SIPCO director Dougie Elliott highlights the impact of the UK Finance Bill on Employee Benefit Trusts and Employer Financed Retirement Benefit Schemes.

"The UK Government published the Finance Bill 2011 on 9th December 2010.

It confirms that there will be changes brought in, effective from 6th April 2011, which will remove the tax advantages of Employee Benefit Trusts (EBTs) and Employer Financed Retirement Benefit Schemes (EFRBS).

As has become the norm, there will also be 'anti-forestalling measures' introduced which will mean that the new post April 2011 law is effective from 9th December 2010.

In other words, there is no 'window of opportunity'.

The underlying philosophy is clear from the fact the government refers to it as 'Disguised Remuneration' and states that it will affect 'employers, directors, and employees who use arrangements involving trusts and other vehicles to avoid, reduce, or defer liabilities to income tax on rewards of an employment or to avoid restrictions on pensions tax relief'.

What is proposed for EFRBS and EBTs?

Where trusts and other intermediate vehicles are used in arrangements aimed at providing value to an individual for what is in substance a reward or recognition in connection with the individual's employment, or loan in connection with the employee's employment, a new Part 7A of Income Tax (Earnings and Pensions) Act 2003 (ITEPA) will provide for a new employment income charge to apply in the following ways:

• sums or assets that are earmarked for employees by trusts or other intermediaries will be treated as though the amount of the sum or the value of the asset concerned is a payment of PAYE income provided by the employee’s employer to the employee;

• loans provided to employees by trusts and other intermediaries will be treated as though the value of the loan provided is a payment of PAYE income provided by the employee’s employer to the employee; and

• assets provided to employees by trusts and other intermediaries will be regarded for tax purposes as a payment of PAYE income by the employer where certain conditions specified in new Part 7A are met.

National Insurance Contributions

Regulations will be brought forward to apply NICs to amounts chargeable to tax under this measure.
The bottom line is that EBTs and EFRBSs will be subject to income tax and NI. Existing structures could be challenged

We think that the International Retirement Benefits Scheme (IRBS) on the Isle of Man may be of use with alternative tax planning in certain circumstances, especially where someone intends to retire outside of the UK or is a foreign national working in the UK.

Obviously, no worthwhile opinion can be obtained as to the effect of these proposed provisions until the detail of the Finance Bill (and its supporting regulations) is settled.

It does have the advantage that it is a bona fide pension scheme and is regulated by the Isle of Man Insurance and Pensions Authority.

The involvement of a tax adviser is strongly recommended."

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