- What is an Employee Benefit Trust?
An EBT is a discretionary Trust which is governed by UK Trust law and a Trust Deed. The beneficiaries are basically employees (including former and future employees) of the company and the trustees are required to act in the best interest of the beneficiaries.
Using an EBT can offer several benefits, both from a tax and financing viewpoint. It is able to acquire shares in the company and hold on to them on a short or long term basis. It is able to borrow monies to acquire shares, for instance at a time when the owner wishes to retire. The shares can be left in the EBT for future allocation by way of various Inland Revenue approved employee share schemes. If properly structured it should be possible for contributions from the company to the EBT to be tax-deductible.
There are four Inland Revenue approved employee share schemes:
There are a number of very significant income tax and capital gains tax benefits to employees, if an approved share scheme is used and the terms are complied with, and the shares are held for the appropriate period, etc. For instance, gains in value under the share schemes are usually free of Income Tax and Capital Gains Tax. The company will also benefit through securing deductibility against its Corporation Tax liability.
As it is unlikely that the company will be quoted on the stock exchange, there will be no "readily available" market value. It is usual for private companies for this valuation to be carried out by the auditors. The whole company would be valued first, and then divided by the number of shares issued, to come up with a price per share. This would be agreed with the Inland Revenue (important for tax purposes) and notified to shareholders once a year.
On a day to day basis, shareholders have very limited rights. They are able to call / attend general meetings of the company and vote on them. They are also usually entitled to any dividends that are paid and to participate in any winding up of the company. They are not, however, permitted to interfere in the running of the business and must leave this to the Board of Directors and Management team.
Most private companies, and most of the employee share schemes, will require employees to have to sell their shares back, usually to the Employee Benefit Trust when they leave or retire. However, they would be entitled to receive the current market value (see question 5 above) for their shares. The shares acquired are then made available for distribution perhaps to recent starters who have no shares.
This would not usually be permitted, as the company would wish all the employees to hang onto their shares while employed at the company so as to maximise the benefits of employee ownership on trading performance. However, in larger companies after the scheme has been in operation for a while, it is possible to operate on internal market in the shares, through the EBT, so that buyers and sellers among the workforce can be matched.
Yes, including part timers, but there can be set a minimum qualifying length of service, such as 12 months before participation is allowed. It is important to note that while all such employees must be invited to participate, it is at each employee's prerogative whether they choose to do so, i.e. the scheme is voluntary in that respect.
Yes, in most private companies, ordinary shares, with voting rights, will be used to operate any of the Inland Revenue share schemes which are used. However it is possible, in certain circumstances for non-voting shares to be issued and used for the SIP scheme.
Yes, it is most important that the workforce are told about the company's plans for employee ownership as soon as practically possible. Regular updates need to take place before the launch of a scheme and, depending on the size of the company, a help line may be offered. Communications and establishing how the scheme has been received, are just as important after the scheme has been launched. The company's AGM, with the opportunity to meet the employees as shareholders, is a good time to update everyone.
Many studies over the years have shown that employee ownership on its own will do little to improve a company's performance. However, where the employee ownership has been linked with a participative style of management, these same studies have shown that these companies enjoy a significant increase in productivity and provides the right motivation to incentivise and retain staff. Companies where employees genuinely feel involved in the decision making process score well in this area.
In many companies at the smaller end of the market, the owner manager's departure as a shareholder leaves the company without adequate management. To get round this, it may be possible to identify one or more people from the existing workforce who, with a bit of guidance over a period of a few years, may be able to work alongside the owner manager and be in a position to take over in full once the owner manager has gone. In other circumstances, where this is not practical, someone from outside will need to be brought in, to work alongside the owner manager for a while prior to taking over completely.
Depending on its size the company will usually have a managing director and other executive directors, such as production director and finance director. These will run the company on a day to day basis. There may also be non-executive directors, particularly where there are significant outside shareholders, and including employee representatives if their shareholding is significant.
In a small company, the Trustees will typically be representatives from management (e.g. the managing director) and from the workforce (possibly elected). There is also usually some merit in having one or more "independent" trustees, not connected to the company but acceptable to both the management and employee representatives. (A balanced trustee board, where the EBT is not seen to be under the control of the company, is usually helpful for tax and accounting reasons.) It should be borne in mind, that regardless of who the trustees are, they must always act in the best interests of the beneficiaries.