In HMRC v Forde and McHugh Limited6, the Supreme Court has unanimously dismissed HMRC’s appeal and reinstated the decision of the Upper Tribunal (UT). This case concerned the  treatment of national insurance contributions (NICs) in respect of an employer company’s  contributions of cash and Treasury Stock to a Funded Unapproved Retirement Benefits Scheme (FURBS).

Facts

The taxpayer company, Forde and McHugh Limited (FML) established by trust deed a retirement benefit  scheme to provide relevant benefits (as defined in section 612, Income and Corporation Taxes Act  1988) to its employees and directors. Mr McHugh, a shareholder in and director of FML, was the sole  member of the scheme.

The scheme provided that on retirement its members would be entitled to a pension for life or such  other relevant benefits as might be agreed. If the member had died by the time the benefit became  payable, it would be applied to or for the benefit of a defined discretionary class of beneficiary  (in Mr McHugh’s case, his wife).

Upon Mr McHugh’s entry into the scheme, FML contributed £1,000 cash plus Treasury Stock with a  nominal value of £162k (the Contributions). At the time of the Contributions, Mr McHugh was 54  years old and, in accordance with the definition of “retirement age” contained in the trust deed,  had no vested interest in the assets. HMRC issued a decision that FML ought nonetheless to have paid NICs in respect of the Contributions. FML appealed against HMRC’s decision.

By direction the UT (Judge Floyd and Judge Avery Jones) heard the appeal at first instance because it was a lead case for a number of other appeals. The UT allowed FML’s appeal. HMRC  appealed to the Court of Appeal (Lord Justice Arden , Lord Justice Rimer and Justice Ryder J)  which, by a majority (Arden LJ and Ryder J), allowed HMRC’s appeal. FML appealed to  the Supreme  Court.

Issues

The Supreme Court noted that the scope of FML’s appeal had reduced significantly from that which  had been considered by the UT and Court of Appeal. FML chose at the Supreme Court to focus on one  key point: whether the Contributions were a payment of earnings to or for the benefit of Mr McHugh  within the meaning of section 6, Social Security Contributions and Benefits Act 1992 (the 1992  Act). It was agreed that the payment was a benefit.

FML’s narrower position focussed principally on the contingent nature of Mr McHugh’s interest in  the Contributions. FML submitted that the payment of “earnings” under section 6 of the 1992 Act did  not extend to the employer’s transfer to a trust of funds or assets in which the earner had at the  time of the transfer only a contingent interest.

In response, HMRC’s principle submission was that earnings are paid to an earner both:

  1. When assets are transferred to a pension scheme to be held on trust b) In addition, when payments are made from the trust fund

In short, HMRC submitted that it looked to the payment and not to what (if anything) the earner  received.

Supreme Court’s decision

Lord Hodge, giving the leading judgment, referred to HMRC’s stance before the Supreme Court as  “remarkable”. He gave three reasons why he thought HMRC’s position was wrong:

  1. First, Lord Hodge considered it “counter-intuitive that a person would earn remuneration both  when his employer paid money into a trust … and again when at a later date that trust fund was paid  out to him.” He was “reluctant to attribute such a view to Parliament absent clear words or  necessary implication, of which there are neither.”
  2. Secondly, he considered that it is only by looking exclusively to what was paid and ignoring  what the earner received that HMRC’s view can be sustained. In his view, such an interpretation of section 6 “denudes the word “earnings” of any meaning” and, on the other hand,  “looking towards what the earner receives avoids the counter-intuitive result.”
  3. Finally, Lord Hodge gave what he described as a subordinate reason relating to the method of  computation. He explained that HMRC’s approach would fail to take into account the element of  contingency. He considered, therefore, that the value of the Contributions would be complex to  calculate because it would need to take into account:
  • the contingent nature of Mr McHugh’s right (ie that Mr McHugh may die before retirement and therefore never receive any payment from the trust which, instead, would be directed  to his wife)
  • the uncertainty of the trustees’ performance in managing the fund until that date

In short, the calculation could not simply be by reference to the value as at the date of the  Contributions alone. Accordingly, HMRC’s approach “fails to address what it was that he received when the transfer was made.”

The Supreme Court concluded that the Contributions were “not the payment of earnings to or for the benefit of Mr McHugh within the meaning of section 6(1) of the 1992 Act”and allowed FML’s  appeal.

Comment

HMRC has long argued that arrangements deferring the payment of remuneration to an employee should  be ignored because, if the fact that the employee does not have the money is ignored, the tax is  paid earlier.

In order to achieve such a result, HMRC persists in attempting to argue that legal relationships  should be ignored along with concepts such as beneficial ownership, so that contractual  arrangements can be looked through. Such arguments have been roundly rejected by the courts (see  Dextra Accessories Ltd and others v Macdonald (Inspector of Taxes)7 and Sempra Metals Ltd v HMRC8).

The Supreme Court’s judgment confirms that employer’s contributions into a FURBS pension are not to  be classified as “earnings” within the meaning of section 6 of the 1992 Act and therefore do not,  at the time of the transfer of value, trigger a liability for the employer to make NICs.

This judgment is also a victory for common sense and the basic principles of taxation. Although the  issues were somewhat wider before the UT and the Court of Appeal, the essence of the dispute before  the Supreme Court was quite simple: should the benefit in question be subject to what in effect  would have been double taxation? Such an outcome was rejected by the Supreme Court and it is to be  hoped that this will dissuade HMRC from seeking double taxation in other similar contexts.

To read the decision click here.