Holding it together

Employee ownership advantages look good on paper, so should you bring your people on board with you? Specialist John Dormer of The RM2 Partnership talks you through the options.

Wider employee ownership doesn’t just benefit employees, organisations and the economy, it also helps business owners retain skilled individuals and recruit new talent whilst boosting their productivity and profitability. So says John Dormer of the RM2 Partnership, who has worked for over 20 years with private company owners to help them establish and run employee share plans.

The RM2 Partnership itself was formed in 1991 and became an employee-owned business in 2019, using the ‘Employee Ownership Trust’ model and the team there has been involved in the design of ‘Share Incentive Plan’ (SIP) and ‘Enterprise Management Incentives’ (EMI) legislation (and other government sponsored employee share plans) and often comments on guidance, policy and market practice relating to employee share ownership. So the following - from Dormer - is worth noting if you’re considering going  that route.

Firstly, note that the benefits of employee ownership are available to businesses of all sizes. Employee Share Ownership Plans (ESOPs) allow employees to acquire shares in their business through tax efficient means and in the process promote positive employee behaviour by encouraging them to think more like business owners, with the incentive of future rewards.

For business owners looking to sell, employee ownership is an increasingly popular choice. By selling the majority of shares to an ‘Employee Ownership Trust’ (EOT), owners can be confident that the business will be owned and run by those they have previously worked with and trust.

A sale to an EOT is free of Capital Gains Tax (CGT) and offers increased flexibility for owners to decide their own exit timeline, without disrupting the ongoing operations of the business. Without having to negotiate, the sales process can be more efficient too, although owners must realise funds are paid from the company’s profits and can take five years or more to be paid.

Employees of a business controlled by an EOT can each receive annual bonuses up to £3,600 free of Income Tax, although National Insurance Contributions (NICs) will apply.

Owners considering employee ownership should seek specialist advice on the different benefits and tax treatments before making a final decision. There are numerous ESOPs available, offering different benefits and tax advantages, but the three most popular plans are as follows...

Enterprise Management Incentive (EMI) is a discretionary share option plan, providing a flexible, tax efficient way for smaller companies to reward some or all employees, by offering them the chance to buy shares in the business in the future, at a price fixed when this offer is made.

The company must be independent, with gross assets of £30m or less and fewer than 250 employees. Options may be granted over shares with a value of up to £250,000 at grant date, with the overall company limit set at £3m.

EMI options can be granted over different share types, with any exercise price and any performance conditions. The options can be exercised any time after grant but will typically lapse ten years after grant.   

Options are free of Income Tax and NICs, but gains will typically be subject to Capital Gains Tax (CGT), but thanks to the application of Business Assets Disposal Relief (BADR), it is usually levied at 10%.

The Company Share Option Plan (CSOP) is another discretionary share option plan, for larger or non-EMI qualifying businesses. It can be made available to all employees or a select few and tailored to meet business objectives with different share classes and performance targets.

The Share Incentive Plan (SIP) is an equitable, all employee share plan that provides a potential zero tax rate, with no Income Tax, no NICs and no CGT. Shares can be gifted free of Income Tax and NICs to employees, who can also use pre-tax salary to buy ‘partnership’ shares, which may entitle them to a further two free ‘matching’ shares for each one bought.

The decision to follow one of the employee ownership routes is not to be taken lightly. It is important to understand that share plans must comply with legislation throughout their lifespan. Care must be taken that corporate events don’t risk disqualifying the scheme, such as entering into a joint venture arrangement, which may disqualify an EMI scheme.

Ensuring the plan is administered correctly is also critical, especially should the company be sold, when the share scheme will be subject to close scrutiny during the due diligence process, when any errors could have serious consequences.

Employee share plans must be registered with HMRC and annual returns submitted. Failure to do so, could possibly result in fines, challenges during due diligence and in the worst-case scenario, disqualify the plan from the numerous tax advantages.

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