Finance Bill 2017 Global Mobility & Employment Taxes

Perspectives

Global Mobility, Immigration & Employment

Finance Bill 2017

Key Employee Engagement Programme

The Finance Bill contains details in relation to the new Key Employee Engagement Programme (KEEP) for SMEs which was unveiled in the budget. The scheme will be available for qualifying options granted during the period 1 January 2018 to 31 December 2023, subject to EU approval, which we understand is in advanced state. The main features of KEEP include:

  • The company must be an unquoted trading company with less than 250 employees and either an annual turnover of not more than €50m and/or an annual Balance Sheet total not exceeding €43m. 
  • The company must be Irish incorporated and resident or resident in an EEA State but carrying on a business in Ireland through a branch or agency.
  • Excluded trades include a broad range of financial activities, professional services and building & construction trades. 
  • Open to full time employees or directors who devote at least 30 hours per week for the company. However excludes any employee or director owning more than 15% of the share capital of the company. 
  • The option must be granted at market value to qualify for a tax deferral.
  • The value of options that can be granted to an employee or director cannot exceed €100,000 in any one year, €250,000 over a 3 year period or 50% of the individual’s annual emoluments in the year in which the option is granted. 
  • Provided the qualifying option is not exercised for 12 months post grant tax will be deferred until the point of sale, at which point Capital Gains Tax will apply.
  • The total market value of the issued but unexercised options of the company must not exceed €3m.

While the detail will be positively received by private Irish companies and their employees, there are a number of technical requirements that will need regular monitoring to ensure the options qualify for tax beneficial treatment. One of the main challenges in relation to KEEP will be the requirement for the company to carry out a valuation of the shares at the grant date to ensure that the options are granted at market value. There will be demand here for an approval process from Revenue to provide certainty to employers.

It will be important for companies to properly manage the scheme so as to ensure that they do not breach the overall limit of €3m in unexercised options or the individual employee limitations. The scheme requires annual reporting by 31 March following year end and failure to comply with this will mean the company is no longer qualifying and result in income tax on exercise of the options.

For more Finance Bill commentary visit our dedicated Finance Bill 2017 webpage.

PAYE Modernisation

In advance of the introduction of a real-time PAYE system under the PAYE modernisation project, a number of technical measures have been introduced with most taking effect from 1 January 2019 with a couple of exceptions.

In particular, PAYE is now moving from an earnings basis to a receipts basis with effect from 1 January 2018. For most employees, this will have no effect. However, for cross border workers this is a significant change and the timing of introduction may create challenges for employers of such workers. It will potentially create planning opportunities for those mobile workers.

In addition, where PAYE is not operated correctly, there will now be a legislative basis from 1 January 2018 to recoup these taxes on a grossed-up basis. This places a potentially significant cost for errors by employers with regards to PAYE.

Other areas

The bill issued today confirms the reduction of the USC rates of 2.5% to 2% and 5% to 4.75%.  It also confirms the increase in the band ceiling for the 2% rate by €600 to €19,372. Unfortunately the higher rate of 8% is unchanged which means the marginal rate of tax remains at 52%. These changes do little to address the progressivity of the system and while the Minister announced in the budget a working group to consider the merger of PRSI and USC it is unclear if or when we will see the marginal rate and progressivity addressed. Although all workers will be affected by the adjustment in USC rates the ability of Ireland to attract talent and remain competitive so as to capitalise on the opportunities presented by Brexit will not be improved as a result of the retention of a 52% marginal rate.

The National Mitigation Plan on climate change includes a pledge to effectively electrify the entire 2 million-strong Irish car and van fleet by 2030. In keeping with this policy the bill introduces a 0% benefit-in-kind rate for electric vehicles for 2018. In addition there is an exemption, which is not limited to 2018 as yet, from benefit-in-kind for electricity used for such vehicles where all employees and directors can avail of the facility. The Minister stated in the budget speech that this is intended to allow for a review of benefit-in-kind on vehicles with a view to informing decisions for the next budget. We await with interest the outcome of this review. The UK moved to an emissions based system in April 2002 with significantly lower benefit-in-kind rates for lower emission cars and a 0% benefit-in-kind rate for electric cars applied for a 5 year period from 6 April 2011 up to 5 April 2015.  While Finance Act 2008 set out an emissions based system for Ireland it did not propose to reduce the benefit-in-kind rate for lower emission cars but proposed increased rates for those with higher emissions. This legislation is subject to Ministerial Order and has not to date been introduced.  It is hoped that the proposed review allows for an extension of the 0% rate for electric vehicles. 

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