HM Revenue and Customs v Forde and McHugh Ltd

For Class 1 National Insurance purposes, “earnings” under the Social Security Contributions and Benefit Act 1992 is an autonomous concept. It is not confined by income-tax principles governing “emoluments”, including indefeasibility and convertibility.

A payment constitutes earnings when remuneration or profit from employment is paid directly to an employee or to a third party for the employee’s benefit. Immediate vesting, a proprietary interest or ready convertibility into money is unnecessary. Employer payments of cash and gilts to an unapproved retirement benefits scheme therefore attracted Class 1 contributions.

HMRC appealed against the Upper Tribunal (Tax and Chancery Chamber) decision, reported at [2011] UKUT 78 (TCC), which had allowed Forde and McHugh Ltd’s appeal against an HMRC decision.

The company had paid cash and gilts to trustees of a funded unapproved retirement benefits scheme for the benefit of a director. The director received a contingent future benefit but no immediate realisable interest. The central issue was whether the payments were “earnings paid to or for the benefit of an earner” under section 6(1) of the Social Security Contributions and Benefit Act 1992.

By a majority, Arden LJ and Ryder J allowed HMRC’s appeal. Rimer LJ dissented.

1. Autonomous statutory concept. Arden LJ held that “earnings” for National Insurance purposes is distinct from income-tax “emoluments”. The income-tax principles of indefeasibility and convertibility do not limit the statutory meaning of earnings. The history of National Insurance legislation, the wording of section 6(1), section 10 and the regulatory scheme showed that Parliament had maintained separate tax and contribution bases. Ryder J agreed that the court should not align the concepts by inference.
2. Meaning of payment. Section 6(1) applies where remuneration or profit derived from employment is paid to the earner or to a third party for the earner’s benefit. The statutory trigger is payment, not unconditional receipt or vesting. An employee need not receive a proprietary or immediately realisable interest.
3. Application. The employer’s payments to the scheme were profits derived from employment and were within the charging provision. The value for contribution purposes was the value of the gilts transferred, rather than the amount later received. Paragraph 13 of Schedule 2 to the Social Security (Contributions) Regulations 2001 was not ultra vires; it operated on the valid assumption that such payments could constitute earnings.
4. Earlier authority. Arden LJ held that Tullett & Tokyo Forex International Ltd and Others v Secretary of State for Social Security, [2000] EWHC (Admin) 350, was wrong to treat National Insurance as chargeable only on what the employee received. The income-tax authorities remained relevant to the tax legislation but did not govern section 6(1).
5. Dissent. Rimer LJ considered that “earnings” had the same ordinary meaning as “emoluments”. In his view, absent an express deeming provision comparable to section 595(1) of the Income and Corporation Taxes Act 1988, the payments were not earnings and paragraph 13 of Schedule 2 could not itself impose a charge.

1. Court of Appeal (Civil Division): By a majority, allowed HMRC’s appeal in [2012] EWCA Civ 692.
2. Upper Tribunal (Tax and Chancery Chamber): Allowed Forde and McHugh Ltd’s appeal against HMRC’s decision in [2011] UKUT 78 (TCC).