In HMRC v Forde and McHugh Limited  UKSC 14, the Supreme Court has decided that a contributions to a funded unapproved retirement benefits scheme (FURBS), payment of benefits under which were contingent on the beneficiary’s reaching a given age, were not “earnings” for the purposes of the Social Security Contributions and Benefits Act 1992, and therefore not subject to Class 1 National Insurance Contributions.
Forde and McHugh Limited (“FML”), established a FURBS for its employees under which the member would receive a pension or other agreed benefits on reaching retirement age. If he died before reaching retirement age, the trustees would apply the fund for the benefit of a defined discretionary class of beneficiary. (Mr McHugh wished the trustees to exercise their discretion in favour of his wife.). Mr McHugh, a director and shareholder, became the sole member of the FURBS. FML made contributions of £1,000 in cash and Treasury stock with a nominal value of £162,000 into the FURBS.
HMRC decided that FML was liable to pay Class 1 National Insurance Contributions (“NICs”) on the contributions. The Upper Tribunal allowed FML’s appeal against HMRC’s decision at first instance. The Court of Appeal then restored HMRC’s decision, following which FML appealed to the Supreme Court.
Issue before the Court
The question before the Supreme Court was whether the transfer of cash and Treasury Stock to the FURBS were “earnings” for the purposes of s. 6(1) of the Social Security Contributions and Benefits Act 1992?
FML argued that “earnings” did not extend to a transfer to a trust of funds or assets in which the earner had only a contingent interest at the time of the transfer. HMRC put forward two arguments:
- The payment was earnings because it was paid as part of Mr McHugh’s remuneration for past or future services. The payment was made to a trust fund which was solely for the benefit of Mr McHugh and his wife.
- Payments made out of the trust fund would be payments in respect of employment and would therefore fall within “earnings”.
The Supreme Court rejected HMRC’s arguments for the following reasons:
- The “ordinary man on the underground” would consider it odd to treat (a) payment by an employer into a trust for the employee’s benefit and (b) payment to the employee out of the trust fund as though they were both “earnings”.
- The word “earnings” indicates what an employee obtains from his employment, not what the employer paid.
- The hypothetical value of Mr McHugh’s entitlement would not be the value of the assets contributed to the fund. It would be the value of his contingent right to the trust fund. Benefits which cannot immediately be converted into money are in principle earnings, but HMRC’s approach did not accurately calculate the value of Mr McHugh’s entitlement (which was conditional on his surviving to retirement age and would vary depending on how the investments performed).
This decision confirms what has generally been understood to be the case - that payments into a FURBS are not “earnings” for the purposes of NICs when they are paid to the trustees. They will be treated as earnings when they are paid out of the trust to the employee.