[2005] UKSSCSC CPC_968_2005 (24 October 2005)

CPC/968/2005

DECISION OF THE SOCIAL SECURITY COMMISSIONER

1.	My decision is that the decision of the Appeal Tribunal was erroneous in point of law.  I set it aside and remit the case for re-hearing in front of a differently constituted tribunal.  The Secretary of State is asked to make fresh calculations concerning the unattributable service charges (as hereafter defined) in the two categories I have indicated in para 10 below.   Both these operations will require inquiries of the management company, but I cannot see how they can be avoided. 

2.	This is an appeal by the Secretary of State with leave granted by the chairman, from the decision of an appeal tribunal dated 26.10.04.  

3.	The claimant is the tenant of Flat 3, Mercian Court, a block of flats.  As such, he is liable to pay a service charge to the management company and the question arising in this appeal is how much is allowable in respect thereof for pension credit purposes.

4.	The DM, in a revised decision, calculated the claimant’s entitlement at £1,063.20 which, together with £48 ground rent, totalled £1,111.20 p.a. or £21.37 p.w.  The claimant had been invoiced by the management company for the year ending 31.3.05 (the relevant year for present purposes) showing the amount due for service charge in the sum of £1,571.67 and ground rent of £48 making a total of £1,619.67 or £31.15 p.w.   Not unnaturally, he is concerned as to how the balance is to be met,  particularly since, for the year from October 2003, his assessment included housing costs of £1,489.75 in respect of service charges, and £48 in respect of ground rent, making a total allowable of £1,537.75 or £29.58 p.w.  

5.	The claimant appealed to an appeal tribunal who heard the appeal on 26.10.04.  The tribunal allowed the appeal, holding that his entitlement was to be calculated in accordance of the whole attributable service charges, without apportionment and reduction.   It is from that decision that the Secretary of State appeals.  

6.	I ordered an oral hearing, which was held on 28.9.05.  Mr Maurici of Counsel appeared on behalf of the Secretary of State:  the claimant did not appear and was not represented.  I am most grateful to Mr Maurici, not only for his assistance at the hearing, but also for his written submissions and, in particular, for an analysis (being Annexure …..) made by him covering which charges were, and which were not, allowable, and the various proportions of what I call “unattributable service charges” i.e. which have an element of both allowable and not allowable.

7.	I must now turn to the issues involved.

	(a)	The claimant is, for pension credit purposes, entitled to “service charges” under para 13(1)(b) of the State Pension Regulations 2002 S.I. 1792.  There is an identical provision in the Schedule 3 of the Income Support General Regulations and any learning on that is equally applicable to pension credit.  Sub‑para (2)(b) of para 13 provides as follows:

		(2)…the deductions to be made from the weekly amounts to be met under this paragraph are –

			(a) …..;

			(b)	where the costs are inclusive of ineligible service charges within the meaning of paragraph 1 of Schedule 1 to the Housing Benefit (General) Regulations 1987 (ineligible service charges) the amounts attributable to those ineligible service charges or where that amount is not separated from or separately identified within the housing cost to be met under this paragraph, such part of the payments made in respect of those housing costs which are fairly attributable to the provision of those ineligible services having regard to the cost of comparable services.”
				(My underlining)

In my judgment, that clearly shows that what is contemplated is some proportion of the whole and, in deciding that the whole was allowable, the tribunal clearly erred in law.   See also paras 5 and 7 CIS/4358/95, para 10 CIS/1460/1995 and para 28 CIS/2901/2004.

Para 1 of Schedule 1 to the Housing Benefit Regs 1987 S.I. 1971 (ineligible service charges) itemises a list of charges which is irrelevant for present purposes, but for the following item:

	“(b)	Charges in respect of any services not specified in sub‑paragraph (a) or (f) which are not connected with the provision of adequate accommodation.”
		(My underling).

That, therefore, is the test.

8.	Now the DM approached the question thus.  He itemised the allowable service charges at £30,326, and the non‑allowable at £14,887, making a total of £45,213.  The allowable charges are thus 67.0736% of the whole and expressed as a fraction of the unattributable service charges of £11,367 the amount allowable, therefore, amounts to £7,624.26.  Thus the total allowable is £37,950.26 and since the claimant is responsible for 2.778% of the whole service charge then his allowable entitlement in respect of unattributable service charges  was £1,054.18 (later adjusted to £1,063.20) which, together with the ground rent of £48, brings about a total of £1,111.20 or £21.37 p.w.

9.	In CIS/2901/04 para 28, the Commissioner formulated a test which, as he freely admitted, would be a very time consuming process and, in my view, a somewhat broad approach should be called for.  It could well be that a management company may not be able, or willing, to provide the necessary calculations.   What the Commissioner  said was:

	“I agree with Mr Maurici that a sufficiently accurate assessment of how much of that expenditure is attributable to accommodation related services cannot be made by simply looking at job description.  It is necessary to establish the number of hours per week spent by the employees on providing those services.  The part of the salaries bill which is attributable to the provision of accommodation related services can then be calculated.  The staff administration costs such as staff advertising, employers liability insurance and personnel management attributable to accommodation related services should be calculated by applying to them the ratio of hours spent on accommodation services to hours spent on support services.  That will be, I have little doubt, a very time consuming process for the management company.”

He then continues:

	“If there is no empirical method of apportioning bank charges, stationery, postage, audit fee,  accountancy charges, and the management fee those costs should all be apportioned in the same ratio.  That is what I have done in this case.”

10.	Now, as I have said, Mr Maurici has produced an extremely useful analysis of the service charges in this case.  He adopts the Commissioner’s test in para 28 as regards staff costs.  Thus he says items Manager Remuneration, Manager Relief/Deputy costs are to be calculated in accordance with the Commissioner’s formula and are not wholly unallowable.  On the other hand, he says that office phone, sundry expenses/petty cash, estate management, accounts administration, audit fees and bank charges are to be calculated according to the formula adopted by the DM.  Thus, broadly speaking, he submits that the method in para 28 of CIS/2901/2004 should be adopted so far as staff costs were concerned for the reasons given by the Commissioner but he submits that it does not follow that the Commissioner was right as regards costs other than staff costs – indeed he was wrong, albeit that what he said was as regards these strictly ………  As regards these costs he adopted the submission of the Secretary of State to me dated 9.5.05 (74/5) which were as follows:

	“2.	I submit that in CIS/2901/04 the Commissioner, at paragraph 28, accepted the principle of apportionment of management charges and audit costs.  However, he suggested that the apportionment should be in accordance with the amount of time spent on accommodation services on the one hand and support services on the other by the staff whose salaries appear in the accounts.

	3.	I respectfully submit that the Commissioner did not explain his reasoning for applying this particular method of apportionment to management charges and audit costs.  I submit that such charges and costs do not relate solely to the activities of staff whose salaries appear in the accounts but instead reflect the provision of all the services provided in the accounts and met by the service charge.  Indeed in many cases there are no specific staffing costs mentioned in the accounts as such costs are either included in the contractor’s costs (eg a builder’a invoice) or are incurred  by the management company’s central staff (so are effectively met out of the management fee itself).  In such cases the methodology suggested in CIS/2901/04 could not be applied.

	4.	I further submit that the Commissioner’s methodology takes no account of salaried time spent on activities that might be regarded as neither accommodation related nor support services in a narrow sense, for example where the property in question employs a porter.  This point arises from the use of the term “support services” rather than “ineligible services”.  
	
	5.	The methodology also produces an unfair outcome in cases where the salaried time is all spent on support services or other ineligible tasks.  Using the approach in CIS/2901/04 this would result in nothing being awarded for management charges or audit costs, even though the management company provides some eligible services, such as building work, for the property but by contractors rather than salaried staff based on the premises.

	6.	Consequently I submit that the apportionment of management charges and audit costs should be arrived at by comparing the value in the accounts of the eligible and ineligible services provided for the residents and for which the service charge is raised.  This would reflect the full range of services provided by the management company and provide a straightforward and comprehensive methodology that could be applied in all cases.

	7.	I further submit that this methodology reflects the nature of audit and central management work which is of a different nature to the day to day upkeep of the property and therefore not amenable to a “time and motion” assessment.  This point particularly applies to audit work which involved the preparation of the overall accounts.  Central management work normally involves dealing with various general administration and corporate issues.  The fee would normally be expected to cover such overheads as the company’s council tax and would include elements for senior executives remuneration and also an element of profit.”

I am content to accept this as a proper basis for apportionment of these costs: indeed I can see no other fair and reasonable basis.

11.	There is one item to which Mr Maurici expressly drew my attention, namely that concerning the Reserve Funds.  There is insufficient information to come to any conclusion about that, but assistance may be found in para 9 of CIS/0667/2002 where the Commissioner said:

	“	9.	A Reserve Fund is a fund that is held in reserve.  By its nature, the works for which it will eventually be used may not be known.  Attributing it to specific works involves an element of speculation, if not guesswork.  That speculation must, of course, be informed.  As best as I have been able to discover it might well be informed by reference to 3 factors.  

		9.1.	First, it may be helpful to consider the terms covering the use of the Reserve Fund or the scope of the landlord’s powers under the service charge.  Unfortunately, it has not been possible to make either of those terms available to me.

		9.2.	Second, it may be helpful to know how it has been spent in the past.  Unfortunately, if there has recently been a change of managing agent for the block of flats in which the claimant lives.  The result is that information is not available.  

		9.3.	Third, there is the work that is planned or anticipated as being paid for from the reserved fund.  Fortunately, there is some evidence of that.  

		10.	The evidence I have is contained in a letter from a firm of Chartered Surveyors dated 27 January 2003.  The relevant passage reads:

			‘There is a reserved fund for maintenance expenditure.  This covers the cost of major items  such as roof repairs, lift replacement, etc. and  cyclical repairs such as external and internal common parts redecoration.’

		It is anticipated that future works will cover:

			Further roof re‑covering; 

		External re‑pointing; 

		Redecoration and improvements of common parts.’

	11.	All of the matters referred to relate to the provision of adequate housing.  So none is an ineligible service charge under the Housing Benefit (General) Regulations 1987.

	12.	So the issue is whether any or them is a repair or improvement under paragraph 16(2).”

He then goes on to consider expressly redecoration, the repair of lifts, roof repairs, re‑pointing.

						(Signed)		J M Henty
									Commissioner 

									24 October 2005