The Rich(er) Sounds of Employee Ownership Trusts

Wednesday 22 May 2019

Richer Sounds (a hi-fi, home cinema, and television specialist) has become one of the latest British companies – including Leeds-based door manufacturer Union Industries – to use an Employee-Ownership Trust (EOT) to give its employees a stake in the company.

The owner and founder of the retailer, Julian Richer, used an EOT to transfer a 60% stake in the business (worth £9.2m).

Mr Richer, who said that he “just wanted to do the right thing” by rewarding the staff who have helped build the business, is also giving them a £3.5m windfall on top of the transfer of shares.

Employee Ownership Models

EOTs are just one way in which a company can give employees shares in the company. Other models of employee ownership include an award of options such as an Enterprise Management Investment (EMI).

This is where a company grants employees the option to purchase shares in the company at a future date for a set price.

EMI schemes are generally used to incentivise key employees and directors to work towards a future sale of the company.

There also a whole raft of schemes which allow companies to give or sell shares to employees known as Share Incentive Plans (SIPs). There are even Phantom Share Awards where a company doesn’t actually issue any shares to employees, but grants them the right to a bonus linked to any increase in the company’s share value.

Employee ownership bodies are clear that the schemes boost companies’ profitability and increase morale.

The Employee Ownership Association states that the employee-owned sector now accounts for more than £30bn in annual turnover, and in a report last year the Ownership Dividend claimed that employee-owned businesses have:

• Greater productivity
• Less staff turnover
• A more innovative workforce, and
• Better long-term plans

Union Industries

In an interview, Andrew Lane the Managing Director of Union Industries, said he believed the company’s record sales since employees acquired the company from the Schofield family was a result of the new ownership structure.

“It is absolutely to do with it. It’s no longer a case of the owner saying ‘I want you to do this or that for me. Now it’s about how we are going to do these things for us.”

Richer Sounds

Mr Richer is not actually giving the shares to Richer Sounds’ employees in the true sense but is effectively allowing the company to pay him for the shares on behalf of the employees (on favourable terms, and over a long period of time).

Arguably Mr Richer could have obtained a higher price and cash up front from a trade sale. However ‘doing the right thing’ by using an EOT may have significant tax advantages for the owner/s.

Tax Advantages of EOTs

Clearly an engaged and incentivised workforce is a good thing. However the tax advantages of EOTs are also very appealing.

EOTs were introduced by the government in the Finance Act 2014 with advantages for both owners looking to exit and its employee owners.

The major tax exemptions are:

• A complete Capital Gains Tax (CGT) exemption on gains made when a controlling interest in a company (or parent company of a trading group) is sold to an EOT; and
• An Income Tax exemption of £3,600 per tax year on certain bonuses issued to all employees (National Insurance Contributions are not exempt).

If we look at the example of Richer Sounds, Julian Richer should pay no CGT on the £9.2m he receives from the company, and each employee should not pay any Income Tax on their share of the £3.5m windfall.

Therefore EOTs will be an attractive option for owners with an interest in the legacy of their companies who also want to ensure a tax efficient exit.

To implement an EOT, or any other employee ownership model, there are strict statutory requirements. Therefore if you are a business owner considering using such a scheme you should seek advice regarding the rules and which model may be appropriate for you.