Employee Ownership Factsheets

What kind of things should you be thinking of when you are about to embark on an Employee Ownership Trust (EOT) transaction?  By getting the business into the best possible shape beforehand, you can ensure your employee ownership transition proceeds smoothly and cost-effectively.   

Structure  

Many companies evolve organically and it’s sometimes necessary to do a bit of restructuring before starting the transaction proper.  For example, it’s not unusual to find subsidiary companies which are now inactive, or legacy items on the balance sheet that are no longer required.  There may be family members named as directors despite moving on from the business.  Charges may remain on file despite being settled. Tidying this up can provide a clean base from which to launch the EOT project.   

Governance  

The key change to the company’s governance structure will be that the Trust will now be the majority shareholder.  The extent of the powers of the Trust will depend on the shareholding split.  There are several elements to making this decision:  

• Future exit 

There will be limited options to divest a minority shareholding in an employee-owned company. There are potentially only four possible routes: sale to other employees, sell to the EOT, sell to the company or bequeath to a “privileged relation”.  It’s highly unlikely the company (and therefore the Trust) will have the available cash to fund a buy back while the deferred consideration is outstanding. Once the company has the cash available, the Trustees would have to be satisfied that acquiring additional shares would be in the best interests of the beneficiaries. 

• Power of veto 

By retaining more than 25% of the shareholding, the seller can hold the power of veto over any decisions and actions by the Trust. As the seller is likely also a Trustee, then the likelihood of any disagreement is minimal.  

• Affordability 

Some sellers decide to limit their shareholding to what the company can easily afford in a timescale that doesn’t constrain any future growth. 

• Retain stake in the business  

For some sellers, retaining a stake is more of an emotional decision.  They want to hold onto a piece of the company that has been such a significant part of their life.  Keeping a small shareholding can also serve as a powerful signal to both staff and customers that the outgoing owner still has an interest in the company’s future success.  

Finances  

It makes sense to ensure that the company’s accounts are in a healthy state prior to the implementation of the EOT.  There might be an opportunity for some refinancing or settling debts from the company cash reserves.  It is usual for the initial consideration to be paid from company cash and it might be prudent to consider retaining cash reserves for that purpose.  

Future planning  

It is in everyone’s interest that the company continues to grow and flourish following the move to employee ownership.  Maintaining a healthy cash flow is of paramount importance. It is worth investing some time into looking at the future expenditure requirements – for example will equipment need renewed over the deferred consideration period?  Are there plans for expansion that will incur costs?  New hires? These elements will be factored into the deferred consideration schedule.  

Who are the beneficiaries? 

The legislation requires that all employees become beneficiaries of the Trust, subject to a qualifying period.  Some organisations use a mixed workforce, with consultants or associates who are viewed as team members but are not on the company’s payroll.  If it makes commercial sense, it may be appropriate to have a conversation with these individuals and review their employment status and relationship with the company. It may also be beneficial to formalise employment contracts, especially with senior level staff. 

Exit strategy – leadership succession  

The EOT can be an excellent plan for ownership succession.  However, changing the company’s ownership structure will not solve any leadership succession issues. Considering who the future leaders will be, whether internal or external hires, can take some time and is critical to the company’s future success.  Unless there are people with the talent and appetite to run the company, it might be difficult for the former owner to realise their exit. By planning well ahead, there is time to design and implement a development plan for future leaders of the business. If the directors decide this has to be an external hire, bear in mind that senior people often have long notice periods. Executive selection is rarely a quick process. Many companies report that their employee ownership is a key recruitment tool for attracting high calibre candidates.  CDS can introduce you to employee-owned companies who have gone through the leadership succession process.  

By investing some time at the beginning of the EOT project will not only make this a much easier transaction, but will also help minimise any distraction to key people, allowing everyone to maintain a focus on the operation of the business.  

Most business owners will only sell their business once.  It’s important that the transaction achieves the best possible outcomes as effectively and as efficiently as possible.  Forming the best team to support the process will help deliver a successful employee ownership transaction that fits with the business, meets the objectives of the owner, and gets the employee ownership journey off to a flying start.  

Who do you need? 

All companies are different.  And of course, the business needs to keep functioning.  Bringing together the appropriate advisers will minimise distraction to the business and critically, you want to have faith that the team you have assembled will deliver the best possible outcome for the sellers, the company and of course, the employees.  

Most transactions will require the following as a core project team:  

Internal team: 

Within the organisation, who is going to lead on the company side?  The selling shareholder/s will be part of the team, as they will likely have a clear vision of what they are looking to achieve.  There may be other directors on board and some companies will include one or two employees to be part of the transition team.  This helps gain buy-in and helps ensure employees are central to the shape of the company going forward.  

Employee Ownership Specialist:  

An employee ownership specialist adviser will have the initial conversations with the business owner about their motivations for considering the EOT route and are often the project lead. They will set out the steps of the process and advise on the key elements of the deal: composition of the trust, incorporating owners’ vision and aims into the constitutional documents, advising on governance structures.  The specialist will  be able to recommend lawyers and accountants familiar with the EOT transaction if the company does not have its own preferred advisers. The specialist will produce a timeline for the transaction and will ensure that the project milestones are achieved and liaise with all advisers to ensure that maximum benefit is derived from project meetings. 

The Specialist will also advise on how and when to engage the body of employees in the process and provide supporting materials.  

Accountant:  

The accountant will provide a valuation of the business and formulate the funding mechanism for the transaction.  The accountant will also submit the applications to HMRC for tax clearance.  If a company’s or the vendors’ tax affairs are complex, it might be wise to include a Tax Specialist.  

Legal Advisers:   

The lawyers will build the legal framework around the desired outcomes of the transaction. The key documents are:  

• Share Purchase Agreement – sets out the commercials of the Transaction  

• Deed of Trust – defines what the Trust purpose is and defines responsibilities   

• Trust Company Articles – sets out how the Trust will operate 

• Target Company Articles – The company’s articles will be revised and updated to reflect new structure 

• Shareholder Agreements – will set out the powers and constraints of any minority shareholders  

• Governance Agreement – an increasing number of transactions include this document that sets out the relationship between the target company board and the Trust Board 

There will also be a number of ancillary documents the lawyers will prepare for the transaction.  These will include board minutes, stock transfer forms and other administrative papers. The lawyer will walk through all of these with the project team.  

The lawyer will usually be engaged by the company, and the selling shareholders will be advised to obtain their own legal advice.  

Independent Trustee: 

If the company has decided who will be their Independent Trustee then this individual may join the Project Team.  

Your Bank:  

Whilst not usually part of the Project Team, it’s a good idea to keep your Relationship Manager informed of your plans and progress.  

The EOT Project Team might call on other specialists such as the company’s HR manager or marketing team to support the project.  

Choosing your advisers 

Co-operative Development Scotland can signpost you to a number of specialist employee ownership advisers who can support you through this process. The specialist will be able to suggest lawyers or accountants who are experienced in EOT transactions and may be willing to produce a project specification and obtain quotes on your behalf.  

If the company would prefer to use their own advisers who may not have knowledge of the EOT process, the specialist will be able to point them to sources of reference appropriate to their field.  

Running the EOT Project Team 

The EOT Project Team will agree how often they should meet, and where. Confidentiality is a prime consideration; often it’s better to meet offsite perhaps in the offices of the advisers. The aim should be to minimise any distraction that might have a negative impact on the running of the business.  

It’s useful to agree milestones for the project and keep note of actions and deadlines.   

Further support 

Many sellers find it useful to learn from the experiences of others.  CDS can introduce you to companies who have taken this path and would be happy to share their perspectives on the transaction.  

This factsheet is intended to give an overview of the trustee role. It is not exhaustive and it is recommended that EOT trustees acquaint themselves with the company’s constitutional documents and take professional advice to clarify any uncertainty.  

What is a trust? 

A trust is a legal arrangement whereby one person manages assets on behalf of another and the trust itself is managed by trustees. Pension funds are often constituted as a trust and administered by trustees, many historic monuments and stately homes are administered through trusts and charities are often set up as trusts.  Trusts are often a feature of the employee-owned business structure.  The Trustees hold the shares on behalf of the company’s employees (the beneficiaries) and hold the board to account to protect and enhance the employees’ value in the business.  

The Employee Ownership Trust 

In 2014, new legislation introduced the Employee Ownership Trust (EOT) which was designed to provide a simpler and more equitable means to structure employee ownership. To qualify as an EOT and the associated tax reliefs the company must comply with certain requirements:  

The all-employee benefit requirement  
The trust must exist for the benefit of all eligible employees. There can be a qualifying period of up to 12 months’ service. 

The equality requirement  
Any distribution from the trust must be shared with all employees on the same terms. 

The controlling interest requirement  
There are four considerations here:  

• The trust must control more than 50% of the company’s total equity 

• The trust must have the majority of voting rights 

• The trust must be entitled to more than 50% of the profits 

• The trust must be entitled to more than 50% of the company’s assets on winding up 

The trading requirement  
The company must be a trading company or the principal company of a trading group. 

If the company meets these requirements, there is an additional requirement that must be met for the company to pay the tax-free bonus:  

The officeholder requirement  
The ratio of office-holders and directors to total employees must not exceed 2/5.  

The Trust 

A trust is usually set up through a trust deed. This document will set out the purpose of the trust, how the trustees are appointed, what their powers are, and it also will define the beneficiaries. 

The Trust can comprise one trustee which would be a corporate trust, or a number of trustees. There is not a lot of difference between how either model operates. The corporate trust appears to be gaining in popularity as it means less administration and offers additional protection for trustees. The role and responsibilities of the trustee is the same whichever structure is chosen.  

Composition of Trustees 

There are few rules regarding the who is appointed to the trust.  All companies are different and what is appropriate for one company may not fit with another.  

It would be usual for the outgoing shareholder to have the right to be a trustee (or appoint an alternate) whilst there is deferred consideration outstanding.  

One of the requirements of the legislation is that the selling shareholders must not control the company post transaction.  One way to do this is to demonstrate that the selling shareholder/s do not have the majority voice on the trust i.e. can be outvoted.  If the outgoing shareholder takes up position as a trustee then the appointment of two other trustees would demonstrate that this individual is not in control of the trust.  

As the trust is an Employee Ownership Trust, it would be usual to include at least one employee, usually elected by beneficiaries.  Many companies find it valuable to include an independent trustee to ensure the trust adheres to its responsibilities.  

The Trust Deed will set out how trustees can be appointed and removed.  

Role of the Trustee 

The trustee’s main duty is to carry out the trust purposes in accordance with the trust deed and the law demands “utmost good faith” in doing so: a high degree of probity, honesty and integrity. The standard of management expected of a trustee is the same standard of care that a prudent business person would take in managing their own affairs.  

The role of the trustee is not a representative position; they must use their own judgement when participating in discussions and decisions.   

Duties of the Trustee  

The following apply to all trustees: EOT, Charity, Pension etc.  The title trustee is used below to include individuals who are directors of a Corporate Trustee. 

Duty to the Terms of the Trust Deed: 
The trustee must know and adhere to the requirements set out in the Trust Deed. 

Duty of loyalty: 
The trustee must administer the trust solely in the interest of the trust beneficiaries. 

Duty to manage the Trust efficiently:  
The trustee must be familiar with the terms of the Trust, the Trust assets and liabilities, the circumstances of the beneficiaries and the purpose of the Trust. 

Duty to act personally:  
The trustees have a responsibility to participate fully in trust matters. They can engage with advisers as they feel necessary, but this does not remove the trustees’ responsibility to act in what they believe to be the best interests of the beneficiaries. Trustee decisions should usually be unanimous; the trust deed will specify.  

Duty to consider the beneficiaries  
The trustee must act impartially and consider the best interests of all beneficiaries in their decision-making. 

Duty to account  
The trustee must keep proper records of discussions and decisions.  

Specific Responsibilities of the EOT Trustee 

The Trustees manage the Trust; effectively they serve the same role as a majority shareholder would in a corporate business. The board, through the Board Chair, report to the Trust.  The Trustees assess the performance of the board in line with the purpose set out in the Trust deed.  

The trustees operate collectively.  The trustees do not have authority or influence as individuals.  

A trustee must use their own judgement to decide what is in the best interests of the beneficiaries of the trust. It is not a representative role i.e. they are not in post to argue for employees as groups or individuals. 

As long as trustees operate with probity, honesty and integrity, they are not legally liable for any decisions made or actions taken. 

Trustees have a duty to take advice where appropriate i.e. from a lawyer, accountant or other business adviser. 

The trust provides scrutiny and oversight of the Company’s actions and decisions, and must be satisfied that the Board of Directors is doing its utmost to ensure that the company is being run as well as it can be, aligned with the stated purpose of the trust.  

The trust does not run the company. The board of the trading company has the legal responsibility to manage the business, set strategy, allocate resources and provide a productive and safe working environment.  

A trustee must always ensure they are completely comfortable that they are sufficiently informed of any issues or matters which may affect the beneficiaries.  

Governance Position 

Where the trust holds the majority of the shares, the trustees influence the significant shareholding of the company. The prime responsibility of the trustees is to hold the board to account in ensuring they are leading the business in the best interests of the trust beneficiaries (usually the employees).  

If the trust holds 100% of the shareholding, then it has complete control of the company.  

75% shareholding will allow the trust to pass special resolutions for example changing the company’s articles, wind up the company, change company name.  

50-74% shareholding allows the trust to pass ordinary resolutions including remove a director, alter share capital, appoint or remove auditors. 

Should the EOT hold less than 50% plus one share, then the company will not qualify to pay any bonus free of income tax.  

Please note that the company’s articles may modify some of these shareholder rights. For example, many companies with majority shareholding in an EOT stipulate that certain decisions require to be agreed by trust beneficiaries.  A proposed sale or relocation are the more common resolutions requiring beneficiary consent in companies where the majority shareholding is held in an EOT.  

Summary 

The role of the trust and trustee is pivotal within the employee-owned business. The trustees are effectively the stewards of the company; safeguarding the employees’ value in the company and ensuring that the beneficiaries’ interests are paramount in all decisions and actions taken by the company.   

Employee ownership is a very flexible model and can be customised to suit the business, the employees and the aspirations of the sellers.  The structures fall into three broad categories:  

• Indirect with all of the shares being held by a Trust  

• Direct with the shareholding in the hands of individuals 

• Hybrid where there will be a mix of Trust and Individual shareholding.  

Indirect Employee Ownership 

Since the introduction of the Employee Ownership Trust (EOT) legislation in 2014, most transactions have some form of ownership in an Employee Trust.  The Trust becomes the buyer of the shares and holds these shares on behalf of the employees. If the Trust meets certain requirements, then there can be tax advantages. <See Setting Up Trust Factsheet> 

The employees are beneficiaries of the Trust.  Trustees, or Trustee Directors, are appointed to govern the Trust and effectively serve as stewards of the company. The Trust is not usually used for trading shares and therefore does not require any future financing.  

Direct Employee Ownership 

Employees can buy shares directly from the sellers.  This can be complicated to implement and requires some mechanism for trading individually held shares. The company would approve the issue of new shares and generate documentation to record this. As an exit option for the business owner, 100% direct share ownership by employees would mean all employees entering into a legal contact with the purchaser, with the associated costs and external advice.  Individual employee share ownership would require each employee to fund the share purchase. This purchase would be from taxed income unless the company implements a tax advantaged share scheme.  Some employees may not have the funds required and this could result in a sense of unfairness.  There would need to be some thought and education around the rights attached to each share and could quickly become unwieldy.  

Hybrid Employee Ownership 

Some companies opt for the best of both structures.  Trust ownership provides a stable structure to hold the majority of the shareholding, and a separate share scheme can be set up to allow employees a direct shareholding.  Some companies opt for an executive share scheme, aimed to incentivise and retain the key personnel in the company. The Enterprise Management Incentive scheme is popular for this purpose. Others choose to extend participation to all employees, using a scheme such as the Share Incentive Plan. You can read more in <Share Scheme factsheet>.  

By limiting the number of shares in circulation, the company can manage the future liability of funding future share purchases from employees.     

The hybrid model facilitates collective ownership with the majority of the shares in the trust, allowing employees to benefit from the tax free EOT bonus if applicable, and also allows individual employees to build capital value in their business.  

Many companies move towards a hybrid model after an employee trust is in place and the new structure is bedded in.  It is worthwhile considering whether a hybrid model may be a possibility in the future, and the constitutional documents can be written in such a way as to facilitate the implementation when the time is right.  

Other Forms of Hybrid Ownership 

As long as more than 50% of the shareholding goes to the Trust and all other conditions are met, the sellers and employees can benefit from the tax advantages.   

Not all sellers want to divest their entire shareholding in the business.  They may want to continue to receive dividends, or have their eye on a future sale. Some sellers are conscious of the financial pressures of a business striving to fund a 100% purchase and decide to sell what they believe the company can easily afford.  In many cases, an owner will retain a shareholding as a signal to both employees and customers that they remain committed to the business.   

The remainder of the shareholding can be held by external investors, passed onto family members or a family trust. Some employee-owned companies have a shareholding in a charitable trust, allowing the charity to benefit from dividends.    

Summary 

There is no one right way to implement employee ownership.  What is important is identifying the most appropriate structure for the business and the employees that also satisfies the desired outcomes for the seller. By considering carefully the long-term outlook for the business, and the composition of the current and future employee group, the employee ownership transaction can deliver a solution that will fit with most situations.  

Employee ownership is a very flexible model and can be customised to suit the business, the employees and the aspirations of the sellers.  The structures fall into three broad categories:  

• Indirect with all of the shares being held by a Trust  

• Direct with the shareholding in the hands of individuals 

• Hybrid where there will be a mix of Trust and Individual shareholding.  

Indirect Employee Ownership 

Since the introduction of the Employee Ownership Trust (EOT) legislation in 2014, most transactions have some form of ownership in an Employee Trust.  The Trust becomes the buyer of the shares and holds these shares on behalf of the employees. If the Trust meets certain requirements, then there can be tax advantages. <See Setting Up Trust Factsheet> 

The employees are beneficiaries of the Trust.  Trustees, or Trustee Directors, are appointed to govern the Trust and effectively serve as stewards of the company. The Trust is not usually used for trading shares and therefore does not require any future financing.  

Direct Employee Ownership 

Employees can buy shares directly from the sellers.  This can be complicated to implement and requires some mechanism for trading individually held shares. The company would approve the issue of new shares and generate documentation to record this. As an exit option for the business owner, 100% direct share ownership by employees would mean all employees entering into a legal contact with the purchaser, with the associated costs and external advice.  Individual employee share ownership would require each employee to fund the share purchase. This purchase would be from taxed income unless the company implements a tax advantaged share scheme.  Some employees may not have the funds required and this could result in a sense of unfairness.  There would need to be some thought and education around the rights attached to each share and could quickly become unwieldy.  

Hybrid Employee Ownership 

Some companies opt for the best of both structures.  Trust ownership provides a stable structure to hold the majority of the shareholding, and a separate share scheme can be set up to allow employees a direct shareholding.  Some companies opt for an executive share scheme, aimed to incentivise and retain the key personnel in the company. The Enterprise Management Incentive scheme is popular for this purpose. Others choose to extend participation to all employees, using a scheme such as the Share Incentive Plan. You can read more in <Share Scheme factsheet>.  

By limiting the number of shares in circulation, the company can manage the future liability of funding future share purchases from employees.     

The hybrid model facilitates collective ownership with the majority of the shares in the trust, allowing employees to benefit from the tax free EOT bonus if applicable, and also allows individual employees to build capital value in their business.  

Many companies move towards a hybrid model after an employee trust is in place and the new structure is bedded in.  It is worthwhile considering whether a hybrid model may be a possibility in the future, and the constitutional documents can be written in such a way as to facilitate the implementation when the time is right.  

Other Forms of Hybrid Ownership 

As long as more than 50% of the shareholding goes to the Trust and all other conditions are met, the sellers and employees can benefit from the tax advantages.   

Not all sellers want to divest their entire shareholding in the business.  They may want to continue to receive dividends, or have their eye on a future sale. Some sellers are conscious of the financial pressures of a business striving to fund a 100% purchase and decide to sell what they believe the company can easily afford.  In many cases, an owner will retain a shareholding as a signal to both employees and customers that they remain committed to the business.   

The remainder of the shareholding can be held by external investors, passed onto family members or a family trust. Some employee-owned companies have a shareholding in a charitable trust, allowing the charity to benefit from dividends.    

Summary 

There is no one right way to implement employee ownership.  What is important is identifying the most appropriate structure for the business and the employees that also satisfies the desired outcomes for the seller. By considering carefully the long-term outlook for the business, and the composition of the current and future employee group, the employee ownership transaction can deliver a solution that will fit with most situations.  

EO Factsheet: HMRC’s Trust Registration Service

Use this 10-step guide to help you report your Employee Ownership Trust (EOT) or Employee Benefit Trust (EBT) to HMRC via the Trust Registration Service (TRS).  All new trusts must register within 90 days of creation.

Background

Anti-money laundering legislation required all tax-paying trusts to register with HMRC’s Trust Registration Service (TRS). Trustees were obliged to register their trust if it had any liability to UK income tax, Capital Gains Tax, Inheritance Tax, Stamp Duty Land Tax or Land and Buildings Transaction Tax (in Scotland).

As most EOTs and EBTs are funded by contributions from the company, then they are unlikely to have any tax liabilities. As such, they did not have to register. However, this changed on 1^st September 2022.

The requirement to register with the TRS was extended to include trusts where all the Trustees are UK resident, or if one of the Trustees are UK resident and the settlor (former owner/s) were UK resident at the time the trust was established. This new requirement will include almost all Employee EOTs and EBTs.

Registration is simple and straightforward. This can be outsourced to a non-Trustee; for example, your Financial Director or external Accountant, but the responsibility for the information held with the TRS remains with the Trustees. Your Trust will have to appoint a Lead Trustee who will be the point of contact for HMRC.

Follow this 10-step guide to register your EOT or EBT.

Step 1 – Assemble the information required

You will need information on the EOT/EBT, the Trustees and the Settlors (the former owners who transferred the assets to the trust).

The EOT/EBT information can be found in the Trust deed. You will be asked for:

• The name of the trust
• The date the trust was created
• The EOT/EBT will be an express trust
• Is it a UK trust (answer to this will be yes)
• Has it purchased any UK land or property (likely answer is no)

The Lead Trustee will need to provide:

• name
• date of birth
• National Insurance number and address (if they are a UK citizen)
• passport details and address (if they are not a UK citizen)
• telephone number
• country of residence
• country of nationality

Information on the other Trustees required:

• name
• date of birth
• country of residence
• country of nationality
• mental capacity at the time of registration — HMRC will assume the individual has mental capacity, unless you say otherwise

Settlors are the individuals who transferred the assets into the trust. In employee-owned companies, this will be the former owners who sold a shareholding to set up the trust. You will need the following for each settlor:

• name
• date of birth
• country of residence
• country of nationality
• mental capacity at the time of registration — HMRC will assume the individual has mental capacity, unless you say otherwise

You will be asked for information on the trust beneficiaries:

• Your beneficiaries will be an employment related category
• Description; for example, employees of CDS Ltd with more than six months’ service
• Number – you will be asked to tick a parameter e.g., 1-100

 Step 2 – Obtain Government Gateway Log –In

Each trust will require its own Government Gateway Log-in. Go to https://www.gov.uk/guidance/register-a-trust-as-a-trustee and hit the Register Now button. This will take you to a page asking for your Government Gateway Log-in. Choose the option Create Sign In details. You will be asked to enter your email address. HMRC will email you a code to confirm your email address. Once you have entered the code, you will be taken to the page to commence registration. Enter your name and create a password. You will then see your trust’s Government Gateway Log-in. Take a note of this as you will need it when you make any amendments to the information (e.g. a change in the trustees).

Step 3 – Additional security

After choosing the Organisation category, you will be asked to set up additional security. You will be given three options to receive an access code. You will be asked if the trust is already registered. If you are registering for the first time the answer will be no. You will then be asked for a Unique Taxpayer Reference. It is unlikely your Trust will have this so the response will be no.

Step 4 – About the type of trust

You will be asked for information about the trust. Your EOT/EBT will be an express trust. You will be asked if the trust has a tax liability for the current year or the past four years. The answer to that will likely be no.

Step 5 – Trust registration – Trust details

The first question is to provide the name of the Trust. You will find this in your Trust Deed. You will then be asked to say when the trust was created. This will be in your Trust Deed. It is likely that it will be the day that the transaction completed for the transfer to employee ownership, but in a few cases the trust may have been set up in advance of the transaction.

You will then be asked if the trust owns property and if it operates outside the EEA. The answers to both questions will likely be no. The next question is whether all trustees are based in the UK.

Step 6 – Trust Registration –Settlor

The Settlors are the selling shareholders who created the trust. You will be asked to input the information you gathered as per above.

Step 7- Trust Registration – Trustees

You will be asked to input the Trustee information.

Step 8 – Trust Registration – Beneficiaries

The EOT will have Company or Employment Related beneficiaries and will be Employees and/or their families. You will be asked for the name of the business and if it is a UK business. You will then be asked to describe the beneficiaries. The Trust Deed will define the qualifying period for beneficiaries; it can be anything up to 12 months’ service. A description might be “an employee of CDS Ltd with more than 12 months’ service”.

You will be asked for the number of employees within wide parameters e.g. 1 –100, 101-200, 201-500 etc.

Step 9 – Trust Registration – Additional sections

You will be asked for further information regarding the trust. The responses to these questions will likely be no for EOTs/EBTs.

Step 10 – Declaration

You will be asked to declare that all information provided is accurate, and that you are aware that you have knowingly provided false information you may be subject to penalties.

Once this is confirmed you will be given the Unique Reference Number for the trust and you will have the option to save and/or print the registration.

Amendments

Should your trust require to be amended, for example, when a new Trustee is appointed, then you have 90 days to make that amendment. You will require the Government Gateway Code and your password.

If you run into any difficulties or have any queries then your accountant may be able to advise, otherwise HMRC have a helpline on 0300 123 1072.

EO Factsheet: The Tax-Free Bonus 

The employee ownership legislation introduced in 2014 allows for a specific financial benefit for employees who work in companies where the controlling stake is held in an Employee Ownership Trust (EOT).  This legislation allows the company to make a bonus payment to employees free of income tax up to £3600 each tax year. This bonus is paid by the employees’ company, not by the EOT.  Excluded participants, i.e. the selling shareholders, shareholders with more than 5% shareholding in the company and people connected to both groups can receive the bonus.  

Whilst there is no income tax up to the £3600 limit, national insurance contributions still have to be paid.  

There are strict requirements to qualify for the exemption for the payment of that bonus:  

• All qualifying employees (i.e. have reached the length of service requirement) must receive an element of bonus 

• The company cannot pay more than £3600 tax free in any tax year.  The bonus can exceed this figure but usual income tax will be applied to the sum above the £3600 limit 

• The payment must not replace regular salary or remuneration 

• The bonus must not be funded through salary, bonus or benefit sacrifice 

• The company must meet the requirements to qualify to be treated as an EOT <link to previous > or repeated as below  

The all-employee benefit requirement The trust must exist for the benefit of all eligible employees. There can be a qualifying period of up to 12 months’ service. 

The equality requirement Any distribution from the trust must be shared with all eligible employees on the same terms. 

The controlling interest requirement There are four considerations here:  

• The trust must control more than 50% of the company’s total equity 

• The trust must have the majority of voting rights 

• The trust must be entitled to more than 50% of the profits 

• The trust must be entitled to more than 50% of the company’s assets on winding up 

The trading requirement The company must be a trading company or the principal company of a trading group. 

The all-employee benefit requirement The trust must exist for the benefit of all eligible employees. There can be a qualifying period of up to 12 months’ service. 

The equality requirement Any distribution from the trust must be shared with all employees on the same terms. The bonus cannot be used to reward a group of employees disproportionately, for example  

• directors or former directors 

• employees receiving the highest levels of remuneration 

• those employed in a particular part of the company or group 

• those who carry on particular kinds of activities 

The controlling interest requirement There are four considerations here:  

• The trust must control more than 50% of the company’s total equity 

• The trust must have the majority of voting rights 

• The trust must be entitled to more than 50% of the profits 

• The trust must be entitled to more than 50% of the company’s assets on winding up 

If the company meets these requirements, there is an additional requirement that must be met for the company to pay the tax free bonus:  

The officeholder requirement The ratio of office-holders and directors (and people connected to them*) to total employees must not exceed 2/5.  This ratio must be met for the 12 month period prior to the payment of the bonus. 

*Connected persons are employees connected to the directors and includes: 

 spouse or civil partner, relative, spouse or civil partner of a relative, spouse or civil partner of a relative of the spouse or civil partner (i.e. in-laws)  

For example, if the company has 10 employees in total and 3 directors and 2 of these directors have a child working in the business, this would breach the officeholder requirement and the company would be unable to pay the bonus tax free.  

Bonus Allocation  

The legislation is clear on how the bonus can be distributed to employees.  Any distribution must be on the same terms for all employees.  The following four criteria apply:  

• All employees receive an equal allocation 

• The bonus is differentiated on length of service  

• The bonus is differentiated on hours worked 

• The bonus is paid proportionate to salary (eg all employees receive a percentage of salary). 

These criteria can be combined but must be calculated on the same terms for all employees. As the bonus is paid by the company, then the criteria used would be decided by the directors. bonus payments would be paid through usual payroll. The company must maintain records of the criteria used and amounts paid and may be asked to demonstrate that the qualifying bonus payment meets the relevant conditions set out in legislation. 

For example 

The company decides to pay £100 per £1000 of salary.  An employee on a salary of £20000 receives £2000 bonus. An employee on a salary of £30000 receives £3000 bonus.  The terms are the same but the amounts are different.  

The company decides to combine two of the criteria and settles on percentage of salary and length of service. Employees receive 3% of salary and £100 per length of service.