A snapshot of employment tax changes in Budget 2018.
In 2016, the Department of Finance launched a consultation on the Taxation of Share Based Remuneration. In KPMG’s response to the consultation, a number of detailed changes were suggested, including the introduction of a new Revenue approved employee share option plan which would seek to place start-up companies and Small and Medium Enterprises (SMEs) on an equal footing with larger employers in attracting and retaining key employees.
Currently, where an employee exercises a share option under an employee share option scheme, a liability to income tax, USC and employee PRSI generally arises at the date of exercise of the option, on the difference between the market value of the share option and the price paid to exercise the option. The timing of this tax liability places most SMEs at a disadvantage to listed companies and multinationals because, unlike their larger competitors, SMEs are generally unable to offer their employees a ready market in their shares which would allow the employee to sell some of the shares to fund the tax liability.
In response to the consultation, in his Budget speech, the minister announced the introduction of a new employee share option incentive scheme targeted at the SME sector. This new Key Employee Engagement Programme (KEEP), will aim to support SMEs in attracting and retaining key talent by effectively deferring the taxation of gains on employee shares until the sale of the shares.
The effect of this new incentive will be to allow qualifying companies to remunerate key employees in a manner which is tax-efficient and is linked to the future success of the company, provided certain qualifying requirements are met throughout the option-holding period. The incentive will be available for qualifying share options granted between 1 January 2018 and 31 December 2023. It is noted that the commencement of the KEEP incentive is subject to State Aid approval but we understand engagement with the European Commission is ongoing and is expected to conclude shortly. 4 TaxingTimes Budget 2018
Broadly, in the case of share options granted and exercised under the KEEP, the tax liability for the employees would only arise at the date of disposal of the relevant shares, and would be subject to capital gains tax instead of income tax, USC and employee PRSI. Therefore, the incentive also provides for a differential of between 15.75% and 19%, based on current tax rates, in the rate of tax payable by an employee on the gain as compared to standard share option gains.
The introduction of KEEP is a welcome development though we await further details in the upcoming Finance Bill of the relevant conditions which will need to be met to qualify under the scheme. For example, it is possible that the value of options permitted to be held under the scheme could be capped. This would align the KEEP scheme with a similar share option scheme in the UK (the Enterprise Management Incentive) which permits employees to have options with a market value of up to £250,000 per employee and employers to grant options with a maximum total market value of £3 million.
As part of the Government’s program to address climate change, the minister is proposing to introduce a 0% benefit-inkind (BIK) rate for electric vehicles for 2018. This is an attractive position when contrasted with the rate of BIK on cars generally, which is 30% of the car’s original market value. This is a welcome development which should incentivise the take up of electric vehicles.
The minister also announced that a comprehensive review of BIK on cars is to be undertaken. This is a welcome development as the current BIK regime for cars is complex. It is hoped that a simplification of the rules will follow.
The minister announced an increase in the National Training Fund Levy from 0.7% to 0.8% from 2018 onwards. This increase represents an additional cost of employment for employers. The levy is collected as part of employer PRSI, which is a tax that employers pay on payroll costs. The rate of employer PRSI is currently 10.75%. The increase in the levy means that the rate of employer PRSI will be 10.85% from 2018. The levy is expected to increase further to 0.9% and 1% in 2019 and 2020 respectively, which would increase the employer PRSI to 10.95% and 11.05% in those years.
Revenue launched a consultation in October 2016 on the modernisation of the Pay-As-You-Earn (PAYE) system, on foot of which Revenue has initiated a programme of modernisation. This PAYE modernisation will require employers to submit real time information on income and taxes for each employee and will allow employees online access to real time information on taxable pay, taxes paid, tax credits (amongst other things). The planned commencement date for this real time reporting is 1 January 2019.
The Budget measures note that a range of compliance interventions will be required to ensure employer obligations are met in advance of implementation in 2019. This follows the release of Revenue’s eBrief No. 89/17 on 3 October 2017, which highlights that as part of the Employer Readiness phase of the PAYE modernisation programme, Revenue is contacting employers who do not appear to have informed them of new employees. Therefore, employers should now take the time to review their employee data and payroll processes to ensure that they are ready to comply with real time reporting from 2019.