A recent Supreme Court judgement has given a boost to pensioners and trustees after quashing a claim by HMRC to tax the same payment twice.
The judgement dismissed a claim by HMRC to tax “earnings” paid to an earner both when assets are transferred to a pension scheme to be held on a trust and also when payments are made from a trust fund.
The case addressed the issue of whether the transfer of cash and assets to a funded unapproved retirement benefit scheme (FURBS) was earnings for the benefit of Mr McHugh in relation to section 6(1) of the Social Security Contributions and Benefits Act 1992.
While there was no doubt that the transfer to the FURBS was to the benefit of Mr McHugh, what couldn’t be argued was that payments from the trust to beneficiaries could be classed as “earnings.”
In dismissing HMRC’s arguments and allowing the appeal of Forde and McHugh Ltd, Lord Hodge said:
- “The ordinary man on the underground” would consider it counter-intuitive that a person would earn remuneration when an amount is paid to a trust and then again when the trustee distributes the fund to the beneficiaries.
- “Earnings” by their very nature suggest that a reader of the legislation should look to what the earner obtains, HMRC’s argument focuses on what was paid which gives rise to this double counting of “earnings”.
- HMRC ignore the existence of “contingency”. In their computation of the value of the contribution HMRC take the value of the assets at the date of transfer, whereas the value to Mr McHugh in this case is the value of the contingent right to the trust fund as it would be at the date of retirement.
This recent judgement would suggest good news for those who are beneficiaries to the successor of FURBS – Employer Financed Retirement Benefit Schemes (EFRBS) and Employee Benefit Trusts (EBTs) – which are similar in nature.
While HMRC have in the past used the previous ruling from the Court of Appeal (which found in favour of their argument) to argue that contributions to EFRBS and EBTs are subject to Class 1 NIC, the Supreme Court has reversed this decision making their argument weak and unconvincing.
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