Forde and McHugh Ltd v Revenue and Customs Commissioners [SC]
| Jurisdiction | England & Wales |
| Judge | Lord Hodge,Lord Sumption,Lord Reed,Lord Neuberger,Lord Toulson |
| Judgment Date | 26 February 2014 |
| Neutral Citation | [2014] UKSC 14 |
| Date | 26 February 2014 |
| Court | Supreme Court |
[2014] UKSC 14
Lord Neuberger, President
Lord Sumption
Lord Reed
Lord Toulson
Lord Hodge
Appellant
Richard Bramwell QC Michael Sherry Anne Redston
(Instructed by Farrer & Co)
Respondent
Philip Jones QC James Rivett
(Instructed by HM Revenue & Customs Solicitors Office)
Heard on 16 January 2014
Lord Hodge, (with whom Lord Neuberger, Lord Sumption, Lord Reed and Lord Toulson agree)
This appeal is the lead case in a number of appeals concerned with the interpretation of the phrase in section 6(1) of the Social Security Contributions and Benefits Act 1992, "[w]here in any tax week earnings are paid to or for the benefit of an earner". It focuses on the meaning of the word "earnings" in that phrase. The context is the payment of an employer's contribution to a Funded Unapproved Retirement Benefits Scheme. Until 2006 such schemes were commonly used to top up sums available through tax-approved pension schemes.
On 11 April 2002 the appellant company (FML) established by trust deed a retirement benefit scheme to provide relevant benefits (as defined in section 612 of the Income and Corporation Taxes Act 1988) to its employees and directors. The trust provided that, upon a member's retirement from service, the trustees were to apply the accumulated fund in providing the member with a pension for life or such other relevant benefits as they might agree with him. On the member's death the trustees were to realise the accumulated fund and apply the net proceeds to or for the benefit of a defined discretionary class of beneficiary. On the same day Mr McHugh, a shareholder and director of FML, asked to become a member of the scheme. He informed the trustees that he wished them to exercise their discretion in favour of his wife in the event of his death. FML made an initial cash contribution to the scheme of £1,000 and transferred to it Treasury Stock with the nominal value of £162,000, both for Mr McHugh's benefit. He has been the only member of the scheme. He has received no relevant benefits from the scheme.
When the transfers were made to the scheme Mr McHugh was 54 years old. He had no vested interest in the assets of the scheme because the retirement age under the scheme was defined as meaning:
"the date between the 50 th birthday and the 85 th birthday notified to a Member by the Employer as the date on which the Member's benefits will become payable. Such date may be varied from time to time by agreement in writing between the Employer and the Member."
FML specified Mr McHugh's retirement age to be his 60 th birthday. But, as HMRC pointed out, he controlled FML and was in a position to bring forward his retirement date for the purposes of the trust deed.
The principal issue which we address is whether the transfer of the cash and Treasury Stock to the scheme was a payment of earnings to or for the benefit of Mr McHugh within the meaning of section 6 of the 1992 Act. It was agreed that the payment was for his benefit. But was it "earnings" for the purposes of that section?
FML appealed against HMRC's decision that it was liable to pay Class 1 National Insurance Contributions on the value of the transfer. The Upper Tribunal (Tax and Chancery Chamber) (Floyd J and Judge Avery Jones) heard the appeal at first instance. It delivered a judgment on 21 February 2011 allowing the appeal. HMRC appealed to the Court of Appeal (Arden LJ, Rimer LJ and Ryder J). By a judgment dated 30 May 2012 the Court of Appeal by a majority (Arden LJ and Ryder J) allowed the appeal and restored the decision of HMRC.
Before this court Mr Bramwell presented FML's appeal on a much narrower front than the case which had been debated before the Court of Appeal. Until his oral submissions to us, FML's case had been that "earnings" in NIC legislation covered the same ground as "emoluments" in income tax legislation. FML abandoned that position and focused principally on the contingent nature of Mr McHugh's interest in the transferred assets. In short, Mr Bramwell accepted that "earnings" had a wider meaning than "emoluments" in income tax legislation. His submission was 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. We, and Mr Jones for HMRC, therefore had to address a different argument from that advanced before the Court of Appeal. Counsel for both parties argued their cases very ably.
The legislative history that lies behind our present system of national insurance shows that Mr Bramwell's change of position was correct: National Insurance Contributions (NICs) have been levied on a basis which is different from the "emoluments" on which income tax has been raised.
Mr David Lloyd George, when Chancellor of the Exchequer in 1911, introduced the first compulsory system of insurance against illness and unemployment in the United Kingdom: the National Insurance Act 1911. The Act fixed contributions rates by reference to the level of an employed person's "remuneration" (section 4 and Second Schedule). Lord Beveridge carried out a substantial review of the by then expanded system of national insurance and reported in 1942. The Beveridge Report (Cmnd 6404) was implemented by the National Insurance Act 1946, which established the National Insurance Fund, into which workers, employers and the state were to contribute. Employers and employed persons were required to make weekly contributions into the National Insurance Fund to pay benefits to the earners and their dependants. Contributions were paid in respect of "earnings". In section 78 of the 1946 Act "earnings" were interpreted to include "any remuneration or profit derived from a gainful occupation".
The current provision for NICs is contained in the 1992 Act and subordinate legislation. Sections 6 to 9 of that Act provide, in relation to an earner employed under a contract of service, that where in any tax week earnings are paid to or for his benefit, the employed earner shall pay a primary Class 1 contribution and his employer will pay a secondary Class 1 contribution (both subject to specified thresholds). Section 3 of the 1992 Act provides that 'earnings' includes "any remuneration or profit derived from an employment".
In my view it is significant that Parliament in the1946 Act, chose to use the word "earnings" rather than "emoluments", which had been a term used in income tax legislation with a definition which had remained substantially unchanged since the Income Tax Act 1842. The latter word had been the subject of judicial interpretation. In particular, in Tennant v Smith [1892] AC 150, the case of the Montrose bank manager whose employer gave him free accommodation in a bank house which he was required to occupy, the House of Lords held that the Inland Revenue could not charge income tax on the value of the accommodation because the employee could not convert the benefit into money. The House of Lords held that emoluments were confined to actual money payments and to benefits in kind which were capable of being turned into money by the recipient. See also Lord Reid's explanation of the case in Heaton v Bell [1970] AC 728, 744–745.
By contrast, from the outset, the word "earnings" in NICs legislation has included benefits in kind which the recipient could not convert into money there and then. Part I of the First Schedule to the 1946 Act, which set out the contribution rates of employed persons, had a rate for earners earning remuneration of under 30 shillings per week and a higher rate for those earning remuneration above that sum. Like the 1911 Act (section 4 and Second Schedule) it treated remuneration, which, as I have said, formed part of the definition of "earnings" in section 78, as...
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