This month’s Breakfast Briefing is based on the hottest topic in company ownership – Employee Ownership Trusts. South West firm, Paradigm Norton is the latest business to make headlines by becoming employee owned. It follows hot on the heels of Richer Sounds joining the most well-known employee owned company, John Lewis. High street staple Lush has also started the journey. PKF Francis Clark will be joined by Christian Wilson from Stephens Scown to look at the Employee Ownership Trust model from a legal and tax perspective. We will also hear some of the factors that are stimulating increasing interest in the model, including the results of research showing that the greater staff engagement and lower staff turnover associated with this model helps to employee owned companies to achieve: - Sales increase of 4.6% per year - EBITDA increase of 25.5% per year - Productivity increase of 4.5% per year We will also consider some of the practical issues to be considered in deciding whether this is an option to pursue and in implementation. There will be a brief mention of some other related (i.e., employee engagement) issues.

1. E M P L O Y E E O W N E R S H I P T R U S T S : T H E
H O T T E S T T O P I C I N C O M PA N Y O W N E R S H I P

2. HOUSEKEEPING
@pkfFrancisClark

3. PROGRAMME
 8.20 – Presentations
 Martin Brown – PKF Francis Clark
 Christian Wilson – Stephens Scown
 9.10 - Questions
 10.00 - Close

4. EOT – IN THE NEWS
 Giving employees share of company can be mutually
rewarding for all – the Sunday Times July 29 2019, 12:01am
 How a switch to employee ownership is bearing fruit –
Financial Times July 18, 2019.
 The rise of the employee ownership model – Lexology 23 Jul 2019
 Why makers of Wallace and Gromit decided to become
employee-owned - Wednesday 24 July 2019 23:0
 Richer Sounds founder hands over control of hi-fi and TV
firm to staff - Tue 14 May 2019 09.48
 Two more architecture practices become employee-
owned – Architects’ Journal June 3, 2019.
 Manchester Digital Agency I-COM Pledges Majority
Stake To Employee Ownership Trust – Business Up North July 31, 2019
 AAR becomes employee-owned in move to strengthen
business – Campaign July 17, 2019
 Construction company turned over to employees – Insider Media
July 23, 2019
Research:
employee owned
companies to
achieve:
• Sales increase
of 4.6% per
year
• EBITDA
increase of
25.5% per year
• Productivity
increase of
4.5% per year

5. Employee Ownership
of Companies
Christian Wilson
Stephens Scown
t: 01872 265100
e: c.wilson@stephens-scown.co.uk

6. What does the EO
environment look like?

7. LASPO
John Lewis Partnership
£3.7 Billion turnover owned by 83,900 ‘partners’

8. Everything begins with the Partnership’s ultimate
purpose and Principle 1:
The happiness of all its members, through their
worthwhile and satisfying employment in a successful
business.
Because the Partnership is owned in trust for its
members, they share the responsibilities of
ownership as well as its rewards - profit, knowledge
and power.

9. Arup are designers, planners and architects
with £1.5 Billion turnover owned by over
14,000 employees in 34 countries.
Arup

10. ‘If the right kind of people feel at home with
us, they will bring in other people of their
kind, and this again will attract a good type
of client and this will make our work more
interesting and rewarding and we will turn
out better work, our reputation and influence
will grow, and the enthusiasm of our
members will grow - it is this enthusiasm
which must start the process in the first
place’

11. Aardman Animations
4 Oscars, 14 BAFTAS, 18 YouTube
channels with 1.5 billion views per years.

12. “We’re not quitting yet”, said Lord &
Sproxton, “but we are preparing for our
future. This approach, the creation of an
employee trust, is the best solution we have
found for keeping Aardman doing what it
does best, keeping the teams in place and
providing continuity for our highly creative
culture. And of course, those that create
value in the company will continue to benefit
directly from the value they create”

13. Richer Sounds
500+ employees – ranked 44 in EO top 50 companies.
Sold 60% stake for £9m but gave circa £4m to employees.
5 Which retailer of the year awards – no zero hours contracts.

14. ‘We firmly believe that happy staff = happy
customers and we are committed to providing our
employees with secure, well-paid jobs in a
stimulating, equal opportunities environment. We
don’t punish sickness, unlike some less ethical
organisations. If our colleagues are unwell, we
encourage them to take time off to recover. We are
proud to be one of the only retailers to be an
accredited Living Wage employer and refuse to
issue zero hour contracts to our valued colleagues’

15. And there are many more…
…from travel companies, printers, engineers,
computer and software companies,
healthcare and legal.
Ranging in size from 10 employees upwards.
Employee Ownership offers a potential
choice for all businesses.

16. What are the reasons for implementing
Employee Ownership?
An easy exit for the founders? Possibly…
• Light due diligence
• Limited fund raising stresses
• Limited warranties
• No need to approach competitors/go to market
• Timing and timescale
• Maintain culture and values
• Legacy
• Tax incentives
• Less risk of business being broken up

17. What are the reasons for implementing
Employee Ownership?
But…
• May not be highest price (market price though)
• Payment may take years through vendor loan (could be
secured)
• Risk to vendors of business difficulties (vendor
protections)

18. What are the reasons for implementing
Employee Ownership?
• Growth – every company involved in the Ownership
Inquiry reported a growth surge.
• Employee motivation and recruitment:
• Individually motivates.
• Act on own initiative.
• Work collectively to improve fortunes of business.
• Purpose – a significant issue for businesses. Companies
that have purpose are more resilient.
• Securing business in location.
• Innovation – all are empowered to bring forward ideas.

19. How to implement? The company today

20. Employee Ownership Trust
(EOT)
Founders/sellers
How to implement?
The Trust is formed for the benefit of the employees

21. Employee Ownership Trust
(EOT)
Founders/sellers
How to implement?
The founders sell the shares to the Trust
Shares sold to EOT
Payment
to
founders
(loan)

22. Employee Ownership Trust
(EOT)
Founders/sellers
How to implement? The end structure
Loan repayment
Profit
share
Gift up
profits

23. Matters to be considered:
More than 50% shareholding & control to transfer (unless tax
not critical).
Need to consider the profit share distribution among the
employees:
• Length of service
• Pro-rated
• Multiple of salary or flat
Who would be the trustees?
• Some employees
• A founder
• An independent
The board runs the company!

24. Conclusions: why consider EO?
If looking at succession, it’s a very strong alternative to a
trade sale and potentially more achievable than an MBO.
If looking at growth it answers some challenges for business
– “We are all in this together”.
The top 50 EO businesses have a combined turnover of
£19.2 billion and are owned collectively by 166,000
employees. Their productivity beat the FTSE 100 with an
increase of 7.7% last year.
Supported by all major political parties, EO
has a very strong future.

25. Stephens Scown Employee Ownership service
• Currently supporting 20 plus businesses on EO journeys
across the UK.
• The first EO law firm.
• Led by Christian Wilson (over 20 years in corporate law)
and Robert Camp (former Managing Partner Stephens
Scown).
• Contributed to the Ownership Dividend Inquiry on
Employee Ownership.
• Members of the CBI working group on employee
ownership and engagement.
• Members of the EOA.

27. B R E A K F A S T B R I E F I N G
E M P L O Y E E O W N E R S H I P : T A X A N D
F U N D I N G
6 August
Martin Brown, PKF Francis Clark

28. EMPLOYEE
OWNERSHIP:
TAX ON TRANSFER

29. SOCIAL GOOD
NOT GIVING AWAY FOR FREE
There are good social reasons for encouraging
employee ownership.
BUT:
The owner gets paid for selling their company

30. TAX RELIEF FOR THE SELLER
 A disposal for capital gains tax
 CGT “exemption” subject to
qualifying conditions
- Effective tax free disposal
- Sold for ‘base cost’
(no gain, no loss)
- Claw back if disqualifying
event within 1 year
- Charge on trustee if
disqualifying event after 1 year
Employee
Ownership Trust
(EOT)
Founders/sellers
Shares sold to
EOT
Payment to
founders (loan)

31. THE 5 QUALIFYING CONDITIONS
HMRC can be approached for pre-transaction
clearances to ensure that the anticipated tax
reliefs are obtained. There are 5 key
requirements:
1. The trading requirement.
 does not to a substantial extent carry out non-
trading activities
2. The all-employee benefit requirement.
 Must be for the benefit of all eligible employees of
a company or group on the same terms.

32. THE 5 QUALIFYING CONDITIONS
3. The controlling interest requirement.
 more than 50% of the ordinary share capital
 hold a majority of the voting rights
 more than 50% of profits available for distribution
 more than 50% of the assets available to equity
holders on a winding up
 Trustee consent needed for any reduction in its
entitlement
4. The limited participation requirement.
5% employee-shareholders < 2
total employees 5
5. The no related disposal requirement.
 This limits the relief available to all connected
claimants on disposals of shares in a particular
company (or companies in the same group) to a single
tax year.

33. DISQUALIFYING EVENTS
 The company/ group ceases to meet the
trading requirement.
 The EOT ceases to meet the all-
employee benefit requirement.
 The trustees act in a way which infringes the
all employee benefit requirement.
 The EOT ceases to meet the controlling
interest requirement.
 The participator fraction exceeds 2/5.

34. EMPLOYEE
OWNERSHIP:
FUNDING ISSUES

35. SALE FINANCING
 Banks will rarely lend 100%
 This can work like a self
financed MBO
 An upfront payment - The
Company settles as much as it
can afford to the EOT
 Balance in loans
- N.B. no tax on loan repayments
 A clearance can be sought that
gifting of profits is not taxable
Employee
Ownership Trust
(EOT)
Founders/sellers
Loan
repayment
Profit
share
Gift up
profits

36. SALE FINANCING
 A key issues for all parties is
that the loan should be
affordable.
 Financial modelling is
important
 The company should not be
sold for more than it is worth:
 The trustee has a duty not to
buy at an inflated price
 Sale at overvalue could also
give rise to tax charges
(including PAYE and NIC) on
the seller.
 A valuation is advisable
Employee
Ownership Trust
(EOT)
Founders/sellers
Loan
repayment
Profit
share
Gift up
profits

37. EMPLOYEE
OWNERSHIP:
TAX BENEFITS FOR
EMPLOYEES

38. BENEFITS TO STAFF
 Employee ownership can help to retain and
motivate staff.
 Tax free bonuses of up to £3,600 per
employee per year can be paid (but not
NIC free)
 These can be varied based upon hours
worked, length of service or salary.
 You can exclude new recruits or on
disciplinary grounds

39. THINGS TO THINK ABOUT
 The all employee benefit – can’t implement
‘discretionary’ share plans (e.g. EMI) using
the EOT shares.
 It is less likely there is a future onward sale.
 It is not a ‘get rich’ scheme for the future
management.
 This has to be a shared ethos.
 The no linked transactions – (ex)owner can’t
benefit from tax exemption in the future on
retained shares.
 There may be limited chances to sell shares
in the future.

40. NEXT…
Q&A and/ or discussion
• EOT
• Other related (i.e., employee engagement) issues e.g., EV.
Future 1st Tuesday of the month breakfast briefings
• Business succession
• Mitigating business risks
• External markets for growth
• Remuneration strategies
• Property update
3rd Annual Food and Drink sector focused breakfast briefing – 28
October 2019 (part of Cornwall Festival of Business)
And do not forget our blog, which contains details of new funds/
sources of SME funding that come to our attention, and our Finance
in Cornwall factsheet

41. 01392 667000
Exeter
01722 337661
Salisbury
01823 275925
Taunton
01803 320100
Torquay
01872 276477
Truro
01752 301010
Plymouth
01202 663600
Poole
Francis Clark LLP is a member firm of the PKF International Limited network of legally independent firms and does not accept any responsibility or liability for the actions or inactions on the part of any other
individual member firm or firms.

42. © copyright PKF Francis Clark, 2019
You shall not copy, make available, retransmit, reproduce, sell, disseminate, separate, licence, distribute, store electronically, publish, broadcast or
otherwise circulate either within your business or for public or commercial purposes any of (or any part of) these materials and / or any services provided
by PKF Francis Clark in any format whatsoever unless you have obtained prior written consent from PKF Francis Clark to do so and entered into a licence.
To the maximum extent permitted by applicable law PKF Francis Clark excludes all representations, warranties and conditions (including, without
limitation, the conditions implied by law) in respect of these materials and /or any services provided by PKF Francis Clark.
These materials and /or any services provided by PKF Francis Clark are designed solely for the benefit of delegates of PKF Francis Clark.
The content of these materials and / or any services provided by PKF Francis Clark does not constitute advice and whilst PKF Francis Clark endeavours
to ensure that the materials and / or any services provided by PKF Francis Clark are correct, we do not warrant the completeness or accuracy of the
materials and /or any services provided by PKF Francis Clark; nor do we commit to ensuring that these materials and / or any services provided by PKF
Francis Clark are up-to-date or error or omission-free.
Where indicated, these materials are subject to Crown copyright protection. Re-use of any such Crown copyright-protected material is subject to current
law and related regulations on the re-use of Crown copyright extracts in England and Wales.
These materials and / or any services provided by PKF Francis Clark are subject to our terms and conditions of business as amended from time to time, a
copy of which is available on request.
Our liability is limited and to the maximum extent permitted under applicable law PKF Francis Clark will not be liable for any direct, indirect or consequential
loss or damage arising in connection with these materials and / or any services provided by PKF Francis Clark, whether arising in tort, contract, or
otherwise, including, without limitation, any loss of profit, contracts, business, goodwill, data, income or revenue. Please note however, that our liability for
fraud, for death or personal injury caused by our negligence, or for any other liability is not excluded or limited.
PKF Francis Clark is a trading name of Francis Clark LLP. Francis Clark LLP is a limited liability partnership, registered in England and Wales with
registered number OC349116. The registered office is Sigma House, Oak View Close, Edginswell Park, Torquay TQ2 7FF where a list of members is
available for inspection and at www.pkf-francisclark.co.uk. The term ‘Partner’ is used to refer to a member of Francis Clark LLP or to an employee.
Registered to carry on audit work in the UK and Ireland, regulated for a range of investment business activities and licensed to carry out reserved legal
activity of non-contentious probate in England and Wales by the Institute of Chartered Accountants in England and Wales. Partners acting as insolvency
practitioners are licensed in the UK by the Institute of Chartered Accountants in England and Wales. A partner appointed as Administrator or Administrative
Receiver acts only as agent of the insolvent entity and without personal liability. Francis Clark LLP is a member firm of the PKF International Limited
network of legally independent firms and does not accept responsibility or liability for the actions or inactions on the part of any other individual member
firm or firms.