CCS/3907/2007

DECISION OF THE CHILD SUPPORT COMMISSIONER

The Child Support Commissioner’s decision

1.	This appeal by the father to the Child Support Commissioner fails.  The decision of the Telford appeal tribunal sitting on 7 August 2007 is not wrong in law.  I must therefore dismiss this appeal and confirm the appeal tribunal’s decision.  

The background to this appeal to the Commissioner

2.	In the technical language of the child support legislation, the appellant is the non-resident parent under the maintenance calculation, the first respondent is the Secretary of State and the second respondent is the parent with care.  For convenience, however, I shall refer to them in this decision as the father, the Secretary of State and the mother respectively.  For all practical purposes the Secretary of State’s functions in relation to child support are carried out by the Child Support Agency (the CSA)

3.	The CSA is at present required by legislation to operate two child support schemes in parallel, an “old scheme” and a “new scheme”.  This is a new scheme case, governed by the Child Support Act 1991, as amended by the Child Support, Pensions and Social Security Act 2000 in March 2003, and by the relevant regulations.   

4.	The central point at issue in this appeal is a relatively short one.  The father works as an IT contractor for an umbrella “IR35” company.  Essentially the question is whether the appeal tribunal applied the correct legal principles in determining the father’s income.  In particular, did the tribunal apply the proper legal test in its treatment of certain elements of the father’s salary described as “non-taxable expenses”?

5.	The background to the appeal is not in dispute.  In November 2005 the CSA ruled that the father was liable to pay £84 a week in child support for his two children as from March of that year.  In August 2006 the father applied for his assessment to be reviewed because of a change in his employment.  It seems he started work for an umbrella IT company on 7 August 2006 (doc 11).  On 31 January 2007 the CSA ruled that the father’s liability was now £75 a week as from 11 August 2006.

6.	The mother lodged an appeal, arguing that it made no sense that the assessment had gone down as the father had moved into better-paid employment and was also now getting an occupational pension.  She challenged the decision to allow him travel expenses as she said that he had moved closer to his place of work (doc 17-19).

7.	The CSA then reconsidered its January 2007 decision.  The submission writer for the appeal took the view that the father’s income had been wrongly calculated.  However, the submission writer did not agree with the mother that the father’s income had been set too low  On the contrary, the submission writer argued that in fact an amount in respect of employer’s national insurance (NI) contributions had been wrongly included as net income and should have been disregarded, so reducing the father’s net income further.

8.	The CSA submission writer considered that the father’s gross income should be reduced by income tax, NI contributions and certain “non-taxable expenses” for the four weeks selected in August and September 2006 (submission, p.7).  The gross income amounts for these four weeks were £576.38, £493.00, £442.25 and £608.92 respectively.  The “non-taxable expenses” (including employers’ NI contributions), which were deducted in arriving at the net income, amounted to a considerable proportion of each of these totals, namely £267.16, £60.89, £361.20 and £270.86 respectively.  On the paysheet these were described as sums in respect of “business mileage, subsistence, [umbrella company] fees, employers N.I.”.

The appeal tribunal’s decision

9.	Neither parent (nor the CSA) asked for an oral hearing of the appeal.  As a result the mother’s appeal was listed as a paper case before the tribunal at Telford.  The tribunal allowed the mother’s appeal on 7 August 2007 (doc 21).  In short the tribunal decided that the “non-taxable expenses” should not have been deducted from the gross income and accordingly directed the CSA to add them back into the calculation of the father’s net income.

10.	The father asked for a full statement of the tribunal’s reasons. This was duly provided (doc 22-24) in a detailed statement in which the tribunal chairman dealt with each of the disputed items in turn.

The parties’ submissions to the Child Support Commissioner

11.	The father now appeals to the Child Support Commissioner with the permission of Mr Commissioner Rowland.  The father’s argument in essence is that the appeal tribunal erred in law in adding back into his net income the non-taxable amounts (docs 25 and 29).  He argues that his child support assessment should be based on his taxable income for HMRC purposes (obviously less tax and NI contributions).

12.	The mother has made no formal representations on the legal issues involved on the appeal to the Commissioner.  She has indicated that she would be happy for there to be an oral hearing but is content for that matter to be decided at my discretion.  I am satisfied that this case can be dealt with (and dealt with more quickly) without a hearing.

13.	The Secretary of State supports the father’s appeal (docs 33-35).  In summary, the Secretary of State’s representative agrees with the tribunal’s decision to add back in the employer’s NI contributions.  However, the Secretary of State’s representative contends that the tribunal erred in its treatment of amounts relating to the umbrella company’s fees, mileage expenses and subsistence allowances.

14.	In paragraph 8 above I explained that the “non-taxable expenses” constituted a significant proportion of the father’s gross pay for the weeks in question.  The first pay period selected, dated 18/08/2006, is fairly typical.  I refer to it below as the sample week.  The umbrella company recorded the non-taxable expenses for this week as being (1) employer’s NI: £27.16, (2) umbrella company fees: £18, (3) mileage: £108 (270 miles, presumably at the standard HMRC permitted rate of 40 pence per mile) and (4) subsistence: £114, making a total of £267.16 in “non-taxable expenses”.  I will deal with each of these matters in turn.

An overview of the legal framework for the calculation of net weekly income

15.	First, however, I note that from a legal perspective the father’s net income has to be determined in accordance with the Schedule to the Child Support (Maintenance Calculations and Special Cases) Regulations 2000 (SI 2001/155).  According to Schedule 1 paragraph 3(1), and as an employed earner, the father’s net weekly income is based on his earnings (as defined by Schedule 1, paragraph 4) less any allowable deductions (Schedule 1, paragraph 5).

16.	The father’s earnings mean “any remuneration or profit derived from that employment” (Schedule 1, paragraph 4(1)).  There seems no dispute in this case that the “gross pay before deductions” figure represents “remuneration or profit derived from that employment”. However, paragraph 4(2) specifically states that certain amounts are not included as earnings.  These include for present purposes “(a) any payment in respect of expenses wholly, exclusively and necessarily incurred in the performance of the duties of the employment” and “(b) any tax-exempt allowance made by an employer to an employee”. I am satisfied that no other sub-paragraphs within paragraph 4(2) are relevant to the present case.

Issue 1: the employer’s national insurance contributions

17.	The first matter in dispute relates to the employer’s NI contributions.  In the sample week the pay details record “National Insurance EE’s [employee’s] £23.34, ER’s [employer’s] £27.16) (doc 13).  The employer’s NI contribution of £27.16 is then also included in a line described as non-taxable expenses.

18.	In this context I take notice of the background to the creation of the IR35 rules.  A service company or an umbrella company offers the individual concerned the advantages of a limited company without all the expenses of running one’s own company.  In particular, I note that where, as here, the father is employed by an umbrella company, the employer’s responsibilities rest with the umbrella company and not with the client.  In these circumstances, the umbrella company’s client does not have to pay employer’s NI contributions on the payment it makes for the father's services, but the umbrella company does.  However, the umbrella company and the father are of course two separate legal entities with separate legal responsibilities. 

19.	The tribunal took the view that the sum relating to the employer’s NI contribution fell within neither paragraph 4(2)(a) or (b) of the Schedule and so should be treated as earnings.  As to paragraph 4(2)(a), the chairman reasoned that logically the payment could not be seen as being in respect of expenses incurred by the father in the performance of the duties of his employment.  As regards paragraph 4(2)(b), the chairman reasoned that the amount concerned could not be described as a “tax-exempt allowance”.

20.	I agree with the tribunal chairman’s reasoning on both points.  The £27.16 was part of the father’s gross earnings and so part of “any remuneration or profit derived from that employment” (paragraph 4(1)).  The sum of £27.16 for that week can hardly constitute expenses incurred by the father in the performance of the duties of his employment as it represents the employer’s NI charge.  Nor was there any evidence it was a tax-exempt “allowance”.  I therefore agree with the Secretary of State’s representative that the tribunal did not err in law on this point.

21.	I note that employees are permitted to have certain deductions made from their earnings in order to arrive at their net weekly income. However, paragraph 5(1)(b) only permits an employee to deduct primary Class 1 contributions.  It follows that there is no provision for a deduction in relation to secondary Class 1 contributions (the employer’s NI charge).

22.	This result may appear anomalous, in that the IR35 rules mean that the father is in effect liable to pay both the employer’s and the employee’s NI contributions, but only sees the latter deducted from his gross income to arrive at his net income for child support purposes.  However, the legislation is tolerably clear on the point.  It must also be remembered that there are other wider and very considerable advantages for the father in operating behind an umbrella company on an IR35 basis.

Issue 2: the IR35 company fee

23.	The second matter relates to the umbrella company fee. This was a fixed amount of £18 in the sample week (and indeed in all the other weeks).  The tribunal chairman reasoned that this sum was covered by neither paragraph 4(2)(a) or (b) for the same reasons as the employer’s NI charge. The Secretary of State’s representative argues that the tribunal’s findings were inadequate on this point in the absence of details as to the purpose of this fee payment and whether the sum could qualify as being “wholly, exclusively and necessarily” incurred in relation to the father’s employment duties.

24.	I do not think that the Secretary of State’s argument about the supposed inadequacy of the findings is made out here.  I bear in mind that this was a paper hearing and so the tribunal was reliant on the information contained in the papers.  True, there was no detail as to the reason for the £18 fee but the chairman was clearly familiar with the IR35 regime.  I regard it as implicit in his reasoning that this was a fee charged by the umbrella company for its administration of the IR35 scheme and the father’s payroll arrangements.

25.	In addition, I find that the tribunal chairman was entitled to conclude that this sum was not “wholly, exclusively and necessarily” incurred in relation to the father’s employment duties. This is a very narrow expression in both tax law and child support law (see also Commissioner’s decision CCS/2561/1998).  Simply because an expense is stipulated by an employer is insufficient: “The test is not whether the employer imposes the expense, but whether the duties do, in the sense that, irrespective of what the employer may prescribe, the duties cannot be performed without incurring the particular outlay” (Donovan L.J. in Brown v Bullock (Inspector of Taxes) [1961] 3 All E.R. 129 at 133B). The tribunal was entitled to decide in effect that in the context of these arrangements the weekly fee was incidental to, rather than integral to, the performance of the father’s employment. 

26.	There is a further and more fundamental reason why the tribunal reached the correct decision on this point, which is implicit in the chairman’s statement that neither the umbrella company fee nor the employer’s NI charge “could in logic be described as a payment in respect of expenses incurred by [the father] in the performance of the duties of his employment”.  As Mr Commissioner Mesher observed in the reported Commissioner’s decision R(CS) 2/96, the statutory provision applies only “to payments made to an employee and not to payments made by an employee”.  That decision related to the original old child support scheme but I find its reasoning equally persuasive here on the construction of paragraph 4(2)(a) .

Issue 3: travel expenses

27.	The third matter concerned the father’s travel expenses.  In the sample week the umbrella company reported the father’s mileage as 270 miles and an expenses allowance of £108.  The tribunal noted the mother’s evidence that the father had moved closer to his place of work.  The tribunal also observed that the reported mileage and consequential expenses payment was the same for most weeks.  On this basis the tribunal chairman concluded that the father had a single place of employment.  He also ruled that the expense of such travel was not “wholly, exclusively and necessarily” incurred in relation to the father’s duties of employment, noting the parallel income tax position for employees.

28.	In fact there are differences between the income tax and child support treatment of travelling expenses for employees.  Income tax law asks whether such costs are “necessarily incurred on travelling in the performance of the duties of the employment” (Income Tax (Earnings and Pensions) Act 2003, section 337(1)).  Child support law, on the other hand, subjects all expenses (including travelling expenses) to the “wholly, exclusively and necessarily” test.

29.	Although the tribunal did not advert to this fine distinction, I can see no basis for interfering with the tribunal’s decision on this point.  The chairman has adequately explained his reasoning from the evidence before him.  The mother had specifically raised the issue of travel to work costs in her letter of appeal.  The father chose not to address this point either on paper beforehand or to attend the hearing to explain. I do not think it reasonable to suggest that the chairman should have delayed matters by adjourning for further information.  He decided the matter on the best evidence available to him and explained why.  The decision discloses no error of law on this point.

Issue 4: the subsistence allowance

30.	The final matter relates to the father’s subsistence allowance.  In the sample week an amount for subsistence expenses of £114 was cited.  The same figure appeared in several other of the weeks recorded by the umbrella company.  As the tribunal observed, “this is a substantial sum and there is no evidence as to how it is broken down”.  The chairman took the view – given the relative consistency of the amount of the payment – that the sum “does not represent the reimbursement of actual expenses, but is rather a conventional sum agreed between employer and employee”. He again concluded on the evidence before him that this sum was not “wholly, exclusively and necessarily” incurred in relation to the father’s duties of employment and explained why.  Again, I can find no fault with the tribunal’s reasoning.  It is based on the evidence before the tribunal and discloses no error of law.

The relationship between child support law and income tax law

31.	To sum up, the father’s case in large part is that “the CSA can calculate maintenance commitments of Non Resident Parents based upon taxable income only.  As a portion of my income now consists of HMRC allowable tax exempt expenses, then these expenses should not be used in the calculation of maintenance” (doc 25).  In this decision I have sought to explain why this approach is mistaken and why the tribunal did not err in law.

32.	It is undoubtedly the case that in future child support liabilities will be based much more closely on taxable income as defined by HMRC.  This is a central feature of the reforms currently before Parliament in the Child Maintenance and Other Payments Bill 2008.  However, the task of the Child Support Commissioner is to apply today’s law, not tomorrow’s law.  At present, there are differences between income tax law and child support law and it does not follow that an assessment for one purpose is necessarily mirrored in the other context.  Putting to one side any policy arguments, there are several sound technical reasons why this should be so, as explained by Mr Commissioner Rowland in decision R(CS) 6/98.

33.	This case certainly illustrates the uneasy fit between the IR35 regime and child support law.  For tax purposes IR35 arrangements provide HMRC with a guarantee that employers’ and employees’ NI contributions will be paid, whilst allowing the individual worker the sort of flexibility as regards work-related expenses that self-employed people (but not employed people) enjoy.  The child support system does not recognise any such “third way”.  A worker is either an employed earner (in which case s/he is governed by Part II to the Schedule to the 2000 Regulations) or a self-employed earner (in which case s/he is subject to the more generous provisions of Part III to the Schedule).  There is no middle way.

	(signed on the original)	N J Wikeley
		Deputy Commissioner

		22 May 2008