Before: Upper Tribunal Judge Paula Gray

Decision: The appeal to the Upper Tribunal is dismissed. The decision of the First-Tier Tribunal sitting at Birmingham on 5/3/12 was correct as matter of law, and it stands.

REASONS FOR DECISION

1.	The appellant and the second respondent are the parents of four children who at all material times have lived with their mother, the Parent with Care in the terms of the applicable legislation.  Their father, who is the Non-Resident Parent, has been liable to make child support maintenance payments to assist with their upkeep.  I will refer to the parents as the mother and the father in this decision.
2.	The Secretary of State for Work and Pensions is the respondent, the functions of CMEC (formerly the CSA) having been assumed by the DWP from 14/8/12 under a Transfer of Functions Order.  I will refer to the body that has from time to time been dealing with child support in this case as the agency.
3.	The agency decision under appeal was dated 25 February 2010. It is a decision revising an earlier decision dated 27 June 2009.  The decision was that the father should pay £59 per week in respect of the children, from the effective date of 5 March 2008.   Both parents challenged this decision, and the case proceeded by way of cross appeals.  The background to the agency decision is set out below.
4.	The matter was heard by Regional Tribunal Judge Rhead, who later, having prepared a statement of reasons explaining his decision, granted permission to appeal on the basis that the matter should be considered by the Upper Tribunal although he did not find grounds to review the decision that he made. That is to say that whilst he appreciated that the case raised a legal issue he was not satisfied that he had made a material error of law. 
5.	The matter came before Upper Tribunal Judge Bano who, on 23 September 2013, made case management directions as to further submissions.  The case was transferred to me on Judge Bano’s retirement. I deal with the respective position of the parties on the issues in the appeal below.
6.	The grounds of appeal centre upon the treatment by the tribunal of evidence concerning the father’s earnings, in which there were legal and procedural complexities.
7.	 Child support maintenance in this case is based on the statutory scheme which came into place on 3/3/2003.  

The agency decision-making background
8.	This section of my judgement is mainly derived from the helpful summary provided by Mrs Tarver in the Secretary of State’s response received on the 6/12/2013.  Although her detailed history starts only in 2009 it is apparent from other papers that the agency has been involved for many years since at page 206 there is a letter from the father’s then representatives, Child Support Solutions, indicating that a Liability Order had been made for a period commencing on 1/12/2004 and for that stage of enforcement proceedings to have been reached there must have been outstanding arrears for some time.  The older matters are not critical to the issues before me, but it is of concern that there have been difficulties as to payments in respect of the upkeep of the children for a decade now.  
9.	On 27/6/09 the father was found liable to pay £50 per week for the then 4 qualifying children from an effective date of 14/1/09.  This seems to have been a supersession decision upon a change of circumstance notified by the father and accepted by the agency.  It related to his income as an employed earner. The father had informed the agency that that he had only a small amount of earnings from his employer EC Ltd, with additional monies received not in the form of earnings, but as loans from an Employee Benefit Trust administered by trustees of M Ltd, which neither he nor his employer controlled.  The agency based the income calculation for child maintenance purposes upon the earnings figure given by the father.  The status of the additional receipts became the central issue in the appeal.
10.	On 6/1/2010 the father disputed the effective date of that reduced maintenance calculation, and on 25/2/10 the decision was revised to a figure of £59 per week from an effective date of 5/03/08. That changed to £50 per week from the effective date 14/1/09, due to there being, in the wording of the legislation, a Relevant Other Child in the father’s new household.
11.	On 13/5/10 the mother appealed that decision, her reasons for the late appeal being accepted.  The appeal was also accepted as a variation request and her comments were sent to the father for his observations.  The basis of the mother’s complaint was the level at which the father’s income from employment was accepted by the agency; in the terms of Child Support (Variation) Regulations 2000 she alleged that he had diverted his earnings. 
12.	On 11/6/2010 the mother’s variation application was refused and the father was once again found to be liable to pay the amounts previously set out in the revision decision.  Both parents appealed.
13.	The mother’s previous appeal also proceeded, and further information was provided by both parties.

The procedural history below
14.	Procedurally it is important for me to state clearly the decisions that were under appeal to the FTT.  
15.	The father’s appeal was against the decision of 27/06/09 as revised on 25/02/10, and the date of decision for the purposes of section 20 (7) Child Support Act 1991 is 27/06/09.   This is of importance in considering the period over which the father’s income was an issue before the FTT; section 20(7) prohibits the FTT from taking into account matters not obtaining at that date.  
16.	The mother had two appeals, one against that decision, and the other against the decision of 11/06/2010 refusing her application for a variation. 
17.	Of course the parents had different reasons for appealing. The father put forward his shared care of the children that he felt had not been recognised and also raised an issue as to children in his current household, that matter being a potential factor in the formula calculation under the applicable rules.  The mother challenged the calculation of the father’s net income and also argued in support of her variation application that he had diverted his income to an Isle of Man trust of which he was the sole trustee.
18.	By the time the matter was heard by the FTT the issues raised by the father were capable of straightforward resolution. There was agreement as to the extent of shared care and the father’s evidence as to the constitution of his household made it clear that there were no children who were able to be taken into account to reduce his income under the formula calculation.
19.	The decision of Judge Rhead was to raise the father’s net income calculation made under the formula, for reasons which I will explain more fully below since they form the central issue in this appeal.  The route that he took in recalculating the net income dealt with the mother’s concerns, obviating the need to consider her variation appeal.  That decision does not appear to have been adjudicated upon, and it would be the usual practice in such a situation to leave the matter live and therefore able to be revived should the decision on the main issue be overturned on further appeal.  
20.	Judge Rhead found as a fact that what was described by the father as a loan, and is most neutrally be described by me at this stage as his receipts from the relevant Employee Benefit Trust, was not a loan, but constituted part of his earnings from employment.  That finding drew on findings in a prior related decision in the Family Court, in which the mother had applied for relief under schedule 1 of the Children Act 1989. Put shortly she had sought a school fees order and “top up maintenance”, given what she said was the father’s income. Although that argument did not wholly succeed District Judge Rhodes found certain facts as to the nature of the receipts from the Employee Benefit Trusts which were adopted by Regional Judge Rhead in the FTT. It is appropriate for me to recite the factual findings which appear at paragraphs 6 to 8 of Judge Rhodes’ judgement, at pages 135 to 136 of my bundle. 

6. Far and away the biggest issue in this case is a determination of the Father’s income so I will address this first of all. The father has a highly skilled job in that he tests computer software. He currently works at [EC] Ltd who provide his services to those companies who need them. In my judgement his income is received in two ways. He is clearly employed by [EC] Ltd and in the year ended 5 April 2011 his gross income was £12,413.50 and £10,338.70 net that is to say £861.56 per month net.  Would he do the job for which he is employed to for that sort of money? The answer comes a clear “no”. He has another source of income from [EC].  He receives regular payment which are said to be “loans”. Originally these loans came from [M] an employee benefits vehicle but since 16 December 2010 and under an agreement of that date between the father and [EC] the loans were received from [EC]. The father says that that change was required by HM Revenue and Customs who have approved the scheme to the extent that they say that no tax is payable on these payments presumably because there is a theoretical yet contractual right to recover the payments. It is also apparent that the payments he received are not set sums on set days but nevertheless they are regular. The Child Support Agency has accepted that the loans do not constitute income for the purpose of their assessment. It is an appeal against that assessment to which I referred earlier in this judgement.
7. To my mind his loan payments are as much part of the father’s income as payments which are made and subject of PAYE deductions. It is simply a tax efficient way of the payments being made to him and, as far as it goes, HMRC have said     that those payments are not taxable. However I do not accept that [EC] will ever seek to recover those payments. It is disingenuous for the father to say that those loan payments are not part of his income. To say otherwise would lead to the ridiculous conclusion that this highly skilled person testing computer software would be working for £12,000 per annum gross.
8. The question then arises as to what his actual income is. To take the latest figures that were available to me I have calculated that between 16 June 2010 and 15 June 2011 the father received loan payments of £69,169.07.  Therefore on that basis his annual net income is £79,507.77 that is to say £6625 per month.”

21.	The statement of reasons prepared by Judge Rhead included the following remarks after he had discussed the county court proceedings and the findings of fact at paragraphs 6 to 8 set out above

11…..“the tribunal is not bound by these findings of fact, but it takes into account that they were made after proper judicial consideration. The issue of the loan was pursued at the oral hearing on 5 March 2012. The evidence which Mr R gave in fact only went to confirm District Judge Rhodes findings of fact in paragraph 6-8. The tribunal was satisfied that the loans were in reality part of Mr R’s earned income.
12. The tribunal adopted District Judge Rhodes findings of fact in relation to the loans and Mr R’s earned income. It may well be a (sic) legitimate and sensible advice if minimising taxation on earned income is concerned but there is no sensible reason why they should extend to a calculation of the person’s liability to support their children. This would be contrary to the stated aims of the Child Support Act 1991.”

The procedure in the Upper Tribunal
22.	 Judge Rhead having granted permission to appeal on the application of the father, the matter proceeded by way of directions, submissions and finally an oral hearing before me.  At that hearing the father appeared but was not represented; the Secretary of State was represented by Mr Cooper, solicitor, and the mother by counsel, Mr Wilkinson.  I am grateful to all parties for their assistance to me both in writing and in argument.   
 
The position of the parties before the Upper Tribunal
23.	The father: The father said that he was employed at all material times by the company EC Ltd.  It was this company which was the employer for the purposes of the Employee Benefit Trust that I referred to above.  He argued that his payments from M Ltd were wholly independent of his employer, and that as a loan they did not form any part of his earnings for the purposes of calculation of maintenance under the child support legislation. 
24.	He argued in addition as to there being a further separate loan agreement during the currency of his employment with EC Ltd (referred to in the judgement of Judge Rhodes) which the FTT had erroneously failed to take into account.
25.	He took issue with the dates used by Judge Rhead for the calculation of his income. He also argued that the income calculation period used by District Judge Rhodes ignored a period between December 2009 and May 2010 when he said that he was not working. 
26.	There was also a procedural issue. He disagreed with the admission of his bank statements over the period 2008- 2009 for two reasons.  They emanated from the family court and permission had not been obtained to disclose them; further, the FTT had directed that any documents should be sent to the tribunal 7 days prior to the hearing; these were submitted only 6 days prior, and he said he had no opportunity to examine them.
27.	Those broadly comprise the father’s points, subject to the issue raised later as to potential notional taxation of any receipts deemed to be earned income.  

28.	The Secretary of State: In the submission provided by Mrs Tarver the Secretary of State, supported the appeal in part.  Although against the father on the central issue of the treatment of the Employee Benefit Trust income the submission stated that the FTT had failed to make findings as to the position of taxation on that income, and argued for remission to the FTT for further findings to be made.  
29.	At the oral hearing Mr Cooper abandoned the support for remission to deal with the taxation point on the basis that the finding of the FTT that the Employee Benefit Trust was a tax efficient vehicle, and the adoption of the findings of the District Judge that the revenue had accepted that no income tax was due on those monies meant that remission was unnecessary.  I will discuss further his position on the taxation issue bearing in mind the judgement of the Court of Appeal in the case of Gray v Secretary of State for Work and Pensions and James [2012] EWCA Civ 1412 (Gray) considered below.

30.	The mother: The mother, through her counsel Mr Wilkinson argued that the receipts had correctly been deemed as the earned income of the father for the purposes of the child support legislation, and that there should be no notional taxation deduction in the circumstances of the case.  

Did the Family Court Proceedings findings bind the FTT?
31.	In the Children Act proceedings in the County Court the issue as to the father’s income had been before District Judge Rhodes. Was there an issue estoppel which led to the FTT being bound by those findings? 
32.	Whereas the findings of a prior tribunal do not bind a subsequent tribunal dealing with the same issue between the same parties there is authority to the effect that such a finding in the county court does.  In CH/704/2005 the issue was whether or not a tribunal in the exercise of an exclusive jurisdiction can be inhibited in its determination of the principal issue within that jurisdiction by a court’s decision on a question central to that issue.  It was said in that case that there were competing public policies in issue in the appeal.  On the one hand there was the policy underlying res judicata which was the desirability of finality in litigation, fairness and the conservation of public resources.  On the other hand there was the need for specialist judicial bodies with exclusive jurisdictions to be able to exercise to the full their inquisitorial role in the determination of questions within their jurisdictions.  Mr Commissioner Angus found that the factual findings of the county court did bind the tribunal. I have always had considerable doubts as to whether that decision is correct.  Argument was not advanced as to the place of the doctrine in inquisitorial proceedings.  There is a line of authority to the effect that there is a difference, a discretionary approach being advocated in the dicta of Diplock LJ (as he then was) in Thoday-v-Thoday [ 1964] P 181 at [24] which was later developed in cases involving children with their inquisitorial element. (Re B (Minors) (Care Proceedings: Issue Estoppel) [1997] Fam 117 per Hale J at 128-9.  
33.	The approach of Hale J (as she then was) was adapted by the Upper Tribunal (Lord Justice Carnworth ( as he then was) and Upper Tribunal Judge Jacobs) to child support proceedings, with their statutory decision making framework in RC-v-CMEC and WC [ 2009] UKUT 62 (AAC) ( later appealed to the Supreme Court and forming part of the decision in the case of R Cart -v-  Upper Tribunal [2011] UKSC 28 but the decision remaining intact) in which it was said 

 ‘while issue estoppel did not formally apply to child support proceedings, it was appropriate for decision-makers and tribunals to take account of, and pay proper respect for, the findings of another court.’

The judgement went on to explain

 “Hale J’s advice needs some adjustment for application in the child support scheme. Tribunals must make the best findings they can on the information and evidence available to them. The information may include findings made by previous tribunals and family courts. The significance of these findings will depend upon their reliability and relevance. In assessing their reliability, tribunals must consider (i) the evidence on which they were based; (ii) the nature of the fact-finding process (for example, whether the parents were subject to cross examination); and (iii) the evidence now available.  If there is no evidence to the contrary, tribunals may be entitled to conclude that findings previously made are sufficient and reliable in the child support context. Whether or not this is so will depend upon their relevance in the particular case. In assessing the relevance of previous findings, tribunals must consider: (iv) the facts that are relevant to the issue before the tribunal; (v) the precision with which they have to be found in order to apply the legislation; (vi) whether the previous findings relate, or can be related by other evidence, to the time now in issue; and (vii) the extent to which the issues in the previous proceedings affected the evidence that was obtained or the facts that were found.” 

33. Here Judge Rhead voluntarily adopted the findings of Judge Rhodes considering them to be persuasive as to the issues he had to decide, and having been found after due judicial consideration at a hearing in which both parents were represented. Nothing said in the passage that I have quoted above seems to me to render the exercise of Judge Rhead’s discretion in this respect legally questionable; on the contrary it seems to me that he has applied the essence of what was put forward in RC.  

Disclosure from the family court 
34.	I turn at this point to a matter raised by the father as to the legitimacy of the FTT receiving certain documents which had been filed in the proceedings before District Judge Rhodes.  The father argues that the permission of the Family Court was not obtained prior to those documents being submitted.
35.	As to that I am wholly satisfied that the documents were properly received and used within the Child Support proceedings.
36.	The proceedings before District Judge Rhodes were proceedings under the Children Act 1989.  That is clear from both his order and his judgement. The documents were provided by the mother to the agency, which submitted the documents to the FTT under cover of a letter of 10 February 2012.
37.	The Family Procedure Rules 2010 provide under part 12 chapter 7 for the disclosure of documents filed within proceedings relating to children.  Chapter 7 is headed “Communication of Information: Proceedings Relating to Children”. A Practice Direction, 12G, supplements part 12 chapter 7 of those rules. The relevant parts read as follows

1.1 Chapter 7 deals with communication of information (whether or not contained in a document filed with the court) relating to proceedings which relate to children.
1.2 subject to any direction of the court, information may be communicated to the purposes of the law relating to contempt in accordance with paragraphs 2.1, 3.1 or 4.1.

Communication of information about party etc. For other purposes 

2.1 a person specified in the first column of the following table may communicate to a person listed in the 2nd column such information as is specified in the 3rd column for the purpose or purposes specified in the fourth column: --

38.	That table includes permission for a party to communicate to both the Child Maintenance and Enforcement Commission (the previous body, the functions of which were transferred to the Secretary of State as set out above) or to the First-Tier Tribunal dealing with an appeal made under section 20 of the Child Support Act 1991. Such disclosure must be for the purposes of making or responding to an appeal under section 20 of the Child Support Act 1991 or the determination of such an appeal, as has been the case here. 

The other procedural issue raised by the father
39.	 This is a suitable juncture at which to deal with the father’s point about procedural unfairness.  He argues that he was surprised by the inclusion of those documents, that he was not legally represented, and that he should have been given time to examine them. The judge should have adjourned the case, he says.
40.	This is a case concerning the maintenance of children; such matters should be concluded as speedily as the interests of justice will allow.  It will be remembered that the decision under appeal was made on 26 June 2009.  The hearing before the FTT took place in March 2012.  Given that timescale any argument that an adjournment was justified would need to be highly persuasive; under section 2 of the Child Support Act 1991 the judge had a duty to consider the welfare of any child likely to be affected by any discretionary decision that he might make.  Those children were the qualifying children, it having been established that the father did not have day to day care of any Relevant Other Children whose interests would also have been taken into account under section 2. It would be a rare case in which avoidable delay was not disadvantageous to children who are the subject of a maintenance assessment. 
41.	The contentious documents were the father’s own bank statements. He had been represented In the Children Act Proceedings where they had been exhibited. These proceedings were concerned with his financial affairs during a period covered by those bank statements. That was, or should have been, well known to him.  He was not surprised; the time the judge gave him at the hearing to review those familiar documents was quite sufficient and the judicial decision not to adjourn was one which can be amply justified on the evidence. There was no procedural irregularity.

The earnings issue
42.	It is easy in these cases, where there are arguments as to the extent of the assessable income of a non-resident parent and the matter turns on the intricacies of the complex child support provisions, to forget that the essence is the maintenance of children. Whatever the precise calculation that may be arrived at after a great deal of legal argument, in most cases the non-resident parent has a financial duty to maintain his children and should be doing so at some level whilst the argument rages.  Here the father admitted to some earnings that were capable of being taken into account, nonetheless the strong impression created was that there were no current payments even based upon the amount which he submitted as his earned income. That is unsatisfactory, however I have put it out of my mind in considering the legal arguments and construing the regulations. 
43.	Paragraph 4 of the schedule to the Maintenance Calculation and Special Cases Regulations (MCSC regulations) defines earnings under 4 (1), and, at the material time, read as follows:

4(1) subject to subparagraph (2) “earnings” means, in the case of employment as an employed earner, any remuneration or profit derived from that employment and includes-
(a)	any bonus, commission, payment in respect of overtime, royalty or fees;
(b)	any holiday pay accept any payable more than 4 weeks after termination of the employment;
(c)	any payment by way of a retainer;
(d)	any statutory sick pay under part XI of the Contribution and Benefits Act or statutory maternity pay under part XII of the contribution and benefits act; and
(dd) any statutory paternity pay under part 12ZA of the Contribution and Benefits Act or any statutory adoption pay under part 12ZB of that act;
(e)	any payment in lieu of notice, and any compensation in respect of the absence or in adequacy of any such notice, but only in so far as such payment or compensation represents loss of income.

44.	The exclusionary part of the regulations appears in paragraph 4 (2).  Whilst the father relied only upon paragraph 4 (2) (e) I cite the relevant paragraphs in full. It is important to see the depth and intricacy of the earnings provisions.

4 (2) earnings for the purposes of this part of schedule 1 do not include –
(a) any payment in respect of expenses wholly, exclusively necessarily occurred in the performance of the duties of the employment;
(b) any tax exempt allowance made by an employer to an employee;
(c) any gratuities paid by customers of the employer;
(d) any payment in kind
(e) any advance of earnings or any loan made by an employer to an employee;
(f) any amount received from an employer during a period when the employee has withdrawn his services by reason of trade disputes;
(g) any payment made in respect to the performance of duties as –
(i)	an auxiliary coastguard in respect of coast rescue activities;
(ii)	a part-time fireman in a fire brigade maintained in pursuance of the Fire Services Act Is 1947 to 1959
(iii)	a person engaged part-time in the money will launch in the lifeboat;
(iv)	a member of any territorial reserve force prescribed in part one of schedule 3 to the Social Security (Contributions) Regulations 1979
   (h) any payment made by a local authority to a member of that authority in           respect of the performance of his duties as a member;
     (i) any payment where –
(i) the employment in respect of which it was made has ceased; and
(ii) a period of the same length as the period by reference to which it was calculated has expired since that is the session but prior to the effective date; or
 (j) where, in any week or other period which falls within the period by  reference to which earnings are calculated, earnings received both in respect of the previous employment and in respect of subsequent employment, the earnings in respect of the previous employment.

45.	 For completeness I cite the relevant parts of paragraph 5 of the same regulations which will be discussed at a later stage in this judgement.

Deductions
5-(1) the deductions to be taken from gross earnings to calculate net income for the purposes of this part of the schedule or any amount deducted from those earnings by way of –
(a) income tax;
(b) primary Class 1 contributions under the Contributions and Benefits Act or under the Contribution and Benefits (Northern Ireland) Act; or
(c) any sums paid by the non-resident parent wards occupational pension scheme or personal pension scheme or, where that scheme is intended partly to provide capital sum to discharge mortgage secured upon parents home, 75% of any such sums,
(2) for the purposes of subparagraph (1) (a), amounts deducted by way of income tax shall be the amount actually deducted, including in respect of payments which are not included as earnings in paragraph 4. 
 
46.	Mrs Tarver opined in her written submission for the Secretary of State that the paragraph 4 (2) (e) exclusion of loans made by an employer from consideration as earnings was written to cover such things as a loan to buy a public transport season ticket or a bicycle, or to take account of the fact that sometimes employees ask for an advance of their wages where they move jobs or change their working hours.  I was not asked to consider any Parliamentary material, but I note that is also the view of the learned commentator Upper Tribunal Judge Edward Jacobs in the note to that provision which appears at page 605 of the 11th (current) edition of Child Support: The Legislation. That is material that I may bear in mind, but it does not constrain me.   
47.	It may not be necessary for me to determine the breadth of this provision; the issue for me it seems is whether the designation of the FTT that the payments were not a loan but a sham (as stated in paragraph 6 of the Decision Notice issued shortly after the hearing at page 190) was a conclusion to which that tribunal was entitled to come given the evidence before it. 
48.	It is necessary for me to expand the father’s argument as to the status of his receipts from the Employee Benefit Trust.

The EBT argument
49.	There was documentary evidence to the effect that the father took up employment with EC Consulting Ltd, a company based in the Isle of Man, on 3/3/2008.  He had previously held a number of company directorships which had become untenable as he became bankrupt; I am not aware of the precise date of that occurrence but a document at page 223 from the Slough County Court shows that a Trustee in Bankruptcy was appointed in respect of the father’s bankruptcy estate with effect from 13 January 2009.  
50.	On 4 April 2008 the father entered into an arrangement with his then employers.  In addition to his earnings from that employment he became the beneficiary of an Employee Benefit Trust (EBT) which advanced him sums of money from time to time under what was termed a loan agreement.   
51.	On 7/3/08, prior to that agreement being signed, the father had notified the agency of a change in his circumstances.  He reported a significant reduction in his earnings.  He was now being paid a salary calculated by the agency as £1,272.75 per month, or a net weekly income of £237.41. He later produced the ‘Loan Agreement’, and I discuss that document further below.
52.	The father’s case is that the loan agreement was genuinely that; a liability that he undertook to repay under the terms of the agreement.  The arrangement was, he explained, accepted by HMRC as legitimate, and he was given indications that neither income tax nor national insurance were due on the amounts received.  
53.	There is some argument as to the precise extent to which the receipts from the EBT enhanced the father’s earnings received directly from EC Ltd as the amounts were not regular and differed somewhat in the various tax years, but in round terms it brought his income up from £12,345.32 per annum net of tax and national insurance to around        £80,000 also net on the basis that no tax or national insurance was due.  
54.	The father’s contract of employment with EC Ltd appears at page 215 of the bundle. The document is entitled “Terms and Conditions of Employment”. It states that the employment began on 3/3/2008. The father is said to be a Consultant and that he is contractually bound to “devote the whole of your time and attention exclusively to the interests of the business “.   It has never been for the father’s case that he was working for EC Ltd part time.
55.	Also exhibited at page 217 is the ‘Loan Agreement’ made on 4 April 2008. The agreement is between M Ltd as trustee of the E Ltd Employee Benefit Trust, and the father.  The loan covers an initial sum said to be lent on 4 April 2008 of £3751.79, but refers also to the advance of additional amounts as may be necessary from time to time upon the conditions in that document. The loan was unsecured and interest-free. Any additional amounts would be added to the original loan. The sum was to become due and payable one month after service of a written demand. Default events envisaged a failure to pay, and the borrower entering into any arrangement for the benefit of his creditors. At paragraph 4.2 it states “upon the occurrence of an Event of Default at any time thereafter the Lender may by notice in writing to the Borrower declare that the loan shall become immediately due and payable without first further notice or demand and such declaration shall be immediately effected.” The applicable law is that of the Isle of Man.
56.	Despite that clause it is worthy of note that loans were made after a Trustee in Bankruptcy was appointed on 9 January 2009 to administer the father’s estate.  Moreover, no demands for repayment of monies advanced have been made.

The status of the EBT agreement 
57.	The issue is the status of the arrangement and in particular whether there would be a call for repayment, that being the critical matter in relation to the taxation treatment.  It seems to me that cannot be a generic point in relation to such arrangements but is a specific factual matter in the case of each Employee Benefit Trust agreement. 
58.	I have been directed to the case of Murray Group Holdings and Others-v- Commissioners of HMRC  [2014] UKUT 292 (TCC) and the [2012] UKFTT 692 and I will deal with the relevance of that case . The main points can be taken from the headnote

 In the circumstances, the acceptance of the loans in question could not amount to payment or earnings because the funds had not been placed unreservedly at the disposal of the employees. The trust structure and loans were genuine legal events with real legal effects. The principal trust and sub-trusts were valid and subsisting and continued. The loans were made in pursuance of discretionary powers and remained legally recoverable and represented debts on the employees’ estates. Thus, the trust structure and loans could not be disregarded or their legal effects elided. Having regard to the legal effect of the trust and loan structure, the employees’ entitlement or expectation was to no more than a loan. Whether the arrangement was viewed commercially or legalistically, the inexorable conclusion was that the payments into trust became a loan and no more. They were not paid over absolutely or unreservedly for or to the order of the individual employee and so did not become earnings or emoluments. The liability to make repayment was not a remote contingency which might in the context of a purposive construction fall to be disregarded. Accordingly, there was no liability to PAYE and NICs.”

59.	I do not consider the conclusions in that case to be determinative of the issue here. It is a case decided by the Upper Tribunal of the Tax Chamber. Although it was decided in Scotland the issues concerned English trust law; the Tax Chamber is a UK tribunal.  It is authority which is persuasive but not binding upon me, however in relation to any case of equal status I would follow it in the interests of judicial comity unless I felt it to be wrongly decided.  The case was one in which the decision was arrived at after a lengthy hearing with legal argument by represented parties and it is a closely reasoned judgement; nonetheless there are a number of features which militate heavily against it being determinative of the status of the EBT in this case. Murray may clarify the law as to income tax liability being dependent upon the status of the money in the hands of the recipient but the decision itself relies very heavily on the factual content, the UT sitting (unusually) in this case as a first instance fact finding body.  The case seems to have been transferred from the First-Tier Tribunal of the Tax Chamber to the Upper Tribunal for the initial hearing of the appeal from HMRC.  I say that because it involved members as well as a judge. The decision was by a majority, the minority judgement of the accountant member being also closely reasoned. 
60.	I note once again that it does not directly concern this EBT arrangement.  In other cases arrangements which may be described as broadly similar have been differently decided. As an example I cite a case in the first tier tribunal of the tax chamber also involving a loan scheme, but where the taxpayer lost.  I cite it not as precedent-it is a first instance decision confined to its own facts-but as an example of the factual differences which may exist in EBT type arrangements. 

Boyle v HMRC  [2013] UKFTT 723 (TC)    The judge says at [96]

“We did not find Mr Boyle a straightforward witness, in particular when giving
his evidence about whether or not he believed he would have to repay the loans he received. He said he had not discussed with Paul Bishopp the issue of whether, when or how such repayment would be made, which we do not find to be credible. He claimed he did believe that he would have to repay the loans, but did not know how or when, despite the fact that the documents show that the loans were expressed to be fully repayable at the end of one year. Despite this professed belief he made no effort in all the intervening years to make any enquiries as to whether any monies were outstanding nor as to his liability to make repayment, nor as to how to do so…”

61.	In any event I must confine myself to the issue of whether the FTT in this case was able on the evidence before it to find that the money received under the EBT arrangement was not in fact a loan but a sham.  I do not find Murray of particular assistance in making that decision. 

The sham argument
62.	This was adumbrated by Judge Rhodes in his judgement, in particular at paragraph 7 when he said “I do not accept that [EC] will ever seek to recover those payments. It is disingenuous for the father to say that those loan payments are not part of his income. To say otherwise would lead to the ridiculous conclusion that this highly skilled person testing computer software would be working for £12,000 per annum gross”.
63.	The father has never answered the obvious question as to why he would choose to work for around £15,000 gross p.a. and loans that he had to repay when according to the Office for National Statistics Annual Survey of Hours and Earnings (ASHE) the median wage of a male employee was some £27,500 in the tax year to April 2008, and given his prior earnings and high commercial value.  It is really that critical issue which led to the allegation that the arrangement was a sham arising.
64.	If the EBT loan arrangement is a sham in that the monies advanced are not expected to be repaid, then those monies cannot be excluded under paragraph 4 (2) (e) as a loan from an employer.  The exclusionary argument seems to me to be a difficult one for the father to run in any event, since he places reliance upon there being no direct connection between EC Ltd and the M Trust which advanced the monies said to be as a loan.  If that is right then the loan is not a loan from his employer but from a disconnected legal person and the exclusion under paragraph 4 (2) (e) would not assist him, but there may then remain an issue as to whether money loaned constituted earnings.  

Earnings under the 2003 CS scheme
65.	I remind myself of the starting point in relation to the assessment of employed earners in the schedule to the MCSC regulations.  Paragraph 4 (1) begins  

4(1) subject to subparagraph (2) “earnings” means, in the case of employment as an employed earner, any remuneration or profit derived from that employment

66.	The key question it seems to me is whether the additional sums are remuneration derived from the father’s employment. CCS 2623 2005 is authority as to the wide meaning of the term "remuneration" in the child support field.   In that case a non-resident parent, employed by a company with which she had no intimate connection, was paid at the minimum wage level but received in addition in each pay period further money said to be a "dividend".  This was at a time when dividend payments were excluded from the net income calculation. It was likely that this method of payment had some tax advantages for the company. Mr Commissioner Jacobs (as he then was) found that the payment was ‘remuneration or profit derived from that employment’ under paragraph 4(1) of the Schedule to the MASC Regulations, applicable in this case.    He said 

‘Derived from’ are words that are wide in their import and mean simply ‘have their origin in’ (R(SB) 21/86 at paragraph 12). ‘Remuneration’ is also wide in its import and means ‘a quid pro quo … whatever consideration he gets for giving his services’ (Blackburn J in The Queen v Postmaster General (1876) 1 QBD 658 at 663).

67.	District Judge Rhodes clear finding was that the disputed payments were part of the father’s income from his employment; the ‘quid pro quo’.  His findings were adopted by the FTT in their different statutory context and it seems to me that the use of the finding within that context was permissible; the applicable child support legislation, despite its prescribed definition of the income to be taken into account for an employed earner, can encompass the classification of the EBT receipts as earned income where they are found not to be a loan.
	
The approach of the FTT to calculation of income and the taxation issue
68.	The father’s argument relied upon HMRC’s rulings on his income over the relevant tax periods as being definitive in relation to his child support assessment. I disagree. 
69.	The case of Gray had that issue at its core; in the words of Lord Justice Wall [16] 

“Challenging the accuracy of trading accounts is obviously not a simple process designed to speed up the assessment of parents’ liability for child support. It would all be much easier if the decision-maker was obliged to accept HMRC’s assessments. Whether he is so bound is the issue which is the subject of this appeal.”

70.	The Court of Appeal accepted that decision makers, whether within the agency or at the FTT, may decline to be constrained by the figures accepted by HMRC and are able, without the intervention of the variation provisions, to ensure that the net income figures reflect the true picture.  That approach reflects the Upper Tribunal jurisprudence over many years which I review in JW-v-SSWP & MC & JC (CSM) [2013] UKUT 407 (AAC) [30-32] reported as [2014] AACR 8.  
71.	 I should say that although Gray was concerned with self-employed income and under the 1992 scheme the case dealt specifically with the statutory interpretation of the August 2007 amendments following the judgement of the House of Lords in the case of Smith v Secretary of State for Work and Pensions [2006] UKHL 35 and the Court considered the similar amendments within the 2003 scheme.   
72.	The ability of a tribunal to diverge from the views of HMRC applies equally, in my view, to the approach of HMRC on a specific issue, such as whether, as in this case, income is accepted as being a loan and not part of earned income.  There is direct authority for the proposition; the case I cite above CCS 2623 2005 being one such case, in which Judge Jacobs declined to follow the revenue approach in relation to the classification of a payment as dividend rather than earnings from employment, which he declared it to be. 
73.	The possibility of scrutiny and divergence was anticipated by Lord Justice Ward in Gray when he was considering the position that the Court ultimately adopted.  He said at [26]

“The consequence surely is that in the vast majority of cases a trader will be liable to have his accounts scrutinised and rejected whenever there is credible evidence that he has under-declared his income or over declared his expenses. Now that may be no bad thing. The interests of the children demand that the right sum of money is paid for their maintenance. But it has two unfortunate consequences. 

(1) Two arms of Government may reach different answers for tax purposes as for child support purposes. That cannot be a good thing….

74.	Good or not, that possible outcome was the result of the interpretation of the provisions by the Court of Appeal.  The tribunal decision will generally be a decision on an historic issue or tax year and applies only in the child support proceedings.  

Notional taxation following Gray 
75.	In relation to the finding that the father's remuneration is in excess of his declared earned income of £273 per week, should  the tribunal apply the case of Gray making notional deductions of national insurance and taxation? 
76.	The principle as set out in Gray suggests that, but this is not only an unusual situation, it also differs from the position in that case in which the paragraphs under consideration were those dealing with the self employed earner, and in those there did not appear what is to me a critical sub-paragraph that forms part of the regulations that I must construe, the full text of which appear at [45] above.  At 5(2)  

(2) for the purposes of subparagraph (1) (a), amounts deducted by way of income tax shall be the amount actually deducted, including in respect of payments which are not included as earnings in paragraph 4. 
 
77.	 That requirement does not appear in the paragraphs that the Court of Appeal were concerned with in Gray, which were the same paragraphs that Upper Tribunal Judge Turnbull had to apply in WM-v-CMEC (CSM) [2011] UKUT (AAC) 226  which that Court approved.  
78.	I note that this rubric does not extend to payments of National Insurance. In this case, however, there is another aspect, and it is one which, even without sub paragraph (2) would have led me to the same conclusion in relation to the income tax position. 
79.	In general an initial agency assessment is made on the basis of declared income and a tribunal finds that there is excess income which has not been declared.  Here the disputed income was disclosed to HMRC. This situation falls outside that which existed in Gray in that the income here has not been hidden from HMRC but it has been the subject of a nil assessment in respect of both income tax and National Insurance. 
80.	The father argued before me that HRMC may yet change their mind and he produced a letter, the admissibility of which was the subject of dispute but I looked at it de bene esse since the content had all but been disclosed during the discussion.  The letter indicated that HMRC may be looking at the matter again, but that is a far cry from saying that the father will have to pay tax and NI.  Accordingly it seems to me that this is not information that sheds light on the position at the date of the decision, and therefore cannot be taken into account under section 20(7) Child Support Act 1991, which governs appeals to the FTT and sets out the ‘date of decision rule’:

“In deciding an appeal under this section the First Tier Tribunal –
(a)	need not consider any issue that is not raised by the appeal and
(b)	shall not take into account any circumstances not obtaining at the time the Commission made the decision…. .”

81.	The status of the receipts as earned income rather than a loan is not definitive of the father’s tax liability.  The legal position is that an employer is responsible for the payment of tax on income which is earnings or deemed to be earnings, and any potential liability of the employee is governed by regulation 72 Conditions A or B, or Reg 81 Condition A Income Tax (Pay As You Earn) Regulations 2003: SI 2003 2682.  Similar provisions govern liability for National Insurance contributions. HMRC may collect the tax or contributions from the employee only if the stringent conditions set out in those regulations are met; under Reg 81 or Reg 72 Condition B the employee must have received the payments ‘knowing that the employer has wilfully failed to deduct the amount of tax which should have been deducted from those payments.’ In Pawlowski v Dunnington CA [1999] STC 55 the Court of Appeal agreed with earlier authorities that ‘actual knowledge is required on the part of the employee’ and approved the earlier High Court decision in R v IRC ex p Chisholm [1981] STC 253  that:

‘the word “knowing” means what it says and does not mean “ought to have known” or “should have been suspicious” or any other weakening of knowledge.’   
82.	It does not seem to me to be axiomatic that HMRC deciding to reinvestigate will lead to the payment of tax or NI.  Accordingly insofar as it is necessary I distinguish Gray in relation to the deduction of notional NI because the position at the date of the decision under appeal to the FTT, 27 June 2009, the time that the FTT and therefore I must consider, was that it would not be collected, and the information as to a possible reconsideration by HMRC does not lead to the conclusion that the position at that date was that it was likely that the disputed sums paid to the father would attract such liability. 

Concluding matters
83.	I note finally that the FTT did not adjudicate upon the mother’s variation appeal under regulation 19 Child Support (Variation) Regulations 2000; the argument as to whether the father had diverted his earnings only needed to be addressed if the receipts from the EBT were to be classified as outside his net income from earnings under the child support legislation.    I have not dealt with the variation application in this decision; it was not technically before me, the appeal being that of the father on the decision on the mother’s cross-appeal in the FTT which had taken issue with the earnings calculation made by the agency. The judge did not, however, dismiss the variation appeal, and it remains technically a live FTT appeal which could be revived if it should become necessary.  If, contrary to my decision income tax and National Insurance should be deducted the decision of Judge Turnbull in WM is authority for the proposition that the notional deductions may be recouped under regulation 19.

	(Signed on the original)	Paula Gray	
		Judge of the Upper Tribunal
		13 March 2015