DECISION OF THE CHILD SUPPORT COMMISSIONER

1.	The Secretary of State's appeal to the Commissioner is allowed. The decision of the Bexleyheath appeal tribunal dated 26 February 2004 is wrong in law, for the reason given below, and I set it aside. It is expedient for me to give the decision that the appeal tribunal should have given on its findings of fact (Child Support Act 1991, section 24(3)(a)). My decision is that the parent with care's appeal against the Secretary of State's decision 31 July 2003 is disallowed, so that the maintenance assessment of £55.71 per week from the effective date of 16 July 2003 is confirmed.

2.	The issue in this case is whether, under the reformed child support scheme, dividends received by the sole shareholder and sole employee of a "one-man company" count as income. The parent with care quite reasonably says that, since the recipient, the non-resident parent in this case, can control how much the company pays him as regular salary and the timing and amount of dividends, they should count. The Secretary of State says that they do not count and is seeking to overturn the appeal tribunal's decision to the contrary. The non-resident parent has, to his credit, declared that he takes no part in the Secretary of State's appeal. I have been driven to agree with the Secretary of State, despite the sense of profound unfairness that I know the parent with care will feel and despite the recognition of a loophole in the new scheme that could be exploited by some unscrupulous non-resident parents (which category does not include the non-resident parent in the present case).

3.	The appeal tribunal was concerned with the maintenance assessment made on 31 July 2003, under which the non-resident parent was liable to pay £55.71 per week from the effective date of 16 July 2003. That was the date on which a maintenance enquiry form had been sent to him following the parent with care's application received on 9 July 2003. As the parents separated in 1998 and there had been an agreement between them at that time for payment for the qualifying children, the application was properly made under the reformed child support system (section 4(1) and (10) of the Child Support Act 1991 as amended with effect from 3 March 2003). The non-resident's income from his salary (£1,800 gross per month) from his main employment with his own personal service company and his small earnings from a spare-time employment were properly calculated as at the "relevant week" (week beginning 9 July 2003) in accordance with the Schedule to the Child Support (Maintenance Calculations and Special Cases) Regulations 2000 (the MCSC Regulations). The result was a figure of net weekly income of £322.83 and the maintenance assessment of £55.71 per week. There is no challenge to those calculations as such, nor now to the account taken of the days on which the non-resident parent had care of the children. The non-resident parent had declared in reply to the application that he received dividends and that the last payment received was of £9,600 in March 2003. It was the failure to take that payment into account that the parent with care challenged in her appeal.

4.	The Secretary of State's written submission to the appeal tribunal did little more than assert that the calculation was correct and that there was no provision under child support legislation to include income from dividends received by directors. The MCSC Regulations, and in particular the Schedule, provided the complete statement of what counts as net weekly income under paragraph 10 of Schedule 1 to the Child Support Act 1991.

5.	The relevant paragraphs of the Schedule to the MCSC Regulations start as follows:

	"1. Net weekly income means the aggregate of the net weekly income of the non-resident parent provided for in this Schedule."

There is then a division according to the source of income: employed earner, self-employed earner, tax credits and other income. Paragraph 3 provides that net weekly income as an employed earner is to be earnings provided for in paragraph 4 calculated or estimated under paragraph 6 by reference to the relevant week, less the deductions authorised in paragraph 5 (income tax, national insurance and pension contributions). Paragraph 6(1) directs attention primarily to earnings in a period beginning no earlier than eight weeks before the relevant week, but does also allow consideration of cumulative earnings since the beginning of the tax year.

6.	Paragraph 4(1) provides:

	"(1) Subject to sub-paragraph (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 except any payable more than 4 weeks after the termination of the employment;
	 (c)	any payment by way of a retainer;
	 (d)	any statutory sick pay ... ;
	 (e)	any payment in lieu of notice [or compensation for failure to give proper notice].

Sub-paragraph (2) excludes various categories of payment, none of which are relevant here. In the Part on other income, paragraphs 14 and 15 provide:

	"Amount
	 14. The amount of other income to be taken into account in calculating or estimating net weekly income shall be the aggregate of the payments to which paragraph 15 applies, net of any income tax deducted and otherwise determined in accordance with this Part.

	Types
	 15. This paragraph applies to any periodical payment of pension or other benefit under an occupational or personal pension scheme or a retirement annuity contract or such other scheme for the provision of income in retirement whether or not approved by the Inland Revenue."

Paragraph 16 deals with the calculation or estimation of the amount of income under paragraph 14.

7.	Both parents attended the hearing on 26 February 2004. The decision was to allow the parent with care's appeal and to direct that the non-resident parent's net weekly income be recalculated to include the dividend payment of £9,600. The statement of reasons, after setting out the background and recording that there was no suggestion that the non-resident parent arranged his financial affairs in order to reduce child support maintenance (as he had operated through his personal service company, for good commercial reasons, for at least 10 years) contained the following:

	"2.4.2 ... There is no specific reference anywhere in paragraph 4 [of the MCSC Regulations] to `dividends'.

	 2.4.3 Dividends are also not included in the definition of `other income' referred to in paragraphs 14 to 16. This is in contrast to the legislation prior to 03.03.03, when the definition of `other income' in paragraph 13 Schedule 1 MASC Regulations 1992 [the Child Support (Maintenance Assessments and Special Cases) Regulations 1992] included dividends.

	 2.4.4 Accordingly, if [the parent with care's] appeal is to be successful and [the non-resident parent's] dividend is to be included in calculation of his Net Weekly Income, it would have to be deemed to fall within paragraph 4. Certainly the dividend is not specifically excluded by paragraph 4(2).

	 2.5 The Tribunal, in considering the application of the Regulations to this case, particularly noted that the definition of `earnings' in paragraph 4(1) ... refers to `any remuneration or profit'. The Tribunal's view was that the sum of £9,600 that [the non-resident parent] paid to himself as a dividend on his shares was nonetheless part of his `remuneration or profit' as a result of his working and came within the definition of `earnings'.

	The items referred to in subparagraphs (a) to (e) of paragraph 4(1) are examples of what should be included as earnings, but the list is not exhaustive and may include dividends.

	...
	2.6 Taking paragraph 4 as a whole the Tribunal decided that [the non-resident parent's] dividend is to be included as part of his earnings in the calculation of Net Weekly Income. It may well be that Parliament intended to exclude dividends on shares of unrelated companies such as, British Telecom etc, but not dividends on shares of companies controlled by the non-resident parent."

8.	The Secretary of State now appeals with the leave of the chairman of the appeal tribunal. The chairman suggested that the Commissioner should hear the appeal urgently, as the proper treatment of dividends was of considerable interest to practitioners of child support law. Unfortunately, there have been some delays. The invitation to the Secretary of State to reply to the submissions of the parents did not arrive, so that that reply was not made until 29 November 2004 (the submission in reply having been made almost immediately on the Secretary of State's representative receiving a reminder). However, that submission resiled from the argument that had previously been put forward in the submission dated 30 June 2004, so that I needed to give the parents a further opportunity to comment. Neither had any further comment to make.

9.	The line that had been taken in the Secretary of State's submission of 30 June 2004 was that, since dividends did not appear in the list in paragraph 4(1) of the Schedule to the MCSC, they could not count as earnings. That line was misconceived, for the reason given in paragraph 2.5 of the appeal tribunal's statement of reasons and as recognised in the Secretary of State's submission of 29 November 2004. A payment not included in the list is earnings if it falls within the meaning of "any remuneration or profit derived from employment". The argument in the latter submission was that the dividends did not "derive from", ie have their origin in (paragraph 12 of Commissioner's decision R(SB) 21/86), the non-resident parent's employment as an employed earner (either as an employee of the company or as the holder of the office of director), but from his ownership of the shares in the company. Therefore, they could not count as income under paragraph 4. Several supporting reasons were given (including references to the principles accepted for income tax and national insurance contribution purposes), but I do not think that they really add anything to the simple and straightforward proposition that if payments are truly paid as dividends on shares in a company they must be regarded as derived from the ownership of the shares and the company's decision to pay a dividend, rather than from being an employee or holding the office of director. I agree. Once that proposition is accepted, I can see no room for distinguishing between dividends paid on shares in "unrelated" companies and those paid on shares in a company by which a non-resident parent is employed or of which he is a sole or controlling director, as the appeal tribunal did. Accordingly, I conclude that the appeal tribunal, although right to say that the dividends were not other income within paragraphs 14 to 16 of the Schedule, went wrong in law in defining what counted as earnings under regulation 4.

10.	The argument made by the parent with care was that the non-resident parent had total control of the payments made to him by the company. If the £9,600 had been paid as a bonus it would have counted as income for child support purposes. The money was just as freely available to him as it would have been if paid as a bonus. It was therefore artificial and wrong to exclude the £9,600 just because it was labelled a dividend, with the advantage of avoiding both national insurance contributions and child support liabilities. Many would find that an excellent argument for the MCSC Regulations to have been made in a different form than that actually approved by Parliament, in a form which retained dividends within the category of "other income". They might say that, even taking into account the possibility of a variation being made (see paragraph 15 below), the aim of simplifying the calculation of earnings and limiting the depth of investigation needed had made too great an inroad into the principle of identifying a fair and reasonable figure for the amount of the non-resident parent's resources that could properly be regarded as available for the support of the children concerned.

11.	I have considered whether the appeal tribunal's decision could possibly be supported by re-casting the parent with care's argument as one that the payment of dividends to the non-resident parent was a sham. However, that could not work in the light of the appeal tribunal's clear and unambiguous findings that the £9,600 constituted a payment of dividends and that the non-resident parent had not arranged his financial affairs in order to reduce his child support maintenance. In addition, the possibility of the payment being regarded as a sham had not been put to the non-resident parent.

12.	Nor do I find justification in that argument for referring the case to a new appeal tribunal for rehearing, to enable there to be more investigation. I note the extract from the National Insurance Manual, available on the Inland Revenue website, attached to the Secretary of State's submission of 29 November 2004, giving guidance about when dividends are earnings for national insurance contribution purposes. The guidance states that dividends are derived from a shareholding, not employment, and are not earnings even if the requirements of company law (as to there being sufficient profits to finance the dividend and the rights of particular classes of shareholder being respected) are not met. Then it states that to decide whether a dividend is genuine rather than a disguised payment of earnings, one needs to see the Memorandum and Articles of Association of the company, the minutes of the meeting at which the dividend declaration was made and the profit and loss account/balance sheet for the years in question.

13.	The point of examining such evidence seems to be to check that a proper declaration of a dividend, usually determined by the directors, has been made. None of that evidence has been asked for in the present case. However, I see no point in asking for it now. The non-resident parent's receipt of dividends has been accepted for national insurance contribution and income tax purposes for many years. Dividends are subject to income tax, but under a different regime from earnings under Schedule E. The non-resident parent would therefore have had to include a separate statement of dividends declared and received in his annual tax return, and been prepared to back up that statement by evidence if further investigated by the Inland Revenue. In addition, it appears that there would have been some checking by the Inland Revenue in relation to national insurance contributions. It seems so easy to produce a genuine payment of dividends in a "one-man" company that there is no need to make a sham payment or one that is not genuine and is a disguised payment of earnings. I therefore proceed on the factual basis accepted by the appeal tribunal, that genuine payments of dividends were made to the non-resident parent.

14.	Accordingly, and for the reason given in paragraph 9 above, I set aside the appeal tribunal's decision as erroneous in point of law. I substitute the decision that the appeal tribunal should have given on its findings of fact, as set out in paragraph 1 above, to disallow the parent with care's appeal to it.

15.	I add some very brief comments on the possibility of a variation being made in circumstances like those of the present case. A specific application would have to be made. One set of circumstances set out in the relevant regulations is where a non-resident parent has the ability to control the amount of income he receives and has unreasonably reduced the amount of the income that would otherwise count under the MCSC Regulations by diverting it into a form that will not count, in order to reduce his liability to pay child support maintenance (Child Support (Variations) Regulations 2000, regulation 19(4)). Those cumulative conditions will be often be difficult to show, perhaps especially the requirement as to the purpose of the diversion of income, "in order to reduce his liability to pay child support maintenance". However, they will not be quite as difficult to show as suggested at some stages of this case. First, the representative of the Secretary of State was probably right to say in the submission of 29 November 2004 that it would not have to have been a non-resident parent's sole purpose to reduce the amount of his child support liability, but that it would be enough if that was a significant operative purpose. Second, the application of regulation 19(4) would not automatically be excluded by the fact that the non-resident parent here had first adopted the practice of paying himself dividends 10 years ago, well before any question of child support maintenance arose. That is because, as director of the company, he has to decide each year how much to pay himself by way of salary and whether to declare any dividends, and their amount, through each year. Thus, it seems to me that the difficult questions about diversion and about purpose must, if an application for variation has been made, be asked each time decisions about payments are made.

	(Signed)           J Mesher    
	Commissioner

	Date:   31 January 2005