We are just in the process of setting up an employee ownership trust (EOT). The company has currently three directors paid via PAYE or dividend by virtue of a class of share, each director owing one ‘A’ share. The company ownership is split between seven shareholders (including the three mentioned) with 60,000 ordinary shares between them. The current directors will be retiring, and from the point the EOT is set up, they will no longer be drawing dividends themselves (surrendering their ‘A’ share). The intention is to set up the EOT, and the new board will be paid using the award of 1 ‘A’ share to allow the mix of dividend and PAYE. The trust will own greater than the 51% required of ordinary shares (probably 100%). Is it allowable to have ‘A’ shares used for the purpose of paying the management team via dividends when there is an EOT in place? 

Arthur Weller replies:  

See HMRC’s Capital Gains manual at CG67800c for rules about EOTs. It seems to me from what you have described that those employees who do not receive an ‘A’ share are 'excluded participators' (see CG67839). Consequently, the 'equality requirement' (see CG67837) does not seem to be fulfilled. So what you are asking should not be allowed. Check CG67840 and CG67841 to see if your scenario fits into one of the exclusions.