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The recent Supreme Court decision in Forde and McHugh
Limited v The Commissioners for H M Revenue & Customs1 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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