Employee ownership: The route to success?

For many employees, the business they work for provides a salary and benefits. But that’s where the employee, employer relationship ends. However, if a business is employee owned, it can have a positive effect on both the business and the employees. In this blog we ask if employee ownership (EO) is the route to success?

What is Employee Ownership?

According to the Employee Ownership Association, EO delivers 4% of UK GDP annually. Data published in June 2020, showed there were 470 EO businesses. And perhaps one of the most famous of those is John Lewis.

EO can take one of three forms:

• Direct employee ownership.
• Indirect employee ownership.
• Combined direct and indirect ownership.

We’ll look at those in more detail later. Choosing this type of business structure has benefits for both the business owners and the employees. But the process should be collaborative, employees should be fully informed of what it means for them and it’s not something that can be achieved overnight.

Why can Employee Ownership be a good thing?

Motivation – Picture yourself on holiday (yes please) collecting your rental car at the airport. Now, while you don’t want to pay the excess, you are less concerned with drinking your fizzy drink in the car. You might not be as concerned with muddy or sandy feet climbing in. When you get home and collect your own car, it all changes. You are absolutely going to be removing muddy boots and you will not be letting passengers eat ice cream in your car!

You care more about your car because you own it and its condition will directly affect you. The same is true with EO. If staff have an investment in the business they work for, they are proven to be more motivated, stay with the business longer and be more productive.

Succession planning – If there is no natural successor for a family business, EO can be a great option. It can avoid the selling off to a third party, who may not maintain the business in its current form.

Business performance – EO actually has a proven track record to increase productivity and improve the financial status of a business. Research by Capital Strategies of the UK’s 50 largest employee-owned companies found that productivity increased by 4.5% year-on-year. And sales increased 4.6% year-on-year.

How does Employee Ownership work?

There are three options to choose from. Your accountant will be able to discuss which option might be best for your business.

Direct employee ownership – This is when employees become individual shareholders and own the majority of the shares in their company.

Indirect employee ownership – This option involves creating an Employee Ownership Trust (EOT) that holds the shares on behalf of the employees.

Combined direct and indirect ownership – This hybrid model sees a block of shares owned by a trust on behalf of employees, combined with some level of individual share ownership, perhaps using one or more of the various government-backed share plans available, which also attract tax reliefs.

In order to become EOT, a business must:

• Be a trading company or the main company of a trading group.
• Ensure all employees benefit from the EOT, excluding any employees who already hold 5% or more of the share capital in the business at the time the trust is set up.
• Make sure the trustees retain, on an ongoing basis, at least a 51% controlling interest in the company.

What are the tax implications?

Well, there are a few. If you opt for the indirect EO route, you can pay tax-free cash bonuses to your employees of up to £3,600 per employee, per year. And you’ll get corporation tax relief on payments to an EOT.

So, as a business owner, if you’re looking to sell your business or to restructure, Employee Ownership could be the answer. It’s a great way to protect the legacy you have built and to protect jobs.

Talk to your accountant or financial advisor to find out if Employee Ownership is possible and the next steps.