2. Employee Ownership Day: 4th July 2013
Buy-back of private and unquoted company shares into treasury
Following the Nuttall Review of Employee Ownership, the Government has already promoted a number of technical changes to company law which will allow private and unquoted companies to buy back, and fund the buy-back of, their own shares more easily and allow such shares to be held in treasury. A question mark remains over whether such changes will be of real practical value unless changes are also made to the tax treatment of the proceeds of a sale back to the company so that the vendor is treated as making a CGT disposal. Under current rules, if the shares have been held for less than 5 years, part of the consideration received is taxed as dividend income. While the Government intends to consult on the introduction of a new relief from CGT upon the disposal of a controlling interest in a business into an employee ownership structure (see below), this will only apply to the sale of shares into a trust, and not to the buy-back of shares by the company itself.
Government consulting on proposed new tax reliefs relating to companies with employee ownership
On 4th July 2013 the Government issued a consultation document seeking views on two possible new reliefs first mentioned in the last Budget :
(a) relief from CGT upon a disposal of shares in a company, and possibly also business assets, by one or more individuals (and possibly trustees) to an employees’ trust which will thereafter have control of the company, by way of ‘indirect employee ownership’; and
(b) a limited relief from income tax and NICs for cash earnings paid out of the profits of an indirectly employee-owned company by the employer company or, possibly, the trust.
The former is expected to encourage individual proprietors of a company (or business) to consider selling their interest in the company to trustees so that the company becomes indirectly employee-owned, rather than selling to a trade buyer. The latter would be of particular benefit to John Lewis Partnership (“JLP”) and other so-called ‘employee-owned’ companies who, unlike companies which pay dividends, are presently only able to make a distribution of profits through the payroll.
Care will be needed to ensure that a shareholder selling shares to an employees’ trust funded out of the company’s distributable profits, will not be ‘caught’ by the “transactions in securities” rules rendering any CGT exemption worthless.
The document raises many questions such as :
- what is the appropriate definition of an ‘employee-owned company’ for these purposes? Should the trust be required to hold at least 25, 51, 70, 75 or 100 % of the issued share capital?
- should the trust hold at least 51% of the voting rights and at least a specified entitlement to assets on a winding-up?
- should the CGT relief be available to more than one transferor?
- is another definition of ‘controlling interest’ appropriate for the CGT relief?
- to ensure fairness, how should the subsequent transfer of shares to employees, or allowing employees to acquire voting rights whilst the trust enjoys capital growth in value, be addressed?
- how should payments qualifying for the income tax relief be defined?
- should that relief be limited to payments by the employer company and how can it be implemented with minimal complexity?
It also seeks more information about existing indirectly employee-owned companies and the likely extent of use of the proposed reliefs. Given that only £50m has been set aside to ‘fund’ the income tax relief (although the CGT relief is not, it seems, so restricted – see para 4.3), and that JLP has some 84,000 ‘partners’, it might be expected that this will provide only very modest benefits to employees of other such indirectly employee-owned companies.
In an ideal world, considerations of the type of employees’ trust able to take advantage of such reliefs would be considered by HM Treasury alongside the recommendation of the OTS for the recognition of a ‘safe-harbour’ trust affording access to these and other protections against unexpected or unfair charges arising in relation to transfers and payments to, and by, a ‘bona fide’ employees’ trust…..
The consultation closes on 26th September 2013. Responses should be sent to: email@example.com
Department for Business, Innovation and Skills publishes model documentation for companies with employee ownership
The Right Hon. Dr. Vince Cable M.P., Secretary of State for BIS and President of the Board of Trade, took the opportunity of addressing a conference in London marking “Employee Ownership Day” to launch the publication of Model Documentation for a Company with Employee Ownership (or, as previously referred to by the Deputy Prime Minister, Nick Clegg, “employee ownership in a box”). The document – which is available at https://www.gov.uk/government/publications/employee-ownership-company-model-documentation – includes model precedents for (a) the constitution of such a company; (b) articles of association of such a company; (c) the trust deed of a suitable form of employees’ trust (with notes); and (d) articles of association of a guarantee company intended to act as corporate trustee of the trust. The documentation, which was drafted for BIS by Pett, Franklin & Co. LLP, is drawn from real-life examples of such companies and is intended to form a useful basis for settling bespoke documentation for a company proposing to convert to such a company. It is envisaged that it will be amended over time to reflect practical experiences of such companies.
HMRC guidance notes published
HMRC has published notes headed “Employee Share Trust – introduction to tax issues” summarising the tax issues which may arise for businesses looking at employee ownership for the first time. The notes can be found at http://www.hmrc.gov.uk/shareschemes/est-intro.pdf.
HMRC has also published notes headed : “Purchase of own shares by non-quoted companies – tax implications for employees selling shares”. These summarise the tax issues arising from recent changes in company law allowing private companies to buy-back their own shares and hold them in treasury. The notes can be found at http://www.hmrc.gov.uk/shareschemes/ee-selling-shares.pdf. It is perhaps unfortunate that the notes do not highlight the principal point that, to secure CGT treatment of the proceeds, the vendor employee must, inter alia, have held the shares for at least 5 years. It is for this reason that it is unlikely that the new rules will displace the need for an employees’ trust to be available to purchase shares from employees.