Forde and McHugh Ltd v HM Revenue and Customs
| Jurisdiction | UK Non-devolved |
| Judgment Date | 21 February 2011 |
| Neutral Citation | [2011] UKUT 78 (TCC) |
| Date | 21 February 2011 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2011] UKUT 78 (TCC).
Upper Tribunal (Tax and Chancery Chamber).
Floyd J and Judge Avery Jones.
Richard Bramwell QC, Michael Sherry and Anne Redston (instructed by Charterhouse (Accountants) LLP) for the taxpayers.
Philip Jones QC and James Rivett (instructed by the Solicitor to HM Revenue and Customs) for the Crown.
The following cases were referred to in the judgment:
Aberdeen Asset Management plcTAX [2010] UKFTT 524 (TC); [2011] TC 00779
Edwards (HMIT) v RobertsTAX (1935) 19 TC 618
R v Postmaster GeneralELR (1876) 1 QBD 658
Sempra Metals Ltd v R & C CommrsSCD (2008) Sp C 698
Smyth (Surveyor of Taxes) v StrettonTAX (1904) 5 TC 36
Telent plc v R & C CommrsSCD (2007) Sp C 632
Tennant v SmithELR [1892] AC 150
Tullett & Tokyo Forex International Ltd v Secretary of State for Social Security [2000] EWHC 350 (Admin)
National Insurance contributions - Employer's contributions - Liability to pay - Payment by employer into conditional or contingent fund for ultimate benefit of employee - Taxpayer company transferring gilts and cash to trustees of funded unapproved retirement benefits scheme (FURBS) - Sole member of scheme director of taxpayer - Whether contributions to scheme amounting to "earnings paid to or for the benefit of an earner" - Taxpayer's appeal allowed - Social Security Contributions and Benefits Act 1992, Social Security Benefits and Contributions Benefits Act 1992 section 6 subsec-or-para 1s. 6(1) - Social Security (Contributions) Regulations 2001 (SI 2001/1004), Sch. 3, Pt. II.
This was an appeal by the taxpayer company against a decision of HMRC that it was liable to pay Class 1 National Insurance contributions (NICs) on the transfer of gilts and cash to the trustees of a funded unapproved retirements benefit scheme (FURBS).
The taxpayer company set up a FURBS by a trust deed in April 2002. On the same day, a director of the taxpayer (M) joined the scheme and was at all material times its sole member. Any property vested in the trustees for the purposes of the scheme was to be applied towards the provision of relevant benefits in accordance with the deed and rules. The rules provided for benefits on retirement from service; death benefits; benefits on change in the nature of service; and benefits on leaving service before retirement age. The taxpayer then transferred treasury stock with a nominal value of £162,000 and £1,000 of cash to the scheme trustees.
HMRC considered that the taxpayer was liable to pay employer's Class 1 NICs in respect of those payments on the basis that the sums paid in respect of the sole member of the scheme constituted "earnings paid to or for the benefit of an earner" within the Social Security Contributions and Benefits Act 1992, s. 6(1). The taxpayer's appeal was heard at first instance by the Upper Tribunal as it was a lead case for a number of other appeals.
In reliance on the decision in Tullett & Tokyo Forex International Ltd v Secretary of State for Social Security [2000] EWHC 350 (Admin), the taxpayer argued that, just as with income tax before the intervention of statute, payments by an employer into funds which were subject to a contingency before they vested in the employees were not "earnings paid to or for the benefit of an earner". The case of Telent plc v R & C Commrs (2007) Sp C 632, where the commissioners held that the amount of "earnings" had been the amount of the contributions into the scheme, had been wrongly decided. Further, there was no basis for giving "earnings" any wider meaning for National Insurance purposes than "emoluments" had in relation to income tax.
HMRC contended that Tullett & Tokyo had been wrongly decided. The definition of earnings in s. 3 of the 1992 Act included "remuneration" which was wider than "emoluments". The common sense view was to regard those payments as the earnings or remuneration of the employee even though subject to a contingency. Alternatively, it was appropriate to regard what M had received as a contingent interest in a fund which could be valued by reference to the payments into the fund; and even if Tullett & Tokyo had been correctly decided, it was distinguishable since a beneficial interest in the gilts transferred to the trustees was conferred on M. That interest could be valued by reference to the value of the gilts when they were transferred in.
Held, allowing the appeal:
1. On general principles, there were no "emoluments" for income tax purposes when an employer paid a sum into a conditional or contingent fund for the ultimate benefit of an employee. Statute had, however, intervened in the case of income tax (ICTA 1988, s. 595) so as to treat contributions paid to a retirement benefits scheme with a view to the provision of benefits for the employee, whether or not subject to any contingency, as income of the employee assessable to tax. (Smyth (Surveyor of Taxes) v Stretton (1904) 5 TC 36 and Edwards (HMIT) v Roberts (1935) 19 TC 618 considered.)
2. There was no basis for giving "earnings" any wider meaning for NIC purposes than "emoluments" had in the income tax sphere. In the National Insurance field in Tullett & Tokyo the High Court held that it was the enhanced value of a life policy which was the earnings and not the transfer of gilts to the insurers. The Upper Tribunal would not depart from that decision. The statute did not extend to all payments made for the benefit of an employee. Only earnings were to be used as the basis for the contribution and the tribunal was unable to find the distinction contended for by HMRC between earnings or remuneration and emoluments. Accordingly, neither the transfer of the gilts nor the cash payment to the trustees fell within "earnings paid to or for the benefit of an earner" (Tullett & Tokyo followed.)
3. The tribunal declined to treat as "earnings" the grant of a contingent interest in a fund which could be valued by reference to the payments into the fund. If a contingent interest failed to meet the definition of "earnings", because it did not give the employee a vested interest in the fund, then it did not assist HMRC that it might be possible to place a value on it. The argument conflated qualification for NICs and computation of amount. (Telent considered.)
4. The beneficial interest argument depended on showing that a beneficial interest in the gilts was conferred on the employee when they were transferred into the scheme. Only then could the transfer be treated as excepted from the "payment in kind" provisions. The tribunal was not persuaded that the effect of the scheme in the present case was to confer a beneficial interest in the gilts on M, who only had a right to ensure that the trustees administered the trust properly. That meant that the trust fund had to be applied to provide the benefits described in the events specified. He did not have a beneficial interest in any of the assets held in the trust.
1. This is an appeal against the decision of the respondents, the Commissioners for Her Majesty's Revenue and Customs, that the appellant company, Forde and McHugh Ltd, was liable to pay Class 1 National Insurance contributions in the period 6 April 2002 to 5 April 2003 on sums paid into a funded unapproved retirement benefits scheme ("FURBS" - "the scheme"). The sums paid were in respect of the sole member of the scheme, Mr WA McHugh, a director of the appellant company. The appeal is being heard at first instance by the Upper Tribunal by direction of the Presidents of the First-tier and Upper Tribunals, as it is a lead case for a number of other appeals.
2. The scheme...
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