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Share breaks Back  
A tax relief that can yield an employee tax free income of ?10,000 per annum is not widely availed of. Approved profit sharing schemes are rare outside semi-state companies.
Win-win scheme
It is no secret that the topic of the taxation of shares for employees is on the agenda in the run up to the December budget.

Trade unions would like to see relaxation of some aspects of existing rules, particularly those relating to the employee share ownership trusts in semi-state companies being privatised.

Employers in the software and e-commerce area would like tax breaks that would enable them to pay high flying employees with shares rather than cash. For fledgling companies in these high tech areas, cash can be scarcer than shares.

Despite all of this activity in considering new breaks, the mystery is why the existing share breaks have proved relatively unpopular. An approved profit sharing scheme is capable of providing an employee with a tax free income of ?10,000 per annum, while his employer receives a deduction for the full cost. At the same time he obtains a three year cash-flow holiday in respect of the tax free ?10,000 per employee.

This scheme looks like a ‘win/win’ scheme for everyone. However it has been little used outside of semi-state companies. Even in semi-state companies its use has been principally related to the privatisation process.

There are certain perceived disadvantages in the approved profit sharing scheme.

The employee has to wait three years before he can obtain cash in his bank account. If current inflation rates were to persist for that three year period, that would represent a cost of between 15% and 18%. That is not far off the standard rate of income tax. Of course it is a very far way off the top rate of income tax.

Since the employer is getting a cash-flow deferral in respect of the sum for three years, the disadvantage could be compensated for by the employer taking that into account in deciding on the extent of the award to the employee.

For the lowest paid employees, there can be the practical difficulty that they cannot afford to forgo any income for a three year period. It is paradoxical that the requirements of the scheme are that all employees should be eligible to participate, but the inherent nature of the scheme, in deferring income for at least three years, makes it unsuitable for the lowest paid employees.

To obtain the tax reliefs, all employees must be eligible to participate on broadly equal terms, but having regard to their relative salaries, years of service etc. The approved profit sharing scheme cannot be confined to a “golden circle” of top employees. This can make it a bit complex to administer but not impossibly so.

Ireland is dominated by private companies. The owners of many family companies do not welcome non-family members in as shareholders. However the fears of the family shareholders may be misplaced. In practice the shares which are issued under the scheme are held by trustees (and not directly by employees) during the initial three year period and typically are disposed of by the employee immediately at the end of the three year period of retention by the trustees.

The degree of invasion of the privacy of a family company that is involved can be manageably minor. While the employees cannot be compelled to sell the shares back at the end of the three year retention period, in practice few employees would wish to retain such shares at the sacrifice of the prospect of a substantial sum of money tax free.

There may also be some worry that where an approved profit sharing scheme is introduced, it will not be seen as “in lieu of bonus” but merely as an additional bonus over and above what would otherwise be negotiated in any event. In such a case of course it represents simply a new cost for the employer.

Nonetheless the lack of enthusiasm for the scheme is surprising. The extent to which the scheme has been utilised may soon become known as the Freedom Of Information Commissioner is proposing to release the names of those companies which have adopted such schemes.

Alternatives being examined
Proposals have been made that the basic elements of the scheme, involving deferral by the employee of his bonus for three years, should be retained but that the connection with shares should be eliminated. Thus productivity gains could be shared with employees on some basis which would defer the payment to the employee for three years, after which it could be paid tax free. This would enable the scheme to be applied to non corporate employers (partnerships and even the State sectors).

Another suggestion would address the special needs of software companies, by permitting them to provide key employees with a disproportionately large element of the benefit of any scheme. This proposal would typically require that everybody be free to benefit from the scheme to some degree, but that a proportion of the total benefits be earmarked for a small number of employees only.

If these share schemes became popular the difficulty is that they would be expensive to the exchequer. There must always therefore be some incentive to the Revenue authorities to ensure that schemes are drafted in a way that prevents widespread take-up.

It will be interesting to see if the December budget produces any result from the current deliberations in this area.

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