Share Options – Changes to PAYE, PRSI & USC Charges
Share Based Remuneration – Charge to Tax, PRSI & USC
The Irish Revenue Commissioners issues a revised Operational Manual concerning Share Based Remuneration Charges to Tax, PRSI and USC in July 2013 following the changes to share based remuneration in the Budget and Finance Act 2011. The changes impact on employers who are to be responsible for the deduction and payment of most of the relevant charges.
Income tax known as “relevant tax on share options” (RTSO) is payable within 30 days of an option being exercised and is outside the PAYE collection system. Individuals who exercise share options are taxable under Schedule E but are “chargeable persons” for the purpose of the act. The usual 31 October self-assessment preliminary payment date does not apply. Instead, a due date of 30 days after the exercise of an option applies. Employees must submit the usual self-assessment return containing details of all share option gains in a tax year by 31 October following the year in which the gains are realised. Where an employee pays RTSO at the marginal income tax rate, the marginal USC rate of 7% applies.
Shares in an employee’s employer company, or a company that controls the employer company awarded on or after January 1st 2011 have been brought into the PAYE collection system. They are to be treated in the same way as other perquisites. The net value of any shares awarded is to be treated as notional pay at the time the shares are given to the employee. If the calculated income tax, USC and PRSI liability exceeds the employee’s pay, the employer is obliged to account for and remit in full the total income tax, USC and PRSI due on the combined actual and notional pay with the relevant P30 return. Any shortfall may be recouped from the employee by collecting it over the remaining pay periods in the tax year. These amounts must be recouped in full by March 31st of the following tax year, otherwise, the employee will be treated as having received a further benefit on the amount of un-recouped income tax, USC and PRSI due on the 31st March and the employer must operate PAYE/PRSI on this further amount.
Vesting of Shares
Where the employee does not actually take ownership of the shares until a specified period has elapsed, the tax liability may arise on the date of vesting, rather than the date of grant, or on an earlier date if the shares or cash pass to the employee on that earlier date. To give employees a chance to sell their shares to fund their tax, PRSI and USC liability Revenue is prepared to postpone collection of the taxes until the date on which the shares are settled rather than the vesting date, provided that the settlement date is not more than 60 days after the vesting date.
Income tax, PRSI and USC should be remitted with the P30 for the month following the month in which the settlement date occurs subject to all remittances being made by the last P30 filing date for the particular tax year.
In cases where the shares have vested and an employee is ceasing employment with a company, income tax, PRSI and USC should be paid at the time of cessation of employment. The chargeable date for tax purposes remains the date of vesting.
Valuation of Shares in private companies.
Shares in a private company are not traded on the stock exchange and therefore do not have an objectively determined open market value. Where such shares are awarded to employees, the employer should make a “best estimate” of the amount of notional pay to be charged to income tax, PRSI and USC. In the case of a Revenue Audit, an employer should be in a position to demonstrate the all relevant information was evaluated, the reasons for choosing the valuation methods used and the detailed workings of the valuation.
Approved Profit Sharing Schemes: Foregoing of Salary
Salary foregone is not chargeable to USC or PRSI at the time that it is foregone. Instead, USC and PRSI are to be changed on the Initial Market Value (IMV) of the shares that are appropriated in lieu of salary foregone. However, where employers chose to do so, they may deduct and pay USC and PRSI where salary is foregone. Shares cannot be appropriated in advance of salary foregoing to fund those shares.
Responsibility for deduction and payment of USC and PRSI
The employer is liable for the deduction and payment of USC and PRSI. This should be done when funds are being given to the trustees to purchase shares. The chargeable value is the IMV of the shares that are to be appropriated to the scheme participants.
Limit on appropriated shares
It is not intended that the requirement to fund the payment of USC and PRSI should impact on the current annual limit on the value of shares that can be appropriated of €12,700. Employees/employers can pay USC and PRSI out of other net earnings if they wish at the time that shares are being appropriated, or salary foregone, as the case may be.
SAYE Schemes – Charge on both grant and exercise:
Revenue will only seek to collect USC and PRSI on the gain arising on the exercise of an option. While such gains are exempt from income tax, the employer is liable to deduct and pay USC through the payroll system when the options are exercised. The company operating the SAYE scheme will not be obliged to make such payroll deductions where the employee exercising the option has ceased to be employed by that company. The USC will be payable by such former employees under the self-assessment system.
Forfeited shares and refunds
Where shares are forfeited, any income tax charge already imposed in respect of the acquisition of the shares is to be reduced to nil and any tax overpaid is to be repaid on foot of an appropriate claim. USC and PRSI will similarly be repaid where shares are forfeited.