TLT responds to the consultation on the Taxation of Employee Ownership Trusts and Employee Benefit Trusts

TLT has responded to the UK government's consultation on the Taxation of Employee Ownership Trusts (EOTs) and Employee Benefit Trusts (EBTs).

The consultation, which ran from 18 July 2023 to 25 September 2023, invited views on proposals to reform the tax treatment of these types of trust with the aim of ensuring that their tax regimes remain focused on rewarding employees and encouraging employee ownership, whilst preventing unintended tax advantages.

TLT response

TLT is, overall, in favour of the proposals put forward by the government in the consultation.

In particular, we are supportive of the government's proposals to:

• prohibit former owners and connected persons from retaining control of an EOT-owned company, although we asked for clarification of how the prohibition would work in practice;
• require that the trustees of the EOT are UK resident; and
• confirm in legislation that contributions made by a company to an EOT to pay the former owners for their shares will not be taxed as distributions. However, we commented that the proposal to limit non-distributions treatment to market value sales may cause uncertainty and suggested that this requirement be dropped given that the government has already introduced anti-avoidance legislation to challenge sales in excess of market value.

We provided detailed comments on two key areas of the consultation relating to composition of the EOT trustee board and the availability of the bonus relief.

Composition of the EOT trustee board

Whilst we encourage the government to introduce a requirement to include employees of the EOT-owned company on the EOT trustee board, we highlighted in our response the practical difficulties that EOT owned companies can encounter in recruiting employees as trustee directors.

Although some of the barriers to employee participation (such as lack of experience and understanding of the role, and reluctance to take on a role which requires employees to challenge the trading company board) can be overcome by adequate and early engagement with employees, we suggested that the government takes steps to encourage employee participation by offering enhanced employment protections to employees who are appointed to the board of the EOT trustee.

We do not support the proposal to introduce a requirement to include independent directors on the EOT trustee board. Although we recognise the benefits that appointing an independent director can bring to an EOT arrangement, recruitment of an independent director is, to a significant extent, outside the control of the trading company and we are concerned that this requirement could act as a barrier to the establishment of an EOT or result in the appointment of individuals who are not suitable for the role.

Availability of the bonus relief

We commented that, based on our extensive experience of EOTs, legislative changes which would further complicate the availability of the bonus relief would be unwelcome and that EOT-owned companies and EOT trustees would benefit from more clarity on, and potentially simplification of, the rules governing the bonus relief.

We suggested that the government could consider legislative changes to:

• require the same bonus amount to be paid to all eligible employees irrespective of remuneration, length of service or hours worked in order to simplify the rules;
• enable the bonus payments to be made by the EOT (instead of the EOT-owned company) to draw a distinction between bonuses received by employees for being "indirect owners" of the business and bonuses received as rewards for performance; and
• enable non-executive directors and the former owners of the business to be excluded from the requirement to receive a tax-free bonus.

Comment

It is encouraging that the government is supporting employee ownership by considering ways in which the existing tax regimes applying to EOTs and EBTs can be improved.

As well as providing comments on the EOT trustee board composition and bonus relief, we suggested a number of additional changes and clarifications to the EOT tax regime to encourage more employee ownership. For example, we recommended that the government confirms in guidance that former owners who sell their shares on deferred consideration terms are allowed enhanced protections, such as veto rights, during the payment period.

If you would like to discuss the consultation or our response, please speak to your usual TLT contact.

Contributors: Ben Watson, Douglas Roberts, Nimarta Cheema, Laura Allum

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at September 2023. Specific advice should be sought for specific cases. For more information see our terms & conditions.