Employees in share option schemes have two weeks to avail of tax changes that could allow them to cut liabilities deferred under existing rules. Laura Slattery sets out how the changes may affect theState's 150,000 option-holders

Employees who are members of share option schemes have two weeks left to apply to the Revenue if they want to avail of changes in the tax rules that could reduce their liability. New provisions on the taxation of unapproved share options introduced in this year's Finance Act allow employees to reduce tax liabilities deferred under the existing rules to the market value or the disposal value of the shares.

The estimated 150,000 workers in Ireland who hold such share options must elect for this treatment by June 1st. The new system aims to help employees whose tax burden is greater than the value of shares they currently hold.

A significant number of employees of multinational companies were granted stock options as part of their remuneration packages. Under existing rules, when such an option is exercised, an income tax charge arises on the difference between the market value of the shares on the date of exercise and the option price.

In respect of share options exercised between April 6th, 2000, and the passing of the Finance Act on March 28th, 2003, employees could defer this tax for up to seven years or until they sold the shares, whichever came first.

But if employees exercised their share options in the late 1990s and held onto them, they are now likely to be under water. Share option schemes were particularly common in the tech sector, which has suffered the full brunt of the collapse in the markets over the past three years.

For example, an employee exercises a share option in July 2000, leading to an income tax charge of €50,000. He or she makes the decision to defer the income tax due. When the employee sells the shares in August 2002, their market value is just €20,000.

Under the old system, this employee would have to pay income tax of the full €50,000 to the Revenue before the tax deadline of October 31st, 2003.

Following the passing of the last Finance Act, this employee can now elect to make a payment on account equal to the market value of the relevant shares on the date they were sold, in this case €20,000.

Employees in this situation must elect to make a payment on or before June 1st, 2003. Under the new system, the reduced tax must be paid within 30 days using the prescribed payslip and return form, available online at www.revenue.ie.

If the employee later sells other shares and makes a net gain, say in June 2005, the balance of the income tax due, €30,000, must be paid before the relevant self-assessment deadline - October 31st, 2006.

The new rules also apply to people who still own shares that are lower in value than any deferred income tax due.

According to the Revenue's tax briefing, if the employee has not yet sold the shares acquired as a result of the exercise of the share option, he or she may make a protective election on or before June 1st to make a payment on account equal to the market value on disposal.

So if the employee sells the shares on July 1st, 2004, for €20,000, the payment on account for €20,000 must be made on or before July 30th, 2004.

The payment on account provision cannot be claimed in respect of income tax due on share options exercised on or after February 6th, 2003, and the Revenue will not repay any amounts paid prior to this date.

At the height of the boom, employers sold these schemes as an attractive and often performance-related part of the employees' remuneration package.

While those who avail of the new rules will not end up owing more than the value of their shares, poor markets have obliterated their paper wealth and effectively rendered participation in share option schemes worthless.

However, Ms Joan O'Connor, a tax partner at Deloitte & Touche with specialist knowledge of the rules on share option schemes, says employers will continue to use them in the future.

"People who have exercised and held their shares and run into difficulties will be much more wary. But as an incentive for employees, these schemes have not lost their appeal, provided the employee is aware of the tax consequences," Ms O'Connor says.

It is important to remember that people are not required to sell their shares in order to avail of the new system, Ms O'Connor notes. In other words, members of unapproved share option schemes can protect themselves from future dips in the price of exercised shares by electing for the new treatment before June 1st.

According to Ms O'Connor, the only group of people who could potentially lose out by electing for the new rules are people who did not comply with the old system, failing to either pay the tax on the exercise of their share options or notify the Revenue of their decision to defer the tax.

Ms O'Connor believes a number of these non-compliant taxpayers may shy away from availing of the new rules in order not to bring attention to their case.

The Finance Act also abolishes the existing option to defer payment of the income tax for up to seven years on share options exercised after the passing of the Act on March 28th, 2003.

The tax on gains on share options exercised between this date and June 30th are subject to normal self-assessment deadlines. However, taxpayers who exercise share options after June 30th will be obliged to make a return on the gain within 30 days.