Income Tax Planning And Osborne's First Budget

George Osborne's first budget has thrown up some interesting developments concerning popular tax strategies that are being heavily promoted as ways around the new 50% income tax rate.

It is clear from both the HMRC and Treasury Budget notes (when read together) that once again the heavy promotion of a tax planning strategy re-packaged as a tax product, both accelerates its demise and damages tax planning generally.

The two particular tax planning strategies that are now clearly in HMRC's sights are the following:

1. The use of Trusts to Reward Employees;

2. Geared Growth and Employment Related Securities.

The First is a follow up to a Budget Note issued in Alistair Darling's March budget.

This concerned the use of Trusts as a means of avoiding, deferring or reducing an Employee's or Director's liabilities to income tax and NICs and by-passing restrictions on pensions tax relief.

The assumption by tax product sellers was that this merely referred to Employee Benefit Trusts ("EBTs") and Family Benefit Trusts ("FBTs") (a variation on an EBT where the Employee or Director's family are the main Beneficiaries).

These had already come under HMRC attack in Revenue & Customs Brief 61/09 issued in October 2009.

These tax product sellers were advised that if EBTs and FBTs had the Inheritance Tax problems HMRC claimed, then the simple solution was to use an Employee Funded Retirement Benefit Scheme ("EFURBS") instead!

EFURBS formerly known as Funded Unapproved Retirement Benefit Schemes ("FURBS") before 6th April 2006 are longstanding alternative vehicles to provide high earning individuals with an adequate pension fund.

The changes to their tax treatment from 6th April 2006 meant that Employees were no longer taxed on Employer contributions as a Benefit In Kind. There was also the potential for a Corporate Tax deduction for the Employer when "Relevant Benefits" are paid to the Employee. A potential time delayed tax deduction.

The Budget note is clear: EFURBS as well as EBTs and FBT will be targeted by the proposed anti-avoidance legislation from April 2011.

The exact form that anti-avoidance legislation will take is unclear. However, HMRC's position is that once funds are allocated unconditionally either to a sub-fund or loaned to Employees or Directors, this is equivalent to an income payment that is subject to PAYE income tax and NICs.

We know this because this was the substance of their argument in Sempra Metals Ltd –v- Commissioners of HMRC [2008]...