The Advantages of the John Lewis model & Employee Ownership Trusts

With potentially no Capital Gains Tax (CGT) payable (a disposal made at ‘nil gain nil loss'), Employee Ownership Trusts (EOTs) can often appear to be too good to be true for business owners, which may result in owner manager businesses not considering its use.

There are, however, similar structure used by well-known businesses.  The John Lewis business model is built around employee ownership, with each employee part-owning the business. This means they get a share of its annual profits and can have their say in how the company is run.

The government likes the employee ownership model for several reasons:

  • It is a counter to short term capitalism.
  • It creates an enduring ownership structure.
  • It provides tangible employee benefits.
  • It encourages long term strategic planning and stimulates investment.

The motivation behind this business model is that it improves company performance due to each employee having a stake, and therefore an extra incentive, in the company’s success.

The use of EOTs has more than doubled in the past three years with the total number of employee-owned business in the UK now over 1,000.
 
The major advantages of EOTs for companies and their team include:

  • Greater employee engagement, productivity and motivation
  • Improved business performance
  • Enhanced brand and reputation
  • Reduction in absence
  • Strengthened stakeholder relationships 

In addition, companies controlled by EOTs are also able to pay tax-free cash bonuses to their employees of up to £3,600 per year!

EMPLOYEE OWNERSHIP TRUSTS (EOTS)

An EOT is an indirect form of employee ownership that sees a trust hold a controlling stake of at least 51% of a company on behalf of all eligible employees. EOTs were brought in by the government in 2014 to encourage staff ownership as a business model.

As accountants working with SME businesses, we work with business owners from an early stage to understand their personal objectives and corporate plans. On the topic of business succession, EOTs work nicely alongside more common exit routes, such as a conventional Trade Sale or a Management Buy Out (MBO).

With no Capital Gains Tax (CGT) payable, EOTs are a fantastic opportunity for business owners.  EOTs fit well across profitable stable businesses with a supporting management team structure in place. This is particularly suitable when the management team do not wish to take on the personal risk and potential personal secured bank borrowing associated with becoming a shareholder (via an MBO or MBO variant).  EOT’s are a popular exit route for business owners.

The Employee Ownership Association confirms that the employee ownership sector has more than doubled in the past three years, with the total number of EOTs now reaching 1,300 in the UK (as at December 2022).

 

The Employee Ownership Association also confirmed in 2022, that of the total number of EOTs, the largest sector (38.2%) relates to ‘Professional Services’ (with a significant proportion understood to be Architects) and the second highest sector, Construction, relating to 13.2% of all UK EOTs.

 

The driving force is quite often owners looking for tax efficient succession options. If the conditions are met, an EOT sale with the prospect of the sellers paying no CGT (noting that it’s deemed to on a no gain, no loss basis) versus the capital taxes payable via Business Asset Disposal Relief (BADR, previously ‘Entrepreneurs’ Relief’) appears to be particularly attractive.

In all cases, the EOT structure and mechanism varies so further work is required to ascertain from an early stage how SME owners are likely to extract value and when, and in most instances, transition ownership to the ’employees’ in the future.

 

Employee ownership can be seen to support the notion of legacy and sustainability. It also allows a company to be passed onto the next generation of leaders in a tax efficient manner.

 

If you want to find out more about the succession options available to you, or Employee Ownership specifically, please feel free to Contact Us

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