The coalition Government is continuing the approach of previous UK governments in seeking to combat perceived improper avoidance of tax. One element to be included in the Finance Bill 2011 concerns arrangements using Employee Benefit Trusts (EBTs) and similar structures to provide benefits to employees or connected persons in a manner which defers income tax or NICs, or avoids those charges entirely.   These aren't intended to affect legitimate employee share plans but any company which has an EBT should consider whether any of its activities might be affected.
 
Although it is understood that the primary targets include family benefit trusts (employer-funded discretionary trusts) and some types of retirement benefit scheme, the legislation, like so many anti-avoidance provisions, is complicated and is drafted very widely.
 
There has been some comment that the legislation may therefore affect mainstream employee incentive arrangements, although HM Revenue & Customs has confirmed that it is not intended to interfere with the operation of ordinary share plans with no tax avoidance motive. There is, however, an opportunity for questions and concerns to be raised with HMRC before 9 February 2011 if interested parties wish to air any particular issues.
 
Broadly, under the legislation, an income tax charge will arise when, at any time on or after 6 April 2011, a third party makes a payment or transfer or otherwise makes available property in favour of past, present or prospective employees or directors, or persons linked to such employee or director, under an arrangement connected with the relevant employment or office. This means, for example, that a loan will be charged to income tax when made, rather than only if and when written off, as currently. 
 
There are, however, specific “safe harbour” exemptions for tax favoured employee share and share option plans, registered pension schemes, employment-related securities options and certain types of restricted securities.
 
There are also detailed provisions to deal with the interaction of the proposed new provisions with existing income tax charging provisions, for example, on interest-free loans.
 
In summary, this area of the law is becoming more complex, and technical advice will often be required which will typically depend on the precise circumstances of each individual case. Nevertheless, companies which operate straightforward employee share schemes should have no major cause for concern.
 
Employee benefit trusts continue to be appropriate, and even necessary, in many employee share plans, although some companies may need to seek assurance regarding some technical issues in the light of the proposed new legislation. Companies which have EBTs – or are thinking about creating one – and which are concerned about the possible impact of this legislation should also note the specific “safe harbour” provisions. In the light of these, it might be worth them considering the advantages of any tax favoured employee share and share option plans of which they are not making full use.