[2007] UKSSCSC CG_1491_2007 (24 September 2007)

PLH                                                                           Commissioner's File:  CG 1491/07
	
	SOCIAL SECURITY ACTS 1992-1998

APPEAL FROM DECISION OF APPEAL TRIBUNAL
ON A QUESTION OF LAW

DECISION OF THE SOCIAL SECURITY COMMISSIONER

     1.     	This appeal by the Secretary of State must be allowed, as in my judgment the decision of the Sunderland appeal tribunal (Mr R A Coia, chairman, sitting alone) on 4 January 2007 was clearly erroneous in law in failing to give effect to the requirements of the relevant legislation on the computation of the claimant’s self‑employed earnings for the purpose of deciding whether he counted as “gainfully employed” for the purposes of carer’s allowance (formerly invalid care allowance).  
     2.     	I set the decision aside and in accordance with section 14(8)(b) Social Security Act 1998 remit the case to be redetermined by another tribunal on the basis of the directions given below as to the principles to be applied.  I decline the claimant’s request for an oral hearing of this present appeal since the points of principle on the relevant law have been adequately dealt with in the written submissions already made to me, and the course I am taking will give him a full opportunity to make any further points and submit any further evidence he wishes on the way the actual calculations are carried out: for example on the amounts that are to be included as allowable revenue expenses of his self‑employed business.
     3.     	The claimant is a man now aged 65 who retired from full‑time employment some years ago and since 1996 has devoted the majority of his time and effort to looking after his disabled wife.  He was awarded and paid invalid care allowance (now renamed carer’s allowance) under section 70 Social Security Contributions and Benefits Act 1992, continuously from 1 April 1996 until the decision just over ten years later that gave rise to these proceedings.  This allowance is a regular weekly cash benefit payable to those regularly and substantially engaged in caring for a seriously disabled person and thereby prevented from engaging in full‑time paid work elsewhere for themselves.  It is thus a condition of receiving the allowance that the claimant is not “gainfully employed”; but to allow people to undertake relatively small amounts of work which do not prejudice the care given to the disabled person, there is an exception by which a person only counts as “gainfully employed” if his or her weekly earnings, calculated in the prescribed manner, exceed a certain prescribed limit.  So far as relevant to this case, that was the same as the “lower earnings limit” from time to time in force for contributions under section 5 of the 1992 Act:  £82 per week for the tax year 2005/2006 ending on 5 April 2006, and £84 per week for the year beginning 6 April 2006.  
     4.     	The legislation that achieves the result just summarised is (1) sections 70(1)(b) and 70(8) of the 1992 Act, which make it a condition of entitlement that the person claiming is not “gainfully employed”, and empower the Secretary of State to prescribe when he or she is or is not to be treated as within that description; (2) regulation 8 of the Social Security (Invalid Care Allowance) Regulations 1976 SI No. 409, which prescribes that a person is not to be treated as gainfully employed on any day in a week unless his earnings in the immediately preceding week have exceeded the lower earnings limit, and (apart from temporary respite periods when the disabled person is in hospital) is to be treated as gainfully employed on every day in a week if his earnings in the immediately preceding week have exceeded that limit; and (3) the Social Security Benefit (Computation of Earnings) Regulations 1996 SI No. 2745, which prescribe how “earnings” are to be calculated for various benefits including this one. 
     5.     	The standard departmental literature issued to claimants contains clear statements drawing attention to the existence of these limits and the need to notify the department if they begin doing any work, whatever the level of earnings, in case the entitlement to benefit is affected; and also to the need to keep the department informed of any material changes in circumstances already notified such as changes in the level of earnings.  
     6.     	The claimant in this case, who was well aware of the limits and the need to keep the department informed of changes in his circumstances, wrote in on 11 June 2005 to say that in April he had commenced part‑time work on a self‑employed basis with UBM Ltd “but my main priority is caring for my wife which is still well in excess of 35 hours per week”.  He enclosed a revenue and expenditure statement showing that after expenses and his estimated tax liability his total net income from this activity had been only £9.81 over the four weeks of April and £244.26 over the five weeks of May, and concluded:
“I trust that this information is sufficient and that as my net earnings are well under the amount I am allowed to earn before affecting my carer’s allowance, that I will continue to qualify for the ICA.”
     7.     	On the basis of those figures, which were indeed well under the prescribed weekly limit of earnings for carer’s allowance, the benefit continued to be paid to him, and that remained the position until early in the following year when he was asked to provide up‑to‑date details of his earnings.
     8.     	When in due course he did so, the detailed revenue and expenditure statements of his business (as a self‑employed enquiry agent) were found by the department to show weekly earnings significantly over the carer’s allowance limit during the year from 6 April 2005, when averaged out and calculated as required by the regulations.  Even on the claimant’s own admission, his own (more favourable) calculation method showed his earnings had exceeded the limit in the months of July and September 2005 and in February 2006, breaking the continuity of his entitlement:  see his letter of 14 April 2006 at page 24, where he very properly acknowledged that he had not informed the department of this at the time, and offered to pay back any benefit found not to be due when the claim was recalculated.  
     9.     	On 10 July 2006 the revised departmental decision which is the subject of this appeal was made, terminating his entitlement to carer’s allowance completely with effect from 17 April 2006, that is the start of the benefit week following the first complete week within the new tax year.  This was on the basis that his weekly earnings figure for that week, derived from the departmental calculation of receipts less allowable expenses of his self-employed business averaged over the previous tax year, had exceeded the earnings limit of £84:  see the decision record and annexed calculation at pages 42 to 43.
     10.     	The claimant appealed against this to the tribunal, arguing that the department’s calculation of his net earnings had been too high in the two respects that (1) no deduction had been allowed for his capital expenditure on equipment; and (2) the deduction allowed for income tax and national insurance contributions had been substantially lower than the amounts he was actually liable to pay as shown on his Inland Revenue tax calculation.  His case was that when these two points were corrected in his favour his earnings would be under the limit and his carer’s allowance should therefore continue.  
     11.     	The department made a written submission to the tribunal referring it to the provisions of the Computation of Earnings regulations cited above which prescribe how earnings are to be computed for this purpose, and deal expressly with both of the points of contention raised by the claimant.  However it failed to attend the tribunal hearing to explain its case further or answer the contentions put forward (in a good deal of detail) by the claimant, both in writing and orally at the hearing itself.  The tribunal chairman recorded the claimant as telling him that no one at the carer’s allowance unit could explain why they had done what they had done, and without going in detail into the regulations cited to him appears to have accepted both this and the claimant’s argument that the termination of the allowance had been incomprehensible, saying that he “gave oral evidence and was a compelling witness whose evidence was accepted”.  
     12.     	On that basis, the tribunal’s decision was to allow the appeal and restore the claimant’s carer’s allowance from 17 April 2006, on the stated ground that his earnings from self‑employment in May 2006 were not over the CA earnings limit: see the decision notice at page 88.  In the statement of reasons subsequently issued on 13 February 2007 (pages 90-91) the chairman commented with some asperity that “As is normal nowadays, the Secretary of State did not send a Presenting Officer, and the Tribunal was materially hindered by the absence of a Presenting Officer to explain what had happened in this case and to give guidance on the law.” He then gave his reasons for accepting the claimant’s arguments on the calculation of his earnings as follows:
“6.  The appeal turns around the application of Regulation 14(1) of the Social Security Benefit (Computation of Earnings) Regulations 1996 in the calculation of income and amounts that have to be deducted to calculate income.  Regulation 14(1) is incorrectly applied to the appellant.  He falls within Regulation 13(1)(a) which provides that for the purposes of calculation of earnings and earnings of the self‑employed, the earnings of a claimant to be taken into account shall be in the case of a self‑employed earner who is engaged in employment on his own account the net profit derived from that employment.  That is the category of worker which the appellant [and] is and his income should be calculated on that basis alone.  Regulation 14(1) specifically does not apply to Regulation 13(1)(a) and the wrong regulation and the wrong deductions have been applied to the appellant.  The appellant’s calculations of his income at document 73 are accepted as they have not been challenged and we [sic] are satisfied that they correctly show his average weekly net earnings to be £75.56, possibly increased to £77.66 if national insurance contributions of £2.10 per week have to be added to them.  This falls below the lower of the two earnings limits mentioned by the Secretary of State in his submission.  The appeal therefore succeeds.”
     13.     	The material ways in which the claimant’s own calculation of his weekly net earnings differed from that of the department were that first, his had incorporated a 40% first-year deduction for his capital expenditure on equipment, in accordance with the capital allowances he was able to claim for tax in the year 2005/2006. Second, he had also deducted from his self‑employed profits the full amount of the income tax and class 4 national insurance contributions he had actually had to pay under the assessment system for that year; thus in effect treating the self‑employed income as the top part of his income and taxable at the full basic rate, with his personal allowances and the initial lower tax rate all attributed to his other income (including in particular a pension from his former employment) as they had already been so applied to reduce his deductions under the PAYE system:  see the tax calculation at page 76 and P60 certificate at page 80.
     14.     	That the interpretation the chairman was thus apparently persuaded to adopt was confused, and plainly incorrect, is I am afraid immediately apparent when one looks at what the regulations actually say, succinctly and entirely accurately explained in the notice of appeal and submissions on behalf of the Secretary of State by Mr W Spencer of the department at pages 99 to 100, 124 to 127 and 142 to 143.  As the notice of appeal acknowledges, some annoyance on the part of the tribunal at the absence of any departmental representative, in a case that self‑evidently required one, is understandable (I dare say it is equally exasperating for Mr Spencer and his colleagues who deal with these appeals, to have to pick up the pieces and make apologies for the effects of management decisions taken by people who probably know a good deal less about the system than they do); but I do not think it really helps anyone that the chairman summarily refused the Secretary of State leave to appeal even after the mistakes of law were pointed out with such clarity and moderation.  The test for bringing an appeal under section 14 Social Security Act 1998 is simply whether the tribunal’s decision, whatever led up to it, is erroneous in law.  This one plainly was, and it requires to be corrected.  
     15.     	To summarise, “earnings” for the purpose of deciding whether a person counts as “gainfully employed” so as to be disentitled from carer’s allowance under section 70 Social Security Contributions and Benefits Act 1992 and regulation 8(1) Social Security (Invalid Care Allowance) Regulations 1976 SI No. 409 are to be calculated as a weekly amount determined in accordance with the 1996 Computation of Earnings regulations already cited.  By regulation 3 ibid. the whole of the earnings from the relevant employment or self-employment are to be taken into account except insofar as the regulations specifically provide for particular sums to be disregarded or deducted.  For a self‑employed earner like this claimant, the calculation is to be done in accordance with regulations 11 to 14.  Regulation 11 recognises the reality that the receipts and expenses of a self‑employed business may fluctuate widely from week to week, and (even though for carer’s allowance the purpose is still to determine on a week-by-week basis whether a person’s earnings have gone over the limit so as to disentitle them for the next following week) provides for the calculation to be done on the basis of a yearly average; alternatively in the case of a business that has recently started or changed in pattern, over such other period as may enable the weekly amount of the person’s true earnings to be determined more accurately.  Regulation 12 lays down the basic principle that earnings means gross receipts, except insofar as the regulations provide for particular amounts or payments to be disregarded.  For practical purposes however, reference need only be made in the present case to the more detailed provisions set out in regulations 13 and 14 for the calculation of a self-employed claimant’s earnings as his “net profit”, and for the deductions that are and are not to be allowed for in arriving at that figure.  
     16.     	As quite correctly recorded by the tribunal chairman, regulation 13(1)(a) provides that in the case of a self‑employed earner such as this claimant, who is engaged in employment on his own account, the earnings to be taken into account shall be the net profit derived from that employment.  Regulation 13(3) refers to carer’s allowance, and  though the particular deductions it provides for are not in point here, thus makes clear that these regulations do apply for that benefit, if indeed there could be any doubt given the express terms of regulation 3.  By regulations 13(4) and (6)-(8), so far as material:
“(4)  For the purposes of paragraph (1)(a), the net profit of the employment shall … be calculated by taking into account the earnings of the employment over the period determined under regulation 11 …  less – 
(a)  subject to paragraphs (6) to (8), any expenses wholly and exclusively defrayed in that period for the purposes of that employment; 
(b)  an amount in respect of – 
(i)  income tax; and 
(ii)  social security contributions payable under the Contributions and Benefits Act, 
calculated in accordance with regulation 14 (deduction of tax and contributions for self‑employed earners); …
(6)  subject to paragraph (7), no deduction shall be made under paragraph (4)(a) … in respect of –
(a)  any capital expenditure; 
(b)  the depreciation of any capital asset; …
[(7) not material]
(8)  a deduction shall not be made in respect of any expenses under paragraph (4)(a) …where the Secretary of State is not satisfied that the expense has been defrayed or, having regard to the nature of the expense and its amount, that it has been reasonably incurred.”
     17.     	Regulation 14 (“Deduction of tax and contributions for self‑employed earners”) provides so far as material that:
“(1) The amount to be deducted in respect of income tax under regulation 13 … (4)(b)(i) … shall be calculated on the basis of the amount of chargeable income and as if that income were assessable to income tax at the lower rate or, as the case may be, the lower rate and the basic rate of tax less only the personal relief to which the claimant is entitled under … the Income and Corporation Taxes Act 1998 (personal reliefs) as is appropriate to his circumstances …
(2)  The amount to be deducted in respect of social security contributions under regulation 13 … (4)(b)(ii) … shall be the total of –
(a)  the amount of Class 2 [flat rate] contributions payable …; and 
(b)  the amount of Class 4 [earnings-related] contributions (if any) which would be payable … on so much of the chargeable income as exceeds the lower limit but does not exceed the upper limit of profits and gains applicable for the tax year …
(3)  In this regulation “chargeable income” means –
(a)  … the earnings derived from the employment less any expenses deducted under paragraph (4)(a) …”
     18.     	The express and unambiguous provisions of the regulations just recited make it clear beyond argument that the view of their effect accepted and incorporated in the chairman’s decision was simply wrong on both of the points at issue, and based on a complete misreading.  As Mr Spencer points out, the provisions that determine how “net profit” is to be calculated for a person who, like this claimant, is a self‑employed person in business on his own account, begin in regulation 13(4) which is expressly made to apply “for the purposes of paragraphs (1)(a)”.  Just as expressly, regulation 13(4)(b) provides that the amounts to be allowed as deductions in respect of income tax and social security contributions are to be calculated in accordance with regulation 14; and regulation 13(6) that no deduction shall be made under paragraph (4)(a) in respect of any capital expenditure, or the depreciation of any capital asset.  The decision to allow the appeal and accept the claimant’s calculations, including in particular a deduction for his capital expenditure and one for income tax much greater than allowed for under regulation 14, simply flies in the face of those express provisions.
     19.     	I therefore set the decision of 4 January 2007 aside and in accordance with section 14(8)(b) Social Security Act 1998 remit to a fresh tribunal for redetermination the claimant’s appeal against the revised departmental decision of 10 July 2006 to supersede and terminate the claimant’s previous continuing award of carer’s allowance with effect from 17 April 2006.  So far as the two points of principle raised by the claimant are concerned I direct the new tribunal expressly that:
(1)  in calculating his earnings for this purpose, no amount may be deducted  from the gross receipts of his self‑employed business in respect of any capital expenditure or depreciation because such a deduction is expressly prohibited by regulation 13(6), and the Secretary of State’s calculation was therefore right to exclude it; and 
(2)  the only amounts which may be deducted from those receipts in respect of his actual or potential liability for income tax and social security contributions as a self‑employed person are those provided for in regulation 14.  Regulation 14(1) requires the self‑employed “chargeable income” to be treated for this purpose as in effect the bottom part of the claimant’s taxable income, not the top: it is mandatory that for this calculation, the benefit of the annual personal relief and lower initial tax rate for the year must be applied exclusively to that income, without regard to the existence of other taxable income or to the way they may in practice have been used or allocated for different purposes under PAYE or otherwise.  As has been made clear in previous Commissioners’ decisions, the allowable deduction of “an amount in respect of income tax” under regulation 13(4) is a self‑contained calculation for the purposes of this regulation alone.  It is irrelevant that the result may differ from the actual income tax the claimant may have been or in due course be assessed to pay whether on that income alone, any other taxable income he has, or a combination of the two: see what was said by the Commissioner on a similarly worded regulation in case CIS 12230/96, especially at paragraphs 15 to 16.  Consequently the method used in the departmental calculation at page 33 of the applicable deductions under regulation 14  was also correct.
     20.     	As noted above the course I am taking will enable the claimant to raise before the new tribunal any point he wishes as to the way in which (consistently with the above principles) the calculation is actually carried out and the consequent determination of whether, or at what point, his earnings first went over the applicable limit to disentitle him from carer’s allowance for the following week.  Since the decision under appeal to the tribunal was one superseding and terminating a previous running award of the allowance, I direct the new tribunal that it will conversely be open to the Secretary of State at the rehearing to argue, on suitable notice so the claimant is not taken by surprise, that the superseding and termination of the previous award ought to be given effect from some earlier date than 17 April 2006.  That could be material if for example it can be seen from the evidence that the weekly rate at which he was working and earning from his self‑employment had got itself established in a pattern significantly above the limit, and above the level of earnings disclosed in his letter of 11 June 2005, at some intermediate point during the course of the tax year 2005/2006, in which case a shorter average period than the full tax year might become appropriate under regulation 11(1)(b).
     21.     	The Secretary of State’s appeal is allowed and the case remitted for rehearing accordingly.  
(Signed)
P L Howell
Commissioner
24 September 2007