Finance (No. 2) Bill 2023 shifts share option taxation to PAYE system

Finance (No. 2) Bill 2023 proposes an amendment to the manner in which taxes are collected on the exercise of share options and other rights by employees.

This is an interesting but not surprising amendment that was not mentioned on Budget day by Minister McGrath. For share options exercised on or after 1 January 2024, taxation of a gain realised on the exercise, assignment or release of a right to acquire shares or other assets is moved from self-assessment to the Pay As You Earn (PAYE) system. As a result employers will be responsible for accounting for the income tax, USC and employee PRSI arising as part of the payroll process.

Historically, employees have been responsible for remitting the taxes (Relevant Tax on Share Options) arising on the exercise of share options to Revenue within 30 days of exercise. Employees are also required to file an income tax return as the exercise of share options makes them a chargeable person for self-assessment tax purposes.

There is no mention yet as to whether this obligation will still continue once the changes are implemented. Minister McGrath announced on Budget day that the Government would be launching a public consultation on share-based remuneration in recognition of its increasing importance in rewarding and retaining employees and the continued globalisation of the workforce.

It is worth noting that over the last 12 to 18 months, Revenue have been carrying out focused compliance interventions in this area. They are reviewing data provided by employers in their annual share scheme reporting returns (RSS1) and comparing this to returns filed by employees who have exercised share options.

We understand that to date a significant level of non-compliance has been detected. Non-payment of taxes can arise where an employee is unaware of their obligation to pay tax on the exercise of share options or in circumstances where share options are exercised when an employee is no longer Irish tax-resident and has omitted to pay taxes in respect of the gain attributable to their Irish workdays. We also understand that there have been errors in calculations of gains.

The information gathered by Revenue during this exercise is most likely the catalyst for this change in the collection mechanism. It remains to be seen what further changes may arise following the completion of the public consultation. Another area of focus could be the tax treatment of Restricted Stock Units (RSUs).

Currently RSUs are considered taxable where the individual is tax-resident in Ireland at the time of vest. If the employee is non-resident, with no taxable services in Ireland, then the awards are not taxable.

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If you or your employees have concerns regarding their share scheme reporting obligations for 2023 or any earlier period, please contact our tax department for further information.