The recent Supreme Court decision in Forde and McHugh Limited v The Commissioners for H M Revenue & Customs 1 was a test case about the meaning of "earnings" for National Insurance purposes.
Forde and McHugh Limited ("FML") established a type of pension scheme called a Funded Unapproved Retirement Benefits Scheme in April 2002 (the "FURBS") to provide relevant benefits to: (i) employees and directors on retirement; or (ii) their relatives on their death. Shortly after the FURBS was established, Mr McHugh, a director and shareholder in FML, became the sole member of the FURBS (aged 54). FML subsequently transferred money and treasury stock to the FURBS. As Mr McHugh had not yet reached his normal retirement age he enjoyed only a contingent right to benefits from the FURBS. Under the legislation, "earnings...paid to or for the benefit" of an earner are subjected to Class 1 national insurance contributions charged on both the earner and the employer. The Supreme Court therefore had to determine whether Mr McHugh received "earnings" on the date that the money and stock were paid into the FURBS or whether he would in fact only accrue earnings on receipt of payment from the trust.
Somewhat unexpectedly, HMRC contended that Mr McHugh received earnings both on the transfer of the assets into the FURBS and then at a later point in time when he received a distribution from the FURBS. HMRC's argument in effect meant that Mr McHugh would be deemed to have received his earnings twice.
In the Supreme Court, Lord Hodge disagreed with HMRC's argument for three main reasons:
- Viewed through the eyes of the ordinary man, it would be an odd result if an individual was treated as receiving earnings both when the employer paid money into the FURBS and again at a later point in time when money was paid from the FURBS to the individual;
- HMRC's argument only took account of what was paid into the FURBS and not what Mr McHugh actually received. The ordinary meaning of the word "earnings" required that what the individual actually received had to be taken into consideration;
- Finally, treating payments into the FURBS as earnings failed to account for the contingent nature of Mr McHugh's benefit. The hypothetical value of Mr McHugh's entitlement was not the value of the assets transferred into the FURBS at the transfer date but rather the value of his contingent right to the FURBS's assets at his retirement date. Attributing a value to Mr McHugh's contingent right would clearly be difficult given that it would need to take account of both the probability of Mr McHugh dying before retirement and the future value of the FURBS's assets at his retirement date.
For these reasons the Supreme Court found in favour of the Appellant ruling that an employer's contributions into a FURBS are not earnings for NIC purposes where the recipient has only a contingent entitlement. It is anticipated that this decision will apply in arrangements other than retirement benefits schemes for example deferred bonus payments held in trust or escrow or in relation to sub-trusts held for specified employee beneficiaries.
From an employer perspective whilst clearly the delay in having to pay an upfront Class 1 NIC liability is a welcome development, that liability is likely to be greater when payment is made to the employee assuming the assets appreciate in value whilst they are held in the scheme.
Whilst this decision was anticipated to apply to many arrangements, there has not been a slew of subsequent cases applying McHugh. As always, we will keep you appraised of developments.
Footnotes
1 [2014] UKSC 14
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