HMRC consultation on EO – what’s your view?
Have you responded to HMRC’s consultation on EOTs and EBTs yet? If not – and you’re an EO business or professional advisor who, like us, supports clients to transition and embed best EO practice – there’s still time to contribute before 25 September 2023.
Why add your view? Because HMRC is keen to gather responses to its proposed changes to the tax treatment of EOTs and EBTs.
The current legislation was introduced in 2014 and created a tax incentive for founder/owners to choose EO when succession planning.
More than 1,400 UK businesses are now employee-owned, most of which are EOTs – up from fewer than 400 EO businesses in 2014. On that score, given the turbulence of recent years, it has been a resounding success.
However, the government wants to ensure that the EO tax regime remains focused on promoting its two original objectives: to reward employees and encourage employee engagement. Hence HMRC’s review.
Welcoming the HMRC review
So what’s our view? Like the Employee Ownership Association and many others who support the EO sector, JGA welcomes the HMRC consultation.
‘It shows the government is prepared to invest time and energy to get the legislation right and secure EO’s long-term success,’ says our MD Jeremy Gadd.
‘JGA’s submission will aim to broaden the focus from simply achieving a successful transaction to ensuring, more widely, that EO transitions are embedded to achieve sustainable growth long after the founder’s departure. For the UK economy to benefit, it has to work for the successor’s successor’
Jeremy Gadd, JGA’s founder and MD
‘JGA’s submission will aim to broaden the focus from simply achieving a successful transaction to ensuring, more widely, that EO transitions are embedded to achieve sustainable growth long after the founder’s departure.
‘For the UK economy to benefit, it has to work for the successor’s successor.’
Adrian Wheale, our board development expert and Associate, Executive Selection, is also in favour of the review.
However, he believes the EO community is looking at it ‘too narrowly’ given the wider context of the government’s White Paper proposals on Audit and Governance. These are currently going through Parliament and, when implemented, are likely to have a significant impact on all businesses, including those that are employee-owned.
Recognising the wider context
As Adrian explains: ‘Until now, HMRC has been, by default, the only de facto regulator patrolling the EO space. However, the White Paper proposals will create a real regulator by proposing that the Financial Reporting Council is replaced by an Audit and Governance Regulator.
‘Although this will be aimed primarily at FTSE companies, EO will fall under its gravitational pull.’
So what does this mean in practice for the EO sector?
‘It means that governance will not only be policed but audited, and significant financial issues of public interest will be tested,’ Adrian says.
‘Valuation, real influence and ownership and related transactions will all potentially be under the microscope. The most significant party of public interest is bound to be HMRC around the legitimacy of the vendor tax break and, secondarily, the tax-free dividend element on an ongoing basis.’
Expecting more scrutiny
Adrian Wheale, JGA Associate and corporate governance expert
Again like many others, Adrian believes the Finance Act 2014 – and, specifically, the Capital Gains Tax break it introduced – has had a ‘massive influence’ on EO’s growth, as it was intended to do.
Worth noting though, he says, is that the Act also enables HMRC to ‘claw back’ any unpaid CGT from the founder/owners should an EO business collapse within three years of being sold to an EOT.
This aspect of the legislation could become relevant in the current case of £700m construction contractor Buckingham Group, which sadly announced that it had ceased trading this month two years after becoming EO.
‘The CGT tax break doesn’t drive everything, but it makes the figures work and has driven demand which is why HMRC will be the most interested party when the new White Paper becomes law,’ he continues.
‘Even if the tax break stays, HMRC will probably become far more proactive via the new regulator and in their own right. Public money is tight and this is a valid target,’ he adds.
‘I’d suggest thinking of the HMRC consultation and government White Paper as a pincer movement.’
Strengthening EO governance and accountability
So what changes would Adrian like to see as a result of the current scrutiny?
‘For me, a good outcome would be that a more robust valuation and due diligence system is put in place at the time of the EO valuation – and that the ongoing corporate governance of EO companies grasps the ‘management of shareholders’ funds’ issue better under Company Law,’ he replies.
‘In parallel with that, I’d like Trustees and EOTs to be better skilled in governance themselves and able to put the appropriate challenge to both founders and executive operating boards / directors from day one of the transaction It's an inevitable consequence of the maturing of the EO domain.’
Encouraging EO companies to add their view
Adrian’s view reflects his long experience as a leading board consultant specialising in board development and review, corporate governance and compliance.
Yet the HMRC consultation is also seeking input from a range of interested parties, including EO trustees and people involved in corporate restructures such as owners of companies that have become employee-owned.
‘HMRC are likely to give quite a lot of weight to representations by companies as suggestions by advisers (however well-informed) can be perceived to be tainted by self-interest, while suggestions… from [EO] companies who have gone to the trouble of making representations cannot be lightly dismissed…’
William Franklin, Partner, Pett Franklin LLP
Within JGA’s own network, William Franklin, Partner of legal specialist Pett Franklin, is particularly keen to encourage companies that have become EOTs to respond to the HMRC consultation before the deadline of 25 September 2023.
‘HMRC are likely to give quite a lot of weight to representations by companies as suggestions by advisers (however well-informed) can be perceived to be tainted by self-interest, while suggestions… from [EO] companies who have gone to the trouble of making representations cannot be lightly dismissed,’ he says.
The 25 September deadline might seem tight but William points out that the consultation is a ‘rare opportunity’ to help shape thinking for companies who consider the EOT model ‘a concept worth promoting and sustaining, and have views as to how employee engagement and responsibility can be encouraged’.
We agree – which is why we’re encouraging our EO networks to contribute to the HMRC consultation too, ahead of the 25 September 2023 deadline.
To do this, click here. Details of how to respond are under the ‘Consultation Process’ section at the end.
Finally, our trusted partner Postlethwaite Solicitors is also planning to provide a formal response to the consultation and is inviting other advisers who’d like to be included to call it on 020 38189420 or email info@postlethwaiteco.com with ‘Government Consultation’ as the subject – by Friday 15 September 2023.
Need our support? To find out more about the Transition, People and Governance services we offer, get in touch.