Key Employee Engagement Programme (KEEP)

Introduced in the Finance Act 2017, the Key Employee Engagement Programme is a share option scheme designed specifically for the employees and directors of qualifying small and medium sized enterprises (SMEs). Changes were subsequently made to the qualifying conditions for KEEP in 2019.

Introduction

KEEP was designed to support SME and start up companies with growth potential in the recruitment and retention of key employees in a highly competitive labour market. The aim was to allow these employees to participate in the growth of the value of a company in a tax efficient way.

Its key advantage is that gains realised on the exercise of the share option will not be subject to income tax, Universal Social Charge (USC) or Pay Related Social Insurance (PRSI). Ordinarily , tax is payable by an employee when a shares are acquired on the exercise of the share option but under KEEP, a Capital Gains Tax (CGT) charge will only arise upon the subsequent disposal of the shares . The scheme applies to share options granted on or after 1 January 2018 and before 1 January 2024.

What are the requirements for KEEP?

There are a number of requirements in respect of who can qualify for KEEP.

To be a “qualifying company”, the company must be incorporated in Ireland or another EEA State, be resident in an EEA State and carry on its business in Ireland through a branch or agency

The key provision is that the company must be an unquoted SME. This is defined as an enterprise which has less than 250 employees and an annual turnover not exceeding €50 million and/or an annual balance sheet total not exceeding €43 million. Companies which carry on certain “excluded activities”, including building and construction and financial activities, are excluded from the scheme as are companies quoted on certain stock exchanges .

Another advantage for employers is that KEEP options do not need to be granted to all employees and may only be restricted to “qualifying employees”.

A qualifying employee must throughout the exercise period:-

1. be a full time employee or full time director of the qualifying company; and

2. devote substantially the whole of his/her time to the service of the company, with a minimum requirement of at least 30 hours per week.

The period within which the options can be exercised is in general a period commencing 12 months after the date of grant of the option.

Changes to the Definition of a “Qualifying Share Option”

There are also restrictions on the type of share options which qualify. The definition of a “qualifying share option” changed in 2019. The total market value of the share options which may be granted to an employee or director must not exceed:-

1. €100,000 in any one year of assessment;

2. €300,000 in all years of assessment; or

3. 100% of the annual emolument of the individual in the year of assessment in which the qualifying share option is granted.

The total market value of issued but unexercised qualifying share options of a company also cannot exceed €3 million at the date of grant.

Shortfalls in KEEP

Whilst the scheme offers advantages to SMEs in the retention of one or more key employees, a number of shortfalls have been identified.

The nature of start ups means that when the company begins life, options are granted to employees to compensate for what may be below average salaries and so the restriction that options cannot exceed 100% of an individual’s annual pay may make it difficult to grant options at an early stage of any meaningful value should employees wish to avail of the scheme. However, this has been increased from a restriction that options could not exceed 50% of an individual’s annual pay and so there is now more scope for share options of a greater value to be granted than before.

Notably however, the requirements for qualifying employees also cut off individuals who may be of enormous benefit to a start up, by acting as an advisor or consultant, as is common for new companies, and it limits the company from providing such early stage advisors with the natural incentive of share options.

Disposal of Shares

Disposal of shares made under the scheme are regarded as capital disposals and so are liable to CGT.

One strategy which may be of further benefit to qualifying SMEs and their employees would be to combine the KEEP scheme with the “Entrepreneur Relief” (ER), introduced by way of the Finance Act 2013 and revised under the Finance Act 2015. The relief provides that a 10% rate of CGT will apply in respect of chargeable gains rather than the normal rate of 33%.

Assets qualifying under ER include shares held in a trading company, and must have been owned by the individual for a continuous period of three of the last five years prior to the disposal of the shares. Those seeking to rely on this relief should be aware that to qualify, the individual must own a minimum of 5% of the shares in the qualifying company.

Conclusion

Whilst there are potential downsides of KEEP, the introduction of the scheme represents a departure in taxation policy in favour of building supports for the SME community to retain key employees past the initial start up phase. The changes in the definition of qualifying share options recognise the limits on the scheme and may now encourage a higher take up of the scheme. Where possible, combining the advantages of KEEP with the Entrepreneur Relief could result in substantial gains for directors and employees.

For further information on this topic, please contact Laura Graham at lgraham@reddycharlton.ie