It'll be tough to ensure employee owner tax breaks hit their target, says EY

27 March 2013

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Patrick Stevens, tax partner at EY, comments on Nick Clegg’s proposals for tax breaks to boost employee owned firms:

“Today’s announcement backs up some of the rhetoric we have been hearing from Government over a number of months, but it’s going to be tough to ensure the proposals hit their intended target.

“The Budget Speech suggested that there should be Capital Gains Tax relief for an owner of a company who is selling out to a group of employees. At first glance this might include a large number of leveraged buyouts, where a small management team often leads a bid with external financial backing.  It would then be possible to give other employees a relatively small interest in the ownership through the medium of an Employee Benefit Trust. The proposals will need to draw a careful line between supporting appropriate transactions and encouraging employee ownership, while excluding anything that could be deemed "financial engineering".

“It has now been suggested that part of employee owner remuneration should be exempted from income tax. Again, the devil will be in the detail. For example, if a very small business consists of two people with no employees, it would be an employee owned business. Those employees would be entitled to all of the profits of the business but would there be an intention to exempt some of their earnings from tax? Probably not, but where do you make the distinction?

“The Government seems to consider that employee owned businesses are inherently a good thing. But it’s a model that comes with its own challenges. When there are tough decisions to be made, particularly those that require redundancies, it can sometimes be more difficult to secure a general consensus in an employee owned business. Also, most businesses are led by an entrepreneur in some guise but employee owned businesses may not have such a person amongst their number. New businesses and those becoming employee owned for the first time may need coaching and support to help make the structure work for them.”