In this guest article, Sean Hackemann from Specialist Accounting Solutions Ltd considers the implications of the recently proposed changes to EOT valuations.

In the Autumn 2024 Budget, the Chancellor Rachel Reeves introduced several changes to the legislation concerning Employee Ownership Trusts (EOT).

One of these changes was that trustees of an EOT must take all reasonable steps to ensure that the consideration paid to acquire the company’s shares does not exceed market value at the time of the disposal.

The questions that shareholders, directors and trustees of companies should be asking are: What is the market value of the company and what are “all reasonable steps”?

Market value

It is best practice to instruct an independent valuer to prepare a valuation report for the trustees to ascertain the market value of the company. Alternatively, it may be possible to review and check a valuation report prepared on behalf of the seller, where the value of the company does not justify a high level of professional fees (i.e. there is no budget for a separate valuation report prepared for the trustees). In both cases, the trustees should have a meeting (in person or virtually) with the valuer to discuss and question the report, with the outcome of the meeting being minuted for the record.

All reasonable steps

The requirement for the trustees of an EOT to take “all reasonable steps” is causing some disquiet amongst advisors, as a failure to satisfy the standard to the satisfaction of HMRC could cause the capital gains tax (“CGT”) relief to be withdrawn on the sale of the shares to the EOT. Guidance from HMRC is expected and it will be interesting to see if HMRC applies a risk-based approach depending on the value of the company. The legislation intends to prevent over-valuations that cannot be supported by trading performance, a cash flow analysis or rely on highly optimistic forecasts, or where the valuation has been prepared on incorrect valuation principles.

The valuation report is almost always prepared before the trust is created, and the trustees are appointed. This is because the valuation is one of the first steps in an EO transaction (even prior to HMRC clearance) and is normally requested by the company at the start of the process. The trust is created nearer completion. Several months can pass between these two points.

Initially, the company’s founders, shareholders and directors, gain sight of the report and review and approve it. Therefore, the trustees might find themselves having to retrospectively accept the market value in the report, which would appear to contravene the “all reasonable steps” benchmark. A separate valuation report is preferable. If a separate valuation report is not practicable due to cost implications, there are a few actions that could be taken by the trustees:

1.     Requesting the valuer to prepare a copy of the report formally addressed to the trust. The trustees must be comfortable with the level of independence of the valuer. The level of independence may not be available if the valuation has been prepared by the reporting accountant or if there has been a previous professional engagement between the sellers and the accountant.

2.     Asking the valuer to confirm whether the trustee board can rely on the valuation report regarding the concluded market value.

3.     If more than three or four months have passed since the report was prepared, the trustees should instruct the valuer to prepare an updated version of the report. This is because more recent trading figures might impact the market value.

4.     Arranging a call or meeting with the valuer to give the trustees the opportunity to ask questions about the report, including the valuation methodologies and assumptions applied, and the concluded value.

Ideally, the trustees should be able to fully understand the report and have gained sufficient comfort on the market value, enabling them to conclude the trust is not “overpaying” for the shares in the company it is acquiring.

The completion board minutes of the EOT trustee approving the purchase and the share purchase agreement should refer to the valuation report and the steps taken to review the valuation.

Following the steps set out above, together with the board minutes and the valuation, should be good evidence of the EOT trustee having satisfied the “all reasonable steps” requirement should HMRC enquire into the EOT transition.

Sean Hackemann is a Director and Founder of Specialist Accounting Solutions Ltd (Team SAS). Team SAS prepares independent business valuation reports for various scenarios, including Employee Ownership transactions.