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[2004] UKSSCSC CCS_1371_2003 (22 July 2004)


 


CCS/1371/2003

DECISION OF THE CHILD SUPPORT COMMISSIONER

The Commissioner's decision in summary

1. The appeal by the parent with care is dismissed. My decision is that the Liverpool appeal tribunal's decision of 8 November 2002 is not wrong in law.

The background to this appeal

2. It appears from the case papers that the parents have three children. When the Child Support Agency made its first assessment in 1995, which appears to have been a nil assessment, two daughters (who I shall call S and C) were living with the mother and a third (who I shall call A) was living with the father. Since 1997 a series of further assessments for various amounts have been made right through to 2003 at the latest.
3. The relevant assessment which is the subject of this appeal was made on 20 May 2002. On that date the Secretary of State decided that the father was liable to pay child support in respect of S in the sum of £41.26 a week as from the effective date of 30 March 2001. The Secretary of State further decided that the father was liable to pay £40.65 weekly from 21 September 2001, following C's return to college.
4. The central issue in this appeal is the way that the child support legislation treats tax liabilities on the father's income. At the time in question the father was in receipt of an occupational pension, worth a little more than £11,000 a year, and also an income from his self-employed work, again in the order of £11,000 (gross). His net profit for income tax purposes for the latter was just under £5,000.
5. The father appealed against the assessment on a form dated 29 May 2002. The ground of his appeal was simply that the assessment had shown income tax of just £0.98 on his weekly earned self-employed income of £93.90, whereas in fact he paid tax of £20.67 (at the 22% rate). He pointed out that the Inland Revenue did not allow him to deduct his personal allowance twice (i.e. once in respect of his pension and then again for his earned income), and asked for his assessment to be readjusted accordingly.
6. Thus the question at the heart of this appeal is essentially this, put in plain English: was the Agency's approach to calculating the father's income, which operated on notional tax liabilities, the correct one? Or should the father be allowed to refer to his actual tax liabilities?

The appeal tribunal's decision

7. The father's appeal was heard at an appeal tribunal in Liverpool on 8 November 2002. The tribunal allowed his appeal. In its Decision Notice, the tribunal directed that the assessment be recalculated on the basis that as the father's personal tax allowance had already been exhausted in respect of his earned income (this appears to be a reference to the pension income) it should therefore 'be ignored and put in the calculation as (0) nil for the purposes of the second calculation of the self-employed income.'
8. The tribunal chairman's reasons indicated that the decision maker had 'followed the letter of the regulations'. The reasons noted that no special provision was made for an individual who had both employed and self-employed income. The chairman also assumed that, following the logic of the Agency's approach, where a self-employed person had several self-employed occupations then a personal allowance would be deducted in respect of each calculation. This, the tribunal argued, 'would be manifestly unjust and could never have been the intention of Parliament'.
9. The tribunal suggested there were two possible ways of dealing with this perceived anomaly. The first was that a tribunal with the benefit of hindsight could refer back to the actual tax liability for the relevant year; however, this option would not be open to a decision maker on first decision. The second was simply to disregard the personal allowance in the second and any further calculations of assessable income within any one assessment. The tribunal clearly opted for the second option.
10. The tribunal's decision was queried first by the Agency. The appeals officer's letter dated 18 November 2002 argued that 'There is no provision in the Child Support Agency regulations to enable the decision maker to adjust the personal allowances when calculating the notional tax on self-employed earnings to take into account the amount of the personal allowance that was attributable against the earnings from employment by the Inland Revenue.' This letter was treated as an application for leave to appeal.
11. The mother wrote supporting the Agency's argument, stating that the chairman had decided the case in accordance with his pragmatic view of what the law should be, rather than what it actually was. The father, inevitably, took a very different view, arguing that it was 'unfair and unjust' as the Agency were asking him to pay money which had already been taken by the Inland Revenue. He observed, echoing the tribunal chairman, that if he had 10 different sources of self-employed income, the Agency would assume he had 10 separate personal allowances so inflating his actual income for assessment purposes.
12. Although the Agency's application for leave to appeal was granted, the Agency did not pursue the appeal. The mother then applied in her own right and was granted leave to appeal to the Child Support Commissioner by the tribunal chairman.

The arguments before the Commissioner

13. The submission by the Secretary of State's representative supports the mother's appeal. The submission points out that the tribunal relied on paragraph 3(5) of Schedule 1 to the Child Support (Maintenance Assessment and Special Cases) Regulations 1992 (S.I. 1992 No. 1815; the MASC Regulations), which deals with cases where no tax return is available. In fact the father had provided a tax return for the relevant year, and so the tribunal should have relied on paragraph 2A of that Schedule. It is further argued that paragraph 2A(3)(a) gives the decision maker no choice but to deduct the relevant personal allowance from the self-employed earnings (irrespective of whether in fact this had already been deducted in respect of another income source).
14. This appeal was the subject of an oral hearing at Bury County Court on 4 February 2004. The father was not present. The mother (the parent with care and the appellant in the context of this appeal to the Commissioner) attended, as did Ms D Haywood for the Secretary of State. I am grateful to them both for their arguments. I also apologise for the delay in finalising this decision, but it became apparent at the hearing that further submissions were needed, comments on which have now been received from all parties.
15. Ms Haywood's arguments at the oral hearing essentially expanded upon those put in the Secretary of State's submission. She supported the mother's appeal, arguing that the tribunal should have applied the plain words of paragraph 2A(3)(a). In her submission the legislation provides for an artificial regime: the father's income was to be assessed by reference to a notional rather than his actual tax liability. She argued that in calculating the tax liability one had to identify the relevant personal allowance and then deduct it from the self-employed income. In support of this argument, Ms Haywood relied on the decision of Mr Commissioner Mesher in an income support decision, CIS/12230/1996.
16. The main issue in that case was the way in which the deduction of income tax from self-employed earnings should be calculated in the context of the income support scheme. Mr Commissioner Mesher analysed the meaning of regulation 39(1) of the Income Support (General) Regulations 1987 (S.I. 1987 No. 1967), which uses similar (but not identical) language to the child support legislation in this appeal. Mr Commissioner Mesher ruled (at paragraphs 15 and 16) that regulation 39 meant that the appropriate maximum personal relief had to be deducted from the amount of self-employed earnings, and that it did not matter that this produced a figure which might be different from the actual tax liability ultimately assessed – for example, because the personal allowance had already been "used up" in respect of another form of income.
17. In Ms Haywood's submission, regulation 39 and paragraph 2A(3)(a) are on all fours and should be read consistently. She also noted that it was administratively much more straightforward for the Agency to work on this system of notional tax liabilities, rather than having to adjust for actual tax liabilities.
18. The mother, following Ms Haywood, supported her arguments. She reiterated her view that the chairman had erred in law by following his own view of what the law should be. She also referred to Commissioner's decision CCS/2858/2002, noting that the child's best interests are at the heart of the question.

The Commissioner's reasons

19. I have considered these arguments carefully but have come to the conclusion that the appeal tribunal arrived at the correct outcome in this case, albeit that it referred incorrectly to paragraph 3(5) when actually paragraph 2A(3) was in issue. However, the same issues arise whichever route is taken.
20. For present purposes the starting point is regulation 7 of the MASC Regulations, which defines how the father's income, known as 'N', is calculated. Essentially that figure 'N' is the aggregate of the various sums assessed under Schedule 1 (see regulation. 7(1)) less the disregards listed in Schedule 2 (regulation 7(2)). Schedule 1 deals with various types of different income sources. Part 1 refers to earnings, and makes separate provision for employees (Chapter 1) and self-employed (Chapter 2). As the tribunal observed, there is no special provision for a person who has both earned income and self-employed income.
21. In this context, it should be noted that strictly the father's occupational pension was not 'earned income' as it was expressly excluded from the category of earnings by paragraph 1(2)(b). The occupational pension was nonetheless rightly taken into account as a form of 'other income' under Part III of Schedule 1 (see paragraph 9). I note also that the Agency deducted the actual tax paid in relation to these pension payments.
22. So far as the self-employed income is concerned, paragraph 2A(2) defines earnings as "the total taxable profits from self-employment of that earner as submitted to the Inland Revenue" less various deductions. The first such deduction (paragraph 2A(2)(a)) is "any income tax relating to the taxable profits from the self-employment determined in accordance with subparagraph (3)". Sub-paragraph (3) reads as follows:

"(3) For the purposes of sub-paragraph (2)(a) the income tax to be deducted from the total taxable profits shall be determined in accordance with the following provisions -

(a) subject to head (d), an amount of earnings equivalent to any personal allowance applicable to the earner by virtue of the provisions of Chapter 1 of Part VII of the Income and Corporation Taxes Act 1988 (personal reliefs) shall be disregarded;

(b) subject to head (c), an amount equivalent to income tax shall be calculated in relation to the earnings remaining following the application of head (a) (the "remaining earnings");
(c) the tax rate applicable at the effective date shall be applied to all the remaining earnings, where necessary increasing or reducing the amount payable to take account of the fact that the earnings relate to a period greater or less than one year;

(d) the amount to be disregarded by virtue of head (a) shall be calculated by reference to the yearly rate applicable at the effective date, that amount being reduced or increased in the same proportion to that which the period represented by the taxable profits bears to the period of one year."

23. Thus the key question is what is meant by the statutory instruction in sub-paragraph 3(a) to disregard "an amount of earnings equivalent to any personal allowance applicable to the earner by virtue of the provisions" of the relevant income tax legislation. In short, the Secretary of State and the mother argue that this means identifying the father's status (e.g. as a single person for personal allowance purposes) and then deducting the relevant amount before calculating the notional tax liability. The father argues that this must refer to his actual tax liability.
24. In my view the correct construction of this legislation is the latter. My principal reason for this is that the legislation expressly refers to the deduction of an amount equivalent to "any personal allowance applicable to the earner by virtue of the provisions" of the relevant income tax legislation. The words "applicable to the earner" in this context imply that the Agency must have regard to the individual's personal tax position. I take judicial notice of the fact that under income tax legislation a taxpayer cannot claim the same personal allowance for the same year more than once. If, as here, the personal allowance has been exhausted in respect of the pension income, there is no such allowance "applicable to the earner by virtue of" the tax legislation for the purposes of the self-employed income. Moreover, paragraph 2A(3)(a) expressly refers to and indeed incorporates the tax legislation in this context.
25. I have considered whether the Secretary of State's argument about this being a purely notional exercise is supported by the reference in paragraph 2A(3)(b) to the calculation of "an amount equivalent to income tax". However, I am not persuaded that this is the case. I note that head (a) refers to the disregard of an amount of earnings "equivalent to" any applicable personal allowance.

The relevance of CIS/12230/1996

26. I have also considered whether the interpretation of these provisions should follow the same approach as taken by Mr Commissioner Mesher in CIS/12230/1996. In my view that authority does not apply in this context, for three reasons. First, this case is concerned with the child support legislation, rather than income support law, and it is by no means obvious that the same considerations apply. The former is concerned with assessing one parent's income for the purpose of calculating the child support liability for his or her child (in a case where neither parent was apparently claiming income support). The latter is concerned with means-testing for assessing entitlement to a state benefit.
27. Secondly, the wording of the two provisions is not actually identical. Regulation 39(1) states that the amount to be deducted by way of income tax

"shall be calculated on the basis of the amount of chargeable income and as if that income were assessable to income tax at the basic rate of tax less only the personal relief to which the claimant is entitled under sections 8 (1) and (2) and 14 (1) (a) and (2) of the Income and Corporation Taxes Act 1970 (personal relief) as is appropriate to his circumstances".

The reference to the 1970 Act rather than the 1988 Act is not material. The use of the word "entitled" might at first glance suggest that one should look at the individual person's actual tax position, and not some notional picture. But the reference in regulation 39(1) to a calculation "as if" the tax were assessed in a certain way reinforces the argument that in the income support context a notional assessment is entirely appropriate.

28. Thirdly, the main reason for Mr Commissioner Mesher's conclusion was his purposive approach to the legislation. There, as he noted, the task was to devise a method for calculating the tax payable on self-employed earnings on a week by week basis. In that context, the alternative construction could only have worked if the assessment was done at the end of the tax year, when the actual tax liability was known, which would have defeated the purpose of a weekly means-tested benefit. In the present case, however, we are concerned with long-term child support liabilities, not a weekly means-tested benefit. In addition, in this case we are by definition dealing with a past tax year for which the actual tax liabilities are known.

The Schedule 2, paragraph 2 point

29. If I am wrong on the construction of paragraph 2A(3), I would also uphold the outcome arrived at by the tribunal for a second and subsidiary reason. This concerns the application of Schedule 2 to the MASC Regulations and a point raised at the oral hearing on which further submissions have been sought.
30. It has already been noted that the father's assessable income is the aggregate of the various sums assessed under Schedule 1 (see regulation 7(1)) less the disregards listed in Schedule 2 (regulation 7(2)). Paragraph 2 of Schedule 2 lists, as one of the amounts to be disregarded when calculating or estimating that income, the following:

"2.    An amount in respect of income tax applicable to the income in question where not otherwise allowed for under these Regulations."

31. The Secretary of State's submission is that the purpose of this is to allow an amount for income tax where there is no other provision in the Regulations to disregard an amount for income tax. The Secretary of State further argues that provision is made for the deduction of an amount by way of income tax under paragraph 2A(3) – albeit on a notional basis – and so paragraph 2 of Schedule 2 does not apply. This approach certainly seems to be the view taken by the author of the Agency's Decision Makers Guide, which states at paragraph 4730: "when calculating the amount of income other than earnings or from benefits the DM should deduct any income tax payable on that income or benefit' (emphasis added). However, paragraph 2 does not include the italicised qualifying and restrictive condition contained in para 4730. There is no obvious reason to confine its remit to income other than earnings or benefits.
32. If I am wrong on the interpretation of paragraph 2A(3), it follows that that provision requires a notional income tax calculation which ignores the actual circumstances of the individual concerned. The result, as demonstrated by this case, is that the individual is assumed to have a lower tax liability than is actually the case (and hence a higher assessable income for child support purposes). That being so, there is obviously a shortfall between the notional tax calculation and the actual tax paid. A plain reading of paragraph 2 of Schedule 2 suggests that this shortfall is "an amount in respect of income tax applicable to the income in question where not otherwise allowed for under these Regulations", and so should be deducted.

The Commissioner's decision

33. My conclusion is thus that the tribunal arrived at the correct outcome in this case. The tribunal erred in referring to paragraph 3(5) rather than 2A(3) but the underlying issue is identical. I therefore dismiss this appeal and confirm the substance of the decision made by the tribunal, namely that as the father's income tax personal allowance had been exhausted in respect of his pension income, then his actual (rather than any notional) tax liability on his self-employed income should be recalculated on the basis that he had no personal allowance to offset against that self-employed income. I finish with two final observations.

Final observations

34. First, the tribunal chairman's speculation about several different self-employed occupations resulting in the deduction of multiple personal allowances has introduced something of a red herring into this appeal. Ms Haywood even assured me that this would be the approach taken by the Agency, although paragraphs 4272-4275 of the Decision Makers Guide would suggest otherwise. But this was not the issue here. The father had two income streams – his pension and his self-employed earnings. The effect of my decision is that he should be assessed on his actual (and known) tax liabilities in respect of both income streams. This is also a fair solution. Otherwise non-resident parents with the same aggregate income would inevitably be treated differently, with different assessable incomes, depending on whether they were, for example, just self-employed or (as here) self-employed and receiving an occupational pension.
35. Secondly, although this decision concerns old cases dealt with under paragraph 2A, the same reasoning should apply equally to old cases dealt with under paragraph 3. As Ms Haywood accepted at the oral hearing, the same issues of interpretation as arise under paragraph 2A also apply in the context of the new child support scheme under paragraph 7(4) of the Schedule to the Child Support (Maintenance Calculations and Special Cases) Regulations 2000 (S.I. 2001 No. 155). If this is not what the Agency thinks the law should be, then the answer is that the regulations need to express that policy intent clearly.

(Signed) N J Wikeley

Deputy Commissioner

(Date) 22 July 2004