This week (28/01/2025), the Finance Bill’s clauses on EOTs went through Committee stage with amendments around the treatment of contributions to the EOT from the business as a “distribution”.
Government had initially committed to continuing to support employee ownership via the EOT as a tax-advantaged vehicle with a package of measures to protect the model as part of the Autumn Budget policy announcements back in October.
We’ve been working hard since then to reflect insights and recommendations on behalf of the EO sector to Ministers, Parliamentarians, and our colleagues in HMRC and HMT.
We’ve supported these measures in principle, recognising the importance of ensuring the generous tax advantages are only used as a vehicle for employee ownership. Many of the measures reflect long-standing recommendations from us and others.
But, as many of you will have seen in discussions here on the Hub, the draft wording of the legislation in the following Finance Bill has raised some concerns – specifically, the technical detail behind these changes may be problematic and potentially inconsistent with the reality of setting up and operating an EOT.
We’ve been raising these concerns with Government and other key stakeholders on behalf of the sector alongside recommendations to guide amendments.
Finance Bill Amendments Relating to EOTs
The wording of the Finance Bill implies that payments to EOTs would now be treated as distributions.
Rather than seeking a non-statutory clearance with HMRC to confirm contributions to the trustee would not be taxable, the trustee will now apply for an exemption for contributions related to the “acquisition cost”.
Prior to the amendments, the exemption in the draft legislation would only apply to the purchase price of shares for the company, interest on the purchase price, and liabilities or stamp duty arising.
Following engagement with the eoa, our partners at the CIOT and others, this was amended so that the definition of “acquisition costs” is now broader. This includes repayment of sums borrowed to fund the acquisition and the cost of valuing the company (the latter being particularly significant considering the new responsibilities placed on trustees to ensure a fair valuation of the company’s share capital).
We welcome these amendments as a positive step but note this leaves some questions around this measure, and substantive issues remain with the other measures drafted into the legislation.
As far as the measure around distributions treatments is concerned, we note the costs covered are still limited; for example, the cost of independent trustees is excluded, which seems to contradict the intended direction of ensuring trustee independence.
We also note the measure - intended to reduce the administrative burden on both HMRC and EOTs - is self-defeating as it simply substitutes the burden of non-statutory clearances with the burden of completing a self-assessment.
What Else Would We Have Liked to See?
We called for a few measures that unfortunately didn’t make it into amendments, such as:
- The current wording suggests an excluded participator (e.g. a former owner) has control of a trust if they can appoint even a single trustee. This is inconsistent with provisions that Excluded Participators themselves cannot make up more than 50% of trustees.
- The new rules allow disqualifying events to be ignored if they result from the death of a trustee, protecting well-intentioned businesses (and former owners) from having a tax clawback triggered so long as they correct the disqualifying event. We welcome this provision but it’s too specific – we’ve recommended widening it to other scenarios, such as the dismissal or departure of an employee trustee.
- Where the new rules require trustees to take “all reasonable steps” to ensure that the purchase price does not exceed a fair value for shares, we have recommended that this wording be omitted, and instead the steps that HMRC expect trustees to take be specifically defined.
- While we recognise the intention for extending the vendor CGT clawback period from one year to four years, to ensure that the EOT is not used as a convenient disposal of a failing company, we are concerned such an extensive clawback period may disincentivize well-intentioned disposals to EOTs. We made a number of possible recommendations here, from shortening the clawback period to an intermediary length of time (e.g. two years) or only applying the extended clawback in certain scenarios.
Keep us Posted on How These Changes Impact You
While we’re unlikely to see any further amendments to the Finance Bill, we’ll seek to take further action.
Firstly, HMRC have informally committed to releasing guidance around ambiguities that we have highlighted in the legislation, such as the duty on trustees to “take all reasonable steps” to ensure a fair valuation of shares.
We’ll aim to push for guidance to be published as soon as possible and in relevant areas. We’ll also aim to ensure guidance is co-produced with experts from within the EO sector, so that it aligns with the practical reality of setting up and operating an EOT.
Furthermore, we ask for all our members, advisors, trustees, etc. to keep us posted on their personal experience of the new rules around EOTs. You can drop an email to our Policy Lead sam.blakeborough@employeeownership.co.uk, get in touch with one of the eoa team, or post here on the Hub.
As we monitor how these rules impact the sector, we will be aiming to collate this insight, and to reflect issues back to government and colleagues in HMRC to push for further action.