Employee Share Profits: Revenue Are Cracking Down

Companies are increasingly offering share options to their employees, but the details as to who is responsible for the tax bill can be unclear. It’s no surprise that, in a survey in Ireland, more than 70% of people surveyed who have sold employee shares have failed to declare taxes.

The Irish Revenue Commissioners is now clamping down on unpaid tax bills arising from employee share options. Revenue is reviewing the Share Scheme Reports (SSR) submitted by employers to Revenue to identify employees who have availed of shares options. This means that people who are enjoying the extra profits from selling their shares may find themselves slapped with a hefty bill if they have not paid the correct taxes and filed the required tax returns.

Whether you hold share options or are part of a profit-sharing scheme, each will have its own tax regulations. Share option schemes are a great incentive, but it’s important to know how to make the most of the tax benefits without falling on the wrong side of the law.

Read on to find out about the different types of share incentive schemes and the tax implications that you should be aware of.

CONTENTS
Employee Share Schemes
Unapproved Share Schemes
Approved Share Schemes
How Much Tax Do I Need to Pay on Employee Shares?
Do You Have to Declare Shares If You Don’t Owe Tax?
Need Some Help With Your Tax Return?

Employee Share Schemes

Share option schemes are a way for employers to reward their staff on top of their salaries. Less common in the past, option schemes are now especially popular within the tech sector and start-ups looking to attract and retain talent. Companies can offer both approved and unapproved schemes, each with advantages and disadvantages.

Unapproved Share Schemes

Unapproved schemes that your employer may offer include share options, KEEP schemes, ESPP, and restricted shares to name a few. But the two main schemes we will be discussing here are:

Share Options

An unapproved share option scheme is for both employees and staff that are not on the payroll (Example: contractors, external consultants, and advisors). There is no need for Revenue approval to set up this type of scheme, and the share options can either be at no cost or at a discounted rate to staff.

Note that a share option is not the same as a share. If you own shares then you own a stake in the company (a shareholder), whereas with options you do not have any ownership. Share options are essentially a contract that will give you the option to buy shares at a later date, often at a better (discounted) price.

With Irish taxes, Revenue states that “you must pay (tax) on any benefit you receive on the exercise, assignment or release of a share option”. This simply means that if you convert your options into shares or sell your share option, you will be charged tax on the profit made.

If you decide to sell your shares after exercising (converting) your share option, you may need to pay capital gains tax.

Key Employee Engagement Programme (KEEP)

One of the main tax benefits of a KEEP scheme is that employees do not need to pay tax when they convert their share option. There are also no taxes applied on the date of grant (the date an employee is given the share option). However, this type of scheme is only available to businesses that meet the conditions outlined by Revenue.

Currently, only full-time employees or directors are eligible for this scheme, and they must work for at least 30 hours a week. Anyone that qualifies for the KEEP scheme can only hold the share option for a maximum of 10 years. They are also not allowed to exercise (convert) their share option to shares within the first 12 months from the date of grant.

Is there any capital gains tax? Yes, you may have to pay CGT under this scheme, but only when you sell your shares.

Approved Share Schemes

An employer will need Revenue approval before they can operate any of these schemes. The tax rules can be confusing, so make sure you go through the details before filing your tax return. There are three types of approved schemes under the Irish Revenue legislation:

Save As You Earn (SAYE)

A Save As You Earn scheme must be associated with an approved savings account (from a bank or building society). It’s used to hold an agreed sum of money deducted from your salary each month. The SAYE scheme has a fixed savings period and can range from 3 to 7 years, after which you will have a few options:

You can take the savings as a lump sum (tax-free)
Use the savings to purchase shares, the number of shares you can buy will depend on the share price offered
Use the savings to buy a few shares only

The maximum amount of savings allowed each month is €500 and is set from the start of the SAYE scheme. Should you choose to buy shares once the savings period is over, you won’t need to pay income tax. However, any gains made are subject to USC and PRSI taxes.

Capital gains tax may also apply when you sell your shares.

Approved Profit Sharing

An Approved Profit-Sharing Scheme (APSS) allows employees to convert profit-sharing bonuses into shares that are income tax-free.

For this type of scheme, you’re exempt from income tax for shares held in an APSS trust, but USC and PRSI still apply. Your employer will deduct this from your paycheque via PAYE.

Each employee can receive up to €12,700 worth of shares annually, and the employer will hold the shares in trust. The shares must stay in the trust for at least two years.

Once the two-year period is up, you can either transfer or sell your shares. This also means there are further income taxes, USC and PRSI taxes that you will have to pay. For tax relief, you will need to keep your shares in the trust for three years.

Income tax will also apply to any dividends you receive — you must declare these to Revenue. Capital gains tax is due if the shares sale price is above the original share value, in other words, the profit/gains made.

Employee Share Ownership Trusts

A company can give shares to their employees through an Employee Share Ownership Trust (ESOT). The shares can be kept in the trust for up to 20 years and are often set up together with an Approved Profit-Sharing scheme. Any payments such as dividends paid out from shares held in an ESOT are taxable.

Employees can transfer the shares held in an ESOT to their APPS trust, where they will receive income tax relief. The same tax rules will apply to the shares after moving them over to the APPS trust.

How does capital gains tax work with an ESOT? You might be liable to pay CGT if you sell your shares. This will also be the case if you transfer your shares over to an APPS trust.

How Much Tax Do I Need to Pay on Employee Shares?

You must pay 52% tax on the initial value of your employee share options when exercised. Also, if there is an increase in this value (profit) at the point of sale, you must pay 33% CGT on the value of the profit.

Example 1:

Get the option to purchase 1,000 shares valued at €10 each at the grant date = €10,000
Exercised after 3 years: 1,000 shares exercised now valued at €15 each = €15,000
Gain on increase share price: €15,000 – €10,000 = €5,000
Tax due on gain: 52% x €5,000 = €2,600 (payable to Revenue 30 days after exercise date)
You keep: €10,240 after tax.

Example 2:

As above you decide to sell these shares in October.
As you have paid tax on the gain on exercise, your new base cost becomes €15.
You sell 1,000 shares now valued at €20 each.
€20 x 1,000 = €20,000
Less base cost €15 x 1,000= €15,000.
Gain of €5,000
Minus tax-free allowance: €5,000 – €1,270 = €3,730
Tax due on gain: 33% x €3,730 = €1,231 (payable to Revenue by the 15^th of Dec)
You keep: €20,000 – €1,231 = €18,765 after tax.

Do You Have to Declare Shares If You Don’t Owe Tax?

Yes! Whether you’ve made a profit or not, you must declare this on your tax return. Even if you are eligible for tax relief on your employee share scheme. It is also important to declare any losses from the sale of shares so that you can offset them against future gains.

Need Some Help With Your Tax Return?

The deadline for income tax returns in Ireland is 31 October 2022. You must settle both your tax return and all payments from the previous year by that date. So, if you’ve sold your shares or received any payment in kind then you’ll need to include details of this.

Other Key Dates:

30 days after you exercise your shares options – you must pay and file an RTSO form (this information will be used when filing the return in the following year.)
CGT Dates 1^st January – 30^th November – File and pay by 15^th December
CGT Dates 1^st December – 31^st December – File and pay by 31^st January

For anything that you might be unsure of, a good tax accountant is your best bet. Tax Return Plus can advise on tax efficiencies that you may not have been aware of and correct any mistakes on your tax return.

Navigating through the details of your employee scheme can be a headache. But the good news is, with advanced preparation, you’ll most likely be in a better position than many.