Global Mobility & Employment taxes
Finance Bill 2018
Key Employee Engagement Programme
The Key Employee Engagement Programme (KEEP) for SMEs was introduced in Finance Act 2017. This scheme allows employees to defer the tax point on share options from exercise to the point of sale whereby the gains is taxed at Capital Gains Tax rates instead of Income Tax rates.
In Budget 2018, the Minister acknowledged that the take up of the scheme by SME employers was less than expected. The lack of take up is due to the legislation governing the 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 talent the Minister announced changes to KEEP in Budget 2019. The Finance Bill confirms these changes:
- the ceiling on the maximum annual market value of share options that may be granted is increased to 100% of the employees emoluments (up from 50%) but subject to an overall lifetime cap;
- the three year limit of €250,000 has been removed and replaced by a lifetime limit; and
- the overall value of KEEP options that may be given to a director or employee is €300,000.
Implementation of these changes remains subject to Ministerial Order.
It is welcomed that the Minister has taken some action to seek to make the KEEP scheme more attractive to employers by increasing the maximum value of share options that may be granted to an employee in one year to 100% of the employee’s emoluments. However this is still not in line with the equivalent UK scheme which does not restrict the award to a percentage of an employee’s emoluments.
The replacement of the 3 year limit of €250,000 with a lifetime limit of €300,000 is a puzzling move and will make the scheme less attractive to SMEs.
Disappointingly the Finance Bill does not contain any additional measures in relation to KEEP. The Minister has not addressed some of the other conditions which have proved to be the main blockers in relation to the take up of the scheme; namely the broad definition of companies excluded from KEEP and the need for the options to be over shares in the employing company rather than the parent company.
It was also hoped that the Minister would introduce a mechanism to agree the valuation of a company with Revenue and thereby reduce the current administration costs for SMEs. Overall it is difficult to see the changes introduced leading to an increased take up of the scheme.
Yet again the Minister has 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. One such area of consideration would be to remove the application of USC and PRSI from Revenue approved share plans to encourage greater take up of these all-employee plans. It is hoped that there would be a continued focus by the Government on the area of reward in 2019.
Revenue’s real-time payroll reporting initiative, known as PAYE Modernisation, is addressed in the Finance Bill to the extent that the legislation is being updated to refer to the new Income Tax (Employments) Regulations 2018, as opposed to the predecessor regulations. There is also a new requirement for employers to file a monthly Universal Social Charge (“USC”) return, in line with the current requirement to file an income tax return.
The Finance Bill confirmed the small adjustments announced in the Budget 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. The band ceiling for the 2% USC rate is increasing by €502 to €19,874 and the 4.75% USC rate is being reduced to 4.5% which applies to income in the €19,875 – €70,044 band. In addition, there is a welcome increase in the value of the earned income credit from €1,150 to €1,350 (although there is still some way to go to achieve parity for the self-employed with the €1,650 PAYE credit available to employed workers) and in the home carer’s credit from €1,200 to €1,500.
As announced in Budget 2018, 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 threshold is being introduced on the Original Market Value (“OMV”) of the electric vehicle of €50,000, meaning that electric vehicles with an OMV of greater than €50,000 will be subject to the benefit-in-kind rules by reference to the amount by which the OMV exceeds the €50,000 threshold.
The Finance Bill includes additional measures to exempt members of the Permanent Defence Forces from tax on certain benefits, including healthcare and certain qualifying accommodation.
There are also favourable changes to the capital allowances regime for employers who provide childcare facilities and fitness centres, which complements an existing relief from BIK for employees.
It was hoped that the Finance Bill would contain some additional clarity with respect to PAYE Modernisation, particularly in respect of the penalty regime that may apply to any reporting errors or omissions, and the ability to self-correct without penalty. As things currently stand, the level of penalty is €4,000 per reporting failure. This is effectively on a per employee basis, which means an error for companies with a large workforce could have sizeable implications. We do expect additional guidance from Revenue in advance of the 1 January 2019 implementation date, which may address this issue.
With respect to the reductions in tax and USC, the combined effect of these changes for a single person paying the marginal tax rate is worth €290 per annum, or less than €6 per week. Unfortunately the marginal tax rate of 52% is unchanged, and remains among the highest in the OECD. The Minister has yet to provide any update on the work of the group announced in Budget 2018 to consider the merger of PRSI and USC, and it is unclear if or when we will see the marginal rate addressed.
The lack of improvements to the Special Assignee Relief Programme is also disappointing, particularly at a time when changes by Revenue to our regime for short term business travellers remains among the most unfavourable in the OECD. Ireland’s ability to remain competitive in attracting talent continues to be undermined as a result of the retention of a disproportionately high rate.