2 November 2021
Employee Ownership Trusts
The last twelve to eighteen months have been intense for many industries and accountancy has not been exempt from that. Many partners who may have been considering retirement over the next few years have decided to expedite their plans following the pandemic, lacking the energy to rebuild or diversify their practices in the new post-pandemic world.
Alongside this, there has been an underlying struggle for partners or practice owners to put suitable succession plans in place. Factors in this underlying struggle include attracting the right talent and whether the desire exists within the younger generation to run things, rather than just doing the work. Not to mention the financial constraints that ambitious individuals might face when it comes to buying out retiring partners or investing in the partnership.
Whilst some partners have tried to remove these financial barriers, it is still a large investment to make. This is where an Employee Ownership Trust (EOT) which has been used in other industry sectors for some time, has recently become a potential avenue to consider.
An EOT can provide the current owners with tax incentives, as well as offering protection to the value they have built within the firm. It also incentivises the staff who you would want to retain within the business and removes the obstacles previously discussed for aspiring future partners.
Shares are placed within the EOT and are attributed to the staff members who are to be involved with the scheme. The structures can be complex, but further information and advice can be sought online or from an experienced accountant. As share capital is required for the EOT to purchase, only limited companies can go down this route. Therefore, sole traders or partnerships wishing to use it will need to incorporate and ideally this should happen a year or two before the buy out is to take place.
In terms of the benefits of an EOT, it can give the seller a capital gains tax rate of effectively zero percent. They can still retain a stake in the business and remain an active manager for however long they wish. For the employees purchasing the business through the EOT, they are acquiring an interest in an established and profitable business with which they are already familiar. They can also keep hold of the management expertise they are used to from the existing partner(s) whilst they learn the ropes. It also works well as a financing option since EOT buy outs can often self-fund from profits.
There are some practical and regulatory considerations, however. As we mentioned earlier, EOTs are only viable options for limited companies. If the employees who are part of the EOT are members of different professional bodies, then the management structure needs to be considered as there could be an impact on how the practice is able to describe itself.
There are further complications if the practice carries out statutory audit work. Audit qualified persons must own and control a registered audit practice; it cannot be owned by an EOT. Therefore, if you are considering an EOT, it may be necessary to separate the audit element of the business into a separate entity. This separate entity should then be owned and controlled only by audit qualified individuals. So, whilst this is possible, it does take some careful thought and planning to arrange successfully.
In summary, EOTs are worth considering as part of succession planning and as a way of overcoming the barriers to this which are being experienced in practices up and down the country. However, it is not a one size fits all approach and will only work if it is carefully planned and managed and thoroughly researched.