How an Employee Benefits from Employee Ownership Trust?

Introduction

Employee Ownership Trust (EOT), special form of benefit provided to the employee of any corporation initiated by the Government in September 2014. It is an effort to inspire more employees to act as shareholders too, to establish a well-structured corporate ambience referring the John Lewis model of corporate structure. The core objective of this initiative is to facilitate broader employee-ownership, in a form of an indirect holding an ownership.

EOT is considered as a permanent shares delegation to an employee not else as a continuous rotation of financial benefits in the company. Basically in employee ownership, the concerned shares are seized through Employee Benefit Trust (EBT), persistently developed for taking the accountability of further benefits of the employees of a company. To get into the slot of being an EOT, an employee must need to meet certain standards or requirements:

1. The concerned company must be a parent company of the business group not the subsidiary one,
2. The trust must bear the regulatory interest in the concerned company or a group of companies, and
3. The trust of the certain company must be functioning for the benefits of all the employee associated with it,

Selling of an EOT

Selling of an EOT depends on three major factors:

1. The company must be the main trustee of the salable EOT,
2. The shareholders (Employee) may sell their shares to the trustee company only, following the purchase agreement. This share selling follows the debt payable by the trustee company, which can be put in the outstanding further.
3. The trustee company can follow the process of sell purchase of the shares, to produce the gross profit, which can be used to make support to EOT. This EOT, will further used in the repayment of the outstanding, made with the shareholder

The selling of an EOT also has some benefits;

1. Financial gain could be made by the shareholders by selling the shares at market price.
2. All the shareholders are not bounded to participate in the share trading,
3. The EOT trading is more convenient share trading than other as it consumes less time and monetary aspects, being processed under the parent company.
4. Hidden tax liabilities, capital gain or other payables not incorporated in the EOT trading,

Basic Requirements

Further, to get the overall benefit of EOT selling the trustee company and the shareholders must acquire following conditions;

1. Established assets must be constrained to include in the process,
2. 40% or below of the total employees of the concerned company can only participate in the share trading, specifically, including the directors and the employees.
3. The company must be the parental company of the group or precisely the trading company to process the concerned EOT trade.
4. Significantly, the trust property must be involved in the benefit of all the concerned employee of that company, on the basis of the wages, employment tenure and working schedule.(As per the guidelines an employee must devote at least 25 hours per week)
5. The trustee must ensure to hold at least 51% of the regulatory interest in the company.
6. The share trading is basically subject to limited exceptions, tries to benefit all eligible employees of the concerned company or group of the companies.

Significance

Employee Ownership Trust not only develops a sense of ownership, being a shareholder but benefits the company as well. The counted benefits could be observed as;

1. Increase in the commitment and sincerity of the employees
2. Increase in innovative performance
3. Increase regularity, affecting the overall business performance of the company
4. Provides a direct platform to the employees and the trustee even to sell or purchase the shares in a very convenient way and at the nominal value.
5. This model facilitates a stable and long term employment, retaining a permanent and strong relationship of trust.
6. Besides, proving a stable employment, it too benefits in the long term and prominent company structure.
7. The EOT trading also supporting to finance employees in the purchase of the shares, as sometimes employees cannot afford the purchase of the company shares significantly.
8. The tax value of the share in the trust is precise, hence the tax liability of the employee and the employer as well is considered negligible.

Basic Tax Exemptions for the Employees

Following are the major and noticeable tax benefits considered for the employees;

1. There are no Capital Gains Tax charges on transferring the shares from qualifying shareholders to an EOT.
2. In the new tax exemptions, qualifying employees are eligible to get paid a Tax Free Bonuses of up to £3,600 per employee per annum made from October 1, 2014, by the EOT.
3. Employees with the completion of twelve months tenure are too eligible to get the payment on the similar ground.
4. The new tax exemptions removed the injustice in share distribution among the employees. Now all the employees can avail the trust ownership and also will be rewarded the gross tax-free income.
5. The shares retain permanently in the trust, henceforth the trading company will too not be eligible to the tax exemptions for the further contributions.
6. Although employee as an individual could also act as a trustee, according to the UK Tax Guidelines, the resident company could only act as a trustee, who escapes the personal liability and the expected administration and management charges in case of a non UK trust processing.

Capital Gain Tax Exemptions

Likewise the employees the employers also have a exemptions in the tax by following the Employee Ownership Trust;

1. Referring the TCGA 1992, s236H, from April6, 2014, a company is entitled to have a complete capital gain tax exemption, if a compiled controlling interest is sold to an employee ownership trust.
2. The newly introduced CGT exemption enables an employer to dismiss the concern if going beyond the price. If there is a doubt on the claimed price of the share then the extra tax saving can make the trade possible by having an added budget for the share purchase.
3. The CGT exemption lead a company in acquiring the controlling interest with an ease, not to make hurry in its collection. By this a company may buy trust from its smaller shareholders and later move for the controlling interest.

Conclusion

The Employee Ownership Trust is mainly focused to extend the employment tenure of the employees to sustain within the same company sensing an ownership too. EOT facilitates such personnel a long term association and the tax advantages with many unique features. Ethically, an EOT must contain a regulatory stake in the parent company or the core trading company, profiting all the existing employees on similar basis.

Capital Gain Tax (CGT) exemption too supports EOT optimistically; strengthen the trust and its functioning more attractive and fruitful. By proving a tax relief to the employer through CGT at the rate of 10%, the sale and purchase of the shares become so predictive and secure in terms of set price value of that share. Hence this could be said that Income Tax relief provides an additional source of income to the employees working in the companies of UK and also creates a convincing platform for the employers in the share trading supporting the positive concept of Employee Ownership Trust.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.