Gabelle Tax Analysis: Definition of earnings for NIC is wider than that for income tax

The Court of Appeal in Forde & McHugh Ltd v Revenue and Customs and Commissioners [2012] EWCA Civ 692 decided that the definition of earnings for NIC is wider than for the purposes of income tax. The decision - published on 14 June – considered whether a contribution made by a company to a funded unapproved retirement benefits scheme (FURBS) was earnings for the purposes of Class 1 NIC.

Section 595(1) of ICTA includes as “earnings” employer payments into a FURBS. Both sides before the Court of Appeal agreed that were it not for that section, payment to the FURBS would not be earnings for the purposes of income tax. There is no equivalent section for NIC. HMRC argued that the definition of earnings for the purposes of NIC is wider than the definition of earnings for income tax and that it included contributions to a FURBS.

(For the purposes of NIC, earnings are defined as ‘any remuneration or profit derived from an employment’ (by s 6(1) (a) of the Social Security Contributions and Benefits Act 1992). For the purposes of income tax, earnings included ‘all salaries, fees, wages, perquisites and profits whatsoever’ (by section 19 of the Income and Corporation Taxes Act 1988).)

The Upper Tribunal had found against HMRC and had held that the payments into the FURBs were not earnings for the purposes of NIC.

The Court of Appeal reversed this decision. It held that the meaning of earnings for the purposes of NIC is not the same as for income tax. For the purposes of NIC, the term earnings includes:

“any payment which constituted remuneration or profit derived from an employment and which met the further condition that it was either paid direct to the employee or paid to a third party for his benefit. There was no requirement, under s 6(1), for the benefit to have vested with an employee, or the statute would have used the phrase 'earnings received by an earner'. Further, the natural meaning of the phrase 'paid to or for the benefit of an earner' treated a payment as having achieved the status of earnings when it was paid, and not when it was unconditionally received. It was therefore irrelevant for the triggering of the liability to pay class 1 contributions under s 6(1) of the 1992 Act that the payment had actually vested.”

This decision comes at a time when the Government is considering merging NIC with income tax. Perhaps the lack of symmetry between the application of NIC and PAYE on a single payment of earnings illustrates the need for a more simplified system.

Tax practitioners will need to consider whether the principle in this decision applies to any of their clients’ incentive arrangements. For example, where a payment is made by an employer to a third person such as an EBT or group company as part of a deferred award, there may be an NIC charge, even if the arrangement falls within the specific exclusions of the disguised remuneration rules.

Priya Dutta is a Senior Tax Consultant at Gabelle LLP. She can be contacted at priya.dutta@gabelletax.com or via TaxDesk on 0845 4900 509.