[2007] UKSSCSC CCS_2806_2006 (26 February 2007)

CCS/2806/2006

DECISION OF THE CHILD SUPPORT COMMISSIONER
  
1.	This is an appeal by the non-resident parent (Mr. C) against a decision of the Southampton Appeal Tribunal made on 16 August 2005. For the reasons set out below that decision was in my judgment erroneous in law and I set it aside. In exercise of the power in section 24(3)(a) of the Child Support Act 1991 I substitute for the Tribunal’s decision a decision in the same terms as that set out in the Tribunal’s Decision Notice, but so that the words from “earnings from company” to “before tax and NI” (both inclusive) are to be replaced with the following:

“Periodical payments: under MASC Regulations para. 15, periodical payments from the company of £30,000 p.a, less notional tax”.

This appeal has therefore in substance not succeeded.  

2.	On 18 January 1999 a decision was made assessing child support maintenance payable by Mr. C in respect of Tamsin, the child of himself and the parent with care (Miss B) in the sum of £83.60 per week. 

3.	On 7 April 2004 Mr. C applied for that decision to be superseded owing to a change in his housing costs. 

4.	On 23 June 2004 a decision was made superseding the existing assessment and assessing Mr. C’s liability for child support maintenance at £5.50 per week from 2 April 2004. That decision was made on the basis that Mr. C’s income should be determined by  dividing by 52 a dividend of £10,000 declared by his company (“the Company”) in respect of the year ended 30 November 2003, in order to compute Mr. C’s income for the relevant week. 

5.	On 22 July 2004 Miss B applied for a departure direction on the grounds of lifestyle inconsistent with declared income, diversion of income and assets which could produce income or a higher income. The Secretary of State referred that application to an appeal tribunal for determination. 

6.	There was a hearing before an appeal tribunal on 9 November 2004, at which the tribunal appears to have directed that the departure application should be treated also as an appeal against the formula assessment decision (i.e. that referred to in paragraph 4 above), and the Secretary of State was directed to prepare a further submission. No copy of those Directions survives in the papers before me. 

7.	There was then a further hearing on 30 March 2005, which Miss B attended, but Mr. C did not. Mr. C was represented by an accountant. That hearing was adjourned, and directions were given for the production by the parties of further documentary evidence. 

8.	The final hearing took place on 16 August 2005, before the same two persons (a legally qualified chairman and a financially qualified panel member) as had comprised the tribunal on 30 March 2005. On this occasion neither Miss B nor Mr. C attended, but the Secretary of State was represented and Mr. C was represented by a Mr. M, who is or was the owner of 20% of the shares in the Company, and who had described himself in a letter dated 16 June 2005 (p.135) as “senior consultant and accountant to” the Company. Mr. M stated in that letter that he was “fully aware of the financial position of the company.” Mr. C is the owner of the other 80% of the shares in the Company, and is its only director. 

9.	The Tribunal allowed Miss B’s appeal against the formula assessment decision and decided (so far as material to this appeal) that the amount of child support maintenance was to be recalculated on the basis that (a) Mr. C’s earnings were to be treated under para. 26 of Schedule 1 to the Child Support (Maintenance Assessments and Special Cases) Regulations 1992 (“the 1992 Regulations”) as being £30,000 per annum before tax and national insurance and (b) no housing costs were to be allowed in calculating Mr. C’s exempt income. In the light of its decision in relation to the amount of Mr. C’s income, the Tribunal dismissed the application for a departure Direction. 

10.	Mr. C now appeals to a Commissioner against the Tribunal’s decision in relation to the formula assessment decision. 

The Tribunal’s decision in relation to Mr. C’s income
11.	The Company’s business is that of buying and selling shellfish. The accounts for the year ended 30 November 2003 show a net loss of £2,940. The profit and loss account has an item for “dividends paid” of £10,000. The balance sheet shows current assets of £165,579, current liabilities of £155,970, the surplus of assets over liabilities being £9,609, which is said in the accounts to be represented by the balance carried forward on the profit and loss account. 

12.	The Record of Proceedings of the hearing on 16 August 2005 shows the following relevant evidence as having been given by Mr. M:

“Balance of liabilities – most of this £160,000 is Mr. C’s a/c – loan account. Movements on loan a/c – lived off loan a/c last year. O/d usually cleared end of season. He is still £26,000 overdrawn. Taking drawings from loan a/c – about £2,500 pm. Remortgaged £150K on flat. Paid £100K into company – direct to NW bank. July 04. 

………………………..Always drawn against loan a/c. Dividend to clear loan a/c. Always drawn about £2,500, several years reasonably accurate. End of a/c year dividend credited back. ……………..

Paid dividend 1 year only. Dividend voted but not drawn. No money to pay dividend. Dividend shown as deduction from profit. No money my share waived. Told not payable. £1900 waived. £4,600 left in undrawn dividends a/c as a creditor. Payable to L if money there. 03-04 a/c not yet finalised. 

……………………………..I am speaking from absolute knowledge. 

……………………………………

High stock suggest earnings to cover all previous years turnover. 

He has not cleared bank July 2005 - £26Ko/d – normally be in surplus. No dividend subsequently.”

13.	The Tribunal’s reasons, so far as directly relevant to this aspect, were as follows:

“The tribunal has been much exercised as to how to determine appropriate earnings from the company. At the material dates and for a period [Mr. C’s] practice has been to draw down £2500 a month from the director’s loan account. £30,000 pa. An end of year dividend is then declared and the sum in question credited back to the loan account. [Mr. M] had received dividend in one year only since the company was incorporated in 2000. In the last year the dividend was voted but not drawn due to insufficient funds. It appears as a creditor to be paid (and credited to the loan account) once funds are available. At the date of hearing the 2003/04 accounts had not been finalised. The tribunal noted the last director’s report on the state of the company finances. However, by reason of the bank’s support and capital injection the business was at the relevant time viable and able to continue to trade with the pattern of draw down from the director’s loan account continuing. 

The tribunal concluded that a primary motive for proceeding in this way was to have a means of not showing income so as to reduce the assessable income for child support purposes. No other explanation has been provided for this somewhat tortuous process. [Mr. C] did not attend to answer the point directly although placed specifically on notice in the adjournment directions of 30 March 2005 that the tribunal would consider this issue. The tribunal concludes accordingly that the assessable income is to include the sum of £30,000 pa gross. MASC Sch 1, para. 26. Had the tribunal not found this sum for inclusion under Para. 26, then it would have included the same figure under MASC Sch 1, para. 15 or arguably under para. 13. 

In recalculating the assessment, the CSA has to apply the 2003/04 tax rates and use the personal allowance only once. The Effective Date of the maintenance assessment is 4 April 2004.”

14.	The first ground for Mr. C’s appeal (as stated in grounds of appeal apparently prepared by Mr. C’s solicitors and annexed to the OSSC 1 Form) is essentially that the Tribunal erred in law in finding that Mr. C’s income from the Company was £30,000 per annum, because (a) the Company made a loss of £2,940 in the year ended 30 November 2003 (b) his tax return for the year 2003/04 shows his income from employment as nil and dividends received as nil and (c) such “drawings” as Mr. C made from the Company “were to a large extent if not fully, either borrowed (from the bank) or a return of his capital injection, and therefore could not be “income” within paras 26 or 13 or 15 of Schedule 1 to the 1992 Regulations and in any event (d) Mr. C has in fact “never adopted the practice of drawing £2,500 per month from the company and accounting to this by way of dividends at the year end. The accounts to 02/03/04 show dividends paid but not at the level of £30,000 per annum.” 

15.	The Secretary of State supports the appeal, as regards the Tribunal’s decision in relation to Mr. C’s income, on the ground that “earnings from self-employment should be based on the total taxable profit and not “drawings” in accordance with paragraphs 2A(2) or 3(1) of Schedule 1 to the 1992 Regulations.” It is further submitted that “although the Tribunal appear to have tried to justify their decision by stating that the amount of the drawings were paid back to the company in the form of dividends of £30,000 which would be treated as income ………. there is no evidence to support that finding.” 

16.	I think, with respect, that the Secretary of State’s submission may indicate some confusion in that it does not seem to me that Mr. C is a “self-employed earner” for the purposes of Schedule 1 to the 1992 Regulations. In so far as he receives remuneration for his services to the company he does so as an “employed earner”. Further, dividends are not received as remuneration as a self-employed (or employed) earner but in respect of his shareholding in the company. As to the second part of the Secretary of State’s submission, I do not read the Tribunal’s decision as finding that dividends in an amount of £30,000 per annum were declared and credited back. The Tribunal stated simply that “an end of year dividend is then declared and the sum in question credited back to the loan account.” 

17.	In a letter dated 21 November 2005 seeking leave to appeal from the chairman, and in  letters dated 27 June 2006 from Mr. M and 25 July 2006 from the Company’s accountants in support of this appeal, it was contended by Mr. C, in effect, that Mr. M had been talking nonsense when he said that Mr. C had a large loan account with the company and that he had been withdrawing £30,000 per annum from the Company. However, in my judgment the Tribunal was entitled to proceed on the footing that Mr. M knew what he was talking about, and was entitled on the basis of his evidence to find that at the material time Mr. C was drawing £2,500 per month from the Company in reduction of amounts which he had loaned to the Company. 

18.	However, in my judgment the Tribunal’s reasoning leading to its conclusion that as at April 2004 Mr. M’s income for child support maintenance purposes was £30,000 per annum (less income tax and national insurance) under para. 26 of Schedule 1 was wrong in law. That provision applies only where the Secretary of State is satisfied (among other things) (a) that a person has performed a service either without remuneration or for remuneration which is less than that normally paid for that service, and (b) that the person or body for whom the service was performed was able to pay remuneration at the normal rate. Where reg. 26 applies the value of the remuneration foregone is to be treated as income of the person who performed the services. The Tribunal’s reasoning contains no finding, let alone any justification for such a finding, either that the remuneration normally paid for Mr C’s services would be of the order of £30,000 per annum, or that the Company was financially able to pay remuneration at that level. It does not therefore seem to me that the Tribunal made all the necessary findings to support its reliance on para. 26. I suspect that the provision which the Tribunal may have intended to rely upon was not para. 26 but para. 27. But if that was so the Tribunal did not in my judgment sufficiently explain, given that virtually no profit was being made by the Company, why it considered that Mr. C had deliberately deprived himself of income. 

19. 	The Tribunal went on to say that “had the tribunal not found this sum for inclusion under para. 26, then it would have included the same figure under MASC Sch1 para. 15 or arguably under para. 13.” 

20.	Para. 13 requires that there be included in “other income” “any interest, dividend or other income derived from capital.” Para. 15 requires that there be included “any other payments or other amounts received on a periodical basis which are not otherwise taken into account under Part I, II, IV or V of this Schedule except …………….”

21.	The Tribunal’s reasoning on this point was very compressed, no doubt because it was confident of its reasoning under para. 26, but in my judgment it is sufficiently clear that what the Tribunal meant was simply that as Mr. C was receiving periodical payments of £2500 per month from the Company, that was required to be treated as his income, either under para. 15 or under para. 13. 

22.	I doubt whether para. 13 was applicable. It seems to me that the words “interest, dividend or other income derived from capital” are probably not wide enough to include periodic repayments of capital. It is not, however, necessary for me to decide that because in my judgment the Tribunal’s decision, on its finding of fact, was soundly based under para. 15. Para. 8 of Schedule 1 provides that “the amount of the other income to be taken into account in calculating or estimating N and M shall be the aggregate of the following amounts determined in accordance with this Part.” As I have said, para. 15 provides for the inclusion of “any other payments or other amounts received on a periodical basis which are not otherwise taken into account under Part I, II, IV or V of this Schedule except …….” None of the exceptions are relevant in this case. The Tribunal’s finding that Mr. C was receiving a regular sum of £2,500 per month from the Company, together with Mr. M’s evidence that those sums were used to pay Mr. C’s living expenses, in my judgment justified its conclusion that para. 15 applied. In my judgment it mattered not that those sums were (as the Tribunal found) repayments of sums due to Mr. C under a loan account (i.e. were repayments of a capital sum due to him). In Morrell v Secretary of State R(IS) 6/03 the Court of Appeal held that regular payments of money, by way of loan, towards living expenses, were “income” for  income support purposes. The present case seems to me to be a stronger one in favour of the conclusion that the sums received from the Company were income because (a) the payments were not by way of loan, but by way of repayment of a loan, and (b) para 15 is a specific provision (which has no equivalent in the income support legislation) that “other income” is to include “any other payments or other amounts received on a periodical basis.” Nor did it matter (if it be the case) that the Company may have had to borrow from its bank in order to pay those amounts, or that Mr. C had not shown them as income on his income tax return. Nor did it in my judgment matter that the Company was making a loss. In R v West Dorset District Council, Ex parte Poupard [1988] 28 RVR 40 it was held by the Court of Appeal that a housing benefit review board had not erred in law in finding that a housing benefit claimant who had been carrying on a loss-making business on his own account (i.e. not through the medium of a company), and who had taken drawings from the business, either out of cash sums received by the business or by increasing the overdraft on the current account, had (for the purpose of calculating his income for housing benefit purposes) received income to the extent of those drawings. The present case seems to me to be a stronger one in favour of the conclusion reached by the Tribunal in that the sums were received by Mr. C from the Company – i.e. a separate entity. 

23.	In my view, therefore, the Tribunal’s decision in relation to income should have been based under para. 15, rather than under para. 26, and the decision as set out in its Decision Notice therefore needs revising to that extent. A consequence of that revision is that, whereas under para. 26 income tax and national insurance are deductible (as expressly stated in the Decision Notice)(see para. 32 of Schedule 1, importing para. 1(3) of that Schedule), as I understand it there can be no question of deducting national insurance in relation to income under para. 15. Notional income tax is, however, deductible: see para. 2 of Schedule 2. 

Housing costs
24.	The Tribunal stated as follows in its Statement of Reasons: 

“In respect of housing costs, the Child Support Agency accepted that its allowance for housing costs was incorrect as much of the money secured on [Mr. C’s property in Southampton] related to borrowings on the industrial units. Had the tribunal concluded that [Mr. C’s] home was at that address then the housing costs element would have needed recalculating to exclude that element relating to the units. As it turns out the tribunal concluded that it was not his home at the material date and so none of those loan costs are for inclusion in exempt income as housing costs. 

[Miss B] contended that [Mr. C’s] home was in Westbourne where he lived with a partner. She produced evidence that the property was for sale that included a transcript of a conversation with the estate agent [pp.73-4] the detail of which has not been challenged. Further the bank statements etc show social expenditure regularly in Westbourne and are indicative of his base being in that area rather than Southampton. Although he had no details, [Mr. M] accepted that [Mr. C] had a partner. The tribunal is satisfied that at the relevant date [Mr. C’s] home was not at [his property in Southampton]. Accordingly the expense was not incurred in respect of the provision of a home. [MASC Sch3 para. 1 etc]. So no allowance is to be given in his exempt income for housing costs.” 

25.	Para. 1 of Schedule 3 to the 1992 Regulations provides that “the following amounts payable in respect of the provision of a home shall be eligible to be taken into account as housing costs …….”

26.	The grounds of appeal in relation to housing costs are (a) that no reasonable tribunal could have reached the decision which the Tribunal did on the evidence before it and (b) that Mr. C should have the opportunity to explain matters in person. 

27.	As regards the latter point, Mr. C had ample notice of Miss B’s contention (see her statement in a document enclosed with her departure application form (p.150) stating that “[Mr. C] spends most of his time in [                   ] with his new partner, and stays at [                    ] maybe 3 or 4 nights a month. This is no longer his main residence.” He had ample opportunity to appear at the hearings before the Tribunal to explain the position. 

28.	As regards the former point, the Tribunal was in my judgment entitled to find, on the basis of (i) Miss B’s evidence to that effect (ii) the evidence in an e-mail from the estate agent dated 2 November 2004 that the Southampton property was then and had for some time been for sale, and that Mr. C was there only about 1 day a week (iii) the evidence as to social expenditure in Westbourne and (iv) Mr. C’s failure to appear at the Tribunal in order to explain the position in person, that the property in Southampton was at the material time no longer Mr C’s home. This was a matter of fact for decision by the Tribunal, and it sufficiently explained its reasons. The e-mail (which was at pages 73-4 of the papers as constituted before the Tribunal, and is now at pages 303-4 of the papers before me) was referred to (inaccurately) by the Tribunal as a transcript of a telephone conversation with the agent. It does not seem to me that that inaccuracy can have affected the substance of the Tribunal’s reasoning. 

29.	The Secretary of State also supports this aspect of the appeal, essentially on the grounds put forward on behalf of Mr. C. As I have said, I do not accept those grounds. In particular, it is said on behalf of the Secretary of State that the tribunal failed to consider whether it was possible for Mr. C to have the social expenditure in Westbourne and yet continue to reside in Southampton. In my judgment it is obvious that the Tribunal would have had that possibility in mind. The expenditure in Westbourne was not regarded by the Tribunal as conclusive. It was only one of the items of evidence which it took into account. 

	(signed on the original)	Charles Turnbull
		Commissioner
		26 February 2007