Spc00632

NATIONAL INSURANCE CONTRIBUTIONS – Class 1 – whether payments to unapproved retirement benefits schemes were “earnings” – whether disregard provisions applicable – basis for calculation of liability	

THE SPECIAL COMMISSIONERS

	TELENT PLC	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		Special Commissioner: 	JOHN CLARK 

Sitting in public in London on 2 July 2007

Timothy Brennan QC, instructed by Ernst & Young, for the Appellant

Philip Jones QC, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.	This appeal concerns the status for National Insurance Contributions (“NICs”) purposes of contributions by an employer into a funded unapproved retirement benefit scheme and into an unapproved life assurance scheme, the money contributions being held on the trusts of the scheme.
2.	To take account of the change in name of the Appellant, I adopt the parties’ convention of referring to it merely as “the Appellant”; I also use their convention of referring to the Respondents as “HMRC” in relation to all times covered by this appeal, as if the Commissioners for Revenue and Customs Act 2005 had applied throughout.
The law
3.	Under s 6(1) of the Social Security Contributions and Benefits Act 1992 (“SSCBA 1992”):
‘(1) Where in any tax week earnings are paid to or for the benefit of an earner over the age of 16 in respect of any one employment of his which is employed earner’s employment–
	(a) a primary Class 1 contribution shall be payable . . . ; and
(b) a secondary Class 1 contribution shall be payable . . . ’
4.	Under s 2(1)(a) SSCBA 1992 as it applied for 2002-03:
‘(1) In this Part of this Act and Parts II to V below—  
	 “employed earner” means a person who is gainfully employed in 	Great Britain either under a contract of service, or in an office 	(including elective office) with emoluments chargeable to 	income tax under Schedule E.’
For 2003-04 the words ‘emoluments . . . Schedule E’ were replaced by the words ‘general earnings’; these are defined in section 7 Income Tax and Pensions Act 2003 (‘the 2003 Act’) as applied by virtue of s 122(1) SSCBA 1992 (itself as amended by the 2003 Act).
5.	Under s 3(1)(a) SSCBA 1992:
‘ “earnings” includes any remuneration or profit from an employment’.
6.	Section 3(2)-(3) SSCBA 1992 provides:
‘(2) For the purposes of this Part of this Act and of Parts II to V below other than those of Schedule 8—
	(a) the amount of a person's earnings for any period; or 
	(b) the amount of his earnings to be treated as comprised in any 	payment made to him or for his benefit,
shall be calculated or estimated in such manner and on such basis as may be prescribed by regulations made by the Treasury with the concurrence of the Secretary of State.
(2A) Regulations made for the purposes of subsection (2) above may provide that, where a payment is made or a benefit provided to or for the benefit of two or more earners, a proportion (determined in such manner as may be prescribed) of the amount or value of the payment or benefit shall be attributed to each earner.
(3) Regulations made for the purposes of subsection (2) above may prescribe that payments of a particular class or description made or falling to be made to or by a person shall, to such extent as may be prescribed, be disregarded or, as the case may be, be deducted from the amount of that person's earnings.’
The facts
7.	The evidence consisted of a bundle of documents and a statement of agreed facts as set out below. There was no oral evidence.
8.	The statement of agreed facts was as follows:
(1)	The Appellant (Telent plc) was formerly named Marconi Corporation plc, changing its name on 24 January 2006.
(2)	By a Notice of Decision issued on 5 May 2006 under the Social Security Contributions (Transfer of Functions etc) Act 1999, s 8 the Respondent (HMRC) determined that Marconi Corporation plc (sic) was liable to pay primary and secondary Class 1 National Insurance Contributions in respect of the earnings of Mr David Clive Beck for the period 6 April 2002 to 5 April 2004.
(3)	The Appellant appealed against that determination by letter of 23 May 2006.
(4)	The dispute arises because during the relevant periods the Appellant made contributions to a Funded Unapproved Retirement Benefit Scheme (FURBS) and to an Unapproved Life Assurance Scheme (ULAS).
(5)	The Respondent (HMRC) contends that those payments constituted ‘earnings’ of Mr Beck for the purposes of s 3 and s 6 of the 1992 Act.  The Appellant contends that the payments are to be disregarded from, or do not constitute, ‘earnings’ as defined.
(6)	No issue arises as to the identity of the Appellant.
(7)	The parties are not at present agreed on the precise figures and a decision in principle is sought, with the figures to be determined subsequently, if necessary.

	THE FURBS
(8)	By letter of 26 April 2002 Mr Beck was told by Marconi plc (which was until 19 May 2003 the parent company of the Appellant) that a FURBS would be established for his benefit, and specifically for him.  His membership was to be subject to the trust deed and rules which were to be executed after his acceptance of this invitation.  Marconi was to contribute 22.5 per cent of basic salary.  It was proposed that 60 per cent (of 22.5 per cent = 13.5 per cent) of any notional contribution would be paid into the FURBS, and 40 per cent (of 22.5 per cent = 9per cent) would be paid to Mr Beck as an allowance to enable him to pay the resultant income tax charge.  (No issue arises in the present case as to payment of primary or secondary NIC, or PAYE, on the cash payments of 40 per cent to Mr Beck).
(9)	Mr Beck accepted the offer of membership of the FURBS by letter of 16 May 2002.
(10)	On 1 July 2002 the Finance and Sealing Committee of Marconi Corporation plc resolved (in a three page Resolution No 12703) to establish eight FURB Schemes, including GEC No 43 in respect of Mr Beck.  The resolution made provision for execution of the definitive Trust Deed and Rules by 31 March 2003 or such other date as Marconi Corporation plc and the Trustees might agree.
(11)	In the circumstances a trust constituting GEC No 43 FURBS in respect of Mr Beck was established on 1 July 2002 with Stanhope Pension Services Ltd as trustee.
(12)	Sums contributed by Marconi Corporation plc were to be held on the trusts of the FURBS to provide benefits in respect of Mr Beck.
(13)	The definitive Trust Deed was executed on 8 January 2004.
(14)	The Trustee duly held the trust fund on trust to provide the benefits set out in the Trust Deed and the Rules scheduled to it.
(15)	During the tax years 6 April 2002 to 5 April 2004 contributions were made into the FURBS by Marconi Corporation plc.

	THE ULAS
(16)	By the letter of 26 April 2002 Marconi plc notified Mr Beck of his entitlement to benefits under an Unapproved Life Assurance Scheme (ULAS).  The ULAS was already established as the GEC Unapproved Life Assurance Scheme dated 6 October 1998 with Stanhope Pension Services Ltd as trustee.
(17)	During the years 6 April 2002 to 5 April 2004 contributions were duly made by Marconi Corporation plc into the ULAS in respect of Mr Beck.
9.	On 3 October 2001 Mr Akehurst on behalf of the Appellant wrote to HMRC in connection with a Notice of Underpayment of PAYE and NICs for 2000-01. In addition to disputing liability in respect of that Notice, Mr Akehurst requested repayment of NICs on other FURBS contributions in the years 1998-99 and 1999-2000. Extensive correspondence ensued. The initial correspondence with HMRC was dealt with by Deloitte & Touche on behalf of the Appellant. Subsequently there was correspondence directly between the Appellant and HMRC. In the later stages the correspondence with HMRC was carried on by Ernst & Young, on the basis that it dealt with social security matters on behalf of the Appellant.
10.	On 5 May 2006, by a formal Notice of Decision under s 8(1)(c) of the Social Security Contributions (Transfer of Functions etc) Act 1999, HMRC determined that the Appellant was liable to pay additional primary and secondary Class 1 National Insurance Contributions for the period 6 April 2002 to 5 April 2004 in respect of Mr David Clive Beck.  The formal appeal was made on 23 May 2006, with an election for hearing before the Special Commissioners.
Arguments for the Appellant
11.	Mr Brennan pointed out that no allegation of tax avoidance was made by HMRC in respect of the contributions made by the Appellant to the FURBS and to the ULAS; the money had gone to trustees and was held by them on the terms of the relevant trusts.
12.	The point of contention depended critically on the construction in their context of a small number of statutory provisions which had not (contrary to certain submissions made by HMRC) altered their meaning because of the enactment of subsequent regulations dealing with other situations.
13.	HMRC asserted that it was a consequence of their case if correct that ‘earnings’ for the purposes of National Insurance Contributions would mean something different from ‘earnings’ for the purposes of income tax. Mr Brennan described this as odd.
14.	At the core of HMRC’s approach to the case seemed to lie the unspoken proposition that the admittedly genuine legal structure under review must in some sense be ignored and the NIC system must be applied to the payments to the trustee as if they were payments of cash to the employee – that one did not look at what the employee got but at what the employer paid.  It appeared however to be accepted by HMRC that this case was inconsistent with the decision of Collins J in Tullett & Tokyo v Secretary of State [2000] EWHC Admin 350 where the arguments of HMRC’s predecessor, the Secretary of State, were rejected on the basis of reasoning which, Mr Brennan submitted, was binding at the level of the Special Commissioners.
15.	HMRC’s contention was that the transfer of money to the trustees constituted payment of earnings for the benefit of Mr Beck, an employed earner, for the purposes of s 2, s 3 and s 6 of the 1992 Act.  The Appellant contended that there was no payment of earnings as defined and, in any event, the payments were, by Regulations, to be disregarded from ‘earnings’ as being payments in kind.
16.	Mr Brennan referred to the historical position. For NIC purposes, benefits in kind had been disregarded throughout the period. In this respect there had been a dichotomy between NICs and income tax since 1948; the result had been that benefits in kind were chargeable to income tax but not subject to NICs. Parliament had developed a “hole and plug” approach to NIC avoidance. In regulation 19(1)(d) of the Social Security (Contributions) Regulations 1979 (SI 1979/591, referred to as “the 1979 Regulations”) payments in kind had been excluded from the computation of earnings for NIC purposes. Various schemes had been introduced to take advantage of this, involving varying degrees of exoticism. However, there had been no amalgamation of the NIC principles with those applying for tax purposes; Parliament had continued to treat payments in kind for NIC purposes in a different way. The technique used was to provide “disregards from disregards”. There was no root and branch approach to the way NIC was charged on non-cash benefits.
17.	HMRC were compelled to argue in relation to NICs that what should be examined was the cost to the employer. This was akin to the income tax test under s 154 of the Income and Corporation Taxes Act 1988 (“ICTA 1988”). Mr Brennan emphasised that this was not the appropriate basis for NICs; there was a basic disregard for payments in kind, then a disregard from that disregard. HMRC were basing their argument on what the employer had put in.
18.	Mr Brennan referred to the legislative provisions. He pointed to the link into emoluments, both via contract of service and office, from s 2(1)(a) SSCBA 1992. In addition to ss 3(1)(a) and 6 SSCBA 1992, he referred to the Social Security Contributions Regulations 2001 (SI 2001/1004, referred to in this decision as “the 2001 Regulations”). Regulation 25 introduced Schedule 3, dealing with payments to be disregarded in the calculation of earnings for the purposes of earnings-related contributions; it provided for a basic disregard of payments in kind, with certain types of payment not disregarded. Regulation 24 introduced Schedule 2, dealing with the calculation of earnings for the purposes of earnings-related contributions in particular cases. He argued that regulation 67 and Schedule 4 maintained the link between NICs and emoluments.
19.	It had been accepted by HMRC that payment into a FURBS was not an “emolument”; this explained the need for s 595 ICTA 1988. (He referred to the status of approved schemes, which were specifically exempted from that provision by s 596.)
20.	Mr Brennan emphasised the need for “earnings” for the purposes of s 6 SSCBA 1992. The section did not refer to cash, and did not use the words “money is paid”. The word “earnings” took one back to s 3 SSCBA 1992. In relation to the latter section, HMRC were arguing that the payment into the FURBS was “remuneration”. Mr Brennan pointed to the words “derived from”; he asked who derived it. What did Mr Beck derive from the employment? For HMRC, Mr Jones was arguing that the expression “earnings” was very wide, even wider than “emoluments”. Mr Brennan emphasised how wide the latter expression was; he referred to ss 19 and 131 ICTA 1988.
21.	He referred to s 148(1) and (3) ICTA 1988; a payment within these provisions was not deemed to be an emolument. He contrasted the express regulation-making power under s 4(6) SSCBA 1992. A payment under s 148 ICTA 1988 could be made subject to such regulations, although this had not been done. Mr Brennan repeated that the Appellant’s payments into the FURBS were not chargeable to NICs as emoluments; they were only chargeable to income tax by virtue of s 595 ICTA 1988. What had not been done was to use the power in s 4(6) SSCBA 1992 to make regulations bringing such payments into the NIC net. This would have been the route to use for this purpose if Parliament had chosen to do so. As Parliament had not done so, HMRC’s argument required a “Procrustean approach” in order to succeed.
22.	Part II of Schedule 3 to the 2001 Regulations provided for the disregard of payments in kind, subject to the exceptions in paragraph 2 of that Part and in the rest of that Schedule. In Schedule 3 there were three concepts. The first was cash or something “as good as” cash. The second was payments in kind, where there was no cash, but an asset. The third involved neither money nor assets, but brought services into account. Mr Brennan emphasised the various categories of payments which had to be specifically excepted from the basic disregard in Part II.
23.	In relation to the ULAS, Mr Brennan argued that the payments were made for the benefit of Mr Beck’s family rather than for Mr Beck or his estate. Mr Beck was only entitled to the insurance benefits, and not to the payments made by the Appellant. There was no payment of earnings to or for the benefit of Mr Beck. The contributions into the ULAS were not liable to Class 1 primary or secondary contributions. Any benefit or potential benefit was not a payment of earnings, and was not within the charge to Class 1 contributions. Alternatively, by virtue of the 2001 Regulations, the “payments” were in any event to be disregarded from “earnings” as payments in kind.
24.	In relation both to the FURBS and the ULAS, there was no payment of earnings to Mr Beck. He got the qualified property interest represented by the benefit of the trust arrangements.
25.	Taking into account the legislation, the only point at which a charge to NIC could arise was the making of a ‘payment’ of ‘earnings’. So the critical questions would be: Who made a payment?  What was paid? Was what was paid ‘earnings’ as defined?  This required consideration of the correct point of view: did one look at it from the point of view of the employee whose ‘earnings’ were under consideration?  Or was it the point of view of the employer at whose cost the earnings were paid?
26.	HMRC’s contention was that the money payment into the trust (FURBS or ULAS) was remuneration derived from an employment and that that money was paid for the benefit of the employee. Their approach was to start with the cash, and to assert that cash was paid for Mr Beck’s benefit and that therefore the cash was his earnings.  The error in this approach was to ignore both the legal structure of the arrangements and the statutory mechanism for imposing the charge to NIC (and the contrary authority of Tullett).  Cash was indeed paid.  But it was not paid to Mr Beck.  The correct analysis was to look at what Mr Beck derived from his employment, not at what was handed over to the trustees in order to create what he derived.  What Mr Beck got was a beneficial interest in the trust fund.  The transfer of the cash to the trustees was apt to create the beneficial interest in their hands.  There was no payment of the beneficial interest to the earner.  There was no payment of cash to the earner.
27.	The statutory test was not a payment of cash for the purpose of creating a beneficial interest for the benefit of Mr Beck. It had to be a payment of earnings for his benefit.  The only payment by the employer was a payment of cash, there was not a payment of the beneficial interest which Mr Beck derived. Mr Beck did not derive cash from his employment.
28.	It was necessary, first, to ask: Were there earnings and what were they? (s 3 SSCBA 1992).  It was necessary, second, to ask: Was there a payment of [those] earnings for the benefit of the earner? (s 6).  To say that there was a payment (loosely) for his benefit was not to say that there was a payment of earnings for his benefit.  The earnings (the entitlement under the trust) were not what was paid for Mr Beck’s benefit.
29.	Thus, although in the loose sense it could be said that cash was paid for the benefit of Mr Beck, that was not enough to trigger the charge, because earnings had to be paid, and that required consideration of what Mr Beck derived from the employment.
30.	This conclusion based on the legislation was what underpinned the decision in Tullett & Tokyo, which Mr Brennan argued was correctly decided. It was necessary to give effect to the legal result of the transaction; one had to look at what the earner received, and not at what the employer paid.
31.	In relation to payment, Mr Brennan did not dispute that where cash was paid having the effect of creating or enhancing a debt owed by the taxpayer by another, this was equivalent to a payment of cash to him.  A payment into a bank was a payment to the taxpayer.  He became to the extent of the payment the creditor of the bank in a debtor-creditor relationship.  He did not gain any property interest in the assets of the bank.  The position was the same if it was a joint account with his spouse.  Whatever the arrangements between taxpayer and spouse, a payment into the taxpayer’s account was a payment to him – he had the right to the whole of the money.
32.	Mr Brennan referred to various cases concerning payment. He argued that none of them established that any payment made by the employer which resulted in a benefit to the employee had therefore to be treated as if it was a payment of earnings in that amount for the benefit of the employee.  In particular, the authorities did not establish that a payment by A (employer) to B (trustee), which had the effect of creating or enhancing a property interest for C (individual), was a payment by A of a property interest to C.  To say this was to recharacterise the transaction as something different.
33.	HMRC’s preferred answer to this difficulty was to say that the ‘earnings’ were the cash, not the property interest, because the cash was paid for the benefit of the earner.  But in order to trigger NIC what must be paid must be earnings. The HMRC approach therefore failed to grapple with the question: What are the earnings?
34.	To the extent that it was necessary to consider what was paid ‘for the benefit of’ the employee, one had to look at what he got, not at what the employer paid. The requirement to look at what the earner received and not at what the employer paid or gave up in order to provide it was well established for income tax purposes, in cases such as Tennant v Smith [1892] AC 150 and Wilkins v Rogerson [1961] 1 Ch 133. There was no justification for HMRC’s position that there was some different rule in relation to NICs. This point had been argued and lost in Tullett, which on this point was indistinguishable and was binding authority.
35.	Mr Brennan challenged HMRC’s contention based on paragraph 13 of Schedule 2 to the 2001 Regulations; the arguments are considered below.
36.	Another basis for resisting the treatment of the payments as earnings for NIC purposes was that Mr Beck did not receive cash, but a beneficial interest in property held under a trust. This was a payment in kind (as had correctly been conceded by HMRC’s predecessors in Tullett & Tokyo) and was subject to the statutory disregard from the definition of ‘earnings paid to or for the benefit of’ the employee, by virtue of regulation 25, Schedule 3 Part II paragraph 1 and the remainder of Parts II-V of that Schedule to the 2001 Regulations. Mr Brennan pointed out that while payments in kind were expressly disregarded from NIC, they had, since 1948, been brought within the net for income tax. HMRC’s contention that the NIC charge may be even wider than for income tax should be seen in this context.  Subject to occasional legislative adjustment to deal with NIC avoidance and PAYE deferral, non-cash benefits had generally been within income tax and outside NIC and PAYE.
37.	The scope of the ‘disregards from the disregard’ in Schedule 3 Parts II-V demonstrated how wide the concept of ‘payment in kind’ was.  If there should be any doubt as to whether, in Part 2 paragraph 1, receipt of a beneficial interest in a trust was a receipt of a payment in kind, the correct answer was given by consideration of the various forms of property right identified in Schedule 3 which would otherwise have fallen within the ‘payment in kind’ disregard and therefore had to be expressly dealt with by way of inclusion or exclusion.
38.	Mr Brennan contended that the appeal ought to be allowed and the Notice of Decision dated 5 May 2006 to be set aside.
Arguments for HMRC
39.	Mr Jones referred to the historical position. Before 1997, the NIC position in relation to such FURBS arrangements appeared to have been muddled. Until October 1985 there had been a cap on employers’ secondary Class 1 contributions, so that before that date there were few NIC avoidance schemes. After that date, such schemes started to develop. The Secretary of State became aware of the use of FURBS. Mr Jones accepted that in the present case the motive did not seem to be avoidance. There was a further benefit because of the capping for tax purposes of approved schemes.
40.	He indicated that in the event of a decision that NICs were due, the obligation to pay them was that of the employer, so that HMRC would not generally have any recourse against Mr Beck.
41.	He made various comments concerning Tullett. First, to the extent that it had been conceded in relation to the chose in action enhancement, it was not an authority. Even on the Appellant’s arguments, the concession had been wrong.
42.	Secondly, the present case differed from Tullett; what had been in question there was discretionary bonuses or benefits. Here the Appellant had agreed as part of Mr Beck’s employment contract to make the contributions.
43.	Thirdly, the present case was a FURBS case, as opposed to the payment of a premium to an insurance company.
44.	Finally, even if Tullett was binding in relation to the present case, HMRC wished to “test drive” their arguments.
45.	Mr Jones emphasised that when contributions were made to the FURBS, Mr Beck personally only obtained a contingent right to the benefit conferred on the trustees. In respect of the ULAS, Mr Beck would not benefit personally, although his “family” would.
46.	Mr Jones referred to the income tax position of a FURBS, and to the definition of “emoluments”. Following such cases as Tennant v Smith, dealing with a benefit which could not be converted into money, “emoluments” were not restricted to money, but there had to be “money’s worth” for there to be an emolument.
47.	In the case of a contribution to a FURBS, there was nothing which the employee could convert into money and therefore he could not be said to have received or been paid an “emolument”. It was for this reason that s 595 existed.
48.	In relation to Class 1 NICs, “remuneration”, in its ordinary legal usage, was wider than “emoluments”. The term “earnings” was probably even wider: this was reinforced by the statement in s 3(1)(a) SSCBA 1992 that “remuneration” merely “includes” remuneration or profit. Mr Jones referred to the interpretation placed in another context on the term “remuneration” in the case of R v The Postmaster General [1876] 1 QBD 658. An employee’s remuneration could be greater than the “emoluments” received by virtue of his employment.
49.	The Appellant argued that the purpose of the word “derived” in s 3(1)(a) was to ask what the employee derived from the employment. HMRC’s view was that the reason for using this word was to establish a connection between the payment and the employment; it did not assist in determining what was remuneration or profit or what amounted to earnings. It was clear from s 3(1), (2), (2A) and (3) that Parliament was giving a wide definition of earnings and conferring on the Treasury (previously, the Secretary of State) power to determine what was to be included and what was to be disregarded.
50.	Although s 6(1) SSCBA 1992 required the earnings to be “paid”, there was no indication in the primary legislation that there was any limitation on the usual wide meaning given to the term “payment” in cases such as White v Elmdene Estates [1960] 1 QB 1 at p 16 (Lord Evershed M.R.).
51.	Considerable regulation-making power was conferred by s 3(2), (2A) and (3) SSCBA 1992 on the Treasury (previously the Secretary of State). It was clear that Parliament had defined “earnings” in a very wide sense and left it to the making of regulations to prescribe what should or should not be caught and how much should be paid by way of Class 1 NICs.
52.	The Appellant had to argue that it was the benefit received by the employee under the FURBS each time a contribution was made that constituted his “earnings” and that these benefits were benefits ‘in kind’ and had to be disregarded. However, Mr Jones submitted that the Appellant’s characterisation in its Statement of Case of the contributions as being ‘earnings paid to or for the benefit of’ the employee was the natural and correct characterisation of the transaction. The term “earnings” included ‘remuneration’. The term ‘remuneration’ was used to include anything the employer did as the quid pro quo for the employee’s services. Here, the employer had remunerated the employee by making a payment to the trustees “for the benefit of” the employee. Giving s 6(1) SSCBA 1992 its natural and ordinary meaning and looking at the transaction realistically it was difficult to see how it could be argued that a payment by an employer to a trustee of a FURBS set up for the benefit of a particular employee could be characterised as anything other than “earnings … paid to or for the benefit of” the employee.
53.	A payment of a cash bonus into an employee’s bank account was a payment to the employee, not an increase in value of the chose in action that the employee had against the bank. This would be the same if the bank account was one owned jointly between the employee and his spouse; the benefit to the spouse did not affect the position. The same would apply where the bonus was paid to a third party to hold on a bare trust for the employee. This would not be described as the employee having earned a chose in action against the trustee. This analysis would also apply where the trustee’s role was that of a bare trust for the employee and his or her spouse, or trustee of a discretionary family settlement.
54.	The drafting of the regulations supported the conclusion that this was the natural and correct characterisation of a payment to an employee’s FURBS. Mr Jones referred to paragraph 13 of Schedule 2 to the 2001 Regulations, on the basis of which he argued that it was the payment to the FURBS that was the “earnings”. To succeed, the Appellant would have to contend that the paragraph was ultra vires on the basis that under ss 3 and 6(1) SSCBA 1992, the payment of money by an employer to a retirement benefits scheme could never amount to the “earnings” of the employee.
55.	An even greater difficulty for the Appellant arose under Schedule 3 to the 2001 Regulations. Paragraph 3(a) of Part VI provided that a payment to a retirement benefit scheme was to be disregarded if, for example, it was an approved scheme. It followed that a payment to an unapproved retirement benefit scheme, such as the FURBS in the present case, was a payment which was not to be disregarded in the calculation of earnings.
56.	Mr Jones submitted that these regulations had proceeded on a perfectly proper and correct interpretation of ss 3(1) and 6(1) SSCBA 1992, namely that a payment by an employee to an employee’s FURBS constituted “earnings … paid to or for the benefit of” the employee. 
57.	In Tullett, the employer’s declaration of trust in respect of the life policy was “earnings” within s 6(1) SSCBA 1992. Although there was no contractual obligation on the employer to make such a declaration, the declaration was made to remunerate the employee for the services that he had provided. Contracts of this type were expressly excluded from the disregard for payments in kind and other categories of payment as set out in the 1979 Regulations (which had been re-enacted in the 2001 Regulations), so it was not necessary to consider whether this amounted to a payment in kind.
58.	The dispute in Tullett related to the subsequent enhancement to the value of the life policy by the employer’s transfer of gilts to the insurance company. The employer argued that the “earnings” paid to or on behalf of the employee was the ‘enhancement in value’ of the policy and not the gilts transferred to the insurance company. If the payment to or on behalf of the employee was the enhancement in value of the policy the employer argued that this was a payment in kind and so was excluded in its entirety from forming part of the employee’s earnings for the purpose of earnings-related contributions.
59.	The Secretary of State had conceded that if it were the enhancement in value of the policy which was the “payment” of “earnings”, this was a payment in kind and so excluded by regulation 19(1)(d) of the 1979 Regulations. Mr Jones submitted that this was a wrong concession; the enhancement of an employee’s chose in action in such circumstances could not properly be described as a “payment in kind”, any more than the bank or trust examples which he had given earlier. The Secretary of State’s argument that what was “paid” as “earnings” to or for the benefit of the employee was the transfer of the gilts to the insurance company, rather than the enhancement in value of the policy, was rejected by the judge. The result of the concession was that the enhancement in value of the policy was to be wholly disregarded for the purpose of computing the Class 1 NICs payable on earnings.
60.	Mr Jones contended that the result in Tullett was counter-intuitive. Collins J had proceeded on the premise that what an employee was “paid” by an employer was in all cases the value actually received by the employee in his own hands; he had said (at [24]):
“ . . . it is necessary to identify what the employee gets and it is the enhancement of the value of his or her policy.”
61.	Mr Jones contended that Collins J had been misled by the definition that had been given to the term ‘emoluments’ in the income tax context, where the emolument was what the employee received and which he could turn into money or money’s worth. If this was the test in the NICs context, the words “for the benefit of” in s 6(1) SSCBA 1992 were entirely emasculated of any meaning because the “earnings” would always be the ultimate economic benefit which as a result of the transaction could only be described as having been paid “to” the employee. The term “emoluments” had not been imported into the NICs context and it should not be used to reduce the scope of the ordinary meaning of the words used in the NICs legislation.
62.	Where an employee had a pre-existing bank account, insurance policy or trust for his benefit (or the benefit of himself and his family) HMRC contended that the correct characterisation of any payment made by the employer to the employee’s bank account, insurance policy or trust was that the payment by the employer constituted “earnings … paid to or for the benefit of” the employee.
63.	If the decision in Tullett was correct, and it was the enhancement in the employee’s chose in action under the FURBS which constituted his “earnings” for the purposes of s 6(1) SSCBA 1992, Mr Jones submitted that it was not a natural and ordinary use of the expression “payment in kind” to include such a benefit as the employee might here receive. He referred also to Part VI of Schedule 3 to the 2001 Regulations. As already submitted, payment to an unapproved retirement benefits scheme was not to be disregarded; this must equally be the case if what was to be treated as the “earnings” was the enhancement in value of the employee’s chose in action as opposed to the payment to the FURBS. Otherwise, much of Part VI of Schedule 3 was entirely otiose.
64.	If this submission was correct, the “earnings” contained in the enhancement in value of the chose in action needed to be calculated in monetary terms. Using by way of analogy paragraph 13 of Schedule 2 to the 2001 Regulations, it must be the case that the amount of the earnings contained in the enhancement in the value of the chose in action for the purpose of calculating the amount of Class 1 NICs due was a sum equal to amount of the contribution paid. Thus in summary, the same result was achieved even if the analysis in Tullett was correct. The same principles applied to the ULAS.
Discussion and conclusion
65.	In form, this is an appeal in respect of the decision relating to the payments made by the Appellant into the FURBS and the ULAS in respect of Mr Beck. The parties informed me that they expected to apply my decision in principle not only to the payments relating to Mr Beck, but also in relation to similar payments made by the Appellant in respect of other employees. However, the contractual position to reflect the parties’ expectations had yet to be finally resolved. Although there are other parties who have similar disputes, this case is not to be treated as a “lead case”, and my decision in this case will therefore apply only to the Appellant, leaving other parties’ cases to be resolved either by means of their own appeals or by an appeal in a selected “lead case”.
66.	The question in this case is one of statutory construction. Several interrelated pieces of legislation have to be considered in order to determine the issue. The order in which these provisions are considered may affect the result, and it is therefore necessary to decide first which order is appropriate.
67.	The charging provision, s 6 SSCBA 1992, applies where “ . . . earnings are paid to or for the benefit of an earner . . . ” This requires examination of the meaning of “earnings”. These are defined in s 3(1)(a) SSCBA 1992. The use in that sub-section of the word “includes” could be taken as implying a greater scope for the definition than that apparent from the words used. However, in the absence of anything to indicate or imply what else might be included, I interpret this as an exhaustive definition.
68.	Section 3(1)(a) includes within the term “earnings” “ . . . any remuneration or profit derived from an employment”. Even when treated as exhaustive, this definition is, on its face, extremely wide.
69.	Turning to the rest of s 3 SSCBA 1992, s 3(2) enables the amount of earnings to be calculated on the basis provided in regulations. This is concentrating on the amount of earnings, not on what constitutes earnings. The effect of this sub-section is amplified by the subsequent sub-sections. Section 3(2A) also relates to the amount of earnings. Section 3(3) is designed to enable items which would be included in the definition of “earnings” to be disregarded in whole or in part, or to be deducted from what would otherwise be treated as earnings. (The remainder of s 3 SSCBA 1992 is not in point in the present case.)
70.	Thus the primary provision indicating what constitutes “earnings” is the definition in s 3(1)(a). On the question of the breadth of this definition, I accept Mr Jones’ contention that the term “remuneration”, in its ordinary legal usage, is wider than “emoluments”, and that the term “earnings” is even wider than “remuneration”, which is merely one element of the definition of “earnings”.
71.	The term “emoluments” is not used in the relevant provisions contained in SSCBA 1992; its use in the secondary legislation is considered below. As a result of ITEPA 2003, the main term now used in the income tax legislation is “earnings”; the concept of an “emolument” is merely one part of that definition.  Mr Brennan accepted that in SSCBA 1992 “earnings” should not be equated with “emoluments”; he stressed the congruity as between remuneration for NIC purposes and income for tax purposes, in that in each case what should be examined was what the employee got. My conclusion is that the construction of SSCBA 1992 should not be influenced by the usage of the word “earnings” in ITEPA 2003, as the respective definitions are for the purposes of different, even though analogous, legislation. I consider below the question of what the earner gets, and the extent to which the apparently wide language used in s 3(1)(a) SSCBA 1992 to define “earnings” is to be regarded as qualified, whether by any other provision or by case law.
72.	To fall within s 3(1)(a) SSCBA 1992, the “remuneration or profit” must be “derived” from an employment. Mr Brennan argued that this required examination of what the relevant individual derived from the employment. At this stage, it should be emphasised that what is being examined is whether there are “earnings” as such; as indicated by the structure of s 3, the question of arriving at the extent to which those earnings fall within the charging provisions is a subsequent stage of the process, to which the word “derived” in s 3(1)(a) is no longer relevant.
73.	In relation to the FURBS and the ULAS, Mr Beck did derive something from his employment. As Mr Jones pointed out, the arrangements were not discretionary; the Appellant was contractually committed to make the contributions to those schemes. What Mr Beck derived was the benefit of being a scheme member, with the cost being borne by the Appellant. Thus Mr Beck was in receipt of “earnings” within s 3(1)(a); whether all or any of those earnings fell within the charging provision is a separate question.
74.	The charging provision, s 6(1) SSCBA 1992, applies where the earner’s relevant employment is “employed earner’s employment”, which is defined in s 2(1)(a). There is no dispute as to Mr Beck’s status; at the material times, he was an employed earner. For the charge under s 6(1) to apply, there must be “earnings” as defined, and those earnings must be “paid to or for the benefit of” the earner.
75.	Given the wide definition of “earnings”, I accept that the word “payment” in s 6(1) refers to the range of methods of providing “earnings” to employed earners, and is not to be regarded as confined to making a money payment to or for the benefit of the earner. (I emphasise that at this stage I am not considering the effect of the 2001 Regulations, which in various instances restrict what would otherwise be within the charge under s 6(1); at this point I am concentrating on the charging provision as contained in the primary legislation.)
76.	Section 4 SSCBA 1992 extends the concept of “earnings” by treating various items as remuneration for the purposes of s 3. Sub-section (6) permits regulations to be made which treat as “earnings” for NIC purposes an amount on which an employed earner is chargeable to income tax under Schedule E or, for later years, under the employment parts of ITEPA 2003. Mr Brennan emphasised that he was not seeking to use this provision to equate “earnings” and “emoluments”; it simply enabled Parliament to link together matters which were chargeable to Schedule E or under ITEPA 2003 and which were not chargeable to NICs, and bring them within the latter charge if it so desired. He argued that this demonstrated an approach of dealing with specific items rather than attempting, as Mr Jones was arguing, to “cram them into” a general statutory charge. I do not interpret s 4(6) as being an implied limitation of the breadth of the definition of “earnings” in s 3, but as a means of extending the latter concept to matters which are clearly within the charge to income tax but which may not so clearly amount to “earnings” as interpreted for NIC purposes.
77.	The 2001 Regulations contain various examples of items which have been treated as “remuneration” in this way. This broad approach to the interpretation of “earnings” is qualified by regulation 25 and Schedule 3, which sets out various categories of payments to be disregarded in the calculation of earnings for NIC purposes. The core provision relating to payments in kind is contained in paragraph 1 of Part II of that Schedule:
"1 A payment in kind, or by way of the provision of services, board and lodging or other facilities is to be disregarded in the calculation of earnings.
This is subject to the paragraph 2 and also to any provision about a payment in kind of a particular description or in particular circumstances in any other Part of this Schedule.”
78.	As discussed above, the meaning of the expression “earnings” is very wide. However, it must be emphasised that for the charge to arise under s 6(1) SSCBA 1992, those earnings must be “paid to or for the benefit of” the employed earner. The effect of any disregard under paragraph 1 of Part II is that the relevant element of the individual’s earnings is to be excluded from the calculation of his or her total earnings for NIC purposes; the element in question remains “earnings” as defined, but is not chargeable.
79.	Paragraph 1 of Part II is qualified in two ways. Paragraph 2 is not relevant in the present case. The important “disregard from the disregard” is contained in the latter part of paragraph 1 beginning with the words “and also . . . ” The only other part of Schedule 3 which is relevant in this case is Part VI, which deals with pensions and pension contributions. Paragraph 2 of that Part disregards an employer’s contribution to a personal pension scheme falling within s 643(1) Income and Corporation Taxes Act 1988 (“ICTA 1988”). Paragraph 3 deals with payments to certain other categories of pension schemes falling within ICTA 1988, in particular approved schemes removed from the charge under s 595 ICTA 1988 by s 596. Paragraph 4 deals with payments of relevant benefits from a FURBS which are attributable to payments made to the FURBS before 6 April 1998, so does not relate to contributions to such a scheme. Paragraph 5 relates to benefits received from an unapproved pension scheme where contributions by the employer to the scheme after 6 April 1988 have been taken into account for the purposes of the employee’s NICs; again, the paragraph is concentrating on the benefits rather than the employer’s contributions.
80.	Mr Jones referred to paragraph 3(a) of Part VI, and argued that as payment to an approved scheme is to be disregarded, a payment to an unapproved retirement benefits scheme such as the FURBS in the present case is a payment which is not to be disregarded in the calculation of earnings. However, it is not sufficient to say that something which falls outside paragraph 3(a) is taken out of the disregard; it is also necessary to consider the impact of the basic disregard in paragraph 1 of Part II. Does a payment to a FURBS fall within the words “A payment in kind, or by way of the provision of services, board and lodging or other facilities”? If so, it will fall to be disregarded by virtue of paragraph 1 of Part II, even if paragraph 3(a) of Part VI could be taken as indicating by implication that a payment to an unapproved scheme fell outside the protection of its own specific disregard.
81.	The answer may lie in the overall structure of Schedule 3. Paragraph 1 of Part I introduces the various Parts of the rest of Schedule 3. Part II is described by paragraph 1(2) of Part I as containing provisions about the treatment of payments in kind. Paragraph 1(3) refers to Parts III and IV specifying items which are not to be disregarded under the “payments in kind” provision. Paragraph 1(4) introduces Part V, which specifies non-cash vouchers to be disregarded under that same provision. Paragraph 1(5) lists a number of items which are “also to be disregarded” in computing earnings. The relevant category for the present case is contained in paragraph 1(5)(a):
“(a) the pensions and pension contributions specified in Part VI;”
82.	The separation of pensions and pensions contributions in this way suggests that the draftsman of the 2001 Regulations did not regard them as falling within the general description of “payments in kind” as set out in paragraph 1 of Part II of Schedule 3. Whether such a conclusion is correct depends on the effect of Tullett.
83.	I do not interpret the Appellant’s Statement of Case as accepting that the Appellant’s contributions were “earnings paid to or for the benefit of” Mr Beck. The Appellant’s argument is that by virtue of paragraph 1 of Part II its contributions are to be disregarded, as payments in kind, from that definition.
84.	The Appellant’s argument is similar to that for the appellants in Tullett as summarised by Collins J at [9]:
“To anticipate the arguments, the appellants submit that the gilts were not earnings paid for the benefit of the employee but represented the cost to the employer of providing what was properly to be regarded as earnings, namely the life policy whose value was enhanced. This was a payment in kind.”
85.	He continued with the summary of the argument put for the Secretary of State:
“Mr Henderson submits that the words ‘for the benefit of’ show that payments of earnings need not be made to the employee direct and the payments of the gilts to the insurers was [sic] manifestly made for the benefit of the employees who were thereby able to receive the value of the premiums."
86.	The latter argument corresponds to part of Mr Jones’ argument; the Appellant had remunerated Mr Beck by making a payment to the trustees “for the benefit of” Mr Beck.
87.	In Tullett, there were two issues. The first was whether the transfers of the gilts to the insurers were payments of earnings to or for the benefit of the employees within the meaning of s 6(1) SSCBA 1992. The second was whether those transfers fell within a specific exclusion from the disregard for payments in kind contained in regulation 19 of the 1979 Regulations. On behalf of the Secretary of State, it had been conceded that the employees received a payment in kind in the form of the life policy or policies with an enhanced value.
88.	In relation to s 6(1), Collins J considered (at [17]) that the income tax cases were of assistance in determining how to identify what an earner had earned, but that the distinction between payments to third parties representing the cost to the employer and what was received by the employee should not be imported into the national insurance regime. At [21] he continued:
“Since tax and national insurance contributions are payable on what the employee receives it would be surprising if, absent special provisions to deal with individual circumstances, the approach should differ. Thus it is, in my judgment, legitimate to seek guidance from the tax cases in identifying what the earner has got by way of remuneration. That may be the same as what the employer has paid, but not necessarily where payments in kind are concerned. In such cases (and Regulation 18 of the Contributions Regulations supports this), the value is the open market value if sold on that day. That means the value to the employee and reflects the approach in the tax field as exemplified by Wilkins v Rogerson (1960) 39 T.C. 344.”
89.	In the following paragraph he said:
“22. The words in s.6(1) are wide and the payment by the employer for, for example, the suit in Wilkins v Rogerson could be said without doing violence to the language to be a payment for the benefit of the employee. Mr. Gardiner contends and Mr. Henderson concedes that there must be a limitation. The question I have to answer is what is the extent of that limitation. I think that Mr. Gardiner is correct to focus on the word `earnings' since that gives the clue. The limitation is that a payment for the benefit of an employee must provide something for that employee and it is the value of what the payment provides that constitutes his earnings. Thus if the payment discharges a debt due, it can properly be regarded as the equivalent of money paid to the employee. If it obtains a benefit in kind, it is the benefit which is the earnings not the payment to obtain it.”
90.	It is clear that what was being considered in Tullett was a payment in kind. Collins J concluded that “ . . . the payment of the gilts to the insurers was not ‘earnings paid ... for the benefit of the earner’ within the meaning of s.6(1) of the 1992 Act . . . ”
91.	As I have stated above, my view in relation to a payment in kind is that its exclusion from the computation of “earnings” does not take it out of the definition of “earnings”.
92.	My conclusion on the status of a pension contribution such as the Appellant’s payments into the FURBS in Mr Beck’s case is that it is not to be characterised as a payment in kind; paragraph 1(5)(a) of Part 1 of Schedule 3 to the 2001 Regulations puts such contributions into an entirely separate category. In relation to the ULAS, I accept that the Appellant’s payments of premiums may not immediately appear to be within the description of “pension contributions” as referred to in that sub-paragraph. However, as Mr Jones pointed out, the ULAS is a “retirement benefits scheme” within the meaning of s 611 ICTA 1988 because it provides “relevant benefits” within s 612. I would regard it as anomalous to arrive at an interpretation which resulted in payments to such a scheme being treated differently from “pension contributions” as such. Thus I do not consider that either form of payment can come within the disregard for payments in kind contained in paragraph 1 of Part II of Schedule 3. To the extent that Tullett was dealing with payments in kind, it does not assist in the present case.
93.	Reverting to the question whether there was a payment of “earnings” within s 6(1) SSCBA 1992, it is clear from Tullett that this requires examination of “ . . . what the employee receives whether directly or indirectly as earnings” (Collins J at [25]). Mr Brennan’s submission was that what Mr Beck received was the qualified property interest represented by the benefit of the trust arrangements. For the reasons which I have already given, I consider that this is to take too narrow a view. How was Mr Beck remunerated? The answer to this in the present context is that the Appellant made him a member of the FURBS and the ULAS and made contributions to both schemes. Unlike the discretionary arrangement in Tullett, here the Appellant was contractually committed to make those contributions. What Mr Beck got, therefore, was funded membership of these two schemes. Whether he stood to benefit under either scheme was not the issue; he had been remunerated by being provided with membership and the continuing funding represented by the Appellant’s ongoing contributions.
94.	On the basis that there was a payment of “earnings” for Mr Beck’s benefit, how should these be calculated? By s 3(2) SSCBA 1992, this calculation should be made on the basis prescribed in regulations; in the present case, the 2001 Regulations apply. Mr Jones could not point to a specific provision dealing with the general principles to be applied in calculating the earnings where a contribution was made to a retirement benefits scheme. However, he referred to paragraph 13 of Schedule 2 to the 2001 Regulations. His contention was that the words “the amount of the earnings which is comprised in that payment” in paragraph 13(1) indicated that it was the payment to the FURBS which was the “earnings”. I have arrived at a slightly different conclusion on the question of what the “earnings” are. Nevertheless, I do consider that paragraph 13 assists, despite its purpose being apportionment where contributions are made to provide retirement benefits in relation to more than one person.
95.	For ease of reference, I set out the full text of the paragraph:
“13—(1) If, pursuant to a retirement benefits scheme, a payment is made with a view to providing any benefits under such a scheme in relation to more than one person, the amount of earnings which is comprised in that payment shall be calculated or estimated on the basis set out in whichever of subparagraphs (2) or (3) applies.
(2) If the separate benefits to be provided to each of the people referred to in sub-paragraph (1) are known at the time when the payment is made, the basis is that of the separate payments which would have had to have been paid to secure the benefits.
(3) In any other case, the amount of the payment shall be apportioned equally between all the persons in respect of whose earnings the payment is to be taken into account.”
96.	Paragraph 13(2) shows by implication that the amount of “earnings” where there is only one person involved is the payments made to secure the benefits. In other words, the amount of the earnings is equal to the contributions paid by the Appellant into the FURBS and the ULAS in order to secure the benefits of Mr Beck’s continuing membership of those schemes.
97.	Mr Brennan did challenge Mr Jones’ contention based on paragraph 13; this was on the grounds that the disregard for payments in kind had existed long before s 3(2A) SSCBA 1992, the authority for paragraph 13, had been inserted by s 48 of the Social Security Act 1998. Given my conclusion that paragraph 13 is only relevant to the question of arriving at the amount of the earnings, and does not determine what constitutes “earnings”, as well as my conclusion that the present case does not involve “payments in kind”, I do not think that it is necessary to deal in detail with Mr Brennan’s comments on the use of later regulations to interpret the disregard provisions in the 1979 Regulations.
98.	I would comment that many of the elements of the 2001 Regulations as analysed above are derived from provisions contained in the 1979 Regulations. For example, regulation 19(1)(k) (now replaced by paragraph 2 of Part VI, Schedule 3 to the 2001 Regulations) was inserted in 1988, while regulation 19(1)(zn)-(zr) (now replaced by the later paragraphs of Part VI, Schedule 3 to the 2001 Regulations)was inserted with effect from 6 April 1999. Similarly, regulation 18(21) (corresponding to paragraph 13 of Schedule 2 to the 2001 Regulations, considered above) was inserted with effect from the same date. I accept that SSCBA 1992 was a consolidating Act, but it is clear that the view of those responsible for the drafting of the respective Regulations has not changed.
99.	Mr Brennan referred to the link between NICs and emoluments maintained by regulation 67 and Schedule 4 to the 2001 Regulations. On the basis of the definition appearing in paragraph 1 of Schedule 4, I do not think that this represents a link. “Emoluments” are defined as “so much of a person’s remuneration or profit derived from employed earner’s employment as constitutes earnings for the purposes of the Act”. The language is entirely that of the legislation relating to NICs.
Summary
100.	I hold that in respect of both the FURBS and the ULAS, Mr Beck was in receipt of earnings within s 6(1) SSCBA 1992, and that the amount of those earnings is to be calculated by reference to the contributions made by the Appellant to those schemes in respect of Mr Beck. The parties requested a decision in principle, leaving the figures to be agreed subsequently. I therefore dismiss the appeal in principle.

JOHN CLARK

SPECIAL COMMISSIONER
RELEASE DATE: 30 August 2007

SC/3101/2006

Authorities referred to in skeletons and not referred to in the decision:
 
R v DSS ex p Overdrive Credit Card Ltd [1991] STC 129
Garforth v Newsmith Stainless Ltd (1978) 52 TC 522, [1979] STC 129
DTE Financial Services Ltd v Wilson [2001] STC 777
MacNiven v Westmoreland Investments Ltd [2001] STC 237
Torkington v Magee 1902 2 KB 427
EDI Services Ltd & others v Revenue and Customs Commissioners (No 2) [2006] STC (SCD) 392 (SpC 539)
Heaton v Bell [1970] AC 728
Abbott v Philbin [1961] AC 352
Eyles v Ellis 4 Bing 112
Amos v Smith 31 LJ Ex 423
Page v Meek 32 LJ QB 4
Waller v Andrews 3 M & W 312
Cannan v Wood 2 M & W 465
Bodger v Arch 10 Ex 333
Thairlwall v The Great Northern Railway Company [1910] 2 KB 509