While some of the changes to the Key Employee Engagement Programme (“KEEP”) announced as part of Budget 2019 are to be welcomed, issues which have led to a low uptake of KEEP incentive programmes by SMEs to date still remain.
What is KEEP?
KEEP is a share-based remuneration incentive to facilitate the use of share-based remuneration by unquoted SME companies to attract key employees. Legislation in respect of KEEP was introduced as part of the Finance Act 2017. The KEEP incentive programme is designed to support SMEs in their effort to attract and retain “qualifying individuals” ie full time employees or directors of a company who work at least 30 hours per week for the company. The KEEP incentive is available for qualifying share options granted between 1 January 2018 and 31 December 2023, provided that the company is a SME at the time of grant of the options.
No employee or employer PRSI is payable on gains realised on the exercise or disposal of KEEP share incentives. Gains arising to employees on the exercise of KEEP share options will, provided certain conditions are met, only be liable to Capital Gains Tax on disposal of the shares. This is in contrast to the income tax, USC and employee PRSI which would normally apply on gains arising on the exercise of share options.
Changes Introduced by Budget 2019
There are a number of conditions which must be satisfied in order for share options to qualify for the KEEP incentive programme. While KEEP came into effect in January 2018, take up of the scheme by targeted SMEs has been minimal due to the restrictions imposed on the scheme. Three separate measures have been introduced by Budget 2019 with the intention of increasing the attractiveness of KEEP to SMEs:
- the ceiling on the maximum annual market value of share options that may be granted to an employee is now equal to 100% of the employee’s salary (up from 50%);
- the overall value of share options that can be granted to employees under the scheme has been increased from €250,000 to €300,000; and
- the three-year limit has been replaced by a lifetime limit;
Analysis of Budget Measures
The changes introduced by Budget 2019 have given rise to some confusion as the limits at (1) and (2) above now apply to an employee’s lifetime rather than to a three year period which appear to impose further restrictions on employees in terms of the benefits they can avail of under a KEEP incentive programme.
Although changes to the ceiling on the maximum annual market value of share options and the overall value of share options that can be granted to employees under the scheme are welcome, these changes do not go far enough to address other obstacles to the KEEP incentive programme. Budget 2019 does not address the exclusion of Fintech SMEs from availing of KEEP. Similarly, the biggest obstacle to KEEP to date has been the fact that the total market value of issued but unexercised share options that can exist per SME must not exceed €3million and despite the measures introduced in Budget 2019, this remains a significant obstacle to high-potential start-ups and other SMEs in Ireland.