[2006] UKSSCSC CCS_3675_2004 (11 July 2006)

PLH                                                                         Commissioner's File:  CCS 3675/04

	CHILD SUPPORT ACTS 1991-1995

APPEAL FROM DECISION OF APPEAL TRIBUNAL
ON A QUESTION OF LAW

DECISION OF THE CHILD SUPPORT COMMISSIONER

Appellant:  [the absent parent]
Respondents: (1) Secretary of State (2) [the parent with care]
Appeal Tribunal:  Cardiff
Tribunal Case Ref:  	U/03/188/ 2002/05988, 2003/01919
Tribunal dates: 14 October 2003, 29 January 2004
Reasons issued: 4 November 2003, 14 & 29 January 2004, 24 July 2005

     1.     	This appeal by the absent parent must be allowed.  In my judgment there was a plain misdirection in the tribunal’s decision to apply the anti-avoidance provision in paragraph 26 of Schedule 1 to the Child Support Maintenance Assessments and Special Cases Regulations 1992 SI No. 1815 so as to treat the absent parent as having extra notional income.  The stated ground that he was carrying on his business through a service company for the principal purpose of reducing his assessable income for child support was inconsistent with the tribunal's express finding and acceptance that in fact his principal purpose was to conform to the practice of other individuals in a similar position and reduce tax liabilities, and that any reduction in assessable income for the purposes of the Child Support Act was only “the effect rather than the intent”.  
     2.     	The tribunal’s decision on the formula assessment is therefore set aside, and there being in my judgment no other material error of law in the way the tribunal dealt with that part of the case, I exercise the power in section 24(3)(a) Child Support Act 1991 to substitute the decision I am satisfied the tribunal should have given on the assessment, namely that no additional amount is to be treated as included in the absent parent’s income under paragraph 26, but in all other respects the directions in the tribunal’s decision of 14 October 2003 are to be given effect.  
     3.     	Since that will make a material difference to the income on which the formula assessment is based and consequently to the absent parent’s liability, it must follow in justice to the qualifying child and the parent with care that the tribunal’s related decision against altering that liability by way of a departure direction has also to be reopened and reconsidered.  Accordingly I also set aside the tribunal’s separate decision of 29 January 2004 to refuse a departure direction, and remit that part of the case to be reconsidered and finally redetermined by either the same or a differently constituted tribunal.  That step is I am afraid inevitable: the broader question of whether there should in justice and equity be any departure from the formula may now involve taking further oral evidence from the parties in the light of the recalculated formula liability, and the tribunal is the appropriate body to conduct that so a rehearing is the only fair way of disposing of it.  In view of that I decline the request of the parent with care for a separate hearing of this present appeal to go into the facts, which would only duplicate effort and cause more avoidable delay.
     4.     	Delay in this case there certainly has been, and nobody could pretend that a system so complex and an appeal process so long-drawn out is a satisfactory way of resolving the basic human and practical question of what a father ought in justice to have been paying for the maintenance needs of his daughter for the period starting in the last week of August in the year 2000, when she was aged just over 13½ and living with her mother. The only saving grace, if it can be called that, is that as her mother was then on income support the amount of financial difference the outcome of the case will make to either of them, for so long as her mother remained on that benefit, is very little: the amount of the liability and the payment of any arrears are of course matters of much more moment between her father and the Secretary of State.  
     5.     	I granted leave for this appeal on 17 November 2005, in the circumstances explained in my determination of that date and my previous direction of 27 June 2005 relating to the tribunal’s proceedings and decision.  In it the absent parent disputes the tribunal’s directions for the calculation of his formula assessment liability from the effective date of 27 August 2000, in the decision it issued after hearing that first part of the case on 14 October 2003.   There is in my judgment no doubt that those formula assessment issues were properly before the tribunal on that date by way of appeal by the parent with care against the Secretary of State’s assessment of a nil liability. The related question of whether there should be any departure from the formula, if that appeal failed and the nil liability was correct under the regulations, was also then before the tribunal as part of the same case, having been referred to it by the Secretary of State.  That issue was separately dealt with by the tribunal in its supplemental decision of 29 January 2004, which was that there should be no departure, because the tribunal’s decision on the formula issue had already substantially increased the liability and removed the injustice a departure would otherwise be aimed at curing.  
     6.     	In those circumstances, as I have already directed in granting leave to appeal, both the two issues dealt with by the tribunal are within the scope of this present appeal: though the main submissions made to me have been confined to the formula assessment questions which must be resolved first.   What the tribunal decided on those questions, and the reasons it did so, are set out in its decision notice dated 4 November 2003 with an annexed schedule at pages 371A-B, and the two statements of reasons issued on 14 January 2004 at page 371E (relating to housing costs) and 24 July 2005 at pages 424-427 (relating to whether additional amounts should be included in the absent parent’s income under paragraph 26 cited above).  The issue of that later separate statement followed my earlier direction of 27 June 2005.  I should like to express my gratitude for the assistance it has given me in clarifying both the reasons for what was obviously a carefully considered decision, and the main legal issue on this appeal.  
     7.     	The decision of the tribunal on the formula assessment issues was to allow the appeal by the parent with care against a decision given by the Secretary of State on 2 July 2001 which had reduced the absent parent’s formula liability from its previous level of £64.69 per week to nil, with effect from 27 August 2000.  The tribunal’s main directions were that the liability should be recalculated using a revised total of £302.31 per week for his eligible housing costs in place of the (substantially larger) figure allowed to him in the Secretary of State’s calculation; and that his net income for the purposes of the assessment should be treated as including an additional £234.92 per week, on top of his actual net remuneration of £487.28 already taken into account by the Secretary of State.   These two changes had the effect of restoring a substantial maintenance liability.  The tribunal gave its decision that this recalculated basis should apply from the effective date of the assessment (27 August 2000) but did not direct any changes in the absent parent’s favour to allow for the effects of events after the date of the Secretary of State’s decision (2 July 2001): such as the taking out of an increased mortgage on 1 September 2001, and reductions in his income and loss of work (in particular due to difficulties with one particular client in the United States) in the autumn of 2001 and in the following year.  Those were all matters he had referred to at the hearing and asked to be taken into account:  cf. the chairman’s contemporaneous note at page 370.
     8.     	According to the evidence before the tribunal, the qualifying child whose maintenance has to be determined was at the material time living with her mother, who was on income support.  Her father, the absent parent, was living with his new partner and two other minor children of theirs or hers (there had I think been at least one previous marriage and divorce before this) in a house subject to a large mortgage, to which they were both contributing.  The mortgage had been taken out in 1996 by the absent parent’s partner and her own previous partner, and she was liable under it for monthly payments of £940.02 though £47.72 of this was a buildings insurance premium.  A mortgage endowment plan policy had been taken out in the joint names of the absent parent and his new partner on 15 December 1999 with a sum assured payable on death of £100,000; the premiums of £417.75 per month payable over some 16 years being invested in a fund aimed at securing a part, though not all, of the debt due under the mortgage.  
     9.     	The absent parent was earning his living as a recruitment or human resources consultant, operating through the medium of his own service company.  The company in question had been incorporated and commenced business only on 13 July 2000, that is some six weeks before the absent parent had applied to the Secretary of State for the previous maintenance assessment to be reviewed on the ground that his earnings had changed (the review that led to the assessment being reduced to nil).  He was the sole director of the company, whose issued shared capital consisted of one share each held by himself and his new partner.  Fees for his services were charged to clients and paid to the company from which he drew out a salary, with various expenses such as the costs of his car being paid and charged as company expenses.  For some years before that he had carried on business in a similar way through another company in which his co‑share holder had been the parent with care, but this had been dissolved after they broke up.  
     10.     	The tribunal accepted the oral evidence he gave at the hearing on 14 October 2003 (pages 366 to 367) that in view of the kind of business he conducted it had been advisable to work through the medium of a limited company, the need for compliance with “IR35” (the Inland Revenue rules on when freelance self‑employed earners or consultants count for tax and national insurance as employees of the client) being a material factor.  He explained the new company by saying that neither he nor his former wife had wished to continue with the previous jointly-owned company after they broke up.  As regards the housing costs, his evidence to the tribunal was that despite some apparently confused references in the papers to other policies, there was only one endowment in place at the relevant time.  This was the one taken out by his new partner and himself on 15 December 1999 to support the existing mortgage, and the premiums on it were £417.75 per month (pages 367 to 368).
     11.     	On that evidence, the tribunal gave the decision I have already described and directed that the child support liability must be recalculated accordingly.  The schedule to its decision notice at page 371B incorporates a “summary of reasons” in which the tribunal recorded that a second loan, described as a home improvement loan, for which the Secretary of State had made an additional allowance of housing costs was not an eligible housing cost at all.  That was because it had been raised to carry out ground works and landscaping in the garden of the absent parent’s home, not for purchasing or securing possession of the home or for carrying out repairs and improvements to the home itself. The costs of that loan were thus outside the scope of “eligible” housing costs as defined in schedule 3 to the MASC regulations.
     12.     	The summary of reasons then continued:
“Of the £940.02 monthly mortgage payment £47.72 is not an eligible housing cost because it is paid as a premium on buildings insurance.  The amount allowable as housing costs is the balance of the mortgage payments, £892.30 per month plus the endowment premiums of £417.75, a total of £302.31 per week.”
That was amplified in the statement of reasons issued on 14 January 2004 at page 371E, which confirmed that the whole of the monthly premiums on the December 1999 endowment policy were accepted by the tribunal as allowable under paragraph 3(4) of schedule 3, as this policy had been obtained and retained for the purpose of discharging the mortgage. However certain other amounts mistakenly included in the Secretary of State’s calculation, apparently relating to a different policy not taken out by the absent parent at all, as well as the costs relating to the home improvement loan, were disallowed as they were not eligible housing costs so far as he was concerned.  As to the changes in the absent parent’s circumstances after the date of the determination under appeal the tribunal’s decision provided for no adjustment to be made, so in effect rejecting his arguments that these ought to have been taken into account or that the decision should incorporate some form of “superseding” effect to allow for what happened later.  
     13.     	As regards the direction that an extra £234.92 per week net was to be added to the absent parent’s income used in the assessment, the tribunal’s summary reasons said:
“The tribunal is satisfied that, by operating his business through a service company, the second respondent is foregoing remuneration of £234.92 per week net and that the conditions prescribed by para 26 of Schedule 1 to the MASC Regulations apply so as to require the addition of that sum to the second respondent’s net income.”
No further explanation of that part of the decision was given, and confusion reigned for an extended period over whether a full statement of reasons for it had been asked for by any party to the proceedings, or provided by the tribunal.  In the end that was resolved by the chairman providing the supplemental statement of reasons of 24 July 2005.  
     14.     	As I said in the direction of 27 June 2005 this was a case in which  it was quite apparent from the chairman’s extensive notes of the proceedings, and the volume of accounting and other documents considered, that he and the financial member with whom he sat had gone into the case with very great care and attention to detail, and their decision to add such an exact sum to the absent parent’s income must have been reached for very clear and specific reasons.  Given that and the terms of my direction, the supplemental statement of 24 July 2005 can in the unusual circumstances of this case be accepted without qualification as a fair and accurate statement of the reasons which actually led the chairman and his financial colleague to reach the decision they did.  
     15.     	Before looking at them, it is well to set out the legislative provision which the tribunal decided to apply.  It is contained in Part V of Schedule 1 to the MASC Regulations already cited, which under the heading “Amounts treated as the income of a parent” prescribes so far as material that: 
“25.  The amounts which fall to be treated as income of the parent in calculating or estimating [his net income under the formula] shall include amounts to be determined in accordance with this Part.  
26. Where a [child support officer] is satisfied –
 (a)  that a person has performed a service either –
(i) without receiving any remuneration in respect of it; or
(ii) for remuneration which is less than that normally paid for that service;
(b) that the service in question was for the benefit of -
(i) another person who is not a member of the same family … or 
(ii) a body which is neither a charity nor a voluntary organisation; 
(c) that the service in question was performed for a person who, or as the case may be, a body which was able to pay remuneration at the normal rate for the service in question; 
(d) that the principal purpose of the person undertaking the service without receiving any or adequate remuneration is to reduce his assessable income for the purposes of the Act; and 
(e) that any remuneration forgone would have fallen to be taken into account as earnings, 
the value of the remuneration forgone shall be estimated by a child support officer and an amount equal to the value so estimated shall be treated as income of the person who performed those services …
32.  Where paragraph 26 applies the amount to be treated as the income of the parent shall be determined as if it were earnings from employment as an employed earner …”
     16.     	The statement of reasons dated 24 July 2005 explains that the tribunal was  satisfied that all of those conditions were met in relation to the “service” it identified the absent parent as performing by working for his service company.  The nub of the reasoning is contained at pages 424-425 where the tribunal said:
“In reaching those conclusions the tribunal was conscious of the fact that many individuals in [the absent parent’s] position worked through the agency of a personal service company and that the main reason for doing this is to reduce tax liability.  The tribunal accepted that this was [his] principal purpose and that the effect was to reduce his assessable income for the purposes of the Child Support Act.  The tribunal followed the decision of CommissionerWilliams in CCS/4912/98, in deciding that it is the effect rather than the intent which applies to sub‑paragraph (d) above.
By trading through the medium of a limited company [the absent parent] effectively reduced his net profit by charging through the company items which would not be charged in the accounts of a sole trader.  In establishing the amount of remuneration forgone, the tribunal has reworked the company’s accounts for the period 30.8.01 to exclude such items as follows …”
And the statement then goes on to set out in detail how the weekly figure of £234.92 additional income is arrived at, by taking the operating profit as shown in the company accounts, adding back in expenses not applicable to the accounts of a sole trader, adjusting for amounts required to be disallowed by tax legislation for a proportion of motor costs, depreciation and so forth, and dealing with various other minor adjustments; after which the tribunal said of the resulting net trading profit figure:
“This then is the profit which would have been assessable had [the absent parent] operated as a sole trader and the difference between this sum and the amount assessed is the remuneration forgone … 
In considering sub‑paragraph (c) the tribunal were satisfied that as the company had already made the payments it added back, it could afford to make them.”
     17.     	For present purposes nothing turns on the details of the calculation process by which the tribunal arrived at a re‑worked profit figure equivalent to £234.92 a week. Nor, in my judgment, is there any ground for questioning their acceptance that as a matter of fact the principal purpose leading the absent parent to operate his business through the medium of a limited company had been to avoid the practical and taxation difficulties of dealing with his clients as a self‑employed person; and that in doing this he was merely doing what a great many other individuals do who work in a similar way, and for the same reasons: any reduction in the income assessable for the purposes of the Child Support Act being, as the tribunal said, the effect of the decision which had been taken for those other purposes rather than the intent which had motivated him to take it.  
     18.     	That conclusion of fact appears to me to be quite properly based on the tribunal’s acceptance of his evidence as to why he had as a matter of course operated through a limited company, referring in particular to IR35; any adverse inference from the timing of the incorporation of the new company being dispelled by his having operated before then in the same way through the old one owned with his former wife. I see no ground for questioning the tribunal’s acceptance of his true purpose as they found it to be.
     19.     	In my judgment it was the next step in the tribunal’s logic that was mistaken.  It does not follow that because the effect of a decision made for some different purpose is also to reduce assessable income for child support, the condition in paragraph 26(d) involves treating that effect as if it had been the parent’s “principal purpose” instead.  Paragraph 26(d) must in my judgment be construed to mean what it actually says.  The condition is only met if the tribunal or person making the decision is satisfied as a matter of actual fact that “the principal purpose”, not just the effect, of the parent acting as he or she did was in order to cause some income otherwise obtained or obtainable to drop out of the reckoning of “assessable income” for the purposes of child support.  
     20.     	There may obviously be difficult borderline cases on individual facts, where the evidence shows more than one purpose or motivating factor behind the actions taken by a parent and it has to be decided whether the principal purpose meets the condtion in paragraph 26(d).  Tribunals will have to resolve those as a matter of good sense and judgment as they come up, in no different way from the many other difficult factual decisions they are accustomed to facing: such factual judgments by the tribunals experienced in this kind of work are unlikely in the ordinary way to be open to challenge on appeal, and quite rightly so.  The words “for the purposes of the Act” at the end of paragraph 26(d) serve in my judgment only to emphasise that this is in the nature of an anti-avoidance provision, and although tribunals may of course be robust and sceptical about self‑serving evidence from a parent about his or her own motives, they do I think have to be satisfied at the end of the day that the actions in question were in fact done with an eye to what might count as child support formula assessable income (and to its reduction), before the condition in paragraph 26(d) can be said to be met.  In other words the test is a subjective one, depending on the intention of the parent concerned: the legislation does not provide for the automatic reversal of anything that happens to have a downwards effect on assessable income regardless of the intent. Whether it ought to be made to do so is not a matter for judicial decision. 
     21.     	As the Commissioner said in paragraphs 15 to 16 of case CCS 4912/98 (the case referred to and relied on in the present tribunal’s statement of reasons):
“The reality is that A set up personal services service companies to divert earnings from him to the companies… he also arranged that L Limited belonged to someone else.
The provisions in Part V of Schedule 1 to the Child Support (Maintenance Assessments and Special Cases) Regulations 1992 are, in my view, designed precisely to deal with this kind of evasion or avoidance by a parent of the obligation to pay child support maintenance for his or her children.  On the facts of this case, as the child support officer submitted, I find that both paragraph 26 and paragraph 27 of Schedule 1 should be applied.  Paragraph 26 deals with the case of someone deliberately working for less than the market rate, while paragraph 27 deals with the case of someone who deliberately gives income or income earning assets away.” 
     22.     	The Commissioner was thus clearly satisfied that the case before him was one of deliberate evasion or avoidance of child support obligations by means of manipulation of income and shareholdings through service companies; and it is in this context that his further remarks in paragraph 20 of the same decision, which this tribunal considered itself to be following, are in my judgment to be read.  The Commissioner there appears to have been concerned with the question whether, given the deliberate intent of a parent to avoid child support obligations, what had to be shown was a “principal purpose” aimed at the reduction of some particular assessment, or simply the reduction of assessable income for child support purposes in general.  His conclusion (in my respectful view wholly correct, and not in the least surprising in that context) was the latter.  He said:
“If the answer is that he or she were seeking to reduce his or her assessable income, then in my view the test is satisfied.  I do not think the words ‘for the purposes of this Act’ add anything to the general test.  As noted below, paragraph 27 also uses the phrase ‘assessable income’ but without the additional words ‘for the purposes of this Act’.  I do not think the phrase ‘assessable income’ is meant to have different meanings in the two paragraphs, nor do I think it does have different meanings.  In other words, it does not have to be shown that a parent reduced his or her remuneration or other income specifically for the purpose of reducing an assessment or anticipated assessment for child support purposes.  It is sufficient to satisfy the tests in paragraphs 26 and 27 that it is shown that the parent’s principal purpose is to reduce his or income, with the effect that when that income comes to be assessed for child support purposes it is less than it would otherwise be.”
     23.     	Read in the context of what the Commissioner had said just before about this being a case of deliberate evasion or avoidance of the obligation to pay child support maintenance, those observations are in my judgment uncontroversial.  I do not think they can or should be read as saying what the tribunal in the present case appears to have understood from them, namely that wherever the effect of an action is to reduce a person’s income when a child support assessment comes to be made, that effect dictates that the “principal purpose” condition in paragraph 26(d) is to be taken as satisfied, even though the tribunal finds as a fact that the principal purpose was actually something else, and regardless of whether this was a case of conscious evasion or avoidance of child support liabilities or not.  I do not for my part think this extension of what he said was actually in the contemplation of the Commissioner when he made the observations in paragraph 20 just quoted; but at all events it would in my view be wrong and inconsistent with the plain words of paragraph 26 itself to construe or apply them in that way.
     24.     	In my judgment therefore the answer has to be that the tribunal’s factual finding and acceptance that the principal purpose of the absent parent operating through his limited company had been for business and tax reasons, rather than the reduction of child support, necessarily means that the condition in paragraph 26(d) was not met in this case, and paragraph 26 does not therefore apply.  Consequently the tribunal misdirected itself in holding that £234.92 a week was to be added under that paragraph to the actual amount of his net income for the assessment, and to that extent its decision must be reversed.  
     25.     	I therefore allow the absent parent’s appeal on that point, but I reject it on the remaining contentions he puts forward, relating to the amount to be allowed for housing costs and whether an adjustment should be included for events after the date of the Secretary of State’s decision under appeal.  In the direction I gave on 27 June 2005 I indicated that neither of these contentions appeared to me to give rise to an arguable point of law to justify an appeal, and though I have reconsidered both of them in the light of the further arguments he has since raised, my conclusion is the same.  
     26.     	As the tribunal correctly directed itself, the eligible housing costs for the purposes of the child support assessment were governed by what is permissible under Schedule 3 of the MASC Regulations.  These include under paragraph 4 the mortgage interest for which his partner is liable on the loan to purchase or secure possession of the home in which the two of them and their family are living; the interest on certain loans for a limited list of repairs and improvements to the home; and the premiums on certain policies of insurance obtained and retained for the purpose of discharging a mortgage or charge on it.  They do not include the costs of other loans or policies for other purposes outside the eligible categories, regardless of the reasons why such expenses have been taken on or incurred.  Consequently the absent parent’s contention that additional amounts should be allowed to him because he took on responsibility for them in connection with one or more of the previous sets of divorce proceedings in which he appears to have been involved is not sustainable, and I reject it.  The tribunal’s decision has quite clearly dealt with the reasons why the allowable housing costs shown by the evidence were limited to the amounts found and recorded in its decision, and why the evidence failed to establish that the absent parent was entitled to any more.  
     27.     	As regards the question of whether the tribunal’s decision on the formula assessment calculation from 27 August 2000 ought to have included alterations to take account of events after the date of the Secretary of State’s decision under appeal of 2 July 2001, there can as I indicated in my direction of 27 June 2005 be no arguable challenge in law, since the tribunal took the only course allowed to it under the legislation.  Section 20(7) Child Support Act 1991 expressly prevented it from taking account (in relation to the formula assessment issues in the case) of “any circumstances not pertaining at the date of the decision under appeal”:  that is the Secretary of State’s decision of 2 July 2001, on the formula assessment effective from 27 August 2000.  Thus while the decision could properly have reflected developments between those two dates, it was obliged to exclude anything that happened subsequently:  such as the absent parent’s period of unemployment and the various other difficulties he suffered from the loss of his contract, since according to his own evidence to the tribunal (pages 64 to 66) these events took place after September 2001.  
     28.     	That is and remains the position in relation to the formula assessment appeal even though, as the absent parent points out, he was in fact permitted and indeed asked to give evidence at the tribunal extending to periods well after those dates.  The reason for that, and for his confusion, is that the tribunal were dealing also with the question of whether there should be any departure from the result of the formula assessment; and the relevant dates to be taken into account for this were different from those applying to the formula assessment itself. The application for a departure had been received only on 30 July 2001 and the Secretary of State had chosen to refer the departure issues to the tribunal without making any decision on them himself at all, so that the same rule about the date of the decision under appeal did not apply.  Those issues will now fall to be determined afresh by the tribunal which will rehear that aspect of the case.  
     29.     	For those reasons, I allow the appeal by the absent parent, set aside the tribunal’s decision of 14 October 2003 on the formula assessment and also that of 29 January 2004 declining to order a departure direction, and on the formula assessment issues substitute my own decision that the child support assessment effective from 27 August 2000 must be recalculated without adding the sum of £234.92 per week to the absent parent’s net income but otherwise in accordance with the directions given by the tribunal. Those are as set out in the decision notice and schedule of 4 November 2003 and short statement of reasons issued on 14 January 2004: in particular that the eligible housing costs of the absent parent were £302.31 per week and no more.  
     30.     	The remainder of the case is remitted to the tribunal to rehear and redetermine all relevant departure issues on the application by the parent with care made on 30 July 2001, on the basis of the formula assessment and the income taken into account under it having to be calculated in accordance with this decision.  In view of the lapse of time I will not give a direction that the tribunal rehearing these issues must necessarily consist of the same members as dealt with the case before; but in view of the volume and detail of the material and the specific directions they have already given on departure questions in their adjournment decision notice of 4 November 2003 (page 328:  in particular on the contribution of the absent parent’s partner to their housing costs, and his own evidence at page 65 that she was in fact continuing to make significant contributions to them) this would in my view be most desirable if it can be arranged.   The parent with care does of course have the right to elect not to proceed with the departure application should she no longer wish to do so, for example as regards any period where for the reasons given in paragraph 4 above the outcome is of little financial interest to her daughter or herself.  
(Signed)
P L Howell
Commissioner
11 July 2006