The concept of employee ownership trusts (EOTs) is gaining popularity in the UK, with more and more companies adopting this model of ownership. Last month, unLTD did some digging into the advantages and potential drawbacks of making this move, speaking to a couple of local business owners who’ve undergone the transition in the process.

In a nutshell, EOTs are a form of employee ownership where a trust holds a controlling stake in a company on behalf of the employees. Possibly the most significant benefit of EOTs to a workforce is that they create a culture of shared ownership, which can lead to increased employee engagement and commitment. In turn, these factors can result in improved productivity, higher job satisfaction and reduced turnover.

One of the most recent converts in South Yorkshire is sustainable catering company PJ Taste, which went live with the scheme earlier this month. After 17 years in business, co-founder Peter Moulam told us that it seemed the perfect way to show staff how much they were valued.

“It’s about working together and not having a hierarchical structure to that ‘one team’ mentality.

“We’ve got members of staff who’ve been with us for fourteen years, and the majority have been with us between four and six years, so it feels like it’s the ultimate way to get staff involved, as beneficiaries of the trust.”

Another advantage of EOTs is that they can help to preserve a company’s legacy and culture. When a company is sold to a third party, there is often a risk that the new owner will make significant changes that are not in line with the original vision and values of the business. By contrast, EOTs ensure that the company’s ownership remains in the hands of the employees, who are more likely to be committed to preserving the company’s core values.

For some businesses, like Sheffield air conditioning experts Airmaster, the culture at the company already reflected the essence of what EOT models try to promote, and this was something they didn’t want to lose in a buyout scenario. After they transitioned in July 2021, managing director Lisa Pogson explained why the move seemed like a good fit for them. 

Employee Ownership Trust
Peter Moulam, PJ Taste

“Airmaster is a family-feel business with a close-knit team; the ethos of employee ownership was already there. People in our team are passionate and keen to take it forward as a business. We had the option of being bought out, but it felt like the ethos wouldn’t have stayed the same.” 

On a financial note, a big plus of switching to this model is the tax benefits offered to both businesses and employees. For example, companies that are majority-owned by an EOT can benefit from capital gains tax relief when the shares are sold. In addition, employees can receive tax-free bonuses when the company performs well.

Peter explained that this was another motivating factor behind their decision: “Original directors sell their shares to the staff, so the business will be run for the benefit of the staff, and then there’s the opportunity to share profit in the form of bonuses. I think the current legislation states the first £3,600 is tax-free per employee. Overall, it feels like a logical conclusion to the way we want to go as a business.” 

The main disadvantage touted around EOTs is that they can be complex to set up. Establishing one requires legal expertise, and there may be ongoing costs associated with managing the trust. In addition, it’s said that the process of transferring ownership to an EOT can take time and require significant effort.

Employee Ownership Trust

However, despite these considerations, Lisa claimed that the process of setting up the EOT wasn’t anything that couldn’t be overcome by a bit of determination, with the transition for Airmaster taking just a few months in total.

“We had been advised it would take a long time,” she said. “But the solicitor we got involved explained that wasn’t the case and if you’ve already got that mindset, just go for it – and we have a can-do attitude at Airmaster! On the whole, we’ve had a positive reaction and the trustee board meetings we have now take an overview of what the business is doing. It provides that extra layer of making sure the decisions in the business are in the best interest of everyone.”

If you’re interested in learning more about setting up an Employee Ownership Trust, visit ownershiphub.uk or contact Colette.Harvey@southyorkshire-ca.gov.uk  

An Idiot’s Guide to Employee Ownership Trusts (EOTs)

Employee Ownership TrustWe asked Andy Froggatt from Royston Parkin, our unLTD finance expert, to give us the lowdown on Trust Law in under 500 words…

Employee Ownership Trusts (EOTs) are a relatively new form of employee ownership in the UK. They were introduced in the Finance Act 2014 and were created to promote employee ownership by allowing business owners to sell their companies to their employees. The aim of EOTs is to help preserve jobs, promote long-term sustainable growth, and encourage a more inclusive and democratic approach to business management.

Under an EOT structure, the shares of a company are sold to a trust on behalf of the employees, who then become the beneficial owners of the business. The trust is managed by independent trustees and its purpose is to hold and manage the shares in the interests of the employees.

The benefits of EOTs include:

  • Tax incentives: Business owners who sell their companies to an EOT can benefit from capital gains tax relief, provided certain conditions are met. Employees who receive a bonus payment from the EOT can also benefit from income tax relief.
  • Improved employee engagement and productivity: Studies have shown that companies with employee ownership structures tend to have higher levels of employee engagement, job satisfaction, and productivity.
  • Succession planning: EOTs provide a way for business owners to exit their businesses in a way that preserves jobs and provides a platform for continued growth and success.
  • Enhanced reputation: Employee ownership can enhance a company’s reputation as a socially responsible business, which can be attractive to customers, investors, and potential employees.

There are some challenges to implementing an EOT structure. One of the main challenges is the cost of setting up and managing the trust, which can be a significant barrier for smaller businesses. Additionally, employee ownership may not be suitable for all types of businesses, particularly those that require significant levels of external investment or have a highly competitive marketplace.

The UK government has also shown support for employee ownership, with the establishment of the Employee Ownership Association (EOA), which promotes and provides support and advice to businesses considering this model.

From a tax perspective, there are also several advantages to setting up an EOT. For example, when a controlling stake in a company is sold to an EOT, the transaction is exempt from capital gains tax, which can result in significant savings for the sellers. In addition, companies that are owned by EOTs can also qualify for certain tax reliefs, such as the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS).

If you are selling your business now or thinking of it in the next couple of years, please contact me on andyfroggatt@roystonparkin.co.uk

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