England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
APPEAL FROM A DECISION OF SOCIAL SECURITY COMMISSIONER HOWELL DATED 9 SEPTEMBER 1999

		Royal Courts of Justice Strand, London, WC2A 2LL Monday 9th April 2001

LORD JUSTICE PILL:

1. This is an appeal by Charles Alexis Beattie, a patient, by his Litigation Friend and Court of Protection Receiver Stephen Kenneth Beattie against a decision of the Social Security Commissioner Mr P L Howell given on 9 September 1999. The Commissioner held that the claimant was not entitled to income support after the end of October 1992 because at all material times from then on his income (or payments falling to be treated as income) under a "structured settlement" damages award made to him in that month exceeded his applicable amount. Section 124(1) of the Social Security Contributions and Benefits Act 1992 provides, amongst other things, that a person in Great Britain is entitled to income support if he has no income or his income does not exceed the applicable amount.
2. Tragically, the claimant, then 17 years old, was involved in a road accident which rendered him quadriplegic. His claim for damages was compromised in October 1992 in the sum of £1,521,976. Mr Stephen Beattie is his father and had in November 1990 been appointed by the Court of Protection as the claimant's receiver. The Court's first general order dated 21 November 1990 provided that:

"As from the date hereof so much as maybe necessary not exceeding the net income of the patient is allowed for the maintenance and general benefit of the patient and for such other purposes as the Court may from time to time direct and insofar as the net income of the patient may be insufficient for those purposes the receiver is to apply to the Court for resort to capital."

3. The agreement providing for a structured settlement was made pursuant to advice from counsel and accountants specialising in this field. The Court of Protection authorised the receiver to sign, in the name and on behalf of the claimant, an agreement with Cigna Insurance Company of Europe. It was noted in the agreement that a sum of almost £400,000 had already been paid and that a further sum of almost £100,000 be paid forthwith. That sum was paid into a contingency fund which is not the subject of dispute in these proceedings.
4. The agreement was dated 19 October 1992 and also provided for regular payments to the receiver. The sum of £5,382.48p was to be paid monthly and there was to be a minimum of 120 payments, regardless of the date of death of the claimant. But, subject to that, no amounts would be payable after the death of the claimant. The agreement provided for increases (or decreases) annually in proportion to the increase (or decrease) in the general index of retail prices. The agreement further provided for a payment of £10,065.36p at the end of each three years with a minimum of 6 such payments and a similar link with the general index of retail prices. It was agreed that the liability of the insurer to discharge the balance of the debt of £1,521,976 to the claimant would be discharged in that manner. At the date of the hearing before the Social Security Appeal Tribunal on 7 October 1998, the monthly payment by the insurance company was about £6,100. This is not a discretionary scheme. It provides for regular payments of a specific amount which can readily be calculated.
5. The nature of the structured settlement following an award of damages for personal injuries was set out in Chapter 6A of Kemp and Kemp on Damages (March 1998). The Commissioner set out the passage in his decision noting that the information had been derived from material supplied by the firm of accountants who had arranged the settlement in the present case.

"The Specialist Annuity Contract.

A structured settlement involves the plaintiff receiving part of his damages in the form of a stream of future annual payments, rather than as a single capital sum at the date of judgment or compromise. The periodical payments are guaranteed to last the lifetime of the plaintiff or such other period of loss as may be specified. In addition, the plaintiff will receive part of his damages as a traditional lump sum and which will pay for essential accommodation, transport, equipment or other similar needs and then act as a contingency fund for the future.

The structured settlement is, in essence, a specialised annuity contract which involves the plaintiff, the defendant and the life office. It enables a portion of the agreed damages to be paid by future annual payments over the lifetime of the plaintiff. The sum which forms the structured element is used by the casualty insurer [the insurer behind the defendant responsible for the injury] to purchase an annuity from a life office in the name of the plaintiff. The life office then makes regular periodical payments to the injured party, as the policy holder, for the balance of his life. These payments, being instalments of capital, do not attract income tax in the hands of the plaintiff. The remaining balance of the agreed settlement figure is the residual contingency fund, which remains at the disposal of the plaintiff in the normal way."

6. It is common ground that the capital in the contingency fund, which is held in the Court of Protection, is, for present purposes, to be disregarded. It is also common ground that the income produced by the fund, which has been applied for the claimant's benefit, does, for present purposes, count as the claimant's income as and when received by him or on his behalf (paragraph 14 of the Commissioner's decision).
7. A person is not entitled to income support if his capital or a prescribed part of it exceeds the prescribed amount. However, Regulation 46 of the Income Support (General) Regulations 1987 provides that there shall be disregarded from the calculation of a claimant's capital any capital, where applicable, specified in Schedule 10 to the Regulations. It is conceded on behalf of the respondents that the capital sum agreed when the personal injury claim for damages was compromised, and all parts of it, are, by reason of the schedule, to be disregarded as a payment made in consequence of the claimant's injury.
8. The question then arises whether the claimant's income exceeds the applicable amount. Part V of the 1987 Regulations makes provision for the calculation of income for the purposes of section 124(1) of the Act. Regulation 29 provides for the calculation of earnings derived from an employed earner's employment and, in paragraph 5, that income which does not consist of earnings shall be calculated in accordance with Chapter V. In that Chapter, Regulation 40(1) provides, insofar as is material, that for the purposes of Regulation 29 (calculation of income other than earnings) the income of a claimant which does not consist of earnings to be taken into account shall … be his gross income and any capital treated as income under Regulation 41. Regulation 40(2) provides that there shall be disregarded from the calculation of a claimant's gross income under paragraph (1) any sum, where applicable, specified in Schedule 9 to the Regulations. Schedule 9 is headed "sums to be disregarded in the calculation of income other than earnings", and sets out a number of types of payment. It is not submitted that any of them cover the present situation.
9. Regulation 41 is headed "Capital Treated as Income" and provides, insofar as is material, that any capital payable by instalments shall (if above a specified amount) be treated as income. Regulation 41(2) provides that "Any payment received under an annuity shall be treated as income". Regulation 42 is headed "Notional Income" and Regulation 42(1) provides that "A claimant shall be treated as possessing income of which he has deprived himself for the purpose of securing entitlement to income support or increasing the amount of that benefit." Regulation 42(2), insofar as is material, provides that "Except in the case of a trust derived from a payment made in consequence of a personal injury, income which would become payable to the claimant upon application being made but which has not be acquired by him shall be treated as possessed by him but only from the date on which it would be so acquired".
10. The Commissioner found that the appeal tribunal's directions upon how the claimant's income was to be calculated for income support purposes was erroneous in point of law. It is not necessary to set out the directions because reliance is not placed on them. The Commissioner's conclusion was:

"In my judgment, Mr Scoon was right in arguing that the status of the annuity payments for income support purposes is conclusively determined not by reg 53 but by reg 41: and that this requires them to be treated as income of the claimant as and when received month by month, even though under the general law or for income tax purposes they may constitute capital in his hands rather than income. The regulation, which is headed "Capital treated as income", prescribes in unqualified terms that all payments received under an annuity are to be treated as income - see reg 41(2) - and in my judgment the annuity payments at issue in this case fall squarely within that provision. Since it is common ground that they represent instalments of an agreed sum of damages I further accept Mr Scoon's primary submission that they also fall within reg 41(1), which requires capital instalments to be treated as income."

The Commissioner also found that Regulation 42 was not relevant "as there is no question of the claimant having deprived himself of income to secure income support".

11. For the claimant, Mr Braithwaite QC submits that the situation cannot be treated simply as a contract between claimant and insurer which would attract the operation of Regulation 41. The contract is under the supervision of the Court of Protection and a broad view of the effect of the arrangement should be taken, bringing into effect the provisions of Regulation 42 which may exclude arrangements such as the present one. Moreover, the payments should be treated as payments to a third party, the receiver, and, by virtue of Regulation 42(4) should be taken into account only insofar as it is proved, which it was not in the present case, to the extent that it was used for the basic needs of the claimant. A broad view of the Regulations permits damages for personal injuries to be ignored for income support purposes. The sum remains capital under Regulation 41 and Regulation 42 is permitted to come into play.
12. Mr Braithwaite also relies on guidance notes issued by the DSS which, he submits, support his submission as to the effect of the Regulations. While accepting that they are not directly at point, he refers to decisions of other Commissioners to illustrate his general submission that a broad view, which excludes the operation of Regulation 41, should be taken.
13. I regret that I am quite unpersuaded by these submissions. I reject first the reliance upon the guidance notes and correspondence of the Department. I accept the submissions of Miss Lieven, for the respondent, that save in one letter in which a mistake was made, the documents either were correct or were dealing with situations different from the present one. Neither do the Commissioners' decisions assist the claimant. The error identified by Deputy Commissioner White in CIS/2299/1998 was the assumption, as to which there was no information, that income from a trust fund was paid to a claimant. The error identified by Commissioner Heald in CIS/368/1994 was the failure to accept that a fund was capital to be disregarded under Schedule 10 of the Regulations. In the present case it is conceded that the fund is to be disregarded as capital. The same point was in issue before Commissioner Powell in CIS/4037/1999. A monthly payment was made by the Court of Protection to the Receiver but the circumstances were different from the present. The capital was held by the Court and was, in the view of the Commissioner, to be disregarded as capital by virtue of paragraph 44 of Schedule 10 and was excluded as income by paragraph 22 of Schedule 9.
14. I see no escape from the conclusion that the payments made by virtue of the agreement of 19 October 1992 come within the category of capital treated as income under Regulation 41 and are therefore to be treated as income for the purposes of the Regulations. I agree with the Commissioner's analysis. Annuities are dealt with expressly in Regulation 41(2) and the payments come within that category. It is not disputed that the payments are received under an annuity and that word has rightly been ascribed to them throughout these proceedings. In Scoble v Secretary of State in Council for India [1903] 1 KB 494, Mathew LJ stated, at p 504, that "an annuity means generally the purchase of an income, and usually involves a change of capital into income, payable annually over a number of years". Considering the difference for tax purposes between an annuity and an annual payment which is in truth a capital payment in Southern-Smith v Clancy [1941] 1 KB 276, Goddard LJ stated, at P 293:

"The only principle that I can deduce from the cases is that the Court must have regard to the true nature of the transaction from which the annual payment arises and ascertain whether or not it is the purchase of an annual income in return for the surrender of capital."

15. The present arrangement is a typical example of an annuity and, as the Commissioner put it, falls squarely within Regulation 41(2). The acceptance in argument of the use of the word "annuity" is not critical to the decision in the present case. Had a different word been used, the Court would have considered the true nature of the transaction which, upon the arrangement made in this case, provides for an annuity within the meaning of Regulation 41(2). The payments may also constitute a capital payment by instalments, within the meaning of Regulation 41(1), but I prefer to treat it as an annuity.
16. I agree with Miss Lieven that that is the single point in the case and the appeal must fail. The continuing role of the Court of Protection does not have a bearing upon the operation of Regulation 41, given the arrangement made. Regulation 42 does not come into play. Under the heading "Notional income", it provides for circumstances in which a claimant is to be treated as possessed of income he does not have but that does not arise because the claimant does have regular income from the capital sum. In any event, I reject entirely the suggestion that, because a receiver has been appointed, the payments can be treated as payments of income to a third party for the purposes of Regulation 42. The payments are made for the benefit of the claimant and his receiver is not a third party for the purposes of section 42(4)(a).
17. Reference was made, in the course of submissions, to ways in which it might be argued that periodic payments out of a personal injury award of capital should not be treated as income for present purposes. Some of them have been considered by Commissioners. It would not be appropriate in deciding this appeal to attempt a comprehensive review which would involve, amongst other things, a detailed consideration of Schedules 9 and 10 and the relationship between paragraphs (1) and (2) of Regulation 42. I add only that whatever other considerations may apply in some cases, the approach by way of structured settlement adopted in this case does have the merit of providing the claimant with regular and quantifiable payments throughout his life.
18. I would dismiss this appeal.

LORD JUSTICE JONATHAN PARKER:

19. I agree.

THE PRESIDENT:

20. I also agree.
Order: Appeal dismissed; no order as to costs. (Order does not form part of approved Judgment)