The Commissioners for H M Revenue & Customs v Forde and McHugh Limited

For national insurance purposes, “earnings” are wider than income tax “emoluments” and may include non-convertible benefits in kind. Whether earnings have been paid nevertheless depends on what the employee obtains from the employment.

An employer’s transfer of assets to trustees is not itself earnings where the employee receives only a contingent right to future benefits. A later pension or deferred bonus may constitute deferred earnings, but Parliament cannot ordinarily be taken to impose contributions both when the fund is created and when it is paid out. The contingent right must not be treated as equivalent in value to the assets transferred to the trustees.

An employer transferred cash and Treasury Stock to a funded unapproved retirement benefits scheme established for its sole member, a director and shareholder. The member would become entitled to pension or other benefits on reaching his specified retirement age. Until then, his interest was contingent and could be defeated by his earlier death.

The Upper Tribunal allowed the employer’s appeal against liability for Class 1 National Insurance Contributions. The Court of Appeal, by a majority, reversed that decision in [2012] EWCA Civ 692.

The issue before the Supreme Court was whether the employer’s transfer to the trustees amounted to a payment of “earnings” to or for the member’s benefit under section 6(1) of the Social Security Contributions and Benefits Act 1992.

1. Appeal allowed unanimously. Lord Hodge delivered the judgment, with which Lord Neuberger, Lord Sumption, Lord Reed and Lord Toulson agreed. The transfer to the trustees was not a payment of earnings within section 6(1) of the Social Security Contributions and Benefits Act 1992. The Upper Tribunal’s judgment was reinstated.
2. “Earnings” in national insurance legislation are not confined to “emoluments” as understood in income tax legislation. The legislative history showed that earnings may include benefits in kind which the recipient cannot immediately convert into money, unless primary or subordinate legislation directs that they be disregarded. The restriction on emoluments illustrated by Tennant v Smith [1892] AC 150 therefore did not govern the meaning of earnings.
3. Section 6(1) directs attention to what the employee obtains from the employment. Treating every employment-related payment as earnings would deprive the word “earnings” of independent meaning. A pension or deferred bonus is ordinarily earned when it is paid to the employee as deferred remuneration. In the absence of clear words or necessary implication, Parliament cannot be taken to have intended the employee to earn the same remuneration both when the employer creates a trust fund and when the fund is later distributed.
4. The member did not receive the cash and Treasury Stock transferred to the trustees. He obtained only a contingent right to future pension or other benefits if he reached retirement age. The value of that right was not the value of the transferred assets. Any valuation would have to reflect both the risk of death before retirement and uncertainty about the trustees’ management of the fund.
5. Edwards v Roberts (1935) 19 TC 618 assisted because it applied the general law concerning contingent interests and focused on what the employee received. The Court also approved Collins J’s approach in Tullett & Tokyo Forex International Ltd v Secretary of State for Social Security [2000] EWHC (Admin) 350 that liability depended on what the employee received. It left open whether, in another case, a contribution might instead be analysed as a payment made from the employee’s salary.

1. United Kingdom Supreme Court: Allowed the employer’s appeal unanimously and reinstated the Upper Tribunal’s judgment: [2014] UKSC 14.
2. Court of Appeal: By a majority, allowed HMRC’s appeal and restored HMRC’s decision: [2012] EWCA Civ 692.
3. Upper Tribunal (Tax and Chancery Chamber): Allowed the employer’s appeal against HMRC’s decision that Class 1 National Insurance Contributions were payable.