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Budget 2024 is an opportunity to make the Income Tax system less unattractive

Tom Maguire discusses the income tax system and what changes Budget 2024 could bring

My last column looked at possible changes that could be made for companies in the forthcoming budget. This week, I was chatting with Colin Forbes, leader of our Global Employer Services team, and we thought it would be good to look at the human side of the equation. The most recently published Exchequer returns to end-May showed income tax receipts remain solid at €13 billion to end-May. These were up 9.5% on an annual basis reflecting, as Minister McGrath put in in the accompanying press release, “an economy where the unemployment rate is now at its lowest level on record”.

Right now, Ireland’s high personal tax rate can act as a disincentive to businesses locating in Ireland, to employees taking on additional work, and to foreign based talent (including Ireland’s diaspora) relocating to Ireland. We know that an attractive personal tax regime is also vitally important for the SME and indigenous business community which relies on talent to grow and scale their business. Given inflation levels consideration should be given to increasing tax bands and credits and Flat Rate Allowances annually in line with the inflation rate.

One of the means of keeping cash in the business is to look to share based remuneration for employees. There are a number of such provisions in our tax code and I’ve written about the Key Employee Engagement Programme (KEEP) previously in this column so won’t relive that here.

There is generally no tax due on the date that a share option is granted. When an employee exercises an option, that individual must pay Income Tax, USC and PRSI on the difference between the market value of the shares on the date of exercise and the amount paid for the shares. Any subsequent sale of the share will be subject to Capital Gains Tax at the rate of 33% on the gain arising. Regular readers will know my view on the CGT rate but sufficed to say when the CGT rate went down in the past from 40% to 20%, the yield increased, and now we have a rate of 33% so consideration could be given to history repeating itself.

However, the tax treatment of a “long option” is different. A long option is one that can be exercised more than seven years from the date it is granted. In that case, the taxpayer pays Income Tax on the grant date and the date of the exercise of the option if the option price is less than the market value of the shares at the grant date. The tax at grant date is due on the difference between the market value of the shares on the grant date and the amount the employee will pay when they exercise the option. To bring less complexity to our tax code then the treatment of long options should be the same as short options. As I’ve said many times in these pages, when it comes to investment simplicity eats complexity for breakfast.

In addition, the tax code on share options requires individuals to “self-assess” for certain tax arising on the exercise of options, rather than having such amounts taxed through payroll. In a nutshell, employees have to complete tax returns where they have share options. Employees without share options or other sources of income are saved that bother. I say “bother” but it’s a legal requirement with penalties for non-compliance. Consideration could be given to taxing options through payroll so that tax returns could be ignored for such employees. Of course, if the employee has other forms of income then that’s a whole different ballgame.

Last year’s finance bill provided for income tax relief for remote working by allowing employees who work from home to claim a 20% tax credit for 30% of the cost of broadband, electricity, and heating, apportioned based on the number of days worked from home during the year. The relief is reduced by any amount reimbursed to the worker by their employer. Also, where the relevant expenses are shared by two or more people, the total costs are apportioned between the individuals based on the amount of the expense paid by each person.

This doesn’t apply to other remotely working from home costs and so consideration should be given to extending the relief to include other costs of working at home. Where an employer pays an employee’s increase in home insurance premium which arises from remote working this should not be treated as taxable under the income tax code. Revenue guidance states that remote working will not impact an individual’s claim for exemption from Capital Gains Tax on disposal of his or her home. This Revenue practice should be put into law.

Identification of an employee’s normal place of work is central to the tax treatment of travel and subsistence payments made to employees. While the position adopted by Revenue is that an employee’s home is not a normal place of work, such rules should now be reconsidered in light of the growing portion of the labour market who work remotely or on a hybrid basis. The employee’s normal place of work should be based on the facts of where the employee carries out the majority of their duties of employment, irrespective of whether that is their home or their employer’s office or, indeed, some other workspace. Therefore, consideration should be given to regarding a home office as a “place of work” in cases where the company formally adopts a hybrid working policy.

Recent Budgets referred to the introduction of a Personal Tax Roadmap. We’ve successfully done the roadmap approach with Corporation tax. It’s like a “tax policy priority to do list” which we can tick off each year. Bottom line, we should seek to make Ireland the number one location for enhancing employment and economic activity. To achieve this, adopting a similar strategy approach for income tax would be a good move.

Overall, when one looks to the human side of the tax code much can be written about what can be done. A key point is the cost-of-living problem right now and the more we can put into peoples’ pockets to alleviate those difficulties the better.

Please note this article first featured in the Business Post on Sunday, 11 June 2023 and was re-published kindly with their permission on our website.