The Finance (No.2) Act 2023 introduced a significant change in respect of unapproved employee share option schemes by shifting the obligation to remit tax on the exercise of options granted under such schemes from individual employees to their employers with effect from 1 January 2024.

On 5 March 2024, the Irish Revenue Commissioners (the “Revenue”) updated Chapter 3 of the Share Schemes Manual to provide further detail on how the collection of tax on unapproved share options would operate in practice.

The Revenue’s guidance states a number of points:

• any gains realised on the exercise of a share option will constitute notional payments and thus subject to income tax, PRSI and USC at the rates provided in the Revenue Payroll Notification for the relevant individual;
• if the tax payable on the exercise of options cannot be deducted from payments made to the employee simultaneously with the exercise or on the employee’s next pay date, employers may:
  • withhold and sell sufficient shares from the employee to fund the acquisition of the shares and the tax due thereon (i.e. “cashless exercise”);
  • request a payment from the employee to cover the tax payable; or
  • pay the tax liability directly and require the employee to make good the payment;
• where an employee exercises an option after leaving employment, their former employer is required to treat the gain arising on exercise as a post-cessation payment and withhold tax accordingly; and
• failure by employers to remit tax on share options will attract penalties and interest on late payment at a daily rate of 0.0274%.

In respect of the “cashless exercise” option above, we note there are express statutory provisions permitting employers to operate “sell to cover” as part of a cashless exercise arrangement in order to meet income tax and USC liabilities arising on the exercise of share options. However, it is unclear if employers have a statutory basis to operate “sell to cover” in respect of employee PRSI. Employers are therefore advised to ensure that they have an express contractual right to operate “sell to cover” arrangements in either their scheme rules or award agreements.

In addition to withholding tax on the exercise of share options, employers are still required to report any share options granted, exercised, transferred or released during a calendar year on Form RSS1 which must be submitted by no later than 31 March following the end of the year in which the options were granted, exercised, transferred or released.

Employers who operate unapproved share option schemes should take account of the updated guidance and ensure that they have adequate payroll procedures in place to collect tax on the exercise of share options, particularly in relation to former employees where the rules of the scheme permit employees to exercise options after leaving employment.

If you would like further advice or assistance in relation to employer obligations on the exercise of unapproved share options, please do not hesitate to get in contact with our Incentives team.