Deloitte submission on the Key Employee Engagement Programme (“KEEP”)

On 27 May 2022, as part of the preparations for Budget 2023 and Finance Bill 2022, the Tax Division of the Department of Finance undertook a public stakeholder consultation on the Key Employee Engagement Programme (“KEEP”).

KEEP is a tax incentive for SMEs to support the use of share options as a form of staff remuneration. It is currently due to expire on 31 December 2023. The purpose of this public consultation was to seek an update on the views of stakeholders as to how they currently view the operation of the scheme.

Submissions closed on 17 June and Deloitte was pleased to provide insights to the selected Department questions raised in the consultation.

Executive summary of observations and recommendations

• The introduction of KEEP was heralded as a welcome move to incentivise Small & Medium-Sized Enterprises (“SMEs”) to retain and reward staff in a tax efficient manner. KEEP was intended to bring Ireland into line with a number of other jurisdictions in order to assist SMEs in competing with publicly quoted companies who have the ability to use share-based remuneration to attract talent. However, KEEP in its current design has unfortunately not provided SMEs with an easy-to-implement and cost-effective way to offer shares to employees.
• The various conditions, both at implementation and during the relevant period, result in increased costs for the employer company, including professional costs, which we believe are prohibitive for SME companies who are considering implementing KEEP.
• Currently companies are facing challenges of cost increases coupled with a constrained labour market and these businesses need to consider alternatives to cash remuneration. The SME sector, and in particular start-up companies with limited cash resources, require a competitive tax effective share scheme to allow them to compete with domestic and international MNCs to attract and retain key employees in the challenging labour market.
• The main positive feature of KEEP is the deferral of the tax until point of sale when the employee has cash resources to pay the tax liability. The programme also envisages that CGT will apply at sale, but we have recommended that changes be made to ensure that this remains the case where there is no third-party sale or listing on a relevant stock exchange.
• A major challenge for SMEs is the various market valuation criteria that must be met and monitored at grant and throughout the life of the programme. In order to have certainty in relation to these conditions being met professional valuations would be required, often on an ongoing basis, which are typically costly. To reduce these costs we have recommended that Revenue issue guidance on the appropriate valuation methodologies that can be used by SME companies that adopt KEEP and that this guidance includes a “safe harbour “approach.
• We have also recommended that changes be made to limit the companies that are excluded from KEEP. These excluded companies will be at a major disadvantage to companies that have qualifying share schemes, so it is important that exclusions only apply where there is a genuine need and where the exclusion will not affect Ireland’s strategy for growth.
• The current legislation and related Revenue guidance only allow relief to be claimed by the most simple of group structures. However, in our experience, very few SME group structures are this simple. Overall, it would be significantly simpler and more in line with commercial reality if KEEP options could be granted in either the qualifying company or in a company which controls the qualifying company irrespective of whether that parent company operates only as a holding company as currently defined within Section 128F. Our recommendations in relation to this are set out in the submission.

Read our full submission here.

Next steps

Responses received will help to inform decisions of the Minister for Finance on further possible enhancements to the operation of the scheme in the forthcoming Finance Bill.