government has asked for representations on broadening the relief to include cases where multiple owners together transfer a controlling interest. In employee buy-outs there can be multiple shareholders, often with no family connection, who all need to sell shares to give the employee trustee control. The new CGT relief will be of greatest benefit if it can operate flexibly and apply to any number of vendors who, acting together, transfer a controlling interest.

Income tax and NICs relief

The second relief is an exemption from income tax and NICs on a certain amount of a bonus paid by an “entity” within an indirectly employee-owned structure. Such a payment is more equivalent to a dividend than pay: in effect a reward that flows from the business model rather than from employment. A company could use, say, an HMRC-approved share incentive plan to provide tax-free shares to its employees but this runs contrary to the principles of the trust model. The ability to pay a tax-free bonus without introducing a share scheme will be welcomed by employee trust owned companies.

This relief will be available for qualifying structures whether or not CGT relief has been claimed. In a generous move to ensure simplicity there may be no reporting requirements for the exempt amounts. Also, although the employee trust must operate for the benefit of all employees, there will probably be no requirement that every employee receives the same value or indeed that every employee receives an annual payment. There will be anti-avoidance provisions to try to prevent only, say, a small group of senior employees from receiving exempt payments. The Government may specify which entity should make the exempt payments. It is often the employer company that pays the “employee ownership” bonuses, at the direction of the employee trustee (it having waived its right to receive a dividend). This avoids both tax and administrative complications. The consultation document indicates that a corporation tax deduction will be available whether the employer company or the employee trustee makes the payments. It is hoped that, to maintain flexibility, either will be permitted to make the payments.

Profit-related bonuses?

The Government may restrict this relief to profit-related bonuses, as they most closely represent a distribution of the profits of the business, but acknowledgesthis could lead to greater complexity. The bonus pool, as agreed between anemployee trustee and a trading company, is often derived from profits available for distribution (which would otherwise be paid as a dividend to the trust). But if, say, interim accounts are needed to provideformal proof of distributable profits this will add considerably to the complexity (and cost) of the arrangements.

Practical effects of the new reliefs

The introduction of these reliefs is further evidence of the Government’s support for employee ownership. The reliefs will help overcome obstacles identified in the Nuttall Review:

  • the reliefs will increase awareness of the employee trust business model. Professional advisers will, in particular, have to mention employee ownership as a succession solution;
  • the tax savings will help support the financing of employee buy-outs; and
  • the CGT relief will help simplify the tax aspects of transactions, especially those involving deferred consideration.

The new reliefs are welcomed by longtime supporters of the employee ownership sector, including the Employee

Ownership Association. There is a concern that the reliefs will succeed too well such that the Government’s budgeted £50 million p.a. will not cover the cost. This should not limit the initial design of the reliefs: the Government should continue its bold support for employee ownership and not worry that it may be too successful.


Graeme Nuttall, Partner and Jennifer Martin, Associate at Field Fisher Waterhouse LLP

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