HM Revenue and Customs v Forde and McHugh Ltd

This appeal, by The Commissioners for Her Majesty’s Revenue and Customs (‘HMRC’), is against a decision of the Upper Tribunal (Tax and Chancery Chamber) (Floyd J and Judge Avery Jones) delivered on 21 February 2011 ([2011] UKUT 78 (TCC)). HMRC were respondents before the Upper Tribunal to a successful appeal by Forde and McHugh Limited (‘FML’) against an earlier decision by HMRC. FML is in turn now the respondent to HMRC’s appeal. The same counsel who appeared before the Upper Tribunal also appeared before us: Mr Jones QC and Mr Rivett for HMRC; and Mr Bramwell QC, Ms Redston and Mr Sherry for FML.

The question for the Upper Tribunal was whether FML was liable to pay Class 1 National Insurance Contributions (‘NICs’) on certain payments made to the trustees of a funded unapproved retirement benefits scheme. Whether FML was so liable depended on whether such payments were ‘earnings … paid to or for the benefit of an earner’ within the meaning of section 6(1) of the Social Security Contributions and Benefit Act 1992. There is no dispute that the payments were made ‘… for the benefit of an earner’. The dispute is whether they were ‘earnings’. HMRC assert that they were; FML asserts that they were not. The Upper Tribunal agreed with FML although it recognised the point as sufficiently finely balanced to justify the giving of permission to appeal to this court. Mr Jones told us that this is a test case. The court regrets that it has taken longer than might have been expected of it to produce its judgments, but this is in part explained by the need to revert to counsel for the benefit of their submissions on a point that occurred to the court whilst considering its judgments.

FML is a street lighting electrical contractor. William McHugh and his wife Catherine are directors and she is also the secretary. The events relating to the establishment of the scheme took place between 9 and 11 April 2002.

On 9 April Mrs McHugh wrote a letter to her husband relaying the FML directors’ announcement of the introduction of an FML retirement benefit scheme, to be constituted from 11 April by way of a trust. Membership of the trust was to be at the discretion of FML, which had agreed to admit Mr McHugh to membership. The letter explained that benefits would become payable to him:

By his acknowledgment of 11 April, Mr McHugh, then 54, agreed to become a member of the trust and to abide by its rules. He understood that recipients of lump sum benefits on death were chosen by the trustees in their discretion but expressed his wish for any such sums arising in his case to be disposed of in favour of Catherine.

An FML board meeting was held on 11 April, attended by Mr McHugh and his wife. Its purpose was to discuss pension arrangements, in particular the setting up of the scheme as an unapproved scheme. FML’s accountants, Charterhouse (Accountants) LLP, had advised it of the benefits of such a scheme, some of which were noted in the minutes. The minutes continued:

The minutes noted that Mr McHugh’s existing pension arrangements were considered and that actuaries had advised as to the funding needed in order to provide him with an appropriate pension taking into account his existing arrangements. It was noted that FML was not in a position to fund the pension to the recommended level but it was resolved that FML should fund it to approximately 90% of such level for the year and review the position at a later date in light of its financial position. It was resolved to establish the FML Retirement Benefit Scheme (‘the scheme’); and that FML should make the following contributions to it in respect of Mr McHugh for the year ending 31 May 2002: (a) a cash payment of £1,000; (b) £82,000 (nominal) of Treasury 5% Stock 2004; and (c) £80,000 (nominal) of Treasury 6¾ % Stock 2004.

The trust deed establishing the scheme was executed on 11 April. The parties were (1) FML, the ‘Principal Employer’; and (2) Mr McHugh and Barnett Waddington Capital Trustees Limited, the trustees. It recited that FML had determined to establish a retirement benefits scheme for employees admitted to membership in accordance with its provisions and that it was intended that it would be funded by contributions from FML or any employer, ‘such contributions to be an expense incurred for the benefit of such employer’s trade’. Clause 3 provided for the scheme to be governed by the provisions of the deed and the scheduled rules and for the trust fund to be held by the trustees ‘upon irrevocable trusts … for application towards the provision of Relevant Benefits under the Scheme in accordance with the Trust Deed and the Rules’. Clause 5 conferred on the trustees wide powers in the administration of the trust, including wide investment powers.

The meat of the scheme is in the rules. Rule 2 provides for membership to be available only to employees and only by the employer’s invitation. Rule 3 provides for the discretionary payment by the employer to the trustees of ‘contributions … in respect of each Member’ and that the scheme members shall make no contribution. Rule 4 is headed ‘Accumulated Funds’, such a fund being defined as ‘part of the Trust Fund allocated to a Member pursuant to rule 4.3’. Rule 4.3 requires the trustees to maintain an accumulated fund for each member, to include (inter alia) the aggregate of the contributions paid by the employer in respect of that member. Rule 4 further provides that:

Rule 5 is headed ‘Benefits on Retirement’ and rule 5.1 provides that upon a member’s retirement from service at or after his retirement age (defined as the date between his 50^th and 85^th birthday notified by the member to the employer as the date on which his benefits will become payable) the member’s accumulated fund is to be applied by the trustees in providing a pension to him for life or such other ‘relevant benefits’ (defined as having the same meaning as in section 612(1) of the Income and Corporation Taxes Act 1988) as the trustees may agree with him. Rule 5.2 entitles the trustees to realise ‘such part of the Trust Fund as corresponds to the Member’s Accumulated Fund’ in order to provide him with the rule 5.1 benefits.

Rule 6, headed ‘Death Benefits’, provides that, on a member’s death, the trustees shall realise his accumulated fund and apply the net proceeds to or for the benefit of one or more of a defined discretionary class of beneficiaries, with rule 6.2 entitling the member to notify the trustees how he would wish them to exercise that discretion (as Mr McHugh did on 11 April).

Rule 13 is headed ‘Assignment’ and its net effect is to prevent, or deter, a member from assigning or charging any present or future ‘Benefit’ (defined as a lump sum, annuity or other money payable to a beneficiary under the rules) to which he may be entitled under the scheme, the rule applying equally upon the member’s bankruptcy. On the occurrence of any applicable event, the member automatically forfeits all rights to benefits under the scheme; and as from the date on which the trustees receive notice of the event of forfeiture, they are to hold the relevant part of the trust fund from which such benefits would have been payable upon a discretionary trust to pay or apply such benefits to or for the benefit of one or more of a discretionary class of beneficiaries, such class to include the member. That is only a general description of the effect of rule 13, but there is no need to describe it more fully. Its substantive effect is that, pending the falling into possession of the member’s right to his benefits on retirement, the member is unable to turn his rights to his own material advantage or otherwise to realise them.

Finally, rule 20, ‘Exclusion from Benefit’, provides that the member’s accumulated fund and its income are to be possessed and enjoyed to the entire exclusion of the member’s estate after his death; and that no part of the capital or income of the trust fund is to be lent to, or paid or applied for the benefit of, any employer.

The material effect of the scheme, for present purposes, is therefore that the member in respect of whom FML makes a contribution receives no immediate realisable interest in his accumulated fund. His enjoyment of it is dependent upon his surviving to his retirement age. Any attempt by him in the meantime to convert his interest to his own account pending that event will result in its forfeiture and the arising of the rule 13 discretionary trusts.

The issue is whether FML’s payments to the scheme – indisputably made ‘… for the benefit of’ Mr McHugh - are correctly to be characterised as payments of ‘earnings’ within the meaning of the statutory provisions imposing the liability to pay NICs. The legislative references that follow are to the legislation applicable at the time material to this case.

The primary legislation is the Social Security Contributions and Benefits Act 1992 (‘the 1992 Act’). Section 2(1) describes and defines the two categories of ‘earner’, namely an ‘employed earner’ and a ‘self-employed earner’. The former is defined as ‘a person 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’. Section 3(1) provides that ‘earnings’ includes ‘any remuneration or profit derived from an employment’ and that ‘earner’ shall be construed accordingly. Section 3 further provides, so far as material:

Section 4 is headed ‘Payments treated as remuneration and earnings’. Section 4(1) provides that statutory sick pay or maternity pay paid to or for the benefit of a person ‘shall be treated as remuneration derived from the employed earner’s employment’. Section 4(4) provides for like treatment in respect of particular gains and sums of the nature there described on which the ‘earner’ is chargeable to tax by the provisions of the Income and Corporation Taxes Act 1988 (‘ICTA’) there referred to. Subsection (6) provides:

The key charging provision is section 6, headed ‘Liability for Class 1 contributions’. It provides, so far as material:

Section 7 defines a ‘Secondary contributor’, so far as material, as follows:

The secondary legislation is also important. The relevant regulations are the Social Security (Contributions) Regulations 2001 (SI 2001/1004) (‘the 2001 Regulations’). I refer first to regulation 22, upon which Mr Bramwell placed some reliance, headed ‘Payment to be treated as earnings’. Regulation 22(1) provides that ‘For the purposes of section 3 of the Act (earnings), the amounts specified in paragraphs (2) to (5) shall be treated as remuneration derived from an employed earner’s employment.’ There is no need to set those paragraphs out. They refer to ‘amounts’ by way of particular payments by a company to its directors, and ‘amounts’ in respect of which the earner is chargeable to Schedule E tax under various provisions of ICTA and the Finance Act 2000.

Regulation 24 is headed ‘Calculation of earnings for the purposes of earnings-related contributions’ and is as follows:

Regulation 25 provides, as just forecast, that ‘Schedule 3 specifies payments which are to be disregarded in the calculation of earnings from employed earner’s employment for the purpose of earnings-related contributions’.

Schedule 2’s stated purpose is as stated in regulation 24, with paragraph 1 explaining that the Schedule contains rules for that purpose. Paragraph 13, headed ‘Apportionment of a payment from a retirement benefits scheme for the benefit of two or more people’, provides:

The first point to note about paragraph 13 is that the ‘from’ in the heading is plainly a mistake for ‘to’ and an amendment correcting that error was made by regulation 27 of The Social Security (Contributions, Categorisation of Earners and Intermediaries) (Amendment) Regulations 2004 (SI 2004/770). The more important point is that paragraph 13 can be said to assume that payments to a retirement benefits scheme such as were made by FML do constitute ‘earnings … paid to or for the benefit of an earner …’ for the purposes of section 6(1). It does not, however, purport to provide that such payments are in fact earnings. Schedule 2 is not concerned with the identification of payments that form part of an earner’s earnings; it is concerned only with the calculation of payments that do form such part.

Schedule 3 to the Regulations is headed as earlier advertised in regulation 25. Its purpose is to identify ‘Payments to be disregarded in the calculation of earnings for the purposes of earnings-related contributions’, but it is in part also devoted to identifying payments of a particular nature that are not to be so disregarded (in effect, disregards of the disregards). Part II is headed ‘Payments in kind’, and provides that certain such payments are to be disregarded, with paragraph 1 providing:

Schedule 3 therefore assumes that payments in kind can in principle form part of an earner’s ‘earnings’. Paragraph 2 then identifies those ‘payments by way of assets [that are] not to be disregarded’, and they include, for example, ‘a readily convertible asset’, shares and stock in a company and loan stock and bonds issued by a public authority. Part VI is devoted to describing the ‘pension payments and pension contributions [that are] to be disregarded’. Those disregards include, by paragraph 3, pension contributions to an approved retirement benefit scheme. The scheme in the present case is, however, an unapproved one and so the FML contributions are not within that disregard. Again, it can be said that Schedule 3 assumes that an employer’s pension contributions can in principle form part of the ‘earnings … paid to or for the benefit of an earner ...’; and, more particularly, by not providing that they are to be disregarded, that such contributions to an unapproved scheme will do so.

It was and is common ground that, save for specific statutory intervention (section 595(1) ICTA, to which I shall come), FML’s payments to the scheme would not be ‘emoluments’ so as to be part of Mr McHugh’s income for tax purposes under Schedule E. HMRC’s argument before the tribunal was, however, that ‘earnings’ in section 6(1) bore a wider meaning than ‘emoluments’. If so, the tribunal observed that the argument left unexplained how much wider. It also discounted the inferences to be drawn from the features of the Schedules to the 2001 Regulations to which I have referred: they could not be invoked in order to interpret the primary legislation and the draftsman’s assumptions may simply have been wrong. The tribunal said that HMRC’s argument ultimately came down to an appeal to its common sense, namely that an ordinary person would be surprised to find that FML’s payments into the scheme for Mr McHugh’s benefit were not his ‘earnings’ or that he had not ‘earned’ them.

That suggested common sense approach was not, however, reflected in the tax cases, in which like payments to a fund in which the employee only had a contingent or conditional interest were not regarded as part of his emoluments for tax purposes. An approach akin to that of the tax cases was also adopted in the field of NICs by Collins J in Tullett v. Tokyo Forex International Limited & Others v. Secretary of State for Social Security [2000] EWHC (Admin) 350, which HMRC submitted was wrongly decided. The tribunal appears to have had at least some doubts as to the authority of Tullett, but observed that it remained the fact that if HMRC’s primary argument was correct, Tullett ought to have been decided the other way. Whilst recognising the point as finely balanced, the tribunal concluded that the neither the transfer of the gilts nor the cash payment to the scheme were ‘earnings … paid to or for the benefit of an earner’. It also rejected two alternative arguments advanced by HMRC.

I shall first set the scene a little more fully by looking at the income tax cases.

Smyth (Surveyor of Taxes) v. Stretton (1904) 5 TC 36 was a decision of Channell J. Mr Stretton, an assistant master at Dulwich College, appealed to the Commissioners of Taxes against a Schedule E assessment in the sum of £385 on the ground that it included a sum of £35 not liable to taxation. His appeal succeeded but the Commissioners’ decision was challenged before the judge by way of case stated. The £35 was the fruit of a scheme established in 1899 under which assistant masters with at least five years’ service would enjoy a salary increase. The scheme required all such masters to become members of the provident fund that it established; and clause 4 provided that the increases of salary were not to be paid to the masters but ‘shall be retained by the Governors and accumulated at compound interest for the purpose of forming the said Provident Fund …’. The masters would become entitled to the accumulated sums upon retirement. The rival arguments were, for the surveyor of taxes, that each master must be taken to have assented to the scheme’s arrangements and that the scheme amounted to no more than a particular way of investing a portion (the £35) of his annual salary; and, for the taxpayer, that the fund was not established by contributions from the masters out of their salary, but by contributions from the governors, and so the contributions were not part of their emoluments.

Channell J preferred the analysis of the surveyor of taxes. He referred, at 42, to Hudson v. Gribble 4 TC 522 as establishing that:

In Edwards v. Roberts (1935) 19 TC 618 the Court of Appeal distinguished Stretton’s case. The case provides a good illustration of the point that Mr Bramwell derives from the tax cases and which he advances as instructive, if not decisive, for the purposes of interpreting the word ‘earnings’ in the present context. Mr Roberts was employed by a company under a 1921 service agreement which provided that, in addition to his annual salary of £425, he had an interest in a ‘conditional fund’. That fund was created by the payment by the company at the end of each financial year to trustees of a sum out of its profits, to be invested in the company’s shares or stock. Subject to forfeiture in certain events, Mr Roberts was entitled to the income produced by his fund at the end of each financial year. He was also entitled to receive part of the capital of his fund (or the investments representing it) at the end of five financial years and of each succeeding year and, on death in service or on the termination of his employment, to receive the whole amount standing to the credit of the fund. He resigned in 1927 and the fund trustees transferred to him the shares purchased out of the payments made to them by the company over the years 1922 to 1927, valued at £1,640. He was assessed to tax on that value for 1927/28. He appealed, asserting that immediately a sum was paid to the trustees by the company, he obtained a beneficial interest in it which became part of his emoluments for the year of payment and that therefore his assessment for 1927/28 should not exceed the amount paid by the company to the trustees during that year. The Commissioners and Singleton J regarded themselves as bound by Stretton’s case to agree. The Court of Appeal, reversing Singleton J, disagreed and upheld the assessment.

Lord Hanworth MR regarded the case as distinguishable from Stretton’s case. There, but for the decision to establish the fund, the masters would have been paid a larger sum by way of salary each year; the payments were the masters’ contributions to the fund by way of a deduction from their salary. He said in relation to the instant case (at 637/638):

Romer LJ, at 639, agreed and described Stretton’s case as:

Maugham LJ also agreed. He said (at 640/641):

The income tax provision relevant to Mr McHugh as an employee of FML, and in force at the time that FML made its payments to the scheme, was section 19, Schedule E, of ICTA, which provided for a charge to tax on his ‘emoluments’ from his employment; and section 131 provides that ‘the expression “emoluments” shall include all salaries, fees, wages, perquisites and profits whatsoever’, a definition largely unchanged since the Income Tax Act 1842.

Quite apart from the fact that it is binding upon us, Mr Jones conceded that in the light of the restrictive interpretation of ‘emoluments’ by then adopted by the courts, Edwards was rightly decided. He accepted, and I agree, that Mr McHugh’s rights under the scheme in respect of the payments made by FML to the trustees were not different in kind from those of Mr Roberts in relation to the annual payments under the scheme that the Court of Appeal considered in his case. In particular, like Mr Roberts in relation to those annual payments, Mr McHugh was unable to convert the benefit of the FML payments into money. Subject to special statutory provision, such payments therefore formed no part of his ‘emoluments’ for tax purposes. That is because they were not in the nature of a salary, fee or wage; nor, because they were incapable of being so converted, were they a perquisite or profit from his employment even though they were of value to him. Mr Jones referred us to various authorities illustrating this (Tennant v. Smith [1892] AC 150, Abbott v. Philbin [1961] AC 352, at 378, per Lord Radcliffe, and Heaton v. Bell [1970] AC 728, at 764, per Lord Diplock). As the point was not in question before us, there is no need to refer to them further.

The income tax position then became, however, the subject of special provision. Section 595 ICTA provides, so far as material, that:

There is no doubt that benefits under the scheme are ‘relevant benefits’ within the meaning of section 595(1) (see the definition in section 612(1)), and therefore that the scheme is a ‘retirement benefits scheme’ within the meaning of section 595(1) (see section 611). It was not suggested to us that the transfer of the gilts to the scheme was not as much the payment of a sum to the scheme for the purposes of section 595(1) as was the payment to it of the £1,000 cash, and the same is shown by this court’s decision in Irving v. Revenue and Customs Commissioners [2008] EWCA Civ 6; [2008] STC 597. Section 596 provides for exceptions from section 595, of which one is that section 595(1) does not apply where the relevant retirement benefits scheme is an approved scheme. As, however, the scheme in this case is an unapproved scheme, section 595(1) does apply. Its effect, therefore, is that the payments by FML to the scheme, although not part of Mr McHugh’s ‘emoluments’ within the meaning of section 131, were deemed to be his income for tax purposes for the tax year ended 5 April 2003 and so assessable to tax under Schedule E.

Section 595(4) can be regarded, broadly, as the income tax equivalent of paragraph 13 of Schedule 2 to the 2001 Regulations. What, however, is not to be found (or at any rate not clearly to be found) in such Regulations is the equivalent of section 595(1). That takes me back to the provisions relating to NICs, which is what this appeal is about. Whether FML was liable to pay NICs in respect of its payments to the scheme turns on whether they were ‘earnings’ paid for the benefit of Mr McHugh within the meaning of section 6(1) of the 1992 Act.

Closer to home in that context is the decision of Collins J in Tullett & Tokyo Forex International Ltd and Others v. Secretary of State for Social Security [2000] EWHC (Admin) 350. Three appeals by way of case stated were before the judge. They all raised the same issue arising under the implementation of similar schemes, namely whether Class I NICs were payable by employers on bonuses provided to their employees. Huge sums were at stake under the schemes in issue, which were designed to enable bonuses to be paid without the need for the employer to deduct tax or pay Class 1 NICs. The effect of section 18(6) of the Social Security Administration Act 1992 was that no appeal lay against Collins J’s decision, which was final.

The schemes operated by the implementation of the following stages: (1) the employer takes out life policies of small value on the lives of the employees to whom the bonuses are to be given. Each policy is at that stage legally and beneficially owned by the employer; and each policy entitles the policyholder to surrender it. Whilst the benefits payable are by reference to units and funds, the policyholder has no legal or beneficial interest in such assets: he merely has a contractual right against the insurer; (2) the employer executes a declaration that he holds identified policies on trust for the employee as the beneficiary. The conferment of that beneficial interest carried an admitted obligation to pay Class 1 NICs, but they were payable on policies that at that stage were only of very low value; (3) the employer buys a short-dated gilt of a value sufficient to cover the bonuses proposed to be paid to the employees; (4) the gilt is transferred to the insurer together with a schedule identifying the amount of premium to be added to the policies relating to the employees. The insurer becomes the legal and beneficial owner of the gilt and the value of each life policy, by then held beneficially by the employees, is increased according to the amount of premium allocated to it; (5) the employer assigns the legal title to the policies to the relevant employees and the insurers are notified; (6) the employee surrenders his policies, whereupon the insurer pays him the surrender value in cash, having sold the gilts in order to place itself in funds.

The transactions took place in the early 1990s and any gap in the legislation exploited by such schemes had since been filled. No arguments based on W.T. Ramsay Ltd v. Inland Revenue Commissioners [1982] AC 300 were advanced to Collins J. The issue before him was whether the transfer of the gilts by the employer to the insurer was ‘earnings paid … for the benefit of the earner’ within the meaning of section 6(1) of the 1992 Act. Insofar as the consequence of such transfer was an enhancement in the value of the policy held by the employee, such enhancement was a ‘payment in kind’, a type of payment that, subject to specific exceptions, was required by the then applicable regulations (the Social Security (Contributions) Regulations 1979 (SI 1979/591)) to be disregarded from the computation of an employed person’s earnings. One exception to that disregard was, however, a payment in kind by way of the conferment of a beneficial interest in certain types of assets, including a life assurance policy. It was that provision that triggered the modest liability to Class 1 NICs referred to in step (2). The subsequent transfer of the gilts led directly to an increase in value of the policies but did not, however, amount to a conferment, or a further conferment, upon the employees of a beneficial interest in them: they already had the entire beneficial interest.

Leading counsel for the Secretary of State conceded that the benefit conferred on the employee by the transfer of the gilts to the insurer was a ‘payment in kind’ in the nature of a consequential enhancement of the value of the employee’s policy. He also recognised that the cost to an employer of the obtaining of a payment in kind should not generally be regarded as a payment within section 6(1) of the 1992 Act. His argument, as summarised by Collins J at [23], was, however, that:

Collins J did not accept the argument. He was influenced by the income tax cases. Whilst recognising that they were not directly applicable, he said, at [17], that he could not ignore them since they were concerned to show how to ascertain what a taxpayer has received and were of assistance in determining how to identify what an earner has earned; and, at [21], he said that:

In deciding that the transfer of the gilts did not amount to relevant ‘earnings’, he said it was necessary to identify what the employee got, which was only in the nature of a benefit in kind, by reason of the enhancement in the value of the policy. A ‘benefit in kind’ was required by the regulations to be disregarded in the calculation of earnings unless it fell within specified exceptions to such exceptions, which the benefit in issue did not. Having said that, he recognised that section 6(1) of the 1992 Act prevailed over the regulations. But he anyway rejected the Secretary of State’s submission as unworkable. He said, at [25], that the cost to the employer of providing a benefit to the employee could not be equated with the value of the benefit so provided. He said that, if there is to be a limitation to be read into section 6(1),

It is not surprising that the Upper Tribunal in the present case expressed the view that, if HMRC’s primary argument before it was correct, Tullett ought to have been decided the other way. Mr Jones submitted to us, as he did to the Upper Tribunal, that Tullett was wrongly decided; alternatively, that the present case is relevantly distinguishable from it.

We were provided with an outline of the history of the legislation relating to the payment of NICs. Mr Bramwell’s main point about it was that there is nothing materially new about the definition of ‘earnings’ in section 3(1) of the 1992 Act. The story starts with the National Insurance Act 1946 (‘the 1946 Act’), which provided for the payment by employed persons and their employers of flat rate contributions in respect of those ‘earning remuneration’ above a threshold limit specified in Schedule 1, with section 78 providing that ‘“earnings” includes any remuneration or profit derived from a gainful employment’.

The National Insurance Act 1959 (‘the 1959 Act’) introduced graduated contributions for employees whose earnings exceeded a defined amount, with flat rate contributions being payable for those not liable to graduated contributions. Section 2(1) provided that:

The National Insurance Act 1965 (‘the 1965 Act’) was a consolidating Act. Section 4(1) provided that graduated contributions were payable by employees and employers whenever there was ‘made to or for the benefit of a person over the age of eighteen a payment on account of his remuneration in any one employment’ exceeding £9 a week. Section 4(2) was in the same terms as section 2(1) of the 1959 Act. Section 114(1) defined ‘earnings’ in the same way as the 1946 Act.

A change came with the Social Security Act 1973 (‘the 1973 Act’), which abolished flat rate contributions and introduced four classes of contributions. Class 1 NICs (employed earners) were, by section 2, paid by reference to a ‘lower earnings limit’ and an ‘upper earnings limit’. Section 2(2) introduced the form of words now to be found in section 6(1) of the 1992 Act – ‘earnings are paid to or for the benefit of an earner’ – and ‘earnings’ and ‘earner’ were defined in section 99(1) of the 1973 Act in the same way as they are in section 3(1) of the 1992 Act (see [16] above). That definition followed the original definition in the 1946 Act save that ‘… from an employment’ was substituted for ‘… from a gainful occupation’. Mr Bramwell submitted that the equivalent of the provision formerly contained in section 4(2) of the 1965 Act is now to be found in regulation 24 of the 2001 Regulations (see [21] above).

Mr Jones’s submission was that the change in the statutory landscape introduced by the 1973 Act means that the income tax cases on the limits of an employee’s ‘emoluments’ for Schedule E tax purposes do not provide helpful guidance as to the interpretation of ‘earnings’ for the purposes of section 6(1). Whilst he accepts that FML’s payments to the scheme cannot be converted by Mr McHugh into money and therefore would not (section 595(1) ICTA apart) form part of his emoluments or income for tax purposes, his primary submission was that there is no reason why such payments, plainly made in consideration of the services rendered and to be rendered by Mr McHugh as an employee of FML, should not be regarded as his ‘earnings’. It makes no difference that they were paid to a third party for his benefit. The ordinary person would, he said, be surprised to find that such payments were not part of Mr McHugh’s ‘earnings’ or that he had not ‘earned’ them. Why else were they made? It makes no difference that, under the scheme, Mr McHugh receives no immediate right in them which he can convert to his own beneficial use. They are paid to a fund in which he has beneficial interest, albeit only a contingent one; if he dies before enjoying it, it passes to his family; and he was therefore better off when the FML payments were made than he was before. If, said Mr Jones, his primary submission as to the interpretation of section 6(1) was correct, it followed that paragraph 13 of Schedule 2 to the 2001 Regulations was correct in its apparent assumption.

Mr Jones argued further that, if he was wrong as to the primary meaning of ‘earnings’ in section 6(1), section 4(6)(a) of the 1992 Act empowered the making of regulations ‘for treating any amount on which an employed earner is chargeable to income tax under Schedule E as remuneration derived from the earner’s employment…’. He said that paragraph 13 of Schedule 2 to, and the inference in relation to unapproved retirement benefit schemes that is capable of being drawn from paragraph 3 of Part VI of Schedule 3 to, the 2001 Regulations could and should be read as amounting to regulatory treatment, as enabled by section 4(6)(a), requiring FML’s payments to the scheme to be treated as part of Mr McHugh’s earnings.

That further argument has, I consider, obvious difficulties. First, paragraph 13 repeats the substance of what was formerly in paragraph 18(21) of The Social Security (Contributions) Regulations 1979, the 2001 Regulations being consolidating regulations. As Mr Bramwell pointed out, section 4(6) of the 1992 Act was inserted into that Act by section 50(2) of the Social Security Act 1998; and Mr Jones did not attempt in his reply to explain how, what is now paragraph 13 of the 2001 Regulations, could be regarded as the product of a power created some 20 years after its predecessor first emerged in the 1979 Regulations. In any event, I would not accept the submission based on paragraph 13. Paragraph 13 explains how, in the particular circumstances to which it is devoted, an assumed charging provision is intended to work. It does not, however, itself impose the charge. It is necessary to find that elsewhere. Unless Mr Jones is right in his primary submission, I do not accept that the legislation does impose the requisite charge.

As for the point made in relation to paragraph 3 of Part VI of Schedule 3, we had no developed oral submissions on it. As follows from what I have just said, I would also not accept that the non-extension of the paragraph 3 disregard to contributions to unapproved schemes can be regarded as an implied exercise of the section 4(6) regulatory power to the effect that such contributions are to be treated as part of the employee’s earnings. The section 4(6) power has to be performed expressly. Mr Bramwell was, in my judgment, right to refer to regulation 22 of the Regulations (‘Payment to be treated as earnings’: see [20] above) as a true example of the exercise of that power. I do not, therefore, accept Mr Jones’s section 4(6) submission.

Mr Jones’s further alternative argument was that if FML’s payments to the scheme were not payments of ‘earnings’, it must at least be the case that the conferring by FML on Mr McHugh of a contingent interest in such payments amounted to the payment to him of ‘earnings’. In that context, Mr Jones invoked paragraph 13 of Schedule 2 as showing by implication that, when the interest is conferred upon just one person, the amount of earnings comprised in the conferment of such an interest must be equal to the amount of the payment made to secure such a benefit.

I have difficulties with that submission as well. First, if the payments to the scheme were not ‘earnings’, I do not follow how the suggested contingent interest in them can have been an interest in ‘earnings’. Second, paragraph 13 does not assist with the valuation of any such interest. It is focused only on the payments to the scheme, not on a contingent interest in them. The submission that Mr McHugh’s defeasible, and unrealisable, interest in the payments to the trustees is to be treated as having a value equivalent to the payments themselves is one that I find remarkable and do not accept.

In my view, the only real issue in this appeal is Mr Jones’s primary submission, namely, whether the payments to the scheme are correctly characterised as ‘earnings’. Mr Bramwell, with sustained and undisguised incredulity at HMRC’s attempt to argue the contrary, submitted that the suggestion is absurd. ‘Earnings’, he said, are what the employee receives for his work. It is another word for income. No employee, on learning of his employer’s contribution to a scheme such as the present one, would say that his earnings had just gone up. He will of course recognise that they are an investment that will enable a pension to be paid to him in due course by way of deferred remuneration, being a pension which, when paid, will be earnings. He will recognise also that the investment is a payment for his benefit. It is not, however, ‘earnings’. The words ‘for the benefit of’ in section 6(1) do not help HMRC. They simply cover the type of situation dealt with in Stretton’s case, in which the employee agrees to the diversion of part of his salary to a retirement benefit scheme; or, for example, the agreed diversion of part of his salary to a charity.

I prefer, and accept, Mr Bramwell’s submissions. The words in section 6(1) falling to be construed are ‘earnings … paid to or for the benefit of an earner’. Section 3(1) explains that ‘earnings’ includes ‘any remuneration or profit derived from an employment’. That collection of words is to be compared with the Schedule E tax provisions under which an employed person is chargeable to tax in respect of his ‘emoluments’, an expression that section 131 ICTA explains ‘shall include all salaries, fees, wages, perquisites and profits whatsoever.’ According to Mr Jones’s submission, there is clear blue water between the respective definitions of ‘earnings’ and ‘emoluments’, with the former ranging materially wider than the latter and catching benefits conferred upon an employee that escape the grasp of the latter.

Beyond asserting that the ordinary meaning of ‘earnings’ is sufficient to include payments made for the benefit of an employee such as those in issue, Mr Jones was unable to explain to my satisfaction the claimed difference between ‘emoluments’ and ‘earnings’. The ordinary meaning of ‘emoluments’ is a salary, fee, remuneration, profit, gain or reward deriving from an office or employment. It is defined in section 131 ICTA in language conveying the essence of that meaning, with the ‘whatsoever’ no doubt directed at casting the net as wide as it reasonably can. Yet the courts have decided that the net so cast does not catch payments of the nature that FML made to the scheme; and that is because, even though they are of value to the employee, he cannot turn them into money. The ordinary meaning of ‘earnings’ is, I consider, the same as that of ‘emoluments’. It is defined in section 3(1) in language conveying the essence of that meaning, being language that is, however, apparently less expansive than the section 131 ICTA definition of ‘emoluments’, with not even a ‘whatsoever’. I fail to understand why, if, as is accepted, ‘emoluments’ do not include payments such as those now in question, ‘earnings’ should be interpreted as doing so. The definition of ‘earnings’ in section 3(1) is materially the same as it has been in relation to employed persons since the 1946 Act. I do not accept that it is or ever has been used in the national insurance legislation in a sense conveying a meaning wider than that of ‘emoluments’.

That being so, HMRC’s case runs into difficulties in relation to FML’s payments to the scheme. In relation to tax chargeable under Schedule E, the legislature has filled what it perceived to be a gap in the meaning of ‘emoluments’ by expressly deeming such payments to be the income of the taxpayer and so chargeable to tax (section 595(1) ICTA). In relation to NICs, however, neither the 1992 Act nor the 2001 Regulations have filled the like gap. That is not because the legislature was not, when enacting the Act, other than fully aware that it would or might need to deem benefits of a particular type to be part of an employed person’s remuneration and earnings which otherwise would not. Section 4 is specifically directed to such deeming, although it instead calls it ‘treating’; and section 4(6) enabled the 2001 Regulations to ‘treat’ as an employed earner’s remuneration ‘any amount on which [he] is chargeable to income tax under Schedule E as remuneration derived from [his] employment’. Regulation 22 is a good example of the exercise of that power. What, however, is nowhere to be found is a provision, either in the 1992 Act or in the 2001 Regulations, that treats an employer’s contributions to an unapproved retirement benefits scheme as such remuneration. True it is that paragraph 13 of Schedule 2 to the 2001 Regulations assumes that such payments either form part of an earner’s remuneration or have been treated as doing so. I agree, however, with Mr Bramwell that in that respect paragraph 13 is mistaken. Paragraph 13 explains how, in the particular circumstances to which it is devoted, an assumed charging provision is intended to work. It has, however, overlooked that there is no charging provision in respect of which its provisions can apply.

I agree with the decision of the Upper Tribunal. I would dismiss the appeal.

The question to be answered in this appeal is whether certain payments in the form of the transfer of gilts by an employer for the benefit of an employee to trustees of a funded unapproved retirement benefits scheme fall within the definition of earnings provided for in section 3 (1) (a) of the Social Security Contributions and Benefit Act 1992 (SSCBA 1992) as “any remuneration or profit derived from an employment” so that the national insurance charging provision in section 6 of the Act applies. There is no dispute that the payments were made for the benefit of the employee, the key issue is whether those payments are earnings.

For the reasons set out below, I have come to the conclusion that on the facts of this case, they are. For those reasons, I too would allow the appeal by Her Majesty’s Revenue and Customs (the Revenue).

The underlying question which arises out of the challenge to the decision of the Upper Tribunal is whether that tribunal should have interpreted the SSCBA 1992 as if there ought not to be a difference in approach to the interpretation of emoluments in the income tax legislation and earnings in the national insurance legislation. In short, if emoluments for income tax purposes do not include contingent benefits paid by an employer other than out of the remuneration of the employee, then should earnings for national insurance purposes be similarly limited? Attractive though the proposition might be that this court should align or treat the interpretation of emoluments and earnings as if they were aligned, I can find nothing in the submissions of the parties which permits this court to do so nor can I overlook the consequences, intended and unintended of this court making that alignment without the benefit of submissions on those consequences and the ability to scrutinise whether those consequences are in accord with a permissible purpose.

I am indebted to Rimer LJ for his summary of the facts at paragraphs 1 to 7 above, which I respectfully adopt. I likewise find myself in complete agreement with my Lord’s analysis and description of the scheme to be found at paragraphs 8 to 14, inclusive, for which I am very grateful. The effect of that analysis is that it is beyond dispute that the employer’s contributions to the scheme were made for the benefit of the employee and that the employee as a member of the scheme received no realisable interest in his accumulated fund. As Arden LJ describes, the employee received a contingent benefit but no immediate benefit and the payments were a discretionary bonus forming no part of the employee’s contractual entitlement.

The legislation to be construed is to be found at sections 3(1)(a) and 6(1) of SSCBA 1992. Emoluments are not an independent concept defined in the Act. Section 4(6) of the Act provides for regulations to be made to align earnings with emoluments. In my judgment, that provision would not be necessary if the concepts were necessarily aligned or had by the time of the SSCBA 1992 become aligned. The provision is permissive not mandatory as might be expected if Parliament intended the concepts to be interpreted in a way that is based on their alignment.

I respectfully agree with Rimer LJ at paragraphs 24 to 26, that paragraph 13 of Schedule 2 to the Social Security (Contributions) Regulations 2001 (‘the 2001 Regulations’) is drafted on the assumption that payments to a retirement benefits scheme such as those made by the employer on behalf of the employee in this case do constitute earnings for the purposes of section 6(1). The schedule is concerned with the calculation of payments that do form such a part and accordingly does not provide that such payments are in fact earnings. Likewise Schedule 3 to the 2001 Regulations assumes that an employer’s pension contributions can in principle form part of the ‘earnings … paid to or for the benefit of the earner …’ and further by not providing that they are to be disregarded, it assumes that such contributions to an unapproved scheme are earnings paid to or for the benefit of the earner.

I agree that the inferences to be drawn from the Schedules to the 2001 Regulations cannot be used to interpret the primary legislation but one has to be prepared to find that paragraph 13 of Schedule 2 is ultra vires and of no effect if one draws assistance in the interpretation of national insurance legislation from the interpretation of tax legislation. That has consequences which are not to be ignored.

That said, I respectfully find myself in complete agreement with Rimer LJ in his analysis of the income tax cases at paragraphs 28 to 40, inclusive. The cases describe like payments into a fund in which the employee has only a conditional or contingent interest as not being part of the employee’s emoluments for tax purposes. I accept that so far as the tax legislation and cases are concerned, that is because the payments were not in the nature of a salary, fee or wage nor were they a perquisite or profit for tax purposes because they were incapable of being converted into money even though they were of value to the employee. I did not understand the Revenue to submit otherwise. It is only because of the application of section 595(1) of the Income and Corporation Taxes Act 1988 (‘ICTA 1988’) that such payments are deemed to be income and assessable to tax under Schedule E.

The description of two principles that can be derived from the income tax cases which Arden LJ sets out at paragraphs 87 to 90 inclusive, is, if I may respectfully say so, very helpful. In particular, I agree with my Lady that having regard to the convertibility principle, there is a distinction to be drawn between a statutory provision that treats benefits in kind as if they were emoluments and one that treats a particular payment as if it were income and the significance of the need for section 595(1) ICTA 1988 is clear: without that provision payments to an unapproved retirement benefits scheme like the payments made in this case would not be liable to income tax as emoluments.

For my part, I am of the view that the court should be very careful to tread by inference into territory where enactment is clearly necessary and where Parliament has not gone. That is even more so where Parliament has made changes which have the effect of separating or keeping separate the statutory schemes when it could have done otherwise.

I pause only to say that if I were called upon to make a judgment I too would come to the conclusion that Tullet v. Tokyo Forex International Limited & Ors v. Secretary of State for Social Security [2000] EWHC (Admin) 350 is wrongly decided in its rejection of the Secretary of State’s argument that the employee should be charged upon the value of what he or another on his behalf has been paid. That rejection was explained by reference not to national insurance cases but to the income tax cases concerning payments in kind which Rimer LJ has so carefully described.

While I accept that there was a link between the statutory schemes as demonstrated by the National Insurance Act 1965 (see section 4(2) set out above), I am of the view that the link was abandoned in the Social Security Act 1973. There is no dispute that the 1973 Act effected a change and I respectfully adopt the description of the origin and functions of the statutory schemes set out by Arden LJ at paragraphs 96 to 98 and 100 below. I agree that in this context the court should be very careful before making an assumption that the approach to national insurance and income tax should be the same. I accept Mr Jones’s submission on behalf of the Revenue that the change effected in 1973 means that without a legal or public policy rationale the income tax cases on emoluments do not provide helpful guidance as to the interpretation of earnings for the purposes of section 6(1) SSCBA 1992. No public or legal policy rationale is advanced by Mr Bramwell to justify placing reliance on the income tax cases in the interpretation of section 6(1).

Mr Jones submits that there is no reason why the payments made into the scheme, which he says were made in consideration of the services rendered by the employee, should not be regarded as the employee’s earnings and he further submits that the ordinary person would be surprised to discover that such payments were not part of the employee’s earnings having regard to the fact that the employee is better off when the payments had been made. Assuming as I do, because it is the context in which the submissions were made, that they are intended to describe the circumstance in this case where the payments are a discretionary bonus, I do not accept that it is sufficient to say in answer to Mr Jones’s submission that no employee on learning of his employer’s contribution to a scheme such as the present one, would say that his earnings had just gone up. I do not accept that such a proposition is necessarily correct i.e. representative of what the general public might think nor do I think that it can be relied upon by this court without more as the basis to make the decision asked of us.

I see the strong force of the argument that the wording of section 6(1) SSCBA 1992 and section 131 ICTA 1988 is sufficiently coincident to question whether there should be any distinction between emoluments and earnings. In my judgment that does not mean that this court is entitled to make that leap.

For my part, I detect no tension between sections 3(1)(a) and 6(1)(a) of the Act. Earnings are remuneration or profit. Profit is not defined but one need look no further than classic dictionary definitions for assistance, for example, Jowett’s Dictionary of English Law 3^rd Ed uses the formulation ‘advantage or gain in money or money’s worth’. That is derived (as it would appear all other legal dictionary definitions are) from what I take to be an all encompassing definition given by Fletcher Moulton LJ in Re Spanish Prospecting Co Ltd [1911] 1 Ch 92 at 98 and 99. Profit for the purposes of section 3(1)(a) SSCBA 1992 clearly includes the acquisition of a benefit in kind: that is included in section 3(2A) of the Act.

I too am indebted to Rimer LJ for his analysis of the trust at paragraphs 8 to 14 of his judgment with which I respectfully agree. The employee received a present right to a future benefit. He will receive the benefit in some form at some time in the future. That does not however mean that the employee has a proprietary interest in the assets of the trust. He does not.

Does that mean the benefit cannot constitute earnings? In my judgment, it is not necessary for an employee to receive a proprietary interest in order for a benefit to be treated as earnings as long as the employee receives a profit from it. There is no doubt that the payments made by the employer in this case were for the employee’s benefit. The Upper Tribunal found as much and accordingly those payments are caught by the plain meaning of section 6(1) SSCBA 1992. That benefit is not a benefit in kind nor is it contingent. It is a profit and is of a different character from a benefit in kind. It was not intended to be a benefit in kind. On this basis, the payment is caught by the plain meaning of the section 6(1)(a) of the Act.

Although we have not been assisted by submissions on all of the matters described by Arden LJ in her five reasons in support of the interpretation of the 1992 Act, I specifically agree with the matters set out above and can find nothing with which I disagree in the remainder.

For my part, the value of the benefit, i.e. the profit for the purpose of the charge, is the value of the gilts transferred i.e. the value paid for the benefit of the employee rather than the value subsequently received. That is what Parliament said and I am not persuaded that this court should depart from the plain meaning of the Act.

For these reasons I have concluded that the Upper Tribunal was wrong and that this appeal should be allowed.

On this appeal, the issue for this court is whether Mr McHugh’s employer must pay Class 1 NICs on payments made to funded unapproved retirement benefits scheme. As a result of these payments, Mr McHugh received a contingent benefit if he survived to retirement but no immediate benefits. The payments were a discretionary bonus, and formed no part of Mr McHugh's contractual entitlement. They consisted of cash and gilts. The scheme was not approved by Her Majesty’s Commissioners for Revenue and Customs, as they are now called (“the Revenue”). If the scheme had been so approved, it would have fallen within an exemption in delegated legislation for payments to approved retirement benefit schemes: see Part VI, paragraph 3 of Schedule 3 to the Social Security (Contributions) Regulations 2001 (“the 2001 Regulations”). The issue turns, however, not on the lack of approval, but on whether the payments constituted "earnings paid to or for the benefit of” Mr McHugh for the purposes of the charging provision for Class 1 NICs in section 6 (1) of the Social Security Contributions and Benefits Act 1992 ("the 1992 Act”) (paragraph 18 above). I need to start by setting out in outline terms the conclusions reached by Rimer LJ.

The judgment of Rimer LJ leads him to conclude that the ordinary meaning of “earnings” in section 3(1) of the 1992 Act is the same as that of “emoluments”, that the statutory definition is materially the same and that it is not and has never been used in national insurance legislation as conveying any wider meaning. On that basis he concludes that there is no charging provision applicable to the contributions of an employer to a retirement benefits scheme which has not been approved by the Revenue, as in this case.

I am greatly indebted to Rimer LJ for his comprehensive judgment, whose scholarship I readily acknowledge. It has set out the issues with great clarity and it will make it unnecessary to repeat much of the ground. However, I shall need to repeat some of it as, pursuing the points he has made, I have after consideration arrived at the opposite conclusion. I would, therefore, allow this appeal. I have found of assistance the most recent written submissions made by Mr Philip Jones QC in relation to section 10 of the 1992 Act, which I consider to be a significant provision for the reasons explained below.

Overall, I conclude that the term “earnings” for the purposes of the 1992 Act is not limited by the principles established by the court for the purposes of income tax on which the employer here relies. The term “earnings” does not, therefore, have the same inherent meaning as “emoluments” and accordingly the charging provisions should be interpreted and applied according to their tenor. I shall start, however, with an explanation of the principles sought to be implied.

There are two relevant principles of income tax in play in this appeal. The first principle is that of indefeasibility established by Edwards v Roberts (1935) 19 TC 618 (paragraphs 32-5 above). A contingent entitlement to a benefit is not sufficient to trigger liability to income tax. The second is that of convertibility. This was established by Tennant v Smith [1892] AC 150. That was the case of the bank manager’s flat which the bank manager was required to occupy for the purposes of his employment. He could not leave it without permission, and he could not realise any cash from the benefit by letting anyone else occupy it. He was not liable to income tax on this benefit. The House of Lords held that emoluments were limited to money, and that which can readily be turned into money, such as gilts.

These two principles are closely related but analytically separate. They were both developed by the courts and are not express statutory provisions. I will refer to them collectively as “the two principles”. In my judgment, payments are not precluded by either principle from being “earnings” for the purposes of liability to pay national insurance contributions. I need to say a little more about the legislative response to the convertibility principle.

In response to the convertibility principle, Parliament enacted that certain benefits in kind were to be treated for income tax purposes as if they were emoluments. They include free accommodation: section 145 of the Income and Corporation Taxes Act 1988 (“the 1988 Act”). However, it is to be noted that there is a distinction between a statutory provision of this kind and one that treats a particular payment as if it were income. There may be a difference in effect as different deductions may be allowed where a payment is treated as an emolument from those allowed where a payment is treated as income.

One example of a provision which treats a payment as income is section 595 of the 1988 Act, set out by Rimer LJ in paragraph 38 above. That is a particularly relevant provision as it shows that a specific statutory provision was needed to make the payments made by the respondent to the unapproved retirement benefits scheme liable to income tax as emoluments.

I shall next turn to some points that I need to make before I set out my reasons for allowing this appeal. I begin with the meaning of “payment”. I use the term “payment” in a neutral sense, that is, as capable of applying to a payment in cash or to the provision of a benefit in kind.

Before I give my five reasons for allowing this appeal, I need to emphasise the implications of the point at stake here. It follows from the conclusion reached by Rimer LJ that paragraph 13 of the 2001 Regulations is ultra vires and that the exemption for payments to approved employer-funded retirement benefit schemes (see paragraph 1 of this judgment) is a totally redundant statutory provision since such payments could never have been earnings. That is serious in itself, and means that there may be claims for the repayment of contributions already made. The Revenue estimates that claims to repayment arising out of contributions to unapproved retirement benefit schemes do not exceed £8.5m.

However, if the meaning of “earnings” is impliedly subject to the principles of indefeasibility and convertibility, there may be many other provisions affected by the same reasoning. There is, for instance, no specific enabling power in relation to sums which for income tax purposes are treated as emoluments (as opposed to income). Thus, there is no express charging provision for benefits in kind. These are in general exempt from national insurance under the 2001 Regulations and the predecessor Regulations, but there are some significant exceptions. These provisions might also be affected. It is impossible for us to form a view about the wider implications of the decision to dismiss this appeal but they may be considerable. On the other hand, if Rimer LJ’s conclusion is correct, then we must apply it, whatever the consequences. With that introduction I turn to the issues of interpretation.

Those who drafted the 2001 Regulations and their predecessors obviously had a different view from Rimer LJ. I emphasise that the meaning of the 1992 Act cannot be governed by the 2001 Regulations, which are drawn up by a department of state and not by Parliament, though they are subject to annulment by Parliament. However, those Regulations do throw some light on the approach of those who have administered the national insurance scheme and from time to time promoted new legislation (see generally, Hales v Bolton Leathers [1951] AC 539, 544 and 548; and see Hanlon v. The Law Society [1981] AC 124, at 193 to 194, per Lord Lowry). I should add that, until recently, those administering the national insurance scheme were not the Revenue but the Department for Social Security and latterly the Contributions Agency.

I turn to my five reasons. They are (1) the different origin and function of national insurance, (2) the severing of the link between emoluments and earnings in the National Insurance Acts 1959 and 1965 (“the 1959 Act” and “the 1965 Act” respectively), (3) the use of the word “paid” in section 6(1) of the 1992 Act, (4) subsequent provisions of the 1992 Act consistent with my interpretation, and (5) the true construction of section 6(1) of the 1992 Act (“earnings paid to or for the benefit of an earner”).

My first reason then relates to the different origin and function of national insurance. This gives a perspective on the issues that was not placed before the distinguished Upper Tribunal (Tax and Chancery Chamber) (Floyd J and Judge Avery Jones) in this case. For my purposes, an outline will suffice but a fuller history of national insurance can be found, for instance, in Tiley and Collison, United Kingdom Tax Guide 2011/2.

National insurance legislation originated in the recommendations of the Report of the Inter-Departmental Committee on Social Insurance and Allied Services (“the Beveridge report”) of 1942 (Cmnd 6404). This recommended that every earner should make a flat rate contribution from his earnings, irrespective of the size of his earnings. In addition, it recommended that the state and the employer should also make contributions. All three sets of contributions would be paid into a fund to pay flat rate benefits to those who had contributed to it and their dependants. Thus national insurance is not a tax. The idea was that those who had the capacity to pay would pay tax and thus fund the state’s contributions. The original principles have been modified over time. In particular in 1959, graduated contributions were introduced. Those contributions could only be imposed on a person’s emoluments for income tax purposes (see section 2(1) of the 1959 Act and section 4(2) of the 1965 Act).

That limited link between “earnings” and “emoluments” was, however, cut in 1975 when a new system of national insurance was introduced. Now national insurance contributions are divided into four classes. There is no provision, however, which provides in terms for earnings to be paid by reference to emoluments or deemed emoluments for income tax purposes. There is a complex history of specific provisions in the 2001 Regulations to make payments earnings and vice-versa. Tiley and Collison concludes that as a result the tax bases for income tax and national insurance overlap but that they are not identical.

In addition, Tiley and Collison explains how there have been efforts over the last decade or more, in which successive governments have been involved, to integrate income tax and national insurance. We cannot take account of those steps which have not involved legislative intervention, but, as I understand it, there was an announcement in the last Budget (subsequent in time to the hearing of this appeal) stating that the government’s intention was to consult not on integration of the substantive provisions but on integration of the way in which national insurance and income tax are operated so as to reduce the burdens on employers. This is some indication at a general level that income tax and national insurance remain in certain substantive respects distinct.

The history is important because it undermines the point made by Collins J in Tullett & Tokyo Forex International Ltd v Secretary of State for Social Security [2000] EWHC (Admin) 350, and adopted by the Upper Tribunal in this case, that it would be surprising in the absence of specific provision if the approach should differ between national insurance and income tax. In my judgment, we should be chary of making any such assumption.

I now turn to my second reason. If the term “earnings” has the same meaning as emoluments for income tax purposes, it was unnecessary for Parliament to link the two as it did in the 1959 and 1965 Acts, which were both predecessors of the 1992 Act. Section 4(2) of the 1965 Act for example provided:

“In relation to graduated contributions, references in this Act to remuneration shall be taken to include, and to include only, any emoluments assessable to income tax under Schedule E (other than pensions), being emoluments from which tax under that Schedule is deductible, but shall apply to a payment of any such remuneration whether or not tax in fact falls to be deducted from that payment.”

That meant that emoluments for the purposes of schedule E were the basis for calculating earnings for the purposes of national insurance. Why would Parliament need to do that if the concepts were inherently materially the same? Parliament does not enact provisions that are unnecessary. The answer is that there would on the basis of the respondent’s interpretation be no reason for this provision in those circumstances. Furthermore some significance must attach to the fact that it only ever applied to one form of contributions, that is, graduated contributions. This implies that a different meaning applied for other purposes. In any event, the provision was abandoned in the Social Security Act 1973. Schedule E was used for limited purposes but not generally as the basis for calculating earnings, even for graduated contributions. From this point onwards in time, it is, in my judgment, clear that the terms “emoluments” for the purposes of income tax and “earnings” for the purposes of national insurance do not have a common root, and that accordingly the tax base for income tax is not the same as the contributions base for national insurance.

Mr Richard Bramwell QC, who appears for the respondent, having begun his submissions by saying that this was a case about the importance of earnings, submits that this provision was merely inserted to make it clear that graduated contributions were to be calculated on earnings before the deduction of tax, ie on gross earnings, a function now expressly carried out by regulation 24 of the 2001 Regulations (paragraph 21 above). However, there are in my judgment several answers that explain why this interpretation is incorrect. First, it is to be presumed that every statutory provision has operative effect and that it has not been inserted merely for clarity. Secondly, if section 4(2) were intended to make it clear that “earnings” meant “gross earnings”, it would have made that provision. Thirdly, if the two principles remained applicable to “earnings”, Parliament would surely have maintained the link and indeed applied it or the principles to earnings for all the purposes of national insurance. Instead, it was repealed. So far from this point assisting the argument of Mr Bramwell, in my judgment, it is adverse to it.

My third reason is based on the use of the word “paid” in section 6(1) of the 1992 Act. This demonstrates that Parliament in primary legislation proceeded on the basis that the meaning of the term “earnings” was not limited to the meaning of the term “emoluments”. The reasons are as follows. The word “payment” can be used in the context of both cash and kind. While Mr Bramwell may not have accepted this point, he did not pursue any submissions on the meaning of “paid” or “payment” in the context of the 1992 Act. In my judgment, as Mr Jones submitted in his oral submissions, it is used in the sense given in the charging provision in section 6(1) of the 1992 Act. In any event, “earnings” is defined in section 3(1)(a) of the 1992 Act as including “any remuneration or profit derived from an employment”, and a “profit” may obviously be made by the acquisition of an item in kind (such as free accommodation or precious stones). (Section 3(2A) (set out in paragraph 16 above) uses both terms: payment and the provision of a benefit. Section 3(2A) was added by amendment in 1998 but it still falls to be interpreted as one with the 1992 Act as originally enacted.) Furthermore, as Mr Jones submitted, that wider connotation means that section 6(1) of the 1992 Act covers payments in kind. This in turn demonstrates that the meaning of “earnings” is not co-extensive with the meaning of “emoluments”. It also demonstrates that convertibility into money is not a requirement of earnings. I shall need to deal again with section 6 below as it is the charging provision in this case and must be interpreted as a whole.

My fourth reason is that there are other ways in which it can be seen that Parliament has approved the autonomous meaning of “earnings”. As I have said, delegated legislation cannot be used to govern the meaning of primary legislation. However, if we were to find in later primary legislation that Parliament has acted upon the view of “earnings” taken in earlier delegated legislation, then in my judgment Parliament must be taken to have approved that meaning, at least to that extent. On that basis, some assistance can be obtained from section 10 of the 1992 Act, as amended by section 74(2) of the Child Support, Pensions and Social Security Act 2000. This was the form in which section 10 stood at the date of the payments in question in this case, though it has since been amended. The fact that it was subsequently amended is not material to the point which I am making. Section 10 as amended in 2000 by primary legislation provides:

“(1)

Where—

(a)

for any tax year an earner is chargeable to income tax under Schedule E on an amount which for the purposes of the Income Tax Acts is or falls to be treated as an emolument received by him from any employment (“the relevant employment”),

(b)

the relevant employment is both employed earner's employment, and employment to which Chapter II of Part V of the 1988 Act (employment of a director or with annual emoluments of more than £8,500), applies, and

(c)

the whole or a part of the emolument falls, for the purposes of Class 1 contributions, to be left out of account in the computation of the earnings paid to or for the benefit of the earner,

a Class 1A contribution shall be payable for that tax year, in accordance with this section, in respect of that earner and so much of the emolument as falls to be so left out of account.”

This provision applies to all benefits in kind treated as emoluments. It constitutes a recognition in primary legislation that national insurance contributions may be levied on earnings in the form of benefits in kind even though such benefits are not emoluments for income tax purposes, but are only treated as such emoluments. Parliament also recognises in subsection (1)(c) that there is legislation that, in the case of some benefits in kind, leaves them out of account for the purposes of national insurance contributions. By implication there is other legislation already on the statute book that levies national insurance on earnings in the form of benefits in kind. In fact that other legislation would have been the 1979 Regulations. For these reasons, section 10 approved the meaning of “earnings” assumed in the Regulations and leaves no real doubt that earnings are a separate and stand-alone concept, which is not merely the mirror image of emoluments for income tax purposes.

Of course, it may be said that there is nothing surprising in this because national insurance legislation is merely treating as earnings payments that are treated as emoluments under income tax legislation. But that misses the point. There is no provision of the 1992 Act that automatically treats any payment treated as emoluments as earnings. Section 4(6)(a) of the 1992 Act (set out in paragraph 17 above) was only inserted by amendment by section 50(2) of the Social Security Act 1998, and it is directed to sums treated as income, and not specifically to sums treated as emoluments, though the latter may be included in its scope.

Accordingly, until 1998 Parliament had created no enabling power in relation to sums treated as emoluments for income tax purposes, such as benefits in kind. On my approach, the reason is that it did not need to do so. It did need to do so on Rimer LJ’s interpretation, as I understand it. That is why his interpretation may have implications also for the treatment of benefits in kind (on which significant amounts of national insurance contributions will presumably have been paid). The absence of an earlier enabling power to treat sums treated as emoluments as earnings supports the view that Parliament did not consider that such a power was necessary in view of the fact that the term “earnings” in any event had a different meaning from “emoluments”.

It will be noted that in my reasons I have concentrated on provisions of primary legislation in which Parliament has proceeded on the basis that the meaning of “earnings” is different from that of “emoluments”. Parliament also proceeded on that basis in the delegated legislation. The provisions of the delegated legislation with which we are primarily concerned were previously contained in the 1979 Regulations. These Regulations continued in force until the 2001 Regulations came into force. The 2001 Regulations consolidated the 1979 Regulations and other Regulations. The 1979 Regulations made provision for the calculation of the value of certain benefits in kind (see paragraph 18 and schedule 1A), which included unquoted securities. There was also a disregard of payments in kind and payments in the form of board or lodging. Those provisions were certainly in force by the time of the passing of the 1992 Act. Accordingly, the 1979 Regulations treated as earnings payments that were not readily convertible into money or money’s worth. Those administering the scheme must have regarded them as within the meaning of “earnings” as otherwise there would have been no enabling power to make those Regulations. Section 4(6) of the 1992 Act (paragraph 17 above) was not introduced until 1998.

In his oral submissions Mr Jones submitted that in both the 1979 Regulations and the 2001 Regulations Parliament had by necessary implication proceeded on the basis that payments to a retirement benefit scheme constitute earnings and that benefits in kind had to be specifically excluded. He further submitted that it was assumed in the drafting of the delegated legislation that there is no need for any provision in the primary legislation because the definition in the primary legislation covers it. In his oral submissions Mr Bramwell submitted that delegated legislation could not be used to interpret primary legislation. He referred to House of Lords authority, which I understand from his later submissions to have been Deposit Protection Board v Barclays Bank plc [1994] 2 AC 367. He submitted on the strength of this authority that the delegated legislation could not be used to interpret primary legislation unless the Regulations were enacted as a single code with the primary legislation and at the same time. He pointed out that the Revenue had not pursued an argument that delegated legislation could be invoked as an aid to interpretation before the Upper Tribunal (see the penultimate sentence of paragraph 31 of their decision). However, I put it to Mr Bramwell in argument that, while the fact that Parliament has proceeded on the basis of an assumption as to what earnings means could not change the meaning of the statutory provision, it could elucidate the meaning of that term in the primary legislation.

The theme of Parliament proceeding on the basis of the wider meaning of “earnings” was picked up again in Mr Jones’ post-hearing submissions on section 10 of the 1992 Act. Reflecting on this point, it seems to me that Mr Jones’ submissions on the 1979 Regulations and section 10 may lead to a further point, which I discuss in the next paragraph.

Though this was not an argument advanced by Mr Jones, it seems to me to be at least arguable that the court should in the circumstances of this case use the 1979 Regulations as an aid to interpretation of the 1992 Act for the following reasons. Parliament must be taken to be aware of the state of the statute-book, certainly when, as in the 1992 Act, it consolidates legislation. Thus Parliament had full knowledge of the way in which national insurance was being administered in the 1979 Regulations when it passed the 1992 Act. That Act (which was partially an amending Act to take account of pre-consolidation amendments recommended by the Law Commissions) made no amendment to the meaning of “earnings”. The fact that no amendment was then made is a strong indication that Parliament approved the meaning of “earnings” reflected in the 1979 Regulations as at the time of the passing of the 1992 Act and that it intended that the national insurance legislation should continue to be administered on the basis of a meaning of “earnings” which diverged from that used for income tax purposes.

So Parliament’s approval by implication of the approach to “earnings” in the 1979 Regulations would, on this basis, mean that to read at least the convertibility principle into the definition of “earnings” in the 1992 Act would be not so much to fulfil the intention of Parliament as to frustrate it. It would also mean that the court should interpret the word “earnings” in the 1992 Act as a separate and stand-alone concept in the light of the provisions of that Act, and not by reference to principles evolved in the different context of income tax legislation. The objection to interpreting primary legislation by reference to delegated legislation may well not apply in this kind of case where the court would be relying on the view Parliament took in primary legislation as the governing view rather than on the view taken in delegated legislation. This point is not, however, essential to my decision but may be appropriate for consideration on some future occasion.

I turn now to my fifth reason, which I have left to last because it is necessary to see the point from a historical and contextual perspective. My fifth point is that the expression “paid to or for the benefit of an earner” in section 6(1) of the 1992 Act, on its true interpretation in the context of the 1992 Act, catches any payments which constitute remuneration or profit derived from an employment and which meet the further condition that they are either paid direct to the employee or paid to a third party for his benefit. There is no doubt that the payments that the employer made in this case were to Mr McHugh’s benefit, and the Upper Tribunal so found.

The relevant words in section 6(1) of the 1992 Act have to be interpreted in a manner consistent with the legislative scheme of national insurance as now contained in the 1992 Act and 2001 Regulations. As I have explained in paragraphs 108 and 113 above, that scheme is inconsistent with the implication of the convertibility principle.

Moreover, the implication of the two principles does not accord with the natural meaning of the language Parliament has used. If the term “earnings” were limited to the sums that had vested in the employee, section 6(1) would more naturally have spoken of “earnings received by an earner”. In addition, if the interest were actually vested in the employee, the third party would receive them only as a nominee for the earner. In that case, the drafter would have no need to refer to the possibility of a third party receiving the earnings. The principle that a person who acts through an agent does the act himself (qui facit per alium facit per se) would apply. The presence of the third party would be ignored for statutory drafting purposes.

Furthermore, and this is a separate and significant point, the expression “paid to or for the benefit of an earner” treats a payment as having achieved the status of earnings when it is paid, and not when it is unconditionally received.

The words “earnings paid to or for the benefit of the earner” have to be applied as they stand. The word “paid” means “paid” and not “received”. It is, therefore, irrelevant for the triggering of the liability to pay class 1 contributions under section 6(1) that the payment is actually vested. Mr Bramwell seeks to draw on the analogy of board or lodging, which, he points out, would be received and not just paid, but it follows from my interpretation of section 6(1) that it is likewise irrelevant whether those benefits in kind are actually received by the earner because, for example, he chooses to live elsewhere.

I have considered whether there is any necessary link between earnings for national insurance purposes and emoluments for income tax purposes, and whether the court should imply the two principles into the national insurance legislation even if the term "earnings" is a separate, stand-alone concept, not having the same meaning as the term "emoluments" for the purposes of income tax legislation. The starting point for this discussion has to be that, even if the courts decided, for example, that a “profit” had by its inherent nature to be vested to be part of the income tax base, it would always be open to Parliament to depart from the two principles for the purposes of national insurance. Any other conclusion would be inconsistent with Parliamentary sovereignty.

In my judgment, the two principles are in fact excluded from national insurance legislation by implication. Benefits in kind have been accepted by Parliament as "earnings" since at least 1979. Therefore the principle of convertibility cannot be implied. The use in the charging provision of the word "paid" in section 6(1), as well as in the predecessor provision in the Social Security Act 1973 (and the cognate expression “payment” in the 1965 Act), focuses attention on the moment that the payment leaves the hands of the employer or other person who makes the payment. It would therefore be inconsistent with section 6 to imply that the payment must result in the vesting of an immediate interest in the earner. I take Parliament’s choice of the word "paid" as opposed to "received" to be deliberate. In short, and this is a general point applying to this appeal as a whole, the court must in my judgment focus on the statutory language under consideration, and not on the judicial interpretation of statutes dealing with a separate subject matter.

Those then are my reasons for preferring the interpretation advanced by the Revenue. Next, there are three points to be made about fairness. As to the first, it may be said that it could be hard on both parties to require payment of a contribution when the benefit has not become vested or is not readily convertible into money. Fairness, however, in this context, is in the first place a matter for Parliament. On the other hand the following points may be noted. The employee, on whom this burden is likely to fall hardest, does not have unlimited exposure to class 1 NICs. He is liable at the rate of 12% up to the upper earnings limit (understood to have been in the relevant tax year below £45,000) and at the additional rate of 2% thereafter. By the imposition of a ceiling on the primary rate and the insertion of a reduction in the rate for the purposes of the additional rate, the burden for the employee has been mitigated. The employer is, and would in 2002/3 have been, subject to unlimited class 1 NICs. So far as the employer is concerned, the cost in terms of national insurance contributions is a matter which it will have to take into account in deciding whether to make a payment which it is not contractually obliged to make.

There is a second point to be made about fairness. It is for obvious reasons a matter of concern if there could be two tranches of national insurance: one on the payment into a scheme and one on the payment out. But there are points that answer this concern. First, Part VI of Schedule 3 to the 2001 Regulations expressly recognises that possibility since it deals with the exemption of both payments out and payments into retirement benefit schemes. Secondly, any objection on the grounds of double-counting works both ways in this case. The risk of double counting arises on the respondent’s interpretation too since Mr McHugh would be liable on his own interpretation on the face of the legislation to pay national insurance on contributions into the scheme and payments of pension out if the scheme had been funded from his own annual salary. Thirdly, we were assured by Mr Jones that in any event, in practice, the Revenue does not seek to levy class 1 NICs on payments of pension if the attributable NICs to the fund have themselves borne national insurance.

The third point on fairness is this. Although national insurance is not a tax, it imposes a financial burden on persons and therefore should be interpreted in the same manner as tax legislation. The language of tax legislation must not be strained so as to bring within it transactions which are not fairly within its charging provisions. As I see it, however, once it is understood that the term “earnings” does not have the same inherent meaning as “emoluments”, the provisions of section 6(1) of the 1992 Act are sufficiently clear for the purpose of reaching a conclusion and do not require any strained interpretation.

For all the reasons given above, my conclusion, therefore, is that the two principles do not apply to “earnings” for the purposes of the 1992 Act. They do not, therefore, prevent a profit derived from an employment forming part of “earnings”. It follows from my conclusion that paragraph 13 of the 2001 Regulations is not ultra vires the 1992 Act. The Upper Tribunal was in my judgment wrong. They were driven to the conclusion that the only way that the case for the Revenue could be put was on the basis of an appeal to common sense as they did not have the benefit of the arguments based on legislative framework on which I have relied. There are two further points with which I must deal.

The first matter is Tullett & Tokyo, which is helpfully examined by Rimer LJ at paragraphs 41 to 47 above. Collins J was in my judgment wrong to hold, as he did in paragraph 21 of his judgment, that national insurance was payable on what the employee received. That is to conflate the two elements of national insurance into one. The issue before Collins J was whether the transfer of gilts by the employer to the insurer underwriting the policy to be held on trust for the employee constituted a payment of "earnings”. The employee argued that this was not the benefit that he had received. Rather the benefit that he received was the increment in the value of the policy. He succeeded on that argument. That meant that no national insurance was payable because it was a benefit in kind which was excluded from national insurance. In my judgment, Collins J should have separated the two elements described above. If he had done so he would have decided (1) that the payment of the gilt was a profit from an employment, and (2) that the amount of the benefit paid by the employer was the value of the gilt.

Finally, I must deal with the objection, which the Upper Tribunal raised, that the approach of the Revenue leaves the meaning of “earnings” unbounded. In my judgment this objection is misconceived. The 1992 Act provides a definition of “earnings”. The only point at issue on this appeal is whether the convertibility and the defeasibility principles of income tax apply. If, as I conclude, they do not apply, the meaning of “earnings” is, I would suggest, clearer than if Rimer LJ’s conclusion is the correct one because the reader does not need to take into account principles implied into the legislation by judicial interpretation.

In consequence, in my judgment, this appeal should be allowed.