UPDATE: Employee ownership

UPDATE: Employee ownership

Published:

Author: Nina Smith

Employee ownership is a topic that remains high on the Government's agenda.

We reported previously on the Nuttall Review of Employee Ownership and the Government's proposals to remove some of the regulatory restrictions on private companies buying back their shares, particularly where the shares form part of an employees' share scheme.

The Government has pressed ahead with its proposed measures in support of employee ownership, with the introduction of changes to the share buy-back regime, the publication of example documents for an employee ownership model, and proposals for new tax incentives.

Share buy-backs

One of the perceived barriers to employee ownership was the overly burdensome procedure with which a company had to comply when buying back shares of its employees when they move on. The changes, which were introduced on 30 April, have simplified the procedure, including:

Where the buy-back relates to an employees' share scheme:

  • enabling shareholders to authorise multiple buy-backs over a specific period of time in advance, through a single shareholder resolution
  • removing the requirement for shares to be paid for on purchase
  • enabling a buy-back to be funded from capital if approved by a special resolution supported by a solvency statement

Whether or not the buy-back is for the purposes of an employees' share scheme, the procedure has been further simplified by:

  • a reduction in the threshold for shareholder approval to buy back shares to a simple majority (from a 75% majority)
  • allowing private companies to hold certain bought-back shares 'in treasury', thus enabling them to hold on to shares until they are reissued
  • permitting companies to fund share buy-backs out of cash, up to an amount in each financial year not exceeding the lower of (a) a maximum of £15,000 in each financial year or (b) the value of 5% of its share capital

Model documents

Following on from those changes, the Government has now published new model documents for an employee owned business, which are designed to offer an 'off-the-shelf' toolkit to help an existing business move to employee ownership. They include:

  • articles of association of an employee-owned company
  • a trust deed for an employees' share trust
  • articles of association of a trustee company for the employees' share trust

The proposed ownership and governance structure offered by the new model is just one example of the form which employee ownership might take. It envisages a trust model of employee ownership alongside direct share ownership, a corporate trustee of the employees' share trust, and an employee council as follows:

Tax incentives

The Government has also announced plans to introduce two new tax reliefs to encourage and support the creation and growth of employee-owned companies.

It is consulting on proposals for a new capital gains tax relief which would apply when the controlling share of a business is sold into an indirect employee ownership structure. At this stage it is unclear how this will inter-act with existing reliefs.

In addition, the Government is considering an income tax and national insurance contributions (NICs) exemption, which would allow indirectly employee owned companies to pay their employees a certain amount per annum, free of income tax and NICs. There would also be an employer NICs exemption for the company.

Comment

Research suggests that employee ownership can provide benefits for the economy and for business and employees through increased productivity. The Government is focusing now on private sector employee ownership as a method for generating growth in the economy.

The share buy-back changes do achieve the aim of reducing administrative burden, making it easier for companies to adopt an employee ownership model. The publication of the model documents coincided with the first 'employee-ownership' day on 4 July 2013, aimed at raising awareness of the employee-owned business model in light of the changes and prompting more companies to consider adopting it.

This is clearly an area the Government is keen to publicise and progress, and the proposed tax reliefs are a further indication of its intention to encourage uptake of the model.