THE recently launched Partnership 2000 states that the Government and the Social, Partners support more favourable tax treatment of employee share schemes and profit sharing as a means of deepening partnership and securing commitment to competitiveness at the level of the enterprise.
There is an indication that appropriate tax adjustments may be made in the forthcoming Finance Bill. With this in mind it is perhaps appropriate to examine what particular, areas the Minister might address on Wednesday afternoon.
Tax incentives for employee profit, sharing schemes were introduced in 1982. In its simplest form, they allowed a company to distribute profits to employees in the form of shares, with associated tax incentives for the employee and the firm.
In 1986, the then Minister for Finance and current Taoiseach, Mr Bruton, introduced a new tax regime for employee, share option schemes which was widely promoted and encouraged throughout the country.
Employers entered into such arrangements with unions and staff in good faith only to find that the 1992 Budget Statement proposed the total abolition of all such tax incentives. However, as a result of intensive lobbying a reprieve was given to profit sharing schemes and further improvements have since been made to the tax incentives associated with such schemes. There are now some 195 Revenue approved schemes in place in Ireland.
However, it has to be recognised that these standard profit sharing arrangements are somewhat narrowly focused in that most large employers in Ireland have more varied types of employee share participation.
The introduction of some measure of tax relief for all employee stock option arrangements is well overdue. In particular Save As You Earn (SAYE) Schemes, where all employees are granted options by the employer on similar terms, have significant attractions for employees in general. Basically the employee elects to save an agreed amount direct from salary over a period, usually three or five years. At the end of the period the savings and an accumulated tax free bonus are then "used to exercise the options.
Such schemes are widely available in Britain, where typically options would be granted at a discount of 20 per cent as an added incentive. The employee is not liable to income tax on the option but will pay capital gains tax in the event of a sale of the shares. The introduction of a share participation incentive along similar lines in Ireland would be welcomed by employers, employees and unions.
Over recent years, there have been significant changes and improvements in the area of corporate governance. All new share schemes are subject to shareholder approval, disclosure requirements and published institutional investor guidelines. Indeed the ability to exercise options is now directly linked to agreed performance criteria. In such an environment it should be possible to take on board appropriate tax incentives.
Arguably with the recent publication of Partnership 2000, the buoyancy in the economy and in tax revenues, the time for changes in this area could not be better. A reintroduction of the 1986 tax relief for share option schemes, to encompass both SAYE arrangements and discretionary share options, would be very timely.
This is because by their nature such schemes have a 10 year life cycle. Thus over the coming 12 to 18 months many of the initial schemes set up in the late 1980s will be coming up for renewal. It would be appropriate that, in designing and structuring such schemes for the next decade, companies could introduce such employee incentives in more benign tax regime.
Consideration also needs to be given to a reduction in the holding period for profit sharing scheme shares from five to three years. In the context of the £5,000 share subscription scheme for newly issued shares, the adverse capital gains taxi (CGT) treatment should be relaxed particularly where the shares have been held for the requisite five years.
Some increase in the annual personal CGT exemption should also be introduced as the current £1,000 limit is wholly inadequate.
Some 15 years on from the initial introduction of tax incentives for employee share participation, the workplace has changed significantly. The concept of a job for life is no longer with us.
Going forward, more and more companies will introduce a flexible benefits policy for employees with the overall value of the package linked to performance. Most companies will include an employee share participation plan as part of these flexible arrangements.
Any changes to the tax regime associated with wider employee share ownership will need to reflect this reality.
