For many years, SMEs have sought a mechanism that would help them attract and retain highly skilled personnel and their prayers seemed to have been answered in the form of KEEP, announced in October’s budget. The scheme proposes to allow qualifying companies to provide their employees with a financial incentive linked to the success of the company and takes the form of a tax-advantaged share option. While it has been given a cautious welcome by many stakeholders, others point out fundamental flaws within the Bill, in its current form.
In order to qualify to utilise the scheme, a company needs to meet certain criteria. It must be a micro-, small- or medium-sized enterprise or employ fewer than 250 staff and have an annual turnover not exceeding €50 million, and/or have an annual balance-sheet total not exceeding €43 million.
The Department of Finance says this is “a relatively simple scheme” that has been designed with SMEs in mind. Minister for Finance Paschal Donohoe says at committee stage he is continuing to engage with representative bodies to ensure the scheme works as intended.
The department says “the incentive will provide for an advantageous tax treatment on any growth in share value between the date that the share options are granted and the date that the options are exercised, provided the qualifying requirements are met throughout the relevant period”.
Gains from the KEEP share options will only be taxed at the time of share sale and will be subject to capital gains tax, in place of the current liability to income tax, USC and PRSI on exercise. This allows a differential of 16 per cent or 19 per cent in the rate of tax payable by the employee on the discount received, as compared to the treatment of standard share-option gains.
The Small Firms Association (SFA) has welcomed the scheme but says it has several key concerns with the Finance Bill.
SFA director Sven Spollen-Behrens says KEEP, as it stands, is out of line with the operation of most start-up and high-growth companies adding this was “clearly not the intention of the department”.
Firstly, limiting the amount of shares that can be granted to an employee to 50 per cent of their annual emoluments is “totally at odds with the intended purpose of the scheme”, Spollen-Behrens says.
“As mentioned, the scheme is needed, as most start-ups struggle to attract and retain talent due to an inability to match upfront salary packages at larger firms. The differences between large firms and start-ups are usually quite significant. Eurostat’s Structure of Earnings survey, for example, shows that in Ireland the premium for managerial-level talent in large firms over small firms varies to between 35 per cent of gross salary (in firms with 250 to 499 staff) to 54 per cent (in firms with over 500 staff). This differential is by all accounts significantly larger for early-stage firms where cash is limited. In these circumstances, share-options form a central if not majority part of the remuneration package for key staff. The trade-off is that these key staff will take less than market wages in exchange for a stake in the future of the company – part of the risk in working for any new company. These are highly sought-after, globally mobile staff with significant market power. The Bill as drafted does not recognise this,” he says.
Dublin Chamber public affairs director Aebhric McGibney says that while he’d like to see this threshold of 50 per cent increased, he understands Government is trying to ensure it protects employees so that there isn’t a “salary sacrifice”.
“It’s so employers don’t pay you a euro and give you €49,999 worth of shares. Share options are a stake in a company that may succeed. From a company point of view, it’s asking employees to take a piece of the risk so while we understand there is some sort of overall limit, we’d like to see that limit changed over time, but it’s a first step,” he says.
Meanwhile, Spollen-Behrens says details within the current Bill will provide “questionable incentives” for company growth and will add a significant level of uncertainty for beneficiaries of the scheme.
The fact that firms must remain an SME “throughout the entirety” of any relevant period must be reviewed, he says.
“In the first instance, this leaves the beneficiary without any certainty as to whether they will be able to benefit from the KEEP scheme or not. To do that, they would have to know if the firms will have more than 250 employees, €50 million in Revenue or €43 million in balance-sheet assets over the relevant period. This will be an issue for otherwise qualifying firms near or at these thresholds. In addition, it leaves a company with key staff with a pecuniary interest in limiting the growth of the company below certain thresholds in the short-run,” he says.
Unworkable
ISME chief executive Neil McDonnell agrees the stipulation that a company must remain an SME “under EU definition” is unworkable. He is calling for this to be amended, along with several other aspects of the Bill.
He says an overall limit of €3 million that will apply on the total value of company share options which can be granted at any one time is too low and that a company’s success would preclude it from using the scheme.
However McGibney says that figure is comparable, allowing for sterling, to the UK scheme.
“The KEEP scheme parallels what they’re doing in the UK, so from our point of view it is competitive. For a lot of smaller businesses, the real challenge is how competitive they are, particularly in the context of Brexit, with the UK,” he says.
Tax director with BDO Ireland Mark Hynes says he sees some complications around company valuations.
He says SMEs, in a strong growth phase, are notoriously difficult to value, therefore they will require some guidelines around how to do this.
He points out it is not practical for already cost-sensitive SMEs to incur costs in valuing their company in order to determine the market value of the share options.
“I fully expect Revenue to issue guidance around this. It’s difficult to have a one-size-fits-all as we are talking about a range of SMEs from different sectors. If they had a process whereby SMEs could make a submission to Revenue to get pre-approval on the valuation, at least they have certainty before they begin the scheme in the first instance,” he says.
Another criticism lies in the fact that the scheme is not retrospective, but McGibney says if share options have already been granted by a company to a staff member then there’s no incentive required. “Whilst it would be nice to make it retrospective, our goal here is to get the biggest bang for our buck to encourage more companies to grant share options to key staff.”
McDonnell says the types of companies that can partake in the scheme is too restrictive, with several excluded, including those from the fintech industry, pharma companies and many professional-service companies, such as accountants, solicitors, business advisers, doctors and architects as well as the construction and building sectors, forestry, steel and shipbuilding sectors. Staff members must also be employed for at least 30 hours a week.
McGibney says Dublin Chamber will be monitoring the scheme closely.
“Our initial indications from talking to members are that it’s not a panacea. Not every firm in the morning is going to turn around and introduce share options for key staff – it wouldn’t work for every company but for that group of companies that are fast-growing and are having difficulty retaining key staff, it will help,” he says.