Has Minister earned his KEEP with amendments to the Finance Bill?
The Finance Bill is nearing its final stages before it becomes law and the Minister for Finance has proposed that additional amendments to the bill be made. These amendments came at report stage and include such items as diverse as a tax treaty with Kazakhstan to a refund initiative of stamp duty where land is used for residential development.
That said, it's clear that the welfare of the employee is front of mind - in that the Minister has proposed tax relief for certain expenditures by employers on equipment and buildings used for fitness centres and childcare facilities.
The employment theme will be developed below because the Key Employee Engagement Programme (KEEP) had been announced in this year's budget and was keenly awaited by many.
KEEP has come in for some criticism since the original bill was published. This is a share-based remuneration package for employees of certain SME companies. Minister Paschal Donohoe, pictured, had flagged earlier in the Finance Bill process that he would bring about further amendments to the programme.
Under KEEP the employee would only suffer Capital Gains Tax (CGT) at 33pc on the disposal of the shares acquired, marking a potentially substantial saving on income tax (Small print: Subject to EU approval). One of the main criticisms to the original version was the extent to which it did what it said on its tin. It didn't.
There's an anti-avoidance provision in the relief which says it won't apply where a company adopts it with a purpose other than to "recruit or retain employees" in the company. It doesn't get clearer than that, but many have argued that KEEP's theory and reality were very different.
The Minister's Report Stage amendments seek to make it substantially better than it was. As Mel Gibson said in 1987's Lethal Weapon before shooting a smiley face into a practice target "Observe…"
As originally proposed, a qualifying KEEP company had to remain an SME and the total market value of its issued but unexercised options couldn't exceed €3m throughout the entire period between grant and exercise of the option by the employee. Basically, an SME is made up of enterprises employing fewer than 250 people with an annual turnover not exceeding €50m, and/or an annual balance sheet total not exceeding €43m.
Therefore a company would have had to keep a constant watching brief on its numbers and let the employees know when their KEEP options no longer qualified. The purpose of the law is to "recruit and retain" staff and the companies could only do that if they could "protect and serve" their employees by advising them of adverse tax consequences. Put another way, employees would have to know when what they signed up to may be put in harm's way. Such a level of uncertainty doesn't fly when it come to an employee's remuneration package.
That was clearly recognised. The report stage amendment seeks to fix this by saying that these tests have to be met at the date of grant of the option so if the company subsequently moves into Facebook levels of success then the employees still get to KEEP the benefits of KEEP. The company's and employee's mutual success objectives are retained.
Don't get me wrong, the KEEP isn't perfect - what is? - for a number of reasons. Right now, these companies already exist and employ people who may have already received options from their employer. Unfortunately this new regime won't apply to existing options (granted before January 1 next) and gains arising on their exercise will be subject to income tax.
Take, Chester, an employee in a pharma startup. He received options this year and all going well he may get additional options next year. When KEEP gets approved by the EU then some of his options will benefit from the CGT rate of 33pc and others will suffer the higher marginal rates of income tax. Chester will have different pieces of paper seeking to remunerate his efforts in the same way but with differing tax results.
Prior to the report stage amendments, Chester's options wouldn't have qualified under KEEP because a pharma company was an "excluded" professional services company; engineering companies were similarly excluded.
The report stage amendment ensures that such companies can qualify so that pharma and the software sector can benefit.
But many others remain on the dark side of the relief: for example; medical, dental, architectural, accountancy and taxation companies are among many of the relief's exclusions as a professional services company.
Other activities, eg financial services, land dealing, forestry are also excluded activities. So there's a list that needs to be checked (maybe twice) before concluding on whether your company's share based remuneration scheme is included.
The KEEP regime allows for an employee's profits arising on the exercise of the qualifying option to be taxable at the lower CGT rate of 33pc but that's still one of the highest rates in the OECD. That matters. It can affect investment activities generally.
As I've previously written the rate of CGT was 20pc back in 1998 having decreased from 40pc before that. When the rate dropped from 40pc in 1998 its yield increased substantially and we should think about this again given our improving economic circumstances.
The rate is clearly something that weighs on the minds of the Taoiseach's party. In its recently published document, 'Building a Republic of Opportunity', it lists amongst some of its priorities to 2025 to bring about a medium term tax strategy that consistently raises the point at which people on modest income reach the top rate of tax in every budget, reducing the marginal income tax rate as well as reducing the Capital Gains Tax rates. Interestingly, it also suggests the possibility of extending the KEEP regime to larger companies.
The amendments discussed above are welcome but not perfect. The changes I suggest above may seem like asking for the moon but that matters. I think JFK put it best: "We go to the moon in this decade and do other things not because they are easy but because they are hard…", We've done hard before; we got this.
Tom Maguire is a tax partner in Deloitte.
Sunday Indo Business