[2004] UKSSCSC CCS_180_2004 (06 September 2004)CCS 180 2004

DECISION OF THE SOCIAL SECURITY COMMISSIONER

1 	I dismiss the appeal. For the reasons below the decision of the tribunal is not wrong in law. 

2	The absent parent (A) is appealing with my permission from a decision of the Manchester appeal tribunal on 17 September 2003 under reference U 40 125 2003 00481.

REASONS FOR THIS DECISION

3	The original decision under appeal to the tribunal was that the absent parent (A) was liable to pay £0 (nothing) to the parent with care (C) for the maintenance of their two qualifying children with effect from 31 May 2002, later changed to 9 August 2002 to reflect A’s housing costs. C appealed against this on several grounds that may be together summarised as A’s failure to disclose his full income and capital. Following this there is considerable correspondence to and from all parties, involving in part evidence of A’s poor health. 

4	The matter came to an appeal tribunal hearing on 13 June 2003. A was present and represented, C was present, and the Secretary of State was represented. The record of proceedings records that a bundle of additional evidence and accounts were handed in.  The tribunal adjourned with directions issued that day to A to produce several other items of evidence, and for the case to be relisted for a hearing with a financially qualified panel member. A further bundle of documents was then produced by A. C made a written comment on these documents. A appeared at the further hearing, as did C and a representative of A and for the Secretary of State. The tribunal included a financial member. 

The tribunal decision 

5	The tribunal allowed C’s appeal. It decided that:
“additional income of £4768.00 net should be added by reason of a dividend from [a named company I shall call ECAP Ltd]. Plus a self-employed income of £8357.00 from which should be deducted the relevant tax and National Insurance. Effective date 31/05/02.” 
A full statement of reasons was separately requested by all three parties. The statement given was relatively short but included findings of fact to support both parts of the tribunal decision.

6	A’s representative then asked for a set aside of the tribunal decision on the ground of a waiver of dividend produced with that request, and also on the ground that A’s income was in fact a repeated revenue loss, boosted by a capital gain, as shown by copy income tax self-assessment return forms produced with the request. A’s representative also cited a decision of mine, CCS 718 2002, in support of a contention that the tribunal had been wrong in law not to base its decision on the Inland Revenue’s decisions on those returns.

The alleged dividend waiver

7	I rejected the first ground of appeal at application stage. Whether or not the copy document dated 29 April 2002 is what it appears to be – namely, a waiver of that date of dividends to which A was entitled from ECAP Ltd for the period stated – its production cannot affect the decision of the tribunal. It is simply too late. A tribunal – particularly one that had adjourned for further information to be produced – cannot be criticised for failing to take account of evidence not put before it. Further, the record of proceedings shows that the issue of a waiver was expressly considered by the tribunal at the oral hearing, so the matter was not forgotten. I confirm my initial view that the ground of appeal is unarguable. 

8	Were the waiver accepted, then it would also fall to be considered why there was a waiver and whether this constituted a diversion of income, or whether the underlying assets (the shares) were assets capable of producing a higher income, both arising under the Child Support Departure Directions and Consequential Amendments Regulations 1996. A and his representative should be aware that a waiver does not of itself remove the dividend income (or its absence) from full consideration under the child support scheme, whatever the income tax position. However, further consideration of that does not arise here. 	

Was “income” capital?

9	The tribunal found from trading accounts put before it that A was an equal partner in a partnership I shall call BAR. The £8357 was half the profit of BAR for the relevant period and was to be taken into account subject to the usual deductions. The basis for the contention that the tribunal erred in this finding was that the amount included a capital gain set against an income loss. This was supported by production to me of A’s income tax self-assessment forms for the period. It was argued in support that the income of a self-employed individual for child support purposes could not include any capital gains. 

10	I do not have a full set of the child support papers in front of me, and nor I assume did the tribunal. Those I have show that the issue of A’s profits from BAR was first raised by C. When asked about them in January 2003, A accepted that he was a partner in BAR but contended that the partnership had made no profits for the relevant year. This would, A stated, be documented when his tax return for the year was completed. There is no further relevant documentation in the papers until after the decision of the tribunal now challenged. 	
11	The evidence produced after the first tribunal hearing included accounts drawn up for BAR by a chartered accountant for the years to 31 March 2001 and 31 March 2002.  The accounts for the year to 31 March 2002 show gross income of £462,797 and net profit of £16,357.  Half of this, subject to a fairly obvious clerical error, was taken by the tribunal as A’s profit for the period. In other words, the tribunal took its figure for the net profits received by A directly from BAR’s accounts. 

12 	Having examined the papers, considered the submissions of all parties, and read the full record of the tribunal hearings in June and September 2003, I am satisfied that the tribunal both had in front of it and examined with the parties all the information that A at that stage chose to make available to it about his income from BAR, including his income tax liabilities.  The production of the self-assessment returns after not only the initial enquiries (when there was an indication that they would be produced) but also both tribunal hearings is irrelevant to this appeal. Nor do I accept the implication that it was the duty of the tribunal to demand more information.  A had already drawn attention to the matter and had complained about the heavy information demands of the tribunal. Had A wished to produce this additional information I am satisfied he could have done so. 

13	The question is therefore whether the tribunal was wrong in law on the information that was available to it about the nature of the profit earned by BAR - and therefore A  - in the relevant period.  In particular, did it go wrong in law in treating a capital gain as income? 
Whether something is income or capital is usually a matter of the context and the evidence produced in cases such as this. It is a question of application of broad distinctions of law to the fact, rather than simply a question of law.  There is of course much income tax jurisprudence on how to determine whether something is trading income or capital. Underlying that are the time-honoured if unofficial “badges of trade”. See for example the account in Simon’s Tiley & Collison:: UK Tax Guide chapter 8. The tests themselves are not in question in a case like this, where the tribunal is concerned only with the application of those well-known approaches. And increasingly, the views of professional accountants as to what is or is not properly described as income or capital in a particular business are accepted for income tax purposes. See Finance Act 1998, sections 42 and 46.  

14	For child support purposes, the rules are those in the Child Support (Maintenance Assessments and Special Cases) Regulations 1992, Schedule 1, chapter 2. The starting point is the “total taxable profits from self-employment of that earner as submitted to the Inland Revenue” less specific amounts (paragraph 2A).  If that is not provided, then paragraph 3 is applied.  Paragraph 3 sets out summary rules for the inclusion for income, based on gross receipts of the employment, and revenue expenses.  In my view, given in particular the express link in the child support legislation to income tax, the general approach to the weight to be placed on properly prepared accounts now laid down for income tax purposes should be followed – subject to any specific statutory variation – in child support cases as well.   

15	A did not produce the returns submitted to the Inland Revenue until after the tribunal hearings. Nor was any point taken on the capital gains issue at any earlier stage by A or his representative. Instead, the tribunal proceeded without objection by A or his representative to look at the substance of the issue based on the BAR accounts.  A now objects to the conclusions that the tribunal drew while doing this. The secretary of state's representative supports this aspect of A’s appeal, but no other. The representative argues that the tribunal should have noted that the 2002 accounts included a profit on sale of property of £45,362 and depreciation of £4,289. On that view, the tribunal should have stripped these sums out of the accounts to identify the income profit. 

16	I note that the 2002 accounts follow the same pattern as the 2001 account. They also showed a profit on sale of property of £15,229 and depreciation of £5,310 as elements in the net profit for the year. The balance sheet for 2002 shows that the depreciation in the 2002 accounts was partly for fixtures and fittings and partly for motor vehicles. The gain was the profit shown on the sale of two properties termed investment properties. 

17	I see no reason why as a matter of law the sales of the houses in this case could not be regarded as trading income. That was how they were presented to the tribunal in the accounts issued by BAR’s accountant. There are property sales and purchases in each of 2001 and 2002 from a large stock of houses. In each of the years the additions were of greater value than the disposals. If one applied the “badges of trade”  - frequency of transactions, reason for sales, work done on the properties between purchase and sale and for the purposes of sale, duration of ownership and timing - the sales and purchases might properly be regarded as on-going trading transactions by the partnership. There is nothing in the papers before the tribunal taking those issues either way. The tribunal was not told that A regarded the property profits as capital profits not income profits for capital gains tax purposes and that the Revenue agreed (if it did).  The argument therefore is that the tribunal, without that information, should as a matter of law have identified and stripped out the property sales as capital.  

18 	But the invitation of the secretary of state's representative to strip away the capital gains and depreciation would not stop there. It would open up several other issues. For example, no attempt has been made at any stage to identify whether the “repairs” claimed were in fact repairs rather than improvements.  Only revenue costs should be included, not any element of improvement of the properties.   In the 2002 year there was a total “repairs” bill of £189,000 on gross rental income of £462,000 on properties, all said to be investment properties, held at a constant book value in the accounts. Did the expenditure of something like 40% of gross rental income on repairs result in no improvements?

19	Another example is the deduction of interest payments from revenue.  Was the interest deductible as a revenue expense as shown in the accounts. Or was it deducted only by reason of the specific entitlement to deduct interest for income tax purposes where houses are held as capital for rental purposes rather than as trading stock? For income tax purposes the difference may not matter. But the concern here is whether for child support purposes the interest is deductible as a revenue expense as a matter of fact. That rule is in paragraph 3(4)(iii) of Schedule 1, read with paragraph 3(3)(a).  Interest is deductible if it was for a loan taken out “for the purposes of the business”. In the 2002 year the interest payment by the partnership was £143,289.  Was this incurred on a loan for the purposes of the business? Or was it to finance capital purchases that did not form part of the ongoing business? 

20	Further, the accounts were partnership accounts, not those of co-owners. Does this, in income tax terms, reflect the Schedule A approach (property business) or the Schedule D Case I approach (trading income)? Co-ownership does not of itself create a partnership, so the existence of the partnership may suggest an activity being carried on in common with a view to profit aside from or in addition to the co-ownership. If so, were the house sales an element in that profit?  

21	A full analysis might have to deal with all those points. But this is an analysis of the evidence, not the law.  I emphasise that none of the latter points has been raised by or put to any of the parties. I raise them because they show that the secretary of state's representative’s submission is a minor part of the whole story. They also illustrate the underlying issue. It is whether the tribunal took a decision of fact or of law when it accepted the net figure at the end of the BAR accounts for 2002 as income on the evidence and arguments put before it. The income tax case of Gittos v Barclay [1982] STC 390 is directly analogous.  It was a case about whether income from holiday lettings was assessable under Schedule D Case I (trading income) or under Schedule A (income from property). Goulding J concluded that the decision of the General Commissioners of Income Tax that it was one rather than the other was a question of fact, and so for the Commissioners not the courts. 

22	 Turing to the specific issues challenged in this appeal, I am satisfied that the tribunal took a decision that was one of fact, not law. The tribunal held an oral hearing at which A was present and represented. A had the chance to raise any issues that he wished to raise on the evidence produced. The tribunal had evidence in front of it on which it could reach the decision it did. It did not have the evidence now adduced to support the appeal, nor was the point now argued put in issue before it. The tribunal included a financial member so should be assumed to have expertise in properly understanding the accounts put before it during the hearing and in making its decision.  Its duty was to decide the matter as a balance of probabilities, not as a certainty. It may be that if A had put before the tribunal the documents that are now put before me then it would have looked into the matter further. But that is not a valid ground of appeal. At the end of the day, the tribunal accepted and acted on the professionally prepared accounts put before it by A. Its decision in doing so was one of fact. I adopt the same approach as that in Gittos v Barclay.

23	 Although I thought it right to grant permission to appeal so that I would consider the matter fully, I am satisfied that this tribunal did not go wrong in law on either of the issues raised by A and his representative s grounds of appeal.

								David Williams
								Commissioner

								06 September 2004
[Signed on the original on the date shown]