Global Mobility, Immigration and Employment
In a widely anticipated move the Minister announced the introduction of the Key Employee Engagement Programme (KEEP) for SMEs in Budget 2018. The scheme was broadly welcomed by Irish private companies and their employees as it provided for a deferral of tax on the exercise of share options until the point of sale and a taxation of the gain at Capital Gains Tax rather than Income Tax rates. However once the legislation was published it became clear that the scheme has limitations which make it unworkable for many SMEs. One of the most notable drawbacks is the capping of an award at 50% of the annual emoluments of the individual for that year. The options must be granted at market value thereby requiring share valuations to be performed which will place additional cost burdens on employers wishing to avail of the scheme. In addition, the company has a number of technical restrictions and also has to continuously monitor its issued but unexercised options throughout the grant to vest period to ensure the market value does not exceed €3m.
Real time payroll reporting will come into effect on 1 January 2019. This has been acknowledged as being the most significant change in the PAYE regime since it was first introduced which will present challenges to Irish employers to capture and report payroll data on a real-time basis. Revenue have indicated that employers who operate shadow payroll for expatriate and mobile employees will be under the same obligation to report payments and benefits on or before the payment date. This is causing significant concern for Irish employers due to the complexities associated with establishing the amounts ultimately liable to Irish tax in light of net pay arrangements, multiple payment sources and the impact of Irish workdays and currency adjustments. The practical difficulties in obtaining details of compensation and benefits from overseas jurisdictions in a timely manner should not be underestimated and is an area which is outside of the control of the Irish based employer.
In light of the potential opportunities arising out of Brexit it is vital that Ireland is well positioned to attract companies who are considering relocating out of the UK to another EU jurisdiction. Our marginal rate of 52% is one of the highest in the EU and puts us at a competitive disadvantage compared to other countries competing for this inward investment.
The Special Assignee Relief Programme (SARP) is a valuable initiative aimed at encouraging skilled personnel to relocate to Ireland by granting an exemption from income tax for 30% of earnings over a €75,000 threshold. However changes introduced in 2015 place on obligation on employers to certify within 30 days of the assignees arrival that the employee is a ‘relevant employee’ for the purposes of the relief. This has resulted in certain individuals being denied the relief for the duration of their assignment due to administrative delays or oversights.
Attracting foreign workers in a full employment environment is essential in order to drive domestic economic growth. Irish companies can and should leverage the experience and expertise of overseas counterparts to benefit their business locally. Revenue’s recently updated guidance on temporary assignees working in Ireland has significant negative implications for overseas personnel who regularly travel to Ireland for business meetings or short-term projects. The changes mean that there is potentially a payroll obligation for individuals who spend minimal days in Ireland each year or at the very least an increased administrative burden on companies to track the movements of these individuals in order to apply for a dispensation from payroll withholding.
The marginal rate of tax should be reduced from its current level of 52% and the entry to the higher rate of tax should be increased. At the very least a roadmap should be put in place to demonstrate to workers when this burden will be reduced.
The KEEP legislation needs to be amended to achieve the stated aim of helping Irish SMEs to recruit and retain appropriately skilled workers. The UK equivalent share scheme, the Enterprise Management Incentive, does not cap the value of the share options granted by reference to the employee’s annual emoluments and it would be a step in the right direction to remove this restriction. We would also welcome the introduction of a mechanism to agree the valuation of a company with Revenue for KEEP purposes in line with the UK regime. A further enhancement would be to allow the option period to be included for the holding period requirements of the CGT Entrepreneur relief. Furthermore the extension of the KEEP scheme to employers who do not meet the SME thresholds would greatly enhance Ireland’s competitiveness in the global war for talent.
The UK introduced real-time payroll reporting some years ago however HMRC relaxed the strict reporting obligations for tax equalised foreign employees working in the UK whereby employers could avail of a Modified PAYE arrangement. The advantage of this relaxation is that PAYE can be calculated and reported monthly on an estimated basis and a review is carried out pre-year end to adjust for any material changes. A similar arrangement should be introduced in the context of Irish PAYE Modernisation which would ease the administrative burden for employers in complying with their reporting obligations for inbound workers.
A reinstatement of the long-standing practice of treating not more than 30 workdays as being incidental and exempt from payroll withholding would provide much needed certainty to companies and would enhance Ireland’s attractiveness for businesses considering locating here as a result of Brexit and other global economic conditions.
The obligation for employers to certify within 30 days of arrival that an employee is eligible to claim SARP should be extended to a more practical timeframe e.g. 90 days. There should be no adverse implications in terms of Departmental oversight of the impact of the incentive as the certification process merely provides details of the number of individuals seeking to avail of the scheme rather than the associated tax cost.
We predict that there may be minor amendments to the KEEP scheme to encourage uptake by employees of Irish private companies however unfortunately we do not expect to see an extension of the regime beyond the SME sector or any relaxation of the CGT entrepreneur relief holding period for KEEP options.
We expect that employers will see an increase in Revenue interaction in terms of compliance checks and onsite visits as we move towards the go-live date of 1 January 2019 for real time payroll reporting. We are hopeful that Revenue will provide greater clarity around the penalty regime for payroll corrections in the context of shadow payrolls and certain non-cash benefits where accurate information may not be available in real-time.
We predict that there will be no fundamental changes to the income tax regime, particularly in light of recent data published indicating that we are now at the highest level of employment ever within the State. While there may be minor tweaks to the bands, we would not expect any material reductions in the tax rates. We remain hopeful that there will be some practical changes introduced to reduce the administrative burdens for employers, but given experience over the past few years, this is more in hope than expectation.