Employer deduction of BIK tax/PRSI on share options

[ClubMan]

My employer operates an ESPP (Employee Share Purchase Plan) which allows employees to contribute up to 15% of gross income in order to purchase company shares at a discounted price each six monthly period (a pretty standard arrangement for ESPPs as far as I know). The discounted share price is considered a BIK and so tax and PRSI liabilities on the employee arise. My company deducts these through payroll and remits them to Revenue this obviating the need for the employee to do anything else (other than file a CGT return if/when the shares purchases are eventually sold obviously). This suits me personally fine since it frees me from the administrative hassle of having to file and pay the BIK tax and PRSI separately. However having read the snippet below (my underlining) in the [broken link removed] I am a bit confused as this seems to suggest that the responsibility for declaring and paying the BIK income tax and PRSI liabilities arising in this context should remain with the employee rather than the employer. Can anybody clarify the rules in this respect and let me know if my employer is doing the correct thing in deducting these liabilities through payroll and remitting them directly to Revenue? Thanks.

10.1 Company Shares

Where shares in a company are given by the company
to an employee free of charge or at a discounted price
or under a share scheme, the employee is chargeable
to tax on the benefit accruing to him or her. However,
PAYE and PRSI do not apply. Instead, the benefit must
be returned on the employee’s return of income form.
The employer must also make a return of the
benefit on form SO2 or form P11D, whichever is
appropriate, by the appropriate due date.

I also noticed [broken link removed] which seems to confirm the interpretation that dealing with the income tax liability on shares/options should remain with the employee and that PRSI is not levied on such BIKs.

Shares

The guidelines specifically exempt shares and certain employer pension contributions from PAYE and PRSI. Despite the fact that employees who receive shares at below market valuewill not besubject to PAYE, they will continue to be liable to income tax under self-assessment and the income tax due must be paid directly by the individual to the Revenue.

Share benefits are not liable to PRSI. However, shares received under a Revenue-approved plan will continue to be exempt from income tax.

 

[ashambles]

[broken link removed]

section 13.4 states for ESPPs (such generosity, but doesn't matter much if you're over the PRSI threshhold),

13.4 PRSI and Levies
The amount chargeable to income tax is not reckonable for PRSI or
Levies.

Somewhat at odds with this newer statement though from

With effect from 1 January 2004, PAYE,PRSI and Health Contribution will apply to all benefits-in-kind. All deductions will be made at source by the employer through the PAYE system.

 

[ClubMan]

With effect from 1 January 2004, PAYE,PRSI and Health Contribution will apply to all benefits-in-kind. All deductions will be made at source by the employer through the PAYE system.

Thanks ashambles - but the snippet that I posted above is from the [broken link removed]to the post 2004 BIK treatment. Is it incorrect and is it the case that, as you say and as I have experienced, the BIK deductions must be made at source by the employer? I suspect that the BIK guide that I'm reading above is either wrong or I am misreading it somehow? The other snippet is from 2001 and I suspect that that is out of date at this stage.

 

[ashambles]

The story seems to be that ESPP/options (normally) do not appear on your payslip and aren't treated as BIK, which also explains why if you got a normal BIK you don't have to do a end of year tax return whereas you do with ESPP/options.

[broken link removed] is the form that needs to be sent in with your payment and it makes no mention of other taxes/levies apart from income tax.

From that form -
Relevant Tax on a Share Option is payable on the gain (i.e. the difference between the market price of the shares and the price actually paid) and calculated at the higher rate of income tax in force when the option is exercised.

 

[ClubMan]

Thanks again - but I'm still a bit confused and trying to chase this up with my employer...

The story seems to be that ESPP/options (normally) do not appear on your payslip and aren't treated as BIK

Does it matter that the contributions (15% of gross each month) towards the purchase of shares at a discounted price under the ESPP did appear on my payslip - i.e. would this be the reason why the BIK income tax and PRSI were deducted via payroll?

which also explains why if you got a normal BIK you don't have to do a end of year tax return whereas you do with ESPP/options.

I don't understand - my BIK tax/PRSI on the scheme was deducted through payroll.

 

[ClubMan]

OK - turns out that the employer (or, rather, their accountants to whom financial issues are outsourced) screwed things up and deducted income tax and PRSI through payroll when they should not have. Income tax is supposed to be declared/paid by the employee via a [broken link removed] within 30 days of the options being exercised (so they are now overdue since the scheme purchase period ended in July) while there is no PRSI liability on this BIK. Now they are refunding the income tax (which will have to be paid to Revenue anyway) and PRSI (which was incorrectly deducted) and employees must make their (now late) RTSO1 payment. Given that this is just the latest in a series of accounting/payroll blunders that I have identified in two different jobs over the past few years it makes me wonder what the hell they teach some accountants at beancounter school...

 

[stuart]

Maybe the teach them how to set-up systems that take about five dry runs of complete chaos before they work and then continously need updates/patches and other minor adjustments to make them work proeprly

Sorry, that's nerd school where they teach geeks to play on the internet

 

[ClubMan]

Thanks - really useful contribution. Keep it up.

 

[ashambles]

I think ESPP may have been taxed more like a normal BIK before the revenue started making "special" provision for it around '97 so maybe that might explain the error.

In theory you'd now be due to pay some interest on the late payment. You should check that any CGT due is paid by Oct 31, even if it's less than the CGT annual allowance it still needs to be detailed in the end of year tax returns. Also you'd need to check that the income tax paid was on the entire gain to the end of period not just on the 15% discount.

Is the 30 day requirement to pay unique to options/espp - it seems harsh and could easily lead to someone taking a loan to pay the tax bill as they wait for the US cheque to arrive and be cleared.

 

[ClubMan]

Thanks for the useful contribution ashambles.

I think ESPP may have been taxed more like a normal BIK before the revenue started making "special" provision for it around '97 so maybe that might explain the error.

Not sure. They seem more confused about it than I am at this stage - and they're supposed to be the experts. Even a geek can read the relevant Revenue docs and figure out the correct tax treatment as I did so I don't know why a beancounter can't do likewise...

In theory you'd now be due to pay some interest on the late payment.

Yes - I realise that. Which is a pain since it was the employer's accountant's fault.

You should check that any CGT due is paid by Oct 31, even if it's less than the CGT annual allowance it still needs to be detailed in the end of year tax returns.

CGT is not an issue as I have not sold the shares. I exercised and held so only income tax on the BIK arising from the discounted option price is relevant right now.

Also you'd need to check that the income tax paid was on the entire gain to the end of period not just on the 15% discount.

I don't understand this. The only BIK arising is the 15% discount on the market value at the time of exercise (and maybe also some gain attributable to US$/€ currency exchange rate fluctuations). Any gain over and above this will only crystallise when the shares are sold and will be assessable for CGT not income tax.

Is the 30 day requirement to pay unique to options/espp - it seems harsh and could easily lead to someone taking a loan to pay the tax bill as they wait for the US cheque to arrive and be cleared.

It's explicitly mentioned in the BIK brochure and on the RTSO1 form but I don't know if it applies in any other situation.

 

[ashambles]

It's my understanding that the income tax will be charged on more than the 15% discount if the price at the end of the period is greater than the start price.

Here's the example from the revenue pt_5e.pdf file linked to above, it is 8 years old but I can't find anything newer.

"If the shares are trading at US$65 at the beginning of the six month offer
period on the Stock Exchange and trading at US$72 at the end of the six
month offer period the shares can be purchased at 85 % of US$65 (US$55.25
per share). The charge to income tax will be US$72 less US$55.25 per share.
In this instance the amount charged to income tax is more than 15% of the
market value of the shares at the date of purchase."

They should have picked better figures, if the shares were 2 at the start and 10 at the end, you'd need to pay income tax at 42% on 10 - (2*.85) = 8.3 per share, not on just the 0.3 per share that someone might reasonably expect.

 

[ClubMan]

It's my understanding that the income tax will be charged on more than the 15% discount if the price at the end of the period is greater than the start price.

Thanks again for the feedback. I think I know what you're getting at now. The minimum BIK involved is 15% but depending on the market price at the start and end of the purchase period the discount/BIKcould work out to be more. As far as I know, the price at the end of the purchase period was less than at the start this time around. I'd have to refer to the specific rules of the scheme and the start and end price but I'm pretty sure that the minimum 15% discount/BIK applied here. But thanks for pointing that issue out all the same as it may be relevant in the future.

On a related issue (and it has probably been asked before ) what US$/€ exchange rate(s?) do Revenue accept for the purpose of conversion of the BIK to € (e.g. Revenue approved rate(s?), employer corporate rates etc.) and how is any gain arising from currency exchange rate fluctuations handled from a BIK tax point of view (e.g. is any gain arising due to exchange rate fluctuations also considered part of the BIK?). Also - is it necessary to convert each monthly ESPP contribution individually or just the lump sum at the end of the ESPP purchase period? Is there any scope for (legitimately!) avoiding/reducing tax through selection of the most preferential rate and conversion approach in this context?

 

[ClubMan]

Two more related queries...

• Do Revenue publish accepted currency exchange rates for this sort of thing on their website? I have the corporate ones which may be used but just wanted to see if there was any scope for savings by using other. Or do they just [broken link removed] on this issue?
• Since I will be filing late (should have been filed by the end of August 2005) what interest/penalties might apply if Revenue were to apply the letter of the law?

Thanks.

 

[strettie]

Clubman,

Exchange Rates
The Revenue only seem to require you to be consistent in the rates you use i.e not to be switching between corporate , revenue and spot rates in order to reduce the BIK. I use www.oanda.com for my rates as they have a very good fx History page and I also avoid the temptation of messing with rates

Exchange Rate and BIK Element
There are no exchange rate profits and losses for the BIK element . Your company will convert your 6 months of payments into the relevant currency to buy shares on the last day of scheme not every month. so the exchange rate will not differ as you have paid and acquired shares on same date.
There will be exchange rate differences for the capital gain part: exchange rate on last day of scheme v exchange rate on date of sale


Interest/Penalties
the only charge is interest at the usual revenue rate which I think is 1.25% per month, not 100% sure of rate . In my experience I have seen returns go in 3 months late not charged any interest.

Strettie

 

[ClubMan]

Exchange Rates
The Revenue only seem to require you to be consistent in the rates you use i.e not to be switching between corporate , revenue and spot rates in order to reduce the BIK. I use www.oanda.com for my rates as they have a very good fx History page and I also avoid the temptation of messing with rates

Thanks - I suspected that. I will run my calculations with the company corporate rates, the Central Bank rates and any others that I can find to see what, if any, significant savings can be made on that front. Probably not much but a useful exercise all the same.

Exchange Rate and BIK Element
There are no exchange rate profits and losses for the BIK element . Your company will convert your 6 months of payments into the relevant currency to buy shares on the last day of scheme not every month. so the exchange rate will not differ as you have paid and acquired shares on same date.

Actually the company does convert the contributions each month from € to US$ in out ESPP using the corporate rate which is based on the published Central Bank rates but not always the specific rate on the day (might be an averaged rate for the month or something like that).

Interest/Penalties
the only charge is interest at the usual revenue rate which I think is 1.25% per month, not 100% sure of rate . In my experience I have seen returns go in 3 months late not charged any interest.

Thanks for that info. I will be submitting a late filing/payment soon so I'll post back with details of how I get on.

 

[ACCK01]

Clubman, I had an ESPP in my last job which sounds very similar to yours and we had to pay income tax not BIK on the 15% discount and I had to file a form 11 in October of each year. I would advise you to contact someone in revenue regarding this as depending on which way your scheme has been set up you could be liable to pay 42% not 20% tax.

From the revenue website: SHARE OPTIONS AND OTHER SHARE SCHEMES

"Share options arise when employees or directors are granted an option to acquire shares in their employers company or its parent company at a favourable price at some time in the future.

An income tax charge under Schedule E arises when an employee or director realises a gain from the exercise, assignment or release of a right that she/he obtained under an option.
Persons in receipt of share options are chargeable persons and are obliged to pay Preliminary Tax and make a Return of Income each year"

 

[ClubMan]

Clubman, I had an ESPP in my last job which sounds very similar to yours and we had to pay income tax not BIK on the 15% discount and I had to file a form 11 in October of each year. I would advise you to contact someone in revenue regarding this as depending on which way your scheme has been set up you could be liable to pay 42% not 20% tax.

I'm not sure what you mean by "income tax not BIK" but in this case I know for sure that we are liable for income tax (42% in the case of all the employees here but if anybody was on 20% that would be their liability) but the problem was that initially the company/accountants incorrectly deducted this via payroll when, in fact, they were supposed to leave it to the individuals to declare and pay within 30 days of the options being exercised/shares being purchased.

 

[ACCK01]

Sorry I mis-read your initial post regarding the BIK versus BIK Income Tax - I'm new to this and just skimmed the posts so please forgive me.

You are liable for income tax (as you stated ) and also must file a form 11 in October and pay preliminary tax for the following year, as well as sending in the RTSO1 within 30 days of the options being exercised/shares being purchased.

 

[ClubMan]

No problem - I was just a bit confused by your contribution above. Are you sure about the Form 11? I thought that a Form RTSO1 within 30 days of the option exercise/share purchase was all that was required?

 

[ACCK01]

You might be better off ringing revenue to confirm, as it looks like your company has messed your tax up.

I know that I and my collegues had to send in form 11s for each year we were in the scheme (a complete pain I might add). Our scheme was a nightmare and I dropped out at the end as the hassle involved with the tax wasn't worth the couple of quid I made in profit.

From the revenue website: SHARE OPTIONS AND OTHER SHARE SCHEMES

An income tax charge under Schedule E arises when an employee or director realises a gain from the exercise, assignment or release of a right that she/he obtained under an option.
Persons in receipt of share options are chargeable persons and are obliged to pay Preliminary Tax and make a Return of Income each year"