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CTM15580 | Distributions to EOTs

From HM Revenue & Customs · Company Taxation Manual

Background

Prior to 30 October 2024, HMRC accepted the view that certain contributions to trustees to provide them funding to pay the consideration for the purchase of shares in companies to set up an Employee-ownership Trust (EOT) were not distributions within CTA10/S1000. This position was not without doubt and so it was very common for taxpayers and their advisors to ask HMRC to confirm the treatment for EOTs through a non-statutory clearance.

HMRC now views their previous position as incorrect, and instead believes that such contributions are paid out of the assets of the company in respect of shares in that company to the trustee in their capacity as a shareholder and will be distributions in the same way as any other contributions to the trustee made by the underlying company. The fact that shares are held in a particular capacity or that shareholders intend to put the funds to a particular use are not relevant factors in and of themselves as to whether something is a distribution in respect of shares. Trustees of EOTs, like other persons who hold shares subject to a trust, remain chargeable to tax on distributions received in respect of those shares.

As with all transactions between a company and its shareholders, whether a payment is a distribution will be a question of fact and depend on what the payment is actually for and in what capacity it is paid. The key question must always be whether the payment is properly regarded as a dividend (within CTA10/s1000(1)A), a distribution out of the assets of a company in respect of shares under section 1000(1)B or is otherwise chargeable under the related provisions in section 1000(1)G/s1020.

Relief

The EOT regime now provides a specific relief from the charge to income tax on certain distributions made to the trustees of an EOT to enable the establishment of the trust. This relief applies to distributions made on or after 30 October 2024.

This relief applies where there has been a disposal of ordinary share capital of a company to an EOT in respect of which the ‘relief requirements’ set out in CG67810 and CG67820 are met but as if references to P were to the person making the disposal whether or not that person is a company.

Where the company makes a payment to the trustees for the purpose of meeting the trustee’s acquisition costs the trustees may make a claim to deduct so much of the costs from that distribution as

  • does not reduce the amount of the distribution below nil, and

  • has not been deducted from any other distribution.

The trustees’ acquisition costs which can be deducted from the distribution are sums expended:

  • on the acquisition of the ordinary share capital in the company where the corresponding disposal of those shares met the requirements for EOT CGT relief, or would have done if the vendor had been within the charge to CGT;

  • the repayment of any sums borrowed to fund that acquisition;

  • the payment of any interest on deferred consideration to the extent that this does not exceed a reasonable commercial rate;

  • the costs of any valuation of the company carried out in connection with that acquisition;

  • any liability to stamp duty or stamp duty reserve tax on the acquisition.

The relief must be claimed by the trustees and claims must be made within four years from the end of the relevant tax year.

How to Claim Relief

If the trustees file a self assessment tax return for the relevant tax year then the claim for s401ZA relief should be made in the return. Otherwise, claims should be made in writing to the following address:

HM Revenue and Customs

Trusts

BX9 1EL

United Kingdom

Claims must include the following information:

  • The name of the EOT

  • TRS reference number for the EOT (see TRSM91020)

  • The name/registration number of the EOT-owned company

  • The tax year for which the claim relates

  • A schedule of the amounts and description of the 'trustee acquisition costs' for which relief is claimed

  • A statement that the trustee is making a claim for relief from income tax under ITTOIA05/S401ZA and that the relief requirements set out at s401ZA have been met

  • For claims made outside of a return, a declaration signed by the claimant that the particulars given in the claim are correct and complete to the best of their information and belief.

Clearances given prior to 30 October 2024

HMRC will remain bound by and continue to honour any clearances already given on the treatment of these payments. Trustees in this situation will not need to claim relief. In addition, for distributions made prior to 30 October 2024, HMRC will not seek to disturb the treatment of contributions made to existing EOT trustees undertaken in line with the conditions on which clearances were given prior to 30 October 2024, even where clearance was not sought from HMRC. Those conditions were that:

  1. the contributions were to be used to meet necessary expenditure aimed at creating and maintaining an employee trust structure for the benefit of the company by facilitating employee ownership and that the EOT was established in accordance with the relevant EOT legislation;

  2. in particular, that the contributions were to be used by the trustees of the EOT to meet their corresponding liabilities in relation to the acquisition of the relevant shares; and

  3. that the consideration paid for the shares was no more than their market value.