In HMRC v Forde and McHugh Limited [2014] UKSC 14, the Supreme Court has dismissed HMRC's appeal and reinstated the decision of the Upper Tribunal. 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 £162,000 (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 Upper Tribunal (Tax and Chancery Chamber) (Floyd J and Judge Avery Jones) ('UT') 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 (Arden LJ, Rimer LJ and 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; and
  2. 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.

Decision

Lord Hodge, giving the leading (and unanimous) 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:
  4. the contingent nature of Mr McHugh's right (i.e. that Mr McHugh may die before retirement and therefore never receive any payment from the trust which, instead, would be directed to his wife); and
  5. 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 have 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 persist 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) [2002] STC (SCD) 413 and Sempra Metals Ltd v HMRC [2008] STC (SCD) 1062).

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 judgement 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 quesion 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.