The Tax Strategy Group Paper – Employment Tax

The Tax Strategy Group (TSG) is in place since the early 1990’s and is chaired by the Department of Finance with membership comprising senior officials and political advisers from a number of Civil Service Departments and Offices. The TSG is not a decision-making body and the papers produced by the Department are simply a list of options and issues to be considered in the Budgetary process.

The following is a summary of the key employment tax related issues that were considered in the paper published on 10 August 2022.

The full TSG papers are available here.

Review of Transborder Workers' Relief

Transborder Workers’ Relief is for people who are resident in the State but travel daily or weekly to work in another country and pay tax in that other country. The effect of the relief in many cases is to limit the tax payable on the earnings to the tax already paid in the other country. In the absence of the relief, such individuals would face an Irish tax bill at the year-end if the overall rate of foreign tax applied to the earnings were less than the Irish rate. This relief largely eliminates this additional charge.

The paper provided an update on following the detailed consideration of this issue in the 2021 paper - allowing claimants perform some of their duties in the State for a foreign employer while still availing of the relief. The TSG again highlight the complexities involved in cross-border taxation, the need to ensure a fair and equitable tax system between Irish and foreign employers and the importance of protecting the Irish tax base.

The TSG has also commented that Revenue is currently looking at ways to minimise and simplify the administrative burden of claiming the relief.

Update on Key Employee Engagement Programme (KEEP)

The Key Employee Engagement Programme (KEEP), introduced in Budget 2018, is a share option plan intended to help SMEs attract and retain talent in a highly competitive labour market. Gains arising to the employee in respect of the KEEP share options are taxed at the time of share sale and subject to capital gains tax rather than income tax.

KEEP is currently applicable in respect of share options granted during the period 1 January 2018 to 31 December 2023.

The TSG notes that the qualifying conditions for KEEP are comparable with other similar share plans around Europe. However, the take-up is still relatively low.

The responses to the public consultation that took place on KEEP in May 2022 were the key areas for consideration. These were as follows:

  • Extend KEEP to 31 December 2025;
  • Introduce measures to facilitate share valuations as this was identified as a key barrier to entry;
  • Widen definition of eligible group structures;
  • Permit share buy back arrangements to enable participants dispose of their KEEP shares;
  • Narrow the list of excluded activities;
  • Change rules around share option company limits;
  • Change rules around employee limits; and
  • Reduce the tax rate to 10% on disposal of shares.

The continuation of the scheme beyond its current sunset date of 31 December 2022 is very likely. However, it remains to be seen if the thorny issue of share valuations will be addressed in Budget 2023.

The amendments introduced in Finance Act 2019, specific to group structures, are still subject to EU approval and no further changes are likely to be forthcoming until these 2019 proposed amendments have been approved.

The remaining issues raised as part of the consultation process received lukewarm responses and are unlikely to be addressed in the upcoming budget.

PRSI - funding for future State pension entitlements

The TSG notes that in 1991, there were 5 working age people to 1 pensioner, and it is projected that this ratio will fall to 3.5 to 1 by 2031 and to 2.3 to 1 by 2051. In addition, people are living longer than previous generations and as a result, the duration of State pension payments has been increasing steadily over time and will continue to do so.

The TSG also notes that the most recent projections predict an annual shortfall in the Social Insurance Fund of over €2.3 billion in 2030, €13 billion by 2050 with anticipated annual shortfalls steadily increasing to some €21 billion in 2070.

The paper sets out the following possible measures to bridge this growing deficit.

  • Increase Employer and Employee PRSI rates from the current respect rate of 11.05% and 4% (unchanged since 2001) to standard rate of 12.55% and 5.5% respectively over a multi-year timeframe; and
  • Gradually increase the rate of contribution for the self-employed to the standard employer rate prevailing at the time (currently 11.05%);

Pensions – Auto-enrolment

The auto-enrolment system has been on the Government radar for some time now and the paper highlights the fact that it will be delivered on a gradual basis with a phased roll-out over a decade.

Now that the overall design of auto-enrolment has been confirmed, work can begin on the necessary legislative, organisational and process structures. This work will continue throughout 2022 and 2023 with contributions to the new system to be paid in 2024.

Carbon Emissions – BIK on company vehicles

The paper comment on the significant changes to the basis of taxing the benefit in kind (BIK) arising from the provision of a company car which will come into effect from 1 January 2023.

The new provisions, which are already on the statute book and are therefore not dependent on the forthcoming Budget, will change the basis of the charge from one based solely on the original market value (‘OMV’) of the car and business mileage travelled, to one which also takes account of the vehicle’s CO2 emissions. This will result in a higher level of BIK being imposed on cars with higher emissions. The changes will apply to existing company cars as well as new cars provided to employees on or after 1 January 2023.

The flat rate BIK charge on company provided vans, currently set at 5% of OMV will increase to 8% from 1 January 2023. The exemption for electric vans will be tapered on the same basis as for electric cars from 2023.

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