Global Mobility, Immigration & Employment Taxes
The Key Employee Engagement Programme for SMEs was announced in Budget 2018. This scheme allows employees to defer the tax on the exercise of share options until the point of sale whereby the gain is taxed at Capital Gains Tax rates instead of Income Tax rates.
In Budget 2019, the Minister acknowledged that the take up of the scheme by SME employers was less than expected. This was due to the legislation governing this scheme proving to be unworkable for many SMEs. In an effort to increase the take up of the scheme to assist SMEs attract and retain key staff, the Minister announced the following amendments to some of the qualifying conditions:
- the ceiling on the maximum annual market value of share options that may be granted is increased to 100% of the employee’s emoluments (up from 50%),
- the three year limit will be replaced with a lifetime limit and
- the overall value of options that may be awarded per employee will be increased from €250,000 to €300,000.
The Minister also made some small changes in the context of income tax. The standard rate tax band is increasing by €750 to €35,300 for single individuals and to €44,300 for married one earner couples.
Two measures were announced relating to the Universal Social Charge (“USC”) : the increase in the band ceiling for the 2% USC rate by €502 to €19,874 and the reduction of the 4.75% USC rate to 4.5% which applies to income in the €19,875 – €70,044 band. Unfortunately the higher rate of 8% is unchanged which means the marginal rate of tax remains at 52%, among the highest in the OECD.
As signposted in last year’s Budget, the National Training Fund levy will increase from 0.8% to 0.9% from 1 January 2019. This is in effect an increase in employer’s PRSI from the current rate of 10.85% to 10.95%. This rate will increase by a further 0.1% in 2020 to 11.05%.
The Minister also announced that the 0% benefit-in-kind rate introduced in last year’s Budget for electric vehicles is being extended for a period of 3 years. Interestingly, a cap is being introduced on the Original Market Value of the electric vehicle of €50,000, meaning that high-end electric vehicles will be subject to the benefit-in-kind rules. More details will be made available in the Finance Bill which will be announced on 18 October 2018.
An item not referenced in the Minister’s speech is the additional tax yield of €50m which is expected in 2019 from the implementation of Real-Time payroll reporting on 1 January 2019. We assume this relates to items previously not processed correctly being pulled into the PAYE net.
It is welcomed that the Minister has taken some action to make the KEEP scheme more attractive to employers by increasing the maximum annual market value of share options that may be granted to 100% of the employee’s emoluments. However, this is still not in line with the equivalent UK Enterprise Management Incentive scheme which does not restrict the award to a percentage of an employee’s emoluments.
In a puzzling move, the replacement of the limit of €250,000 worth of share options over 3 consecutive tax years with a lifetime limit of €300,000 will make the scheme less attractive to SMEs.
The Minister did not make any announcements regarding some of the other conditions which have proved to be the main blockers to take up of the scheme; namely the broad definitions of companies excluded from the KEEP scheme and the shares needing to be held in the employing company rather than the parent company.
It was also hoped that the Minister would announce a mechanism to agree the valuation of a company with Revenue and thereby reduce the current administration costs for SMEs. We await next week’s Finance Bill to see if any further measures are announced to address these issues. As things stand, we are not clear that the new measures are positive.
The Minister has again this year not taken the opportunity to announce any broader changes to the taxation of share schemes, which will be disappointing for domestic and foreign MNCs who do not meet the SME thresholds. However, it would be hoped that there would be a continued focus by the Government on the area of reward in 2019.
The changes to USC and income tax will be positively received. However, at 52%, we still have one of the highest marginal rates in the EU and OECD and it is disappointing that a roadmap has not been announced to demonstrate to workers when this burden will be reduced. Despite the many references to Brexit proofing the economy in the Minister’s speech, there were no references to changes to the Foreign Earnings Deduction or the Special Assignee Relief Programme but administrative changes may potentially be introduced in the Finance Bill. Given that, in the Brexit context, most companies have chosen to increase their presence in a number of locations, now is the time to ensure we are competitive in attracting the bulk of the talent to Ireland, and capitalise on this important opportunity from a jobs creation perspective.
The increase in expected tax yield from the introduction of Real-Time payroll reporting on 1 January 2019 is a timely reminder to employers that they must continue to prepare for this significant change in their payroll processes and procedures between now and the end of 2018. Revenue have been proactive in their communications on this topic. We expect further guidance from Revenue on a number of complex payroll areas such as shadow payrolls affecting multinational employers in Ireland and non-cash benefits such as equity remuneration. We are also hopeful that the upcoming Finance Bill will provide greater clarity around the penalty regime for payroll corrections in the context of shadow payrolls and non-cash benefits where accurate information is not available in real-time.