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The devil will be in the detail, say proponents of share options.
A new Key Employee Engagement Programme (KEEP) has been revealed by the Minister for Finance and Minister for Public Expenditure and Reform Paschal Donohoe, TD, as part of Budget 2018.
“Research has shown that employee financial participation can be effective in increasing competitiveness and helping companies to attract and retain staff in a competitive labour market,” Donohoe said.
However, the Minister was scant on detail, and employers and employees will have to wait until next week when the finance bill will be published for more information.
“I am announcing a new Key Employee Engagement Programme, or KEEP for short, to support small and medium enterprises in their efforts to attract and retain key employees in a competitive international labour market, by providing for an advantageous tax treatment on share options.
“KEEP will allow small to medium enterprises to provide key employees with a financial incentive linked to the success of the company.”
The currently punitive system for employee share options means that employees can be hit with hefty tax bills on share options, or in the event of a business being sold.
Indigenous tech companies are struggling to compete with multinationals in terms of pay, perks and options.
Clarity on the issue and the creation of a fair and equitable system that doesn’t punish workers unfairly has long been called for.
Gill Brennan, CEO of the Irish ProShare Association, described the move as a welcome step in the right direction for employee participation in business.
“In relation to how it will be implemented, that is the great unknown because the Minister didn’t say very much more about how it would function.
“We are glad that the Minister has acknowledged that participation increases productivity growth and helps companies retain key staff. The indigenous business sector in Ireland forms the backbone of the company and accounts for 68pc of employment.
“With the huge focus on social issues, from housing to health, we are glad the Minister found room to address the share options issue. But the devil will be in the detail.”
Current share options set-up is grossly unfair to employees
Brian Caulfield, managing partner at Draper Esprit, is one of the most accomplished tech founders and venture capitalists in Ireland. He also gave the KEEP scheme a cautious welcome.
“Not only is the current taxation excessive but also, the whole structure of the system when it comes to share options is unfair.
“I hope that the new scheme won’t be another scheme along the lines of the previously approved share options scheme, which was essentially useless.”
Caulfield warned that under the current scheme, share options in an early-stage company are subject to the full income tax.
“But it is much worse than that. If you had share options worth €1m in a company being acquired, under current trends, acquirers will pay you in four tranches over four years because they want to retain you. On day one, you would get the first €250,000 but you would also be hit with a tax bill right away for €520,000. Right away, you are being punished and it is grossly unfair.”
Caulfield said that because of the realities of business, not all acquisitions or acqui-hires go according to plan. “If you didn’t get the remaining €750,000 because the acquirer goes bust, you leave or you get fired, in that case your loss is treated as a capital loss under capital gains tax rules and you are not entitled to a refund of the tax paid.
“You could offset the €750,000 against a potential gain in the future, but lightning doesn’t necessarily strike twice.”
Caulfield said it has been several years since a consultation process began on the share options and capital gains tax situation.
“Hopefully, next week’s finance bill will have some good news for employees and awarding share options in Irish businesses.”
