DECISION OF THE CHILD SUPPORT COMMISSIONER

1.	The non-resident parent's appeal to the Commissioner is allowed. The decision of the Middlesbrough appeal tribunal dated 9 July 2007 is wrong in law, for the reasons given below, and I set it aside. The case is referred to a differently constituted appeal tribunal for determination in accordance with the directions in paragraphs 21 and 22 below (Child Support Act 1991, section 24(3)(d)).

2.	In the language of the child support legislation, the appellant to the Commissioner is the non-resident parent and the second respondent is the parent with care. From now on I shall call them "the father" and "the mother" respectively.

3.	The father's appeal to the Commissioner was supported on behalf of the Secretary of State for Work and Pensions (in whose name officers of the Child Support Agency make decisions) in a written submission dated 19 November 2007, which suggested that the case should be referred to a new appeal tribunal for rehearing. Following replies by the mother and the father, Mr Commissioner Levenson granted the mother's request for an oral hearing of the appeal, which took place before me at Doncaster County Court on 28 April 2008. The father did not attend. The mother did attend. The Secretary of State was represented by Mr Henry Hendron of the Office of the Solicitor to the Department for Work and Pensions. I thank both for their contributions, but I fear that the hearing did not actually take matters any further forward.

The background
4.	The decision that was under appeal to the appeal tribunal was the child support maintenance calculation made on 30 October 2006. That calculation made the father liable to pay child support maintenance of £31.71 per week with effect from 5 June 2006 and was based on his net weekly income being £190.71, derived from payslips for 1 June and 1 July 2006 showing gross monthly salary of £1075.78, £825.52 after deduction of income tax and national insurance contributions (although that should have produced a weekly figure of £190.50).

5.	The mother appealed against the decision on 13 November 2006. She said that the father had previously been earning £800 a week, rather than a month, and supplied copies of his bank statements from July 2005 to January 2006 showing CHAPS transfers at about that level down to November 2005 and corresponding levels of expenditure. She said that, as he had now formed a limited company for the provision of his services, he was concealing expenses within its finances and failing to declare dividend income. He had taken out a personal loan of £10,000, which was transferred to the company and paying the repayments of £315.83 per month. Copies of the relevant documents were supplied. The father had also bought a new vehicle on hire purchase in February 2006, but I note that that was done in the name of the company. The mother also mentioned the taking of foreign holidays and the purchase of a new house, overall querying where the money was coming from to meet all of the financial outlay.

6.	The mother's appeal was treated as including applications for variations on the grounds of lifestyle inconsistent with declared income, income not taken into account and assets. Because the appeal had been made within a month of the decision, those applications had effect as applications for revision under regulation 3A(1)(a)(ii) of the Social Security and Child Support (Decisions and Appeals) Regulations 1999. None of the applications was accepted, on the basis of insufficient evidence. In particular, the father had replied that he had given full disclosure of his income from the company and had not taken any dividends from that company since it started trading. That outcome was notified in a letter dated 14 February 2007. The technical result was that there had been a refusal to revise the decision of 30 October 2006 to give effect to a variation, so that the mother's appeal against that decision continued in being.

7.	The mother again challenged the amount of income the father was in reality enjoying. He stated in reply that he would be taking a single dividend annually, after the accounts had been finalised by his accountants and the profits identified and that he would make a payment to the mother out of the amount net of tax. Directions from a chairman of appeal tribunals required the father to produce all bank statements for the year to 30 October 2006, details of dividends received from his company, vehicles he owned and holidays taken. Both parents were required to produce itemised lists, with documentary evidence, of average weekly income and expenditure over that year. There was a warning that failure to comply with the directions might lead to adverse inferences being drawn by an appeal tribunal. The mother provided an itemised list, but the father did not. He repeated his statement of the amount of salary received and said that he trying to get his accounts finalised early, although he was not required to submit a tax return for 2006/07 until January 2008. Another chairman directed the father to produce company bank statements from inception to date and draft management accounts. The father produced a P60 for 2006/07 showing gross earnings of £12,000. In a letter dated 27 May 2007 he stated that he had drawn a £15,000 net dividend on 27 April 2007, which would form part of his income for the 2007/08 tax year, not 2006/07. He said that he would not produce any company bank statements because the CSA had no claim against the company, only against his own income, and he relied on the Data Protection Act. He later produced the first page of a letter from his accountants confirming his net income from a company by which was employed in the period 8 April 2005 to 25 November 2005 (including salary and dividends) and from the new company in the period from 26 November 2005 to 5 April 2006 (comprising salary only).

The appeal tribunal's decision
8.	The mother attended the hearing on 9 July 2007. The father did not. The appeal tribunal allowed the mother's appeal and decided that the father's net income at the relevant date of 5 June 2006 was £480 per week. That was calculated by deducting income tax and national insurance from annual salary of £12,000 and adding the net dividend of £15,000, which, according to the decision notice, "had to be earned in the tax year 06/07". In the statement of reasons, the appeal tribunal, having found the mother's evidence to have been entirely credible, accepted that the father was probably earning about £1,000 gross per week. It calculated his weekly income "from all sources" at £480. It found that his lifestyle required a weekly income of £301.75, but simply went on conclude that the father's income from employment at the effective date taking into account dividend income was £480 per week and that, as that exceeded the amount required to meet his lifestyle, the application for a variation was refused.

The appeal to the Commissioner
9.	The father now appeals against the appeal tribunal's decision with the leave of Mr Commissioner Levenson. In my judgment the reasons given in the Secretary of State's submission dated 19 November 2007 for the appeal tribunal having gone wrong in law are unanswerable.

Errors of law: section 20(7)(b) of the Child Support Act 1991
10.	First, and in my view most fundamental, the appeal tribunal ignored the prohibition in section 20(7)(b) of the Child Support Act 1991 against taking into account circumstances not obtaining on the date of the decision under appeal. The decision under appeal here was given on 30 October 2006. Commissioner's decision R(CS) 1/03 confirms that in cases of refusals to revise it is the date of the decision not revised that is relevant for section 20(7)(b). At that date, the company had not declared any dividend and the father had not received any dividend. The company's first accounting period, which ran to 31 March 2007, had not come to an end. The appeal tribunal was not entitled to take into account the receipt of the £15,000 in net dividends on 27 April 2007. It was not an effective way around the prohibition for the appeal tribunal to have said that the dividend was earned in the 2006/07 tax year. Although that was true in a sense, it is more accurate to say that the company was, through the father's work, earning the profits from which a dividend could be paid. But during that tax year the father had no more than an expectation that he could eventually draw a dividend. Some disaster could have happened to cause a severe reduction in the profits available for distribution or make it prudent to retain profits within the company. The existence of the father's expectations in the period before 30 October 2006 was not in itself sufficient to ground the making of a variation under regulation 19(1A) of the Child Support (Variations) Regulations 2000 (see below).

Errors of law: dividends as income
11.	Second, the appeal tribunal at the very least failed to give an adequate explanation, based on the necessary findings of fact, of how the father's receipt of dividends affected his income for the purposes of the child support maintenance calculation, such that the statement of reasons left it unclear whether the appeal tribunal had adopted wrong principles of law. The appeal tribunal appears to have regarded the dividend as part of the father's earnings from employment as an employed earner. But dividends cannot be part of the remuneration or profit derived from employment that can count as part of net weekly income under paragraph 4 of the Schedule to the Child Support (Maintenance Calculations and Special Cases) Regulations 2000 ("the MCSC Regulations"). They are not paid because the recipient is an employee but because the recipient owns shares in the limited company which has decided to pay a dividend on them. That was confirmed in Commissioner's decision R(CS) 4/05, which also confirmed that dividends do not come within any of the other categories of income to be taken into account under the Schedule. It is only if it can be said that payments are not truly dividends, but are really payments of earnings disguised as dividends, that the payments could be taken into account as income. But in the present case the appeal tribunal made no findings of fact on which such a conclusion could be based and the circumstances of the payment of one lump sum after the end of the company's first accounting period make it very difficult to conclude that the payment was not in fact a dividend. The circumstances are a very long way indeed away from those in CCS/623/2005, where the "disguised earnings" possibility was mentioned. There, the parent's weekly wages were said to include an element of dividend on top of earnings at the statutory minimum wage rate.

Errors of law: regulation 19(1A) of the Variations Regulations
12.	If the appeal tribunal intended to rely on regulation 19(1A) of the Variations Regulations, it did not say so expressly or make any findings of fact on the conditions for its application. Regulation 19(1A) requires the making of a variation where:

	"(a)	the non-resident parent has the ability to control the amount of income he receives from a company or business, including earnings from employment or self-employment; and
	 (b)	the Secretary of State is satisfied that the non-resident parent is receiving income from that company or business which would not otherwise fall to be taken into account under the Maintenance Calculations and Special Cases Regulations."

It may be that it could have been assumed from the way that the father had responded about the company that he did have the ability to control the amount of income he received from the company, although the appeal tribunal did not say so. But the appeal tribunal could not have found sub-paragraph (b) satisfied, because at no date from 5 June 2006 down to 30 October 2006 had it been shown that the father received any income that did not fall to be taken into account under the MCSC Regulations. Dividend income would fall into that category, but the father did not receive any such income until 27 April 2007, after the last date that could be considered in accordance with section 20(7)(b) of the Child Support Act 1991.

Errors of law: regulation 20 of the Variations Regulations
13.	Thus the appeal tribunal's decision cannot be supported on either of those possible bases. Nor can it be saved even to a limited extent by its finding that the father's lifestyle required a weekly income of £301.75 while the weekly net income taken into account in the maintenance calculation was £190.91 or £190.50. Because it regarded the application of regulation 20 of the Variations Regulations as overtaken by its legally wrong conclusions on the taking into account of dividend income, it did not go on to make the other findings of fact that would have been necessary for a decision to make a variation on the ground of lifestyle inconsistent with declared income. In particular, there were no findings on whether the father's lifestyle was paid for from any of the sources listed in regulation 20(3) of the Variations Regulations, which would exclude the operation of the variation. And there was no consideration of the general test of whether it would be just and equitable to make the variation.

Errors of law: regulation 19(4) of the Variations Regulations
14.	There was a further error of law, not raised so far in any submissions. The officer of the CSA who considered the mother's appeal against the decision of 30 October 2006 took too narrow a view of the categories of variation she was to be regarded as applying for. Part of what she was saying was that the father was taking an artificially low salary from his new company and would be able to take dividends out. There has been a concentration above on the legal difficulties where no dividend had yet been declared or drawn at the relevant dates. But the mother's case seems to me also to raise squarely the potential application of regulation 19(4) of the Variations Regulations:

	"(4) A case shall constitute a case for the purposes of paragraph 4(1) of Schedule 4B to the Act where--
	 (a)	the non-resident parent has the ability to control the amount of income he receives, including earnings from employment or self-employment, whether or not the whole of that income is derived from the company or business from which his earnings are derived, and
	 (b)	the Secretary of State is satisfied that the non-resident parent has unreasonably reduced the amount of his income which would otherwise fall to be taken into account under the Maintenance Calculations and Special Cases Regulations or paragraph (1A) by diverting it to other persons or for purposes other than the provision of such income for himself."

The words "in order to reduce his liability to pay child support maintenance", which used to appear at the end of sub-paragraph (b), were removed with effect from 6 April 2005.

15.	Regulation 19(4) can be seen as part of a package along with regulation 19(1A) (see, for instance, Commissioner's decision CCS/1320/2005). The latter can apply once a dividend has been paid. The former can apply as soon as a decision has been made to limit the level of current salary that might otherwise have been paid for the services provided, so as to allow for payment of a dividend or dividends at some later date(s). There is a diversion of income that would count under the MCSC Regulations to purposes other than the provision of such income. If it is accepted that the father here had the ability to control the amount of income that would count under the MCSC Regulations, ie salary, he would then have an argument that he did not act unreasonably in the early days of a new company in paying himself a modest salary. But there would be questions about how modest and about what was reasonable in a context in which there was an existing liability for child support maintenance when the decisions on salary level were made. Those difficult issues should have been considered by the decision-maker of 14 February 2007 and by the appeal tribunal.

The Commissioner's decision
16.	For those reasons, the appeal tribunal's decision must be set aside as wrong in law. There is no alternative to referring the case to a differently constituted appeal tribunal for rehearing in accordance with the directions below. I am not in a position to substitute a decision on the mother's appeal against the decision of 30 October 2006. The Secretary of State's representative's submission of 19 November 2007 had suggested a remission to a new appeal tribunal, so that the father would not have been expecting the Commissioner to substitute a decision. And it would not be fair to make a decision against him, on lifestyle inconsistent with declared income, say, without having given him the opportunity to put forward a case under regulation 20(3) of the Variations Regulations or on "just and equitable" grounds. Nor could a decision be made under regulation 19(4) without giving the father the opportunity to argue that its conditions were not met.

General comments
17.	Before giving specific directions, I want to make a few general comments on where my decision leaves the case. First, Mr Hendron for the Secretary of State urged me strenuously to express an opinion on the correctness or otherwise of what was said by Mr Commissioner Turnbull in decision CCS/2703/2007. The Commissioner has refused the Secretary of State leave to appeal to the Court of Appeal in that case and the application may be renewed to the Court of Appeal itself. I decline to express any opinion. It is not necessary to my decision in the present case or to the directions to be given to the new appeal tribunal to know if Mr Commissioner Turnbull was right to hold that, where an annual dividend was paid about nine months before the date from which a variation under regulation 19(1A) could take effect on an application, the condition that the non-resident parent "is receiving" income that does not count under the MCSC Regulations was not met. The legal problem in the present case is a different one. Here, the dividends paid in relation to the father's previous employment (last paid it seems in June 2005) had ceased to be relevant on the significant change of circumstances of the creation of the new company. Contrary to Mr Hendron's submission, nothing that I said about CCS/2703/2007 would carry any authority. That decision must be followed and applied by appeal tribunals and decision-makers unless and until it is overturned by the Court of Appeal or departed from in another Commissioner's decision where the issue is a necessary part of the decision.

18.	But I would add this. The state of the legislation on the "reformed" child support scheme as it affects the taking into account of dividends is in quite a mess. The omission of dividends from the categories of income taken into account under the MCSC Regulations opened up a big loophole for unscrupulous non-resident parents and, even for such parents operating small companies perfectly legitimately and responsibly, meant ignoring income that was available for the support of children. Accepting the presence of the clumsy device of the Variations Regulations being applied on top of the ordinary maintenance calculations, the original form of the regulations did not stop up the loophole. Regulation 19(1A) got much closer, although it cannot be taken to have reversed the original and deliberate policy decision to omit dividend income from the ordinary calculation. There is a powerful argument against interpreting regulation 19(1A) in a way that makes it almost impossible for a parent with care, who in the nature of things is unlikely to be privy to all the non-resident parent's financial transactions, to time an application for a variation so that it is not doomed to failure just because of its timing.

19.	My second general comment is that the father will now clearly realise the nature of the case that he has to meet. He will realise how an appeal tribunal may legitimately draw adverse inferences against him if he fails to produce information he has been directed to provide and how he may be disadvantaged if he fails to take the opportunity to attend a hearing at which issues of fact are being determined, to give evidence and to answer questions in person. I give some specific directions below. In the light of what I have decided about the application of regulation 19(1A) of the Variations Regulations, it seems likely that the strongest parts of the mother's case in relation to the period from and including 5 June 2006 before the new appeal tribunal will be on the diversion of income under regulation 19(4) and on lifestyle inconsistent with declared income under regulation 20. The father's evidence, and any further evidence available from his accountants or from any other financial adviser, as to how the figure of £1,000 gross monthly salary was chosen would be particularly relevant to the first issue and the list of average personal income and expenditure for the year to 30 October 2006 and any explanation of other sources of meeting expenditure would be particularly relevant to the second issue. I note here that the director's report and financial statements for the period ended 31 March 2007 as approved by the board on 19 July 2007, obtained by the mother from Companies House and produced at the hearing on 28 April 2008, shows that the father owned the only two shares issued in the company. Thus, he would appear to have had control of any decision of the company in general meeting to pay a dividend on the shares and as to the salary to be paid to himself, regardless of whether there was another director in addition to himself (which is left a bit ambiguous by note 10 to the financial statements).

20.	The third general comment is that, despite the Secretary of State's current submission that the mother's deemed application for a variation under regulation 19(1A) stemming from her appeal against the decision of 30 October 2006 was doomed to failure because no dividend was received by the father until 17 April 2007, no-one from the CSA apparently suggested to her that there was any need to make a subsequent actual application on that ground after that date, rather than let the existing appeal be decided by the appeal tribunal. Of course there is a limit to how far the CSA can go in advising one parent as to the courses of action open, but that is a matter that the mother might wish to take up with the CSA. The mother may make an application for a variation now on that and other grounds, but the outcome would depend on a lot of things that I do not know about, such as more recent payments of dividends and salary to the father and any new maintenance calculations.

Directions to the new appeal tribunal
21.	The composition of the new appeal tribunal is a matter for a district chairman of appeal tribunals exercising the delegated powers of the President, but it seems to me that it would be an advantage for there to be a financially qualified panel member again. Neither member of the appeal tribunal of 9 July 2007 can be a member of the new appeal tribunal. The district chairman will wish to consider whether any further directions need to be given about the provision of information and evidence, with the appropriate warnings about the consequences of non-compliance, and for a fresh written submission from the Secretary of State. However, the district chairman will also wish to weigh in the balance the desirability of a speedy rehearing in a case in which circumstances obtaining after 30 October 2006 cannot be considered, when as a result of the present decision (in particular, paragraph 19 above) the father will be aware of the possible consequences if he does not now fully comply with the directions given in 2007 or attend the rehearing.

22.	There must be a complete rehearing of the mother's appeal against the Secretary of State's decision dated 30 October 2006, encompassing also the refusal to revise that decision so as to agree variations on the grounds of lifestyle inconsistent with declared income, income not taken into account and assets, plus the ground of diversion of income. The new appeal tribunal must consider afresh the evidence and submissions put before it and will not be bound in any way by any findings made or conclusions expressed by the appeal tribunal of 9 July 2007. The evidence will include the director's report and financial statements mentioned in paragraph 19 above. The new appeal tribunal must apply the legal approach set out above and in particular avoid the errors of law identified in paragraphs 10 to 15 above. As I have already indicated, it appears likely that the main focus will be on whether the conditions for agreeing a variation with effect from 5 June 2006 (or from some other date prior to 31 October 2006) on the ground of diversion of income or lifestyle inconsistent with the declared income. The evaluation of all the evidence will be entirely a matter for the judgment of the members of the new appeal tribunal. The decision on the facts in this case is still open.

	(Signed)      J Mesher
	Commissioner

	Date:     7 May 2008
££[2008] UKSSCSC CCS_3355_2007 (07 May 2008)