Employee Ownership Trusts
At the end of October, YesTax announced that the ownership of the business had transferred to its employees via an Employee Ownership Trust (EOT). The decision to become employee owned was driven by the desire to sustain the company’s unique culture and to recognise the fact that the business was built upon the hard work and commitment of its employees. The EOT secures the foundations on which YesTax has been built and gives its employees a shared ownership structure that they will directly benefit from.
By widening the ownership of the business to its employees, YesTax is securing the future of the business, its ethos, values and employees, whilst rooting itself locally for the longer term. YesTax gives 2.5% of its turnover to children’s charities across the world and this will continue under the new ownership model.
What is an Employee Ownership Trust (EOT)? - An EOT is an employee benefit trust whose purpose is to hold shares in a trading company on behalf of the employees of that company.
Why are EOTs set up? – EOTs allow the existing shareholders to effectively sell their shares in the company to the EOT trust. The shareholders are paid out of future profits and any cash the business holds.
How do they work in practice? – The company shares are valued independently. The existing shareholders will then enter into a contract with both the company and EOT. The terms of the contract are that the shareholders agree to sell their shares to the EOT, the trustees agree to buy their shares, and the company agrees to fund the purchase at the agreed valuation over a period of time.
So, who owns the company? – Once the shares have been acquired by the EOT, the trust owns the company. The employees of the company become the beneficiaries of the trust.
Who are the Trustees of the Trust? – It can vary but typically the trustees are made up of staff members, exiting shareholders and an independent representative.
What are the benefits for the employees of a company owned by an EOT? – The main benefit is that going forwards the employees will share in the profits of the company. In addition, a company owned by an EOT can pay tax free bonuses of up to £3,600 per annum to its employees.
How do employees receive benefits from the trust? – Typically, the company will make an annual contribution to the trust from a proportion of its profits. These contributions will be used partly to pay the shareholders for the shares. The remainder will be paid out to the employees of the company who are the beneficiaries of the trust.
Are distributions to staff from an EOT trust subject to tax? – Yes, they are subject to income tax and national insurance contributions.
Do all company employees receive the same amount from the trust? – It can vary. Often, the amount each employee receives is dictated by length of service and seniority. However, the distributions can also be split equally amongst all staff.
Can the trustees exclude any individual employees from benefiting? – No. All employees must benefit in some way.
Do new employees receive a bonus from the trust? – As new employees join the business, they will also benefit from the trust distributions, subject to the formula and rules set out in the trust agreement.
Can employees sell the shares? – No, employees do not own shares directly.
What happens if an employee leaves the company? – If an employee leaves the company, then they cease to be eligible beneficiaries of the trust.
Can the exiting shareholders, who sold their shares to the EOT trust, benefit from the trust? – No. The shareholders and any members of their family are specifically excluded from the EOT trust and cannot benefit in any way. This of course excludes the amounts they receive for their shares.
What if the company was sold in the future? – The trustees would, after paying any capital gains tax and other costs, distribute the remaining proceeds, subject to income tax and NICs, to the employees.
If you want to learn more about how YesTax transferred ownership of the business to the employees or more information about EOTs in general, please contact hello@yes.tax
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