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In
Canada, it's party time. Prime Minister Mark Carney's
Government has decided to make the tax incentive to
support Employee Ownership Trusts permanent. This
means that, once and for all, the number of transfers
of businesses to employees will increase in Canada,
just as it has done in the USA and, since 2014, in
the UK.
The trust model makes this possible. The trust embodies
ownership by the company's community of employees.
It is this collective that becomes the owner of the
company, without the employees having to put a penny
of their own money into it. It's a credit sale. Generally,
it is the seller of the company that extends credit
to the employee trust, known as a "vendor loan”.
The seller of the business agrees to spread the payment
of the sale over a period of time, generally five
to seven years. The trust being the owner, it can
use the company's profits to repay the loan to the
seller.
Why does the seller agree to this payment period?
Because the tax incentive exempts the seller from
tax on the sale of the company to the employee trust.
And so we've come full circle. In the final analysis,
the company's employees are the main beneficiaries
of the tax-free sales proceeds granted to the vendor.
In the United Kingdom it's no longer a party.
For nearly six months now, the situation has been
confused. The government of Chancellor of the Exchequer
Rachel Reeves has decided to retax the sale of companies
to employees. Instead of 100% tax relief on the proceeds
of the sale, this is now only 50%, or half.
As a result, the credit mechanism for staggering payment
has become much more complicated, or even impossible.
Many owners have decided not to sell to employees.
Overnight, the number of businesses transferred to
employees plummeted. Recent findings show that we
are moving towards a new equilibrium: Instead of 100
companies being passed on to employees before Ms Reeves'
decision, there will now only be 50, i.e. half that
number or even slightly lower. Instead of 8% of all
business transfers going to employees before Ms Reeves'
move, only 3 or 4% will do so in future (see graph).
Ms Reeves' motives remain obscure in this mess, a
mixture of ideological whims and vested interests
- nothing solid. And the consequences are manifold,
as we'll come back to shortly. What is certain is
that employees are ultimately the main losers of the
re-taxation sought by Ms Reeves' government.
There is only one way to avert this British disaster. It
is essential to reinstate the 100% exemption on capital
gains relating to the sale of a company to an Employee
Ownership Trust.
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