Government plans to change tax on shares to boost start-ups

The Department of Finance is seeking businesses' views on how workers' share schemes should be taxed as part of its plan to boost start-ups.

One element of the Government’s plan to aid small business is a commitment to exploring how to change the current system of taxing the gains on shares given by employers to their staff. The Department of Finance yesterday began a detailed review of the issue by seeking submissions from all interested parties on how to come up with an efficient way of taxing employee shares.

The move follows a consultation last year on how to use the tax system to incentivise entrepreneurs. One of the issues highlighted was the fact start-ups, particularly those in technology, give shares to employees to encourage skilled staff to stay with the business.

However, as employees are taxed at the higher 41 per cent rate when they exercise share options and are then liable for capital gains at 33 per cent if the stocks’ value increases, the Republic’s system undermines this incentive.

Key issues

The

Irish Tax Institute

, which welcomed the department’s move, pointed out that one of the key issues is that when workers exercise their options to take up shares, they are taxed on what is gain on paper rather than in actual cash.

“Share options are taxed at an individual’s marginal rate of tax, making it uncompetitive when compared with countries whose marginal rate is lower and/or paid a higher entry point,” it says.

It also points out that there are only two Revenue-approved schemes for share options in the Republic. These are subject to many conditions and the relief does not apply to social insurance and the USC.

Brian Keegan, director of taxation at the Institute of Chartered Accountants, noted that many of the schemes tried in the Republic over the past 25 years have run into a number of difficulties. At the same time, government efforts to broaden the tax net during the recession meant it closed off many of the concessions that were available.

“It is now almost impossible to derive any benefit from employee share ownership,” Mr Keegan said. He said there is also a problem with “underwater options” – shares whose value has fallen below the price at which they were awarded.

According to an EU study quoted in the department’s consultation document, companies workers’ shares are more profitable, create more jobs and pay more taxes.