Without great fanfare, the March Budget documentation contains what some have seen as an ominous reference to "future action" by the Government to crack down on trust-based attempts to avoid the post-April 2011 restrictions on the tax relief applicable to the pension savings of high earners (broadly, those whose taxable income is over £150,000).
In the relevant paragraph, the Government "announces future action to tackle the use of arrangements to reward employees through the use of trusts and other intermediaries, with the purpose of avoiding, deferring or reducing liabilities to income tax or NICs or avoiding restrictions on pensions tax relief". The Government "will consider options for tackling these avoidance arrangements with the intention of introducing any necessary legislation to take effect from April 2011."
This has been interpreted by some as a potential threat to employer-financed retirement benefit schemes (EFRBSs). In essence, EFRBSs are unregistered pension schemes, viewed as successor vehicles to pre-A Day unapproved arrangements. They are subject to their own particular tax and National Insurance requirements (which are broadly more favourable to high earners when compared to the effects of the post-April 2011 tax relief restrictions). Many employers are considering establishing EFRBSs for their high earners in order to mitigate the effects of the forthcoming tax relief restrictions. The ambiguous commentary in the Budget document has been followed-up by anti-avoidance provisions in the Finance Act 2010, which are themselves widely drafted and could, on their strict wording, encompass EFRBS.
However, it would be surprising if EFRBSs were the intended focus of the Government's anti-avoidance policy, particularly in light of the fact that HMRC has traditionally viewed EFRBSs (and their predecessor unapproved schemes) as legitimate retirement benefit vehicles. HMRC has, for example, published separate technical guidance on the operation of EFRBSs in its Employment Income Manual.
More significantly, when HMRC updated its anti-forestalling technical guidance in Autumn 2009, it included reference to EFRBSs and, in particular, it noted that the anti-avoidance provisions within the anti-forestalling regime are wide enough to apply if an EFRBS is set up other than solely for the provision of benefits. For example, the provisions might apply where an EFRBS is used as an alternative to a registered pension scheme "but with the intention of transferring the rights" to a registered pension scheme "at an opportunity when, for example, an annual allowance charge will not apply but that charge might otherwise have applied had the contributions been paid directly to, or the rights accrued under, the registered pension scheme."
The corollary of this approach is that EFRBSs set up solely for the provision of benefits would not be caught by the anti-forestalling anti-avoidance provisions. It would be surprising, therefore, if the Government was to consider EFRBSs as falling foul of the anti-avoidance principle in the post-April 2011 regime (or it would, at least, be reasonable to expect official guidance/commentary to make specific reference to these well known trust-based schemes if the Government has decided to bring them within the ambit of the anti-avoidance provisions).
It is worth noting also that HMRC tweaked EFRBSs' tax treatment as recently as in the Pre-Budget Report (November 2009) (to levy a tax charge where EFRBSs payments are made to an entity which is not an individual). Just prior to that (in August 2009), HMRC also featured EFRBSs in a tax avoidance "spotlight" (focusing on EFRBSs which were structured purportedly to allow an immediate corporation tax deduction (in "traditional" EFRBSs, the corporation tax deduction is deferred until benefits are paid)). These would have been ideal opportunities for HMRC to "tackle" any wider concerns about EFRBSs.
However, the Budget documentation leaves the door open for HMRC to bring arrangements such as EFRBSs within the anti-avoidance provisions (thus restricting their efficacy as a more tax-efficient way for employers to provide retirement benefits for its high earners after April 2011). Whilst this may at the moment seem unlikely, employers may prefer to wait and see if the position is clarified after the General Election.