National Insurance – not just another income tax

From most peoples’ perspective, national insurance is simply income tax by another name.

Even amongst tax practitioners, there has been a recognition that similar principles applied to the two forms of revenue, even if the underlying historical and statutory frameworks were different.

The Court of Appeal has recently taken a different view however, with the majority in HMRC v Forde and McHugh Ltd [2012] EWCA Civ 692, making it clear that the distinction between national insurance and income tax is important and cannot be ignored. Or to put it another way, it cannot be assumed that what applies for income tax also applies for national insurance.

The case concerned payments by an employer into a funded unapproved retirement benefit scheme (‘FURBS’).

For national insurance purposes, section 3(1)(a) of the Social Security Contributions and Benefits Act 1992 (‘SSCBA 1992′) defines earnings as including ‘any remuneration or profit derived from an employment‘.

At the material time, section 19 of the Income and Corporation Taxes Act 1988 (‘ICTA 1988′) charged income tax on ‘emoluments’, which were defined as including ‘all salaries, fees, wages, perquisites and profits whatsoever’. Section 595(1) of ICTA 1988 deemed sums paid by employers to a FURBS to be emoluments. The parties agreed that if it were not for section 595(1), payments to the FURBS would not amount to emoluments for income tax purposes.

The issue in this case, therefore, was whether, given the absence of an equivalent to section 595(1) in the national insurance legislation, the payments were not ‘earnings’ for national insurance purposes, or whether (as HMRC contended) the terms ‘earnings’ was wider than the income tax definition of emoluments, and therefore covered payments to a FURBS.

Arden LJ and Ryder LJ, disagreeing with the Upper Tribunal, held that ‘earnings’ was wider than ‘emoluments’ for income tax purposes. Their reasoning was based on a number of factors, the most important being:

• Income tax and national insurance have different origins. Since 1973, there has been no explicit statutory provision linking national insurance to emoluments for income tax purposes, and one could not be inferred.
• Section 6(1) SSCBA 1992 refers to earnings paid to or for the benefit of an earner. The use of the word ‘paid’ as opposed, for example, reference to amounts received by the employee was telling. Read in conjunction with section 3(1), ‘earnings’ for national insurance purposes captures any remuneration or profit paid to the employee, or paid to someone else but for the employee’s benefit (as was the case here).

The consequence of drawing this distinction between income tax and national insurance was that sums which were contingent or not readily convertible into cash could still be charged to national insurance, even though, absent specific provisions, they would not be emoluments for income tax purposes.

Comment

Although HMRC will no doubt be pleased with the decision, as it is understood that they could otherwise have been exposed to repayment claims of up to £8.5M arising from contributions to unapproved retirement benefit schemes, the decision presents a potential headache for taxpayers and HMRC alike in defining the scope of ‘earnings’ for national insurance purposes, without necessarily being able to rely upon the assistance of income tax based case law. This may lead to more disputes whilst the parameters of national insurance earnings are determined.

The Court of Appeal refused Forde and McHugh’s application for permission to appeal to the Supreme Court, but it is of course still open to them to make an application for permission direct to the Supreme Court. As this is now the leading case in this difficult area and the lead case for a number of other appeals, it would be helpful if the Supreme Court was to agree to hear an appeal.