You can KEEP it: Hardly a Budget for entrepreneurs

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Once again start-ups and entrepreneurs barely got a nod in a Budget that was meant to be a buffer against Brexit.

At times you wonder if the mandarins in the Department of Finance imagine start-ups, entrepreneurs and SME owner-managers to be strange beasts that clambered up the beach from the blue lagoon.

At a time when Ireland should be doing the most to boost SMEs and entrepreneurs, Budget 2019 was a damp squib indeed.

‘What are they afraid of? That the SME and start-up community might grow, and that employees will have greater take-home pay?’
– GILL BRENNAN

While pitched as a Brexit Budget, Budget 2019 failed to tackle areas where entrepreneurs’ UK counterparts are better supported and incentivised such as more inviting investment schemes and employee share ownership schemes.

In Budget 2019 there were no changes made to the unfit-for-purpose capital gains tax system. Not one mention of it.

Not only that, but at a time when the seed funding market in Ireland has imploded and when venture capital funding has reached a dangerous precipice, not one effort was made to fix the BES-EIIS (Business Expansion Scheme-Employment Incentive and Investment Scheme).

An amendment to the Finance Act in November last year prevents friends and families from participating in BES-EIIS rounds, often the only source of seed funding for Irish start-ups. In Ireland, the total amount invested under BES has fallen by 70pc since 2011.

This was not addressed in Budget 2019 at a time when the options for funding start-ups are drying up. Recent figures from the Irish Venture Capital Association showed that Irish venture capital funding in the most recent quarter fell for the first time since 2011, while seed funding for early-stage start-ups crashed almost 40pc.

Unnecessary obstacles will only reinforce the failure of the KEEP scheme so far

The failure of the Key Employee Engagement Programme (KEEP) – which has yet to incentivise a single employee on the island of Ireland – was acknowledged by the Minister for Finance Paschal Donohoe, TD.

“I am aware that take-up has been less than expected and I have decided to take early action now,” he said.

In Budget 2019, Donohoe increased the ceiling on the maximum annual market value of share options that may be granted to 100pc of salary and replaced the three-year limit to a lifetime limit, increasing the overall value of options that may be rewarded to employees to €300,000.

The thing is, unlike civil servants who can look forward to gold-plated pensions on retirement, most employees of SMEs have no such benefits.

The purpose of KEEP is to enable employers to retain employees and attract and incentivise new ones. However, according to Gill Brennan of the Irish ProShare Association, KEEP even in its expanded format is not fit for purpose. While the increase on share options to 100pc of an employee’s salary was welcome, changing the three-year limit to a lifetime will cause confusion because it creates an obstacle rather than remove one.

She said there was no mention of guidance or safe harbour around valuing a company, no mention of the fintech exclusions that prevent companies adopting KEEP, and no mention of the €3m market value limit on a company, which is a “significant obstacle for high-growth start-ups and SMEs.”

“The Government and their mandarins seem to have an aversion to any type of share ownership in the private sector. They are in a bubble. Unless it is a semi-state ESOT [employee share ownership trust] they have no idea. Budget 2019 was underwhelming in this regard.

“The positive is that KEEP is still on the radar in the Department of Finance. The key point we are making is that not one SME has implemented KEEP. There are around 30 companies that have started but so far not one employee has gotten their hands on a KEEP share option.

“In the grand scheme of things, [the fact that] 96pc of the Irish economy is driven by the SME sector and only a handful have even looked at KEEP is disappointing but not surprising because of the obstacles. The problem is this creates confusion for a scheme that should be so easy to implement.

“Why try and reinvent the wheel? There is nothing wrong with saying it works in the UK. We have a similar legal structure, they just need to convert it to Irish law. What are they afraid of? That the SME and start-up community might grow, and that employees will have greater take-home pay?”

Brennan added: “They called it a Brexit-buffering budget but, to be honest, it only buffers the multinationals. They cannot ignore the fact that we have an SME sector that needs support.”

Another measure announced was the extension for a further three years of Three Year Start-up Relief, which provides corporate tax relief for profit-making start-up companies that create and maintain jobs.

But, to avail of this, start-ups need to be able to get to a stage where they are profitable. As Brennan concludes: “How can you make something profitable if you cannot attract or retain the staff? The foundation of any business is its staff. And if the Government don’t realise that then they are banging the wrong drum.”

Editor John Kennedy is an award-winning technology journalist.

editorial@siliconrepublic.com