» Vince Cable MP accepts EOA role

» 11 November for EOA conference
» Ken Clarke addresses 30th anniversary Dinner
» BIS Minister launches new EOA report

» 2009 Budget
» SAYE bonus rate changes
» SAYE consultation update
» Grays Timber Products v HM Revenue & Customs
» HMRC and EBTs
» Plumbly v Beatthatquote.com Limited

Liberal Democrat deputy leader and shadow chancellor Vince Cable MP has accepted EOA’s invitation to become one of its new honorary vice presidents. Others to accept the role are Lord Best OBE, president of the Local Government Association; Dame Julia Cleverdon CBE, vice president of Business in the Community; Philippa Foster Back OBE, chief executive of the Institute of Business Ethics; Ram Gidoomal CBE, chair of trustees with the Employability Forum; John Neill CBE, Unipart chief executive; Guardian columnist Polly Toynbee; and Professor Richard Wilkinson, author of ‘The Spirit Level’ and emeritus professor at the University of Nottingham

Speakers from more than 30 co-owned businesses feature in this year’s EOA employee ownership conference at the NEC Birmingham International on 11 November. With a choice of around 20 sessions, getting more from the employee ownership advantage is the focus of the event, sponsored by advisers Field Fisher Waterhouse LLP and Lee & Priestley LLP.

Link to Conference Programme

Shadow Business Secretary Kenneth Clarke MP was keynote speaker at EOA’s Summer Dinner in June, sponsored by eaga plc. Clarke congratulated the Association on its 30th anniversary and praised its founder Robert Oakeshott, who received a presentation from president Sir Stuart Hampson.

Business & Industry Minister Lord Young launched EOA’s latest publication – ‘From Colleagues to Owners’ – at a Parliamentary reception in June sponsored by the Baxi Partnership. Authored by journalist Andrew Bibby, the report profiles why and how ten companies made the transition to employee ownership. Other speakers at the event included Sir Peter Thompson, co-founder of report sponsors Child Base, one of the firms studied.

Link to From Colleagues to Owners

John Lewis Partnership chairman Charlie Mayfield led an EOA delegation in discussions with senior policy officials at No 10 about how government can encourage continued growth of the £25 billion sector. The Prime Minister’s special adviser on business and economic recovery hosted the meeting, which is expected to lead to further discussions.

EOA is working on its own employee ownership manifesto to present to the main political parties as they begin to prepare for the next general election. It recommends:

The manifesto is still in draft and is subject to consultation. EOA members are encouraged to share their views with EOA’s policy director – contact nigel.mason@employeeownership.co.uk

In this study of 25 EOA member companies, author Sarah Silcox compares practice in areas like employee engagement, governance and employee ownership culture. Commenting on the report, chief executive of co-owned Child Base, Mike Thompson, said: “I enjoy the stories from others of how they have moved the challenge forward – I really hope those from outside, thinking about the future for their company, now know there is a useful source of information from whom they can learn so much.”

Getting your ownership structure right - guide

EOA’s new guide to optimising your company’s co-ownership structure is by lawyer Robert Postlethwaite, a specialist adviser on employee share schemes. As well as advising on the choice between trust and shares-based ownership schemes, the publication also has definitive guides to the Government-approved Share Incentive Plan, SAYE, Company Share Option Plan, and Enterprise Management Incentive schemes.

Tell researchers about your business

EOA members have been invited to reply to a major survey into Britain’s co-owned business sector. Researchers at London’s Cass business school, in a project funded by the John Lewis Partnership and supported by EOA, are studying how firms with employee ownership grow, innovate and perform. If your company hasn't yet replied to the survey just go to the link below to complete the questionnaire.

The scope for employee ownership following the meltdown in the conventional economy is the focus of a new study by think tank Demos. Commissioned by the John Lewis Partnership, the study is due for publication in the Autumn. Author Will Davies is a speaker at EOA’s conference on 11 November.

Introducing employee ownership in parts of the health service could transform staff commitment and service to patients, according to a major new study funded by the Nuffield Trust. In ‘NHS Mutual’, health experts Chris Ham [left] and Jo Ellins argue that Government should build on examples like EOA members Central Surrey Health, who are profiled in the study.

HMRC’s latest annual statistics show the number of live SAYE plans fell 12% in 2007-08 to 830, the lowest level since 1989. The number of live SIP plans fell for the first time since SIPs were introduced in 2000. By contrast, EMI schemes continued to grow. As Graeme Nuttall points out in his Whitehall Update below, changes to the income tax rates in the 2009 Budget may give a boost to share schemes. Nevertheless, these figures, the last on the public record before the next general election, show that there is still a lot more to be done to entrench all-employee ownership in UK companies.

Employee ownership expert Nigel Mason has joined EOA as its first policy director. Previously corporate development director with Equiniti, who are share registrars for over 600 public companies, Nigel was also co-founder and chief executive of employee buy out advisers Capital Strategies.

EOA has launched a new public database of co-owned businesses in conjunction with the University of Oxford, called Ownership Matters. The website, which is free and available to anyone to use and edit, is based on a “wiki” and lists 450 companies that are known or suspected to be substantially employee-owned. EOA wants everyone with an interest in this field to share their knowledge about the sector by correcting and maintaining the list, so that we have a much better data base for research and lobbying.

Whitehall Update is written by Graeme Nuttall [pictured], legal adviser to the EOA and tax partner with Field Fisher Waterhouse LLP

The 2009 Budget might be good for employee ownership in a curious way.  There was little directly affecting employee share plans in the Budget but a combination of other changes could encourage company owners to look more favourably on employee ownership as a succession solution, so as to increase the number of conversions to employee and trust ownership.

On 22 April 2009 the Government announced a headline grabbing additional higher rate of income tax of 50% on incomes over £150,000 from 6 April 2010.  In the Pre-Budget Report the Government said it would increase employer’s and employees’ national insurance contribution (“NIC”) rates by 0.5% respectively from 6 April 2011.  The additional rate on earnings above the upper earning limit also then increases by 0.5% to 1.5%.  So, from 6 April 2011 the combined effective rate for higher earners exercising unapproved share options (who have agreed to pay the employer’s NIC under the terms of the option) will be 58.1%.
The capital gains tax rate remains at 18% (or 10% if entrepreneur’s relief applies).  This big difference in the tax treatment of income and capital gains will encourage fuller use of HM Revenue and Customs tax advantaged share plans, and also prompt employers to consider more complex tax planning arrangements.  The risks to participants in such plans become more acceptable if the choice is between tax at 18% rather than tax at pushing 60%.  In the short term there will be tax planning based around advancing rewards so as to avoid the higher rates of tax. 

Company owners will be less likely to withdraw money from their business as salary or even as dividends and cannot now rely on pension contributions to reduce their tax bill.

The Government also announced restrictions on tax relief for pension contributions for those earning more than £150,000.  The Budget announcement prohibited higher rate tax relief immediately for amounts in excess of £20,000 a year, for those affected, unless they make quarterly or more regular contributions. The Financial Secretary acknowledged that those with less regular contribution patterns may be prejudiced and invited submissions. A modest change was made to increase the maximum contribution, for some, in the 2009-10 and 2010-11 to £30,000. Nevertheless, from 6 April 2011 tax relief will be restricted.  This will discourage company owners from tying up funds in pension plans. 

The combination of these tax changes means that owners can now be encouraged more than ever to consider a broader retirement strategy: one of using company funds to finance an employee buy out, in which the owners receive sale proceeds taxed at only 10% (if entrepreneur’s relief applies).
There is one other Budget comment to note.  The Government stated that it “will keep tax advantaged share schemes under review to ensure the widest range of employees can benefit from them”. It is, however, understood that there are no current plans to make any particular changes to the existing rules on tax advantaged employee share schemes (apart from those to SAYE announced on Budget Day).

Since the last bulletin, SAYE share option plan bonus rates have changed three times to maintain them in line with other interest rates.  Details of the latest changes, on 29 May 2009, are available from the HM Revenue & Customs web site:

HMRC brought to a close its informal consultation (see December 2008 Bulletin) on SAYE plan administrative changes.  HMRC announced its detailed conclusions before the Budget and asked, in particular, for views on the proposal that the period of notice which HMRC gives of changes in bonus rates is reduced from 28 days to 15 days.  The consultation was aimed primarily at SAYE plan administrators.  These changes were confirmed in the 2009 Budget announcements. 

HMRC provided the following confirmation during the consultation, which may be of broader interest to those companies operating paperless awards under approved plans:

HMRC and EBTs

HMRC continues to investigate cases in which employee benefit trusts (EBTs) have been  used for tax planning purposes and, in particular, to obtain a tax deduction for cash contributions that are channelled to employees without accounting for income tax or national insurance contributions.  Past bulletins (e.g. June 2007) have provided updates.  At the outset of these investigations Field Fisher Waterhouse LLP obtained an assurance from HMRC that “EBTs for the purpose of achieving employee control structures in a bona fide trading operation” are distinct from “Contrived arrangements involving EBTs for the purpose of sheltering remuneration from income tax and national insurance contributions”.  If any member company is contacted by one of the specialist HMRC investigation teams please contact Patrick Burns and we will consider whether this assurance needs updating.

Grays Timber Products Ltd v HM Revenue and Customs (2009)

The taxpayer failed in its appeal in this case.  In broad terms, arrangements in a shareholders' agreement for an employee to receive extra consideration on a share sale did not increase the market value of the shares and so the employee was taxed on the extra consideration as income, rather than a capital gain.  This is a complex area of tax law.  The case highlights the importance of careful planning and that there can be a significant difference in tax treatment between including rights in the articles of association and including rights in separate agreements with shareholders.

Plumbly v Beatthatquote.com Limited (2009)

A former director successfully claimed damages from his former employer for its failure to allot shares on the exercise of an employee share option.  Arguments that he had breached his fiduciary duties, the terms of his contract of employment or the terms of a non-compete side letter, by working on another web site, were dismissed.  This case is a reminder that share options provide contractual rights.  It is important to define in an option agreement the circumstances in which the option may (and may not) be exercised.

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