The Supreme Court has determined in the case of HMRC v Forde and McHugh Limited the NIC treatment of historic contributions to non-qualifying retirement benefits (or pension) schemes in a judgement given on 26th February.

The case concerned the funding of a pension plan by a company for the benefit of employees and directors of Forde and McHugh Limited. In practice, the main beneficiary was Mr McHugh, a director and shareholder in the Company. The plan terms allowed for retirement benefits to be paid from a starting date to be notified by the Employer to the Beneficiary between the 50th and 85th birthday of the individual concerned. In this case, the same individual controlled the Company and was therefore able to determine the date to be applied.

The question considered by the Court was whether the funding amounted to “earnings” for NIC purposes when made subject to a contingency (in this case, that Mr McHugh did not die before his retirement date. If he did, the plan terms provided for the benefit to be paid at the discretion of the Trustees to another Beneficiary such as his spouse.

The conclusion reached by the Supreme Court was that on these facts, while “earnings” for NIC purposes carried a wider meaning than “emoluments” for general tax purposes, the funding of the pension plan did not amount to the provision of earnings for three reasons:

• The “ordinary man on the underground” would regard it as counter intuitive to say (as implied in the HMRC argument) that both the funding and the distribution give rise to earnings.
• The HMRC argument rested on what was paid rather than what was received whereas the legislation on remuneration is concerned with “what the employee receives from his employment”.
• Under the terms of the plan, no payment would have been made if, prior to the payment date, the individual had died prior to the retirement date so that the payment was in effect conditional.

Our View

The case is another in a line where HMRC have sought to assert that earnings charges (in this case, to NICs) arise on the funding of the trust rather than on the provision of benefits. In most cases, this argument has not been successful due to the proper analysis of the arrangements being that at the time of funding, the employee has no received any amount or benefit.

As such, the case has limited relevance to the continuing funding of pension plans (as the rules relating to the tax and NIC treatment of such funding has changed) but is of importance for historic cases where HMRC have sought the payment of NICs. The case may also have an effect on the wider HMRC challenges to the tax treatment of the funding of employee benefit trusts, where their arguments are also based on establishing tax and NIC liabilities at the time of the allocation of assets rather than payment or other provision of benefits.