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Wednesday, 17th April 2024
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Share Options Back  
There are at present six different Irish tax regimes which apply to shares, or share options, obtained by reason of employment. This patchwork of tax measures results in a different effective tax burden on corporate employees, and those employed by individuals.
The primary rule relating to shares obtained by reason of an employment or directorship is that the value of the share, to the extent it exceeds any sum given for it by the employee /director is charged to income tax at the time it is received. The basic rule relating to a share option from an employment/directorship is that the value of the share when it is obtained less any sum paid for it or the option, is charged to income tax on the exercise of the option.

What is wrong with that?
There are two things wrong with it. Firstly, the executive who has to pay out approximately 48 per cent of the value of the shares may well find that he can only finance such a tax payment by selling part of the shares. Tax is an obstacle to the employee remaining a shareholder to the extent he and his employer would wish.

The second problem is that the tax rules do not distinguish between employees/directors who are traditional €9-5.30€ employees, and those who are in essence entrepreneurs. Many new enterprises, especially in high tech areas, are in reality joint ventures between highly talented people with little or no capital, and providers of capital (who may or may not have talent!). Typically the providers of capital will have their interest represented by shares, and those who bring to the joint venture their entrepreneurial skills, and talents in the high tech area, will have their interest initially represented by share options. The provider of capital will not face a tax bill until they dispose of their shares, and then typically will be taxed at 20 per cent CGT rates. The joint venturer who provides his skills and talents in what may be a high risk operation will be hit with a tax bill the moment he exercises his options. The tax bill will be at an effective rate of around 48 per cent and he may find that he can€t retain all of the shares he was entitled to, in consequence of funding the tax bill. Some of the six shares/ options regimes that now exist in the tax code attempt to address one or other of these two problems.

l Approved profit sharing schemes enable an employee to take a mixture of salary/bonus in a tax free form. Pre-tax salary/bonus is diverted to trustees who acquire shares in the employer company on behalf of the employee. After 3 years, the employee can dispose of the shares without an income tax charge, but subject to normal CGT. This effectively converts employment income (potentially taxed at up to 48 per cent) into a capital gain taxed at 20 per cent. It enables the employee to hold on to the shares without incurring any immediate tax bill. However the limit on the amount of shares an employee may receive in this fashion of £10,000 per annum is pretty irrelevant in the context of the top class talent that high-tech firms need to attract.

l Save as you earn (SAYE) share option schemes were introduced in the Finance Act 1999. They involve an employee signing up to a savings plan whereby he puts a specified amount of after tax income into the plan. The proceeds of the savings scheme can be used to acquire employer company shares at a discount of up to 25 per cent of the market value on the day the savings scheme was launched. No tax arises until the shares are disposed of, and the tax is then capital gains tax at a rate of 20 per cent.

There is an effective limit to the value of the shares which can be obtained under this scheme. The limit is provided by the fact that the maximum savings per annum which can be put into the savings scheme is £3,000 per employee.

l Employee share ownership trusts (ESOTs) were born to solve the tax problems presented by the requirement of the staff of semi state companies to receive a large chunk of the shares free or on favourable terms, on the occasion of privatisation. The schemes outlined above all have strict annual limits to them. The value of the shares which employees would receive under the privatisation deals would far exceed those limits. The solution was to create an ESOT, which is a form of warehouse for the shares which can then release them through an approved profit sharing scheme to the employees in amounts of up to £10,000 per annum per employee, in a tax free manner. ESOTs can be used by any company and not merely by semi-states. Employer companies can obtain a tax deduction immediately for the value of the moneys contributed to the ESOT, and the shares can be warehoused within the ESOT for up to 20 years!

All of the schemes outlined above have one feature in common. They require that broadly all employees of the company be entitled to participate in the scheme on terms that are broadly similar (allowing for differences in length of service, salary level etc). This €one in all in€ approach probably owes its origins to the €national wages consensus€

l A share subscription scheme provides an employee with a tax deduction of up to £5,000 for sums subscribed to acquire shares in his employer company. The limit of £5,000 is a lifetime limit. The company must be an Irish trading or holding company and the relief can be clawed back if the shares are disposed of within 3 years.

l The only scheme which is not subject to €one in, all in€, requirement and is not subject to limits as to the value which can be involved, is the restricted stock scheme. This isn€t even legislated for but operates on the basis of Revenue rulings in relation to basic law. It is based on the simple proposition, that if for bona fide commercial reasons, the shares which are given to an employee are subject to absolute restrictions on his ability to dispose of them for the period of time, then the shares are worth less than if such restrictions did not apply to them. Accordingly, in computing the tax on the employee, the lower value of the shares is taken into account.

All of the schemes outlined above are not available to those who are employed by unincorporated businesses, such as sole traders or partnerships. That is a basic dilemma that has been swept under the carpet.

The share schemes that do exist do not address needs of the high tech growth sectors to attract talented staff with a real stake in the company. In his recent budget speech, the UK Chancellor said €I will publish details of a very different kind of targeted tax cut for those who are prepared to move from secure jobs and venture their time and effort to create wealth for our country. The new enterprise management incentive will allow the award of equity worth up to £100,000 building up the new path breaking companies our economy needs€.

€Consensus€ share schemes are all very well but they do not meet the needs of the high tech sector of the economy. The Minister should take courage from the UK example and act in his next budget.

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