At certain times of year, a sentence that mentions John Lewis tends to be about its status as a Christmas advertiser. Less often discussed, but well worth knowing about, is the status of John Lewis & Partners as employee owned, and how the sale of a business to this special form of ownership (employee ownership trust; EOT for short) has notable tax benefits.
What is an EOT?
An EOT holds a controlling stake in a company on behalf of all its employees. This sustainable ownership structure can foster greater loyalty and motivation among employees.
There are thought to be over 300 EOTs in the UK. They range from retailers (John Lewis & Partners, Richer Sounds) and art galleries (Portland Gallery) to professional services firms (Hodge Jones & Allen solicitors).
EOTs and tax incentives
Since 2014, EOT legislation has allowed shareholders to sell their companies to employee ownership and pay no capital gains tax (CGT) if certain conditions are met.
Following the release by the Office of Tax Simplification (OTS) of its review of CGT in 2020 (which we discussed here), there is an acceptance that, after £299 billion of Government borrowing in response to the COVID-19 pandemic in 2020/21 alone, CGT will eventually only rise. Sales devoid of CGT may become increasingly desirable transactions.
The Government’s intention in allowing sales to EOTs to be made without CGT is to encourage the growth of employee-owned companies, allowing employees to share in the rewards. Employee ownership creates a strong platform for the continued success and growth of the company since it’s the employees who know the business best.
A significant aspect of EOT ownership is that bonuses or profit shares can be paid to employees free of income tax. There is a limit of £3,600 per employee per year, and the bonuses must be paid to all employees on the same terms. This means that benefits cannot be allocated in favour of particular employees and can only be varied by reference to salary, length of service or hours worked.
When is an EOT the right option?
Although it may sound attractive, a sale to an EOT is not suitable for all companies. There needs to be a strong management team in place who supports employee ownership and the employees need to be engaged in the process.
However, an EOT could be used if the selling shareholders are unable to find a suitable third-party purchaser, where some shareholders do not wish to sell or where the company is not suitable for an IPO (an initial public offering for listing on a stock exchange).
In light of the pandemic and its economic impact, many businesses are keen to plan for the future. Experienced advisers can help a business and its people to explore the option of an EOT as part of those plans.
How BKL can help
BKL has advised on a large number of disposals to EOTs over the past two years as employee ownership is becoming increasingly popular. The process is generally led by solicitors – such as Postlethwaite, a specialist firm with whom we’ve jointly advised on many sales to EOTs – but the selling shareholders and the trustees of the EOT both engage share valuation experts, such as our corporate finance team, to value the company. This valuation is used as the basis for determining the purchase price.
Most employee-owned businesses in the UK are nowhere near the size of John Lewis & Partners. There is no limit on the number of employees a company can have to be suitable for employee ownership and we have advised on some disposals to EOTs of owner-managed businesses with only a handful of employees.
For more information, please get in touch with your usual BKL contact or use our enquiry form.
You can also watch a recording of our webinar with Postlethwaite on employee ownership trusts.
