Boost for Ireland’s start-ups as income tax is removed from share options

20 Oct 2017

Image: GarageStock/Shutterstock

KEEP scheme will prove to be an important lever for companies to reward and retain staff as war for tech talent escalates.

Employees of SMEs and start-ups can no longer be penalised for receiving share options, according to new provisions in the Finance Bill following Budget 2018.

This overcomes a critical hurdle in the war for talent as small companies can now offer shares to retain workers who might be lured elsewhere by attractive benefits and perks.

‘Employees are the backbone of any business. Rewarding shares says “we value you and the contribution you have made to the company”’

Critics of the Irish State’s backward tax rules for entrepreneurs have been lobbying hard for years for changes in the taxation of share options.

Details in the new Key Employee Engagement Programme (KEEP) revealed in yesterday’s (19 October) Finance Bill, show that owners of businesses can reward valued staff members with shares in the company exempt of tax, universal social charge (USC) and PRSI.

However, when the employee disposes of the shares – such as in the case of an acquisition – they would still be subject to 33pc capital gains tax (CGT).

Share options key to staff retention

The move is, nevertheless, a step in the right direction because, until now, if a company tried to reward an employee with shares in the business, that employee would instantly have to come up with the cash to cover the rate of income tax.

The KEEP initiative brings Irish tax rules on share options in line with the UK’s EMI (Enterprise Management Incentive) scheme.

However, Ireland is still behind the UK when it comes to CGT. Under existing CGT rules, the tax is 10pc only for the first €1m of a transaction, and the 33pc is applied for remaining amounts. In the UK, however, under the EIS (Enterprise Investment Scheme), entrepreneurs pay just 10pc tax on the first €10m they make.

“It is what we expected it to be,” said Gill Brennan, CEO of the Irish ProShare Association. “KEEP replicates the EMI scheme in the UK, the only difference is it doesn’t provide entrepreneurs relief to reduce CGT.

“We still need clarity around where CGT will be applicable. For example, will it apply to ever type of disposal of a share, such as when a company is taken over.

“The key thing here is there is no longer income tax applied, or USC or PRSI, when an employer rewards a loyal, valuable employee with shares. The only time a tax liability will be applied is on disposal of those shares.

“This means companies can now focus on keeping their best talent tied into the company. For employees, it means they can receive dividends when profits are shared out.

“Before this, if an employer offered the same employees share options they would be hit with income tax, PRSI and USC penalties.

“KEEP is a way to maintain and keep employees in a company, retain the best talent by offering them options and they won’t have to pay tax on it until they vest that option.”

Brennan said that now there is a job of education to be done educating SMEs and start-ups about KEEP and this should involve Enterprise Ireland and the Local Enterprise Offices (LEOs).

Brennan pointed to the UK Employee Ownership Index – which measures performance of companies that have 3pc or 10pc of their issued share capital held for the benefit of employees – which has outperformed the FTSE index consistently since the 1990s.

“The index of companies that have rewarded 3pc of share capital to employees has shown growth of 27pc on average since 2003 while the 10pc index has shown average growth of 15pc in the same period,” said Brennan.

Ultimately, Brennan said, for start-ups competing to retain talent in the face of enticements from larger tech multinationals, KEEP represents a victory.

“It is great news for companies that don’t have a lot of spare cash to still be able to show employees how much they value their workers.

“Employees are the backbone of any business. Rewarding shares says ‘we value you and the contribution you have made to the company.’”

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years