In October 2017, the finance minister Paschal Donohoe unveiled a new Key Employee Engagement Programme – Keep for short.
At the time, the minister explained that the scheme was designed to support small and medium enterprises in their efforts to attract and retain key employees in a competitive international labour market. The scheme would provide for an advantageous tax treatment on share options, with Donohoe saying it would help SMEs “provide key employees with a financial incentive linked to the success of the company”.
In theory, it was a great idea and should have helped smaller firms to recruit and retain employees by taxing their gains as capital at 33 per cent instead of as income at up to 52 per cent.
In practice, however, it has been a disaster. As the entrepreneur and investor Brian Caulfield put it in a column in The Currency last October: “Share options are a key tool in achieving this. Again, this is an issue that was recognised by government several years ago with the introduction of the Keep share option scheme, which has been amended subsequently. Unfortunately, Keep is fatally flawed in several respects and take-up to date has been minimal.”
The figures bear this out. The scheme benefited fewer than ten employees in 2019. Figures from the Department of Finance said that due to its low take-up, the scheme cost the state just €78,000 in 2019 and €186,000 in 2021. In a recent submission to government, consultants KPMG said the scheme cost €600,000 in 2021, well below its budgeted cost of €10 million.
The reasons for the low pick-up are multi-faceted, ranging from cumbersome paperwork to non-standardised paperwork. Put bluntly, the scheme is too complex to provide any real benefit.
The government knows this, of course. Changes were proposed back in 2019 to improve its attractiveness including opening the scheme to employees who work part-time and to those who switch employment between companies that belong to the same group.
However, the scheme requires state aid approval from the European Commission. This has yet to be granted, meaning that the 2019 changes have yet to be implemented. “The intervention of the Covid-19 pandemic has had a significant impact on progress in this area. As of today’s date, it has not yet been possible to commence the relevant provisions of the legislation,” according to a consultation paper published by the Department of Finance earlier this year.
Despite this, the government has commissioned another review with the aim of announcing more improvements to the scheme in this year’s budget.
According to the department: “In addition to the aim of having an effective measure in place, the challenges facing young SMEs including after-effects from the Covid-19 pandemic, skills shortages which are particularly acute in certain sectors, and input cost increases, not least on the energy front, also provide an important context and rationale for the review.”
So, what can we expect? In its submission, KPMG said “a more flexible scheme is needed to help level the playing field for smaller domestic businesses struggling to attract and retain key workers and who cannot match the salaries paid by larger employers”. The government, meanwhile, says that Keep should “compare favourably” with similar schemes in other countries, while operating in “a cost-effective manner from an Exchequer perspective”.
The Tánaiste Leo Varadkar gave his views on the issue in his interview with Rosanna at the weekend. “The take-up has been disappointing so the Department of Finance is doing some work at the moment with a view to making changes in the forthcoming Finance Act that would make that better,” Varadkar said. “A lot of those small companies find it hard to hold on to talent and it is through share options and so on that they can retain people.”
While Varadkar did not give the specific details of a revised Keep scheme, as it isn’t fully decided upon, he said the objective is to make it more attractive and to make sure more companies qualify.
Hopefully it will work in its new incarnation, as a functioning share option scheme is crucial for so many young companies.
For example, how do Bay Area start-ups prise well-paid engineers away from the likes of Google? A big thing they do is offer them equity. US companies make much greater use of stock options than Irish ones.
As I wrote before: “So a start-up might offer a Google engineer a 70 per cent salary cut, plus options on one per cent of the business. If, in five years, the start-up goes bust or gets sold for $10 million, the engineer will have lost out. If the start-up gets sold for $100 million, they’ll come out ahead. And if it gets sold for $1 billion, they can retire.”
However, awarding options here for young companies is too difficult. This is preventing them from using the scheme, but also leading to them relocating elsewhere. This results in murky agreements that can mean employees don’t get good value [in the event of a company being successful]; as well as high solicitors fees, which dissuades start-ups from setting schemes up.
In Stephen Kinsella’s interview with Shane Curran last year, Curran made the point that exciting Irish companies are incorporating in the US, not for tax purposes, but to take advantage of the smooth paperwork over there:
“US investors and even European investors have all the paperwork ready to go. Lawyers are very, very quick and streamlined at doing transactions with Delaware companies. And I think people need to appreciate that the Delaware thing isn’t anything malicious at all. It’s not tax structuring. It’s not tax avoidance. It’s purely just for streamlining the transactions.”
The Keep scheme is currently under review again. This time, however, the changes need to be wide-ranging and designed to ensure the scheme is simple and effective. And, unlike with the last review, the changes need to be implemented.