THE UPPER TRIBUNAL	Appeal No.  CCS 648 2009
ADMINISTRATIVE APPEALS CHAMBER

DW v Child Maintenance and Enforcement Commission and JO (CSM)

Hearing at Manchester Civil Justice Centre on 19 01 2010
The appellant represented himself
Stephen Cooper, solicitor, represented the Child Maintenance and Enforcement Commission
The second respondent did not attend and was not represented 

DECISION

	Permission to appeal to the Upper Tribunal is granted.

	The appeal is allowed. For the reasons below, the decision of the 	tribunal is set aside. I refer the appeal to a new tribunal to decide the 	appeal again in accordance with the following directions. 

Directions for new hearing

A	The new hearing will be at an oral hearing. 

B	The new tribunal should not involve any judge or other member who has previously been a member of a tribunal involved in this appeal.

C	The parties are reminded that the tribunal can only deal with the appeal as at the date of the original decision under appeal. 

D	If any party has any further written evidence to put before the tribunal, this should be sent to the tribunal within one month of the issue of this decision. 

These directions are subject to any later direction by a tribunal judge. 

REASONS FOR DECISION

1	I heard the application and appeal at the Civil Justice Centre in Manchester. All parties had been given notice of the hearing and that the appeal would be considered at that hearing if permission be granted. I gave permission to appeal at the hearing, and confirm that decision. I then heard the submissions of both the appellant (A) and Mr Cooper on the substantive issues in the appeal. 

2	As the second respondent (P) was not present at the hearing, a draft of this decision was issued to her and her comments invited. Her reply, technically received a few days late, but which I have considered, repeats the core of her case but raises no new point. Aside, therefore, from these comments, I confirm below the reasons given as issued in the draft decision. I therefore do not consider that there are grounds to delay the process further by inviting comments of the other parties on those comments.

The matter in dispute
3	A was liable to pay P £87.00 weekly for child support maintenance for their child N from 12 11 2007. This was reduced to £59.00 weekly from 24 03 2008. P asked for this decision to be varied in respect of what she contended to be a diversion of income. P made her claim for a variation succinctly in an application on 19 05 2008. She ticked the box to indicate that she thought that A “has diverted income to other persons or for purposes other than the provision of income for themselves”. She confirmed that A worked for a limited company. She then stated:

	“He is diverting his money into a seperate pension. He did this in September and was 	putting £800 per month in it for a month. Then it went down to £50. He has now 	changed it again to £850.00 a month because it was investigated and he was found 	out.”

She contended that the amount being diverted was £850.00 a month. She requested that a variation be applied to the way in which the general rule about deductions for pension contributions was applied to A’s income.

The legislation
4	For an employed earner, the Maintenance Calculation and Special Cases Regulations 2000 (“the MCSC Regulations”) provide that in calculating the net weekly income of the earner certain deductions are to be taken into account. The Schedule to those Regulations, paragraph 5, provides that:

	“(1) The deductions to be taken into account from gross earnings to calculate net income for the purposes of this Part of the Schedule are any amounts deducted from those earnings by way of: 

	(a)	income tax;

	(b)	primary Class 1 contributions under the Contributions and Benefits Act…; or

	(c) 	any sums paid by the non-resident parent towards an occupational pension 	scheme or personal pension scheme or, where that scheme is intended partly to 	provide a capital sum to discharge a mortgage secured upon that parent’s 	home, 75 per cent of any such sums.

	(2) For the purposes of sub-paragraph (1)(a), the amount deducted by way of 	income tax shall be the amounts actually deducted, including in respect of 	payments which are not included as earnings in paragraph 4.”

5	The Child Support Act 1991, Schedule 4B, paragraph 4 allows the Secretary of State to make regulations prescribing conditions when a variation may be made to a maintenance calculation. The regulation in issue in this appeal is regulation 19(4) of the Child Support (Variations) Regulations 2000. This provided that a variation may be made where:

	“(a) the non-resident parent has the ability to control the amount of income he 	receives, including earnings from employment or self-employment, whether or not the 	whole of that income is derived from the company or business from which his 	earnings are derived, and
	
	(b) the Secretary of State is satisfied that the non-resident parent has unreasonably 	reduced the amount of his income which would otherwise fall to be taken into account 	under the Maintenance Calculations and Special Cases Regulations … by diverting it 	to other persons or for purposes other than the provision of such income for 	himself…”

The decision under appeal
6	P’s request for a variation was refused by the Child Maintenance and Enforcement Commission (which includes in this decision the Secretary of State for Work and Pensions as previously responsible for the Child Support Agency). The only explanation of the rejection of this application given to P was that “[A]” confirmed he is not diverting his pension.” A telephone log file note dated 24 05 2008 explains: “… he is not diverting his pension that he reduced it to buy Christmas presents for his children. NRP’s pension is recorded on CS2 occupational and private. I am therefore rejecting this variation.” It is not clear to me what the grounds for this decision were. It appears to be a rejection of the application on the grounds that A did in fact pay out the sums he said as pension contributions save for a short term variation at Christmas. If that is so, then the officer did not deal with the substance of P’s application, namely that A should not be allowed to deduct the whole of his pension contributions. 

7	P’s appeal to the tribunal repeated two issues from the previous exchanges in correspondence: that A was putting money into a private pension to avoid paying child maintenance, and separately that the amount he was actually putting in was less than the amount he said he was putting in.

The evidence  
8	The papers contain excessively but inconsistently redacted documents about the pension fund and contributions made by A. The documents are also plainly incomplete. Had anything turned on this, I would have directed that full unredacted documents be produced. I am satisfied that, taken with A’s evidence to the tribunal, there are sufficient details to deal with the relevant issues of law. A set up a private pension in or about September 2007. It was in the form of contributions to purchase units in a fund, the Virgin Pension Growth Fund. The evidence shows that it was in a tax-approved form. A agreed to a direct debit from his bank account of £850.00 monthly starting on 1 10 2007. But it appears that A was not required to pay a set sum monthly as part of his agreement with the pension fund. As there are no relevant policy documents in the papers, this is not clear, and I make no finding of fact on it. However, the record of actual contributions, and A’s own evidence, suggest that the amount he chose to pay monthly was not a matter of contract but of personal choice. The fund invested what he actually paid together with the income tax relief it reclaimed on his behalf. 

9	A statement dated 2 04 2008 confirms that A made the following contributions in the relevant period:

	3  09 2007		£  850
	1  10 2007		£  850
	1  11 2007		£  850
	4  12 2007		£    50
	2  01 2008		£    50
 	1  02 2008		£    50
	29 02 2008		£  850
	3  03 2008		£    50
	31 03 2008		£3,000
	1  04 2008		£  850

In evidence to the first-tier tribunal, A confirmed that he also paid contributions to a works pension. The amounts of those contributions are not identified in the papers, and the tribunal made no finding about them. He told the tribunal that he wanted to retire at 50 or 55. 

The tribunal decision
10	The tribunal’s decision was to allow A to deduct half his personal pension contribution of £850 monthly. Its reasons were:

	“[A] said in evidence that his reason for paying into this additional scheme was that 	he wished to retire at the age of 50 or 55. The tribunal accepted that this 	was the 	only reason he had for paying into this pension scheme. The tribunal however 	concluded that considering this to be the only reason, that in the light of the present 	demands on his income – namely the maintenance of the 	qualifying child – that [A] 	was unreasonably reducing his income that 	would otherwise fall to be taken into 	account under the MC and Special Care Regulations [Regulation 19(4)(6)].

	The tribunal considered [A’s] overall income and financial situation in coming to this 	conclusion. Accordingly, the tribunal decide that the amount payable of £850 into the 	private pension should be reduced by 50% and this figure should be in the calculation 	effective from 24 March 2008. In all the circumstances the tribunal considered that it 	was just and equitable for a variation to be made in 	this case.”

Grounds of appeal
11	A sought permission to appeal on the grounds that primary legislation states that all recognised pension contributions are to be fully allowed.

12	An Upper Tribunal judge directed a hearing of the application, drawing the attention of the parties to the decision of Commissioner Mesher in CCS 289 2008. In a written submission in response, the Child Maintenance and Enforcement Commission supported the application to appeal by reference to that decision. This was referred to another Upper Tribunal judge. The judge noted that the relevant provision in the legislation (regulation 19(4), as set out above) had been amended from 6 04 2009 by SI 2009 No 736, regulation 4(3). He invited the Child Maintenance and Enforcement Commission to indicate if this was a response to CCS 289 2008. 

13	In response, the Child Maintenance and Enforcement Commission confirmed that Commissioner Mesher’s decision had been taken into account in the amendments, but submitted that the changes were not retrospective and therefore did not affect the appeal. At the same time the Child Maintenance and Enforcement Commission drew attention to another decision, CCS 2707 2007 of Commissioner Turnbull, that conflicted directly with CCS 289 2008, and invited the Upper Tribunal judge to deal with the resulting conflict as it applied to this appeal.	I granted permission to appeal because of this apparent conflict. CCS 289 2008 was decided about three weeks after CCS 2707 2007 and did not refer to the other decision. I must consider both decisions. I ignore the later amendment to regulation 19(4), as it takes effect only after the dates relevant to this appeal.

The arguments of the parties
14	A maintained before me his contention that he was entitled to deduct his full pension contributions as actually made. He explained to me why it was that he considered he was entitled to take that view in the light of his personal and family history with regard to pensions and life expectancy.

15	Mr Cooper submitted that there was a clear disagreement between previous decisions of Commissioners on the application of regulation 19(4) to cases such as this. He accepted that no reference should be made to any change to that regulation after the period relevant to this appeal, and he did not rely on the change in his argument. He submitted that it was open for decision in this case which of the two views of regulation 19(4) should be applied. In his submission the better view is that of Commissioner Turnbull in CCS 2707 and 2708 2007. He had adopted a reading of the provision that was entirely within the wording used. That is particularly so if a purposive view is taken of the provision as a whole. The decisions of someone about his or her pension provision are exactly the sort of decisions that should be open to review and variation in the child support scheme. Further, both (a) and (b) should be read together as a whole when taking that view. 

16	On that basis he submitted that it is then a question of fact whether the amount of A’s income had been unreasonably reduced by the pension contributions. Further, he submitted that the tribunal had looked at the issue as a whole and had reached a conclusion it was entitled to reach. He submitted that it was open to me to confirm the outcome decision of the tribunal below.  

CCS 2707 and 2708 2007
17	The facts behind these decisions showed, as here, of multiple pension contributions. The individual concerned was paying £150 a month in contributions to his employer’s main pension fund, £275 in additional voluntary contributions to that fund, and £470 to a separate stakeholder pension. The contributions amounted to 37.5 per cent of total salary. A social security tribunal accepted these contributions as properly deductible and rejected an appeal by the mother against a decision refusing her a variation under regulation 19(4) for diversion of income.

18	Commissioner Turnbull decided that the tribunal had applied the wrong (pre-2005) version of regulation 19(4) and set aside the tribunal decision on that ground. He went on to make his own decision in place of that of the tribunal. In so doing, he considered only regulation 19(4) and none of the underlying legislation. He set the issue for decision as:

	“[20]	As [the individual] can choose how much he pays by way of additional 	pension contributions, and those are deducted in computing his earnings for 	child support purposes, para (a) of reg. 19(4) is clearly satisfied. The question is then 	whether [the individual] has “unreasonably reduced the amount of his income which 	would otherwise fall to be taken into account” by paying additional pension 	contributions.”	

19	The Commissioner examined on the facts of the case the amount paid by the individual to the various pension funds, the advice he had taken in doing this, and the resultant pension entitlement at the age at which the Commissioner accepted it as reasonable for the individual to consider retiring. After this factual analysis, the Commissioner found as fact (at [30]) that the amounts being paid by the individual “were very much towards the upper limit of what could be considered a reasonable reduction of his income for the purposes of regulation 19(4)”. On those facts, regulation 19(4)(b) was not satisfied. He therefore confirmed the decision of the Secretary of State and tribunal allowing the full contributions to be deducted.

CCS 289 2008
20	  The facts here are less clear. Commissioner Mesher sets out several matters on which there was a lack of clarity in the case put to the tribunal. He also noted several errors made by the tribunal in considering the case. In essence, it again concerned an employee who decided to make major contributions from his earnings to pension funds. The tribunal found that the individual was earning approximately £350 a week and contributed £250 a week to a pension fund. The tribunal found:

	“Whilst the Tribunal was sceptical as to the purpose of such substantial pension 	payments nevertheless as advised by the Presenting Officer the legislation permits 	this and [the father] confirmed that he had verified that from [the CSA] before entering 	into that arrangement. The Tribunal’s conclusion as a matter of fact was that [the 	father’s] main purpose in investing such amounts in pension was to reduce and 	defeat the maintenance assessment…”

21	The Commissioner identified a number of errors made by the tribunal in its decision in the application of the ordinary rules on the maintenance calculation, but not with regard to regulation 19(4). As to regulation 19(4), the Commissioner commented:

	“[25]	Mr Wilson for the Secretary of State submits that in the circumstances of the 	present case the condition in sub-paragraph (a) cannot be met. I am somewhat 	reluctantly driven to agree. The father had the ability to control the 	amount of his net 	weekly income, as calculated under the MCSC regulations, for the purposes of the 	ordinary maintenance calculation. But that is not the test in sub-paragraph (a). The 	reference there is to income, not to new weekly income, and to income received. The 	test therefore restricts the application of regulation 19(4), when earnings from 	employment are being considered, to cases where the non-resident parent has the 	ability to control the amount of earnings that are paid to him. The test is not satisfied 	by an ability to control the amount of the non-resident parent’s own expenditure by 	spending it in a way that reduced the amount of his net weekly income, as was 	argued in this 	case … the necessary condition in sub-paragraph (a) is not met.” 	 

22	Dealing with the underlying rules, he dealt with one other point of law relevant to this decision. At [23] he raised the question of the application of paragraph 5(1) of the Schedule to the MCSC Regulations as it applied to the facts of that case. The pension contributions had not been deducted from the individual’s earnings but paid by him direct to the pension fund. On this the Commissioner commented:

	“… I agree with [the officer representing the Secretary of State] that the reference in 	the opening part of paragraph to any amount deducted from earnings does not 	restrict head (c) to employees’ contributions to schemes that are deducted by an 	employer at source. The special provision about pension mortgages would never 	apply if that were so, and it would make an unintended and unjustifiable difference to 	the approach in paragraph 1(3) of Schedule 1 to the Child Support (Maintenance 	Assessment and Special Cases) Regulations 1992. Thus, to be accepted by the 	appeal tribunal, for the purposes of the ordinary maintenance calculation, whatever 	contributions are in fact made by a parent who is an employed earner to an 	occupational or personal pension scheme must be deducted in calculating weekly net 	income. There is no provision in the “reformed” child support scheme for cases 	beginning in or after 2003 for a parent to be treated as still possessing income of 	which he has unreasonably deprived himself.”

Analysis
23	 I find this case problematic partly because of the disagreement between two judicial colleagues and partly because – as I mentioned at the hearing of this appeal – there is a major element missing in both those cases. The missing element is the variation in the ways in which income tax relief is accorded to employees on pension contributions of the kinds entered into in both those cases and in this case. It adds a complexity in operating these rules which is not factored expressly either into the rules themselves or consideration of them in the appeals that have arisen. That complexity must have been in the mind of those who drafted the regulations. This is because the definitions of “occupational pension scheme” and “personal pension scheme” – the phrases used in paragraph 5 – limit relevant pension contributions to contributions made to tax-approved schemes. The extent of the income tax relief is important because it can reduce the net cost of the pension contributions to an employee by 20 per cent or, if the employee is liable to higher rate income tax, 40 per cent. And in some, but not all, cases it does this with immediate effect. This is because the relief may be given in several different ways. 

24	In summary, the problem is this. An employee can contribute to the employer’s main scheme, can make additional voluntary contributions to that scheme, or can contribute to other pension schemes that are approved for tax purposes. Approval for tax purposes carries the significant advantage to the employee that the pension contribution can be deducted in full, in ordinary cases such as this, from the employee’s taxable income in computing the income tax payable. 

25	If the employee contributes to the employer’s main scheme, then the employer usually operates a “net pay scheme”. The income tax payable by the employee is calculated after deduction of the employee’s pension contribution. The immediate result is a lower income tax deduction at the employee’s marginal income tax rate. In that way the employee immediately receives full tax relief and, for the purposes of paragraph 5 of the Schedule, will be credited with a smaller deduction of income tax. 

26	If the employee contributes to most forms of personal pension, the employee may contribute either directly to the pension fund or through the employer. The employer cannot operate the net pay scheme on the employee’s contributions. Instead, the pension provider claims back the basic rate tax relief for the employee and usually adds it to the contributions paid to the fund. So, in cash terms, the pension fund receives more than the employee pays. In this case, for Schedule 5 purposes, the employee will suffer a larger deduction of income tax but will get the benefit indirectly in increased pension contributions. Additionally, if the employee is liable to higher rate tax, then additional tax relief can be claimed by the employee at the end of the year (and effect can be given to it through the PAYE coding applying to earnings).

27	In other cases again, the employer cannot operate the net pay scheme, and the pension fund cannot claim the tax rebate for the employee. This applies to a retirement annuity scheme. In these cases, the employee must claim the tax relief as a deduction against income. In practice, this may be factored into the PAYE coding for the individual and so in due course affect the actual tax deducted.    

28	It is obvious from this that the provisions of paragraph 5 of the Schedule do not directly take any account of these differences. As a result, the rule can best be described as a default rule. It is therefore important, in my view, that it be read together with the power to vary that default rule where appropriate.	

29	That brings sharply into focus the actual wording of paragraph 5 and the gloss put on that wording by the Secretary of State with the agreement of the Commissioner (see [22] above). If the wording of the paragraph is read strictly, it will apply only to those pension contributions deducted by an employer from the employee’s pay before it is received. In most, if not all, cases, that would be a deduction to which the net pay scheme would be applied. The result is that the income tax relief would be given at the same time as the pension contribution was deducted. If the paragraph is read more broadly, then the inconsistencies noted above arise in other cases.

30	In my judgment, the broad view of paragraph 5 makes practical sense of the rule about deduction of pension contributions in the light of the problems outlined above. It allows full account to be taken of the various ways in which an employee can contribute to approved pension funds. I accept that broader view as consistent with the underlying purpose of allowing deductions of pension contributions where those contributions are to tax-approved schemes.  

31	That interpretation must also be considered when dealing with a request for a variation of the application of the rule. That brings into focus the different views taken in the previous cases about regulation 19(4). It reflects on the way in which regulation 19(4)(a) is to be applied in this case, and in particular how the phrase “has the ability to control the amount of income he receives” is to be interpreted. 

32	If paragraph 5 is interpreted to take account only of deductions for pension contributions made before an employee receives net earnings, then it is consistent to take a similar narrow view of sub-paragraph (a) and to apply it only where the individual has the power to change the amount of income received. Different considerations apply if, as I have indicated above I accept, account can also be taken of pension contributions made after the employee receives net earnings. On that basis it is consistent that this be regarded as within the scope of regulation 19(4)(a) as well. 

33	On that basis, I accept Mr Cooper’s submissions and I respectfully disagree with Commissioner Mesher that the application of regulation 19(4)(a) to cases such as this is to be decided on a narrow interpretation of that paragraph as a matter of law. I prefer the view of Commissioner Turnbull that the application of regulation 19(4) is a question to be decided on the basis of the net receipts of income by the individual after account is taken of any of the deductions provided for in paragraph 5 of the Schedule, whether deducted directly from the salary before it is paid to the employee or from that salary. To read this provision more narrowly would introduce inconsistencies in the scope of operation of regulation 19(4) as between different arrangements made by different employees to make pension contributions that were dependent on the kind of pension arranged and as between the income tax consequences of those differences.

34	I conclude that the relevant legislation is to be interpreted as providing:

(a)	An employee is entitled to claim a deduction in the calculation of her or his net income under paragraph 5 of the Schedule for all actual pension contributions made by him from his gross earnings to any occupational pension scheme or personal pension scheme. If there is any doubt, a decision must be made whether the contributions are to a tax-approved scheme of a kind defined in regulation 1 of the MCSC Regulations 2000. What contributions have actually been made is a question of fact. Where, as appears to be the case here, the contributor can change the levels of contribution from one month to another at will, then careful account may need to be taken of what was actually paid. In some cases there may be an argument that a sum paid as a contribution was paid as capital and not from gross earnings (for example where the contribution exceeds the gross earnings). 

(b)	A recipient of child support maintenance is entitled to ask for a variation under regulation 19(4) if she or he contends that because of the pension contributions actually paid the employee has unreasonably reduced the amount of her or his income after account is taken of those pension contributions. It is for the Child Maintenance and Enforcement Commission, and on appeal the tribunal, to decide whether on all the evidence the reduction, or part of it, is unreasonable. If so, they are required by regulation 19(5)(c) to decide “the whole of the amount by which … the non-resident parent had unreasonably reduced his income”. 

My decision
35	The decision of the tribunal below is set aside. I do not consider that it has made adequate findings of fact to support its decision even if it is accepted that its approach is consistent on the facts with the relevant requirements of the legislation. For example, the tribunal has not made any finding about the total pension contributions made by A in the relevant period, nor the proportion of his gross earnings spent in this way. 

36	The new tribunal needs to find the total amount of pension contributions actually being made by A in each relevant month. That must include not only the Virgin Personal Pension but also all other pension contributions. And it should take into account the tax position. For example the contributions recorded as received in the personal pension scheme include tax rebates. The effect is that A’s gross income is reduced in the standard calculation by income tax deductions that are then refunded to A indirectly as additional contributions to his personal pension scheme. So his total pension contributions should include those sums also. Both those factors will make the total monthly contributions more than £850 on the facts in the papers. 

37	The tribunal then needs to consider whether that total is unreasonable. The effect of regulation 19(5)(b) is also to pose the opposite question. If the total pension contributions made by the individual are unreasonable, what amount is reasonable? In deciding that, I commend to the tribunal the approach taken on the facts in CCS 2027 and 2028 2007. The following may be relevant:

	How old is the individual? 
	At what age is it reasonable that the individual should expect to be able to retire in the 	light of his or her personal and family medical history? (From April 2010 tax-approved 	pension funds cannot in normal cases make new pension payments to anyone below 	the age of 55). 
	What entitlements will the individual have under the various pension schemes of 	which he or she is a member? 
	When will they be received? 
	What is the past record of pension contributions of the individual, and what other 	provision (for example, capital) is available to assist funding the individual’s 	retirement? 
	On what advice, if any, is the individual acting in making the current level of 	contributions?
	What proportion of current gross income is being used by the individual to fund 	pension contributions? 

38	The tribunal must, of course, follow the general statutory framework for any decision on a variation. It must have in mind, for example, the general principle that “parents should be responsible for maintaining their children whenever they can afford to do so” (Child Support Act 1991, section 28E(2)(a)). And it must be satisfied that, in all the circumstances of the case, it is just and reasonable to agree to the variation, having regard to the welfare of any child likely to be affected by the variation (Section 28F(1)). I stress those points, 

because they emphasise that it is not only the employee’s prospective pension requirements that are to be taken into account. His or her own requirements cannot be viewed in isolation in a variation case. Attention must also be paid to the current needs of the relevant children. To that extent I reject the approach taken by A in his arguments to me.   

David Williams
Upper Tribunal Judge
9 06 2010

[Signed on the original on the date stated]