If I create a shortcut on my Desktop using
Right Click < New < Shortcut
Then entering am address like http://www.mytest.com is there anyway for this to grab the favicon used and use it for the icon on desktop automatically or is this not possible?
Save your icon image(s) as .png format, then use this tool to compile them into a single .ico file:
png2ico - PNG to icon converter (Linux, Unix, GNU, Windows, ...)
The beauty of this tool (and tools like it) are that it can save multiple sizes in a single .ico file so that the destination can display the size that fits best (e.g., if a user enlarges the icon view, the higher resolution size can be displayed instead of the tiny one enlarged for a better quality image).
This is a command-line tool, which is also nice for automation purposes, but also because then you have complete control over what's going on, which is not always typical of GUIs.