Saturday 19 January 2019

Call to cap tax on SME share option schemes to retain talent

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Colm Kelpie

The tax bill workers are hit with for receiving shares as part of their pay should be capped to allow expanding firms attract and retain key talent, the Government has been told.

The Government is looking at the possibility of introducing a tax-advantaged share options scheme for small and medium-sized businesses.

Dublin Chamber of Commerce said studies have shown that increased employee ownership in a business - by taking shares - has a strong and positive correlation with company survival rates.

But it warned that upfront income tax liabilities on the granting of shares or uncapped deferred income tax liabilities on the exercise of share options can mitigate any benefits.

"Capping the income tax that would arise on the exercise of share options would allow employers to attract and retain key employees that are crucial to the survival and growth of their business when these employees are in high demand by other employers," Dublin Chamber said, in its budget submission.

It is proposing that an employee who is granted share options to be subject to income tax only on the discount between the option exercise price, and the market value of the shares on the date of grant of the option, with the income tax liability arising on the date of the exercise of the option.

It used the example of the UK's Enterprise Management Incentive (EMI).

"We propose that each employee can hold unexercised EMI options over shares worth up to €250,000," the Dublin Chamber submission said.

"The maximum value of unexercised EMI options that can be held at any time by all the company's employees should be €3 million. Both limits are measured at the date of grant.

"If the option exercise price is equal to the market value of the shares at the date of grant of the option, then no income tax would be liable.

"However, if these options are granted at a discount, then income tax is liable on the discount. The income tax liability will arise upon the exercise of the option by the employee."

In last October's Budget then Minister Michael Noonan announced the Government wanted to introduce a new, SME-focused, share-based incentive scheme, to be introduced next year. He said it would have to be approved by the European Commission.

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