England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM COMMISSIONER P.L. HOWELL Q.C.
THE CHILD SUPPORT COMMISSIONERS

		Royal Courts of Justice Strand, London, WC2A 2LL
		19th October 2004

Lord Justice Ward :

Introduction

1. The Child Support Agency has not won many plaudits for its efficiency, though to be fair, it may be improving. Certainly in the early years of its operation it came under much criticism for its delays and erroneous calculations of child support both of which can be explained by the difficulties encountered by the staff working out the complicated formulae for the assessment of child support maintenance. As is well known, the Child Support Act 1991 was introduced in order largely to remove from the court's jurisdiction all matters relating to the assessment, enforcement and collection of child maintenance. Except in limited circumstances, the parent with care of a child had to resort to the Agency to obtain child support from the absent parent, now called the non-resident parent. Liability is calculated in accordance with an algebraic formula which I once described as "obtuse", from which description I have not found much reason to recant. One of the symbols in this formula is the absent parent's net income. This case concerns the difficulties in assessing those earnings where the absent parent is self-employed.
2. The problem in a nutshell is this. Under the regulations as originally promulgated, "earnings" means the gross receipts of the employment less certain expenses but it is expressly provided that such expenses do not include any capital expenditure or depreciation of any capital assets. After the Act was substantially amended in 1995 the new regulations, whilst preserving the old approach for exceptional cases, defined "earnings" as the total taxable profits as submitted to the Inland Revenue in accordance with their requirements and the regulations are silent as to whether or not capital expenditure and depreciation are to be deducted. It is common ground that depreciation must be deducted but battle is joined over the deduction of capital allowances. The effect can be dramatic as the facts of this case exemplify. On one view of the figures, Mr Smith's liability for the child support of his three children would be £11.28. As Mr Mostyn Q.C. points out on the mother's behalf, this is not £11.28 for each of the three children, but £11.28 for all of them. With characteristic vigour he submits that such an assessment "is startling to the point of absurdity". On his construction the proper assessment would have been the maximum, then £106 per week for each child, £318 per week in total. The tragedy, nay the scandal, of this case is that the assessment must be backdated to 20^th September 2001, nearly three years ago since when 22 different assessments have been made, none of them final. There may still be no end in sight.

The issues.

3. The main question arising on the appeal is thus whether capital allowances are included or excluded for the purpose of calculating net income. A subsidiary question arises in this way. As originally enacted there was and there remains a limited right of appeal but no appeal capable of varying an assessment correctly calculated. Reforms in 1995 allow the Secretary of State to direct a departure from an assessment in certain circumstances one of which may avail the mother in this case. Thus the subsidiary question is whether one must leave her to exercise that remedy if one cannot properly robustly construe the regulations in her favour.

The facts in a little more detail.

4. The marriage of Mr and Mrs Smith broke down in December 1997. She applied to the Secretary of State (who administers the Child Support Agency) for a child maintenance assessment for their three children, boys now 17 and 13 years old and a girl of 14 who reside with her. As I understand it, she was, or certainly for the most part she was, in receipt of income support and consequently she was obliged to resort to the Child Support Agency to assess and collect maintenance for the children, the jurisdiction of the court being excluded in her case.
5. At the time of the original assessment with which we are concerned Mr Smith carried on business as an unincorporated sole trader. The nature of that business is to acquire fleets of motor cars on hire purchase or other credit-sale terms, then adapt them by adding dual controls in order to let them to driving schools, take them back at the end of the rental period, remove the dual controls and sell them. For accounting purposes he is entitled to claim substantial capital allowances and show a high rate of depreciation.
6. The original calculation made by the Secretary of State on 26^th September 2001 was based on the accounts for the year ending 31^st March 2000, the most recent available at that time. They showed that the business had a turnover of £131,887 and after deducting trade expenses a net profit of £45,479 was recorded. For tax purposes the depreciation of £35,901 had to be added back as it was not an allowable revenue expense in calculating the annual profit arising within the charge to income tax under Schedule D. The capital allowances for that year amounted to £72,000 and if that figure were also to be deducted in order to arrive at his "total taxable profits", the child support assessment would be made on an income of £9,380 leading to the assessment of £11.28 a week for the three children. In the decision of the Commissioner made on 6^th October 2003 the Commissioner Mr P.L. Howell Q.C. described this as Basis (B). He pointed out that if the capital allowances were not to be deducted, his Basis (A), then the trading profit would rise to £81,380 with an obviously increased child support assessment.
7. Mrs Smith exercised the right of appeal from the Secretary of State's decision afforded her by s.20 of the Child Support Act 1991, ("the 1991 Act"). By the time the matter was heard by the Appeal Tribunal on 8^th April 2002 the figures for the year ended March 2001 had become available and it was common ground that they were then the correct figures to use for calculating the liability from the effective date of 20^th September 2001. They showed that the turnover had increased to £284,570 which after deduction of trade expenses of £221,012 left a net profit of £61,305. For tax purposes the profit chargeable to Schedule D after adding back depreciation of £107,301 and the other minor non-allowable expenses would be increased to £169,520, Basis (A) for that year. In this year the capital allowances amounted to £148,628 so that an assessment carried out on Basis (B) would be calculated as if the taxable income was only £20,892.
8. The starkness of the dispute between the parties is that, as calculated by the Commissioner, the liability of this father to maintain his children would be assessed on an income of £3,260 a week on Basis (A) or less than one-eighth of that, £401 on Basis (B). As the Commissioner has observed, "It has to be one or the other".
9. The Appeal Tribunal's solution was a modified version of Basis (B) and this was in turn appealed to the Commissioner. It was agreed by all parties that the Tribunal's modifications were erroneous and there was essentially only one point for the Commissioner to decide which he expressed in these terms:-

"In calculating a self-employed trader's earnings for child support purposes, is he or is he not entitled to any deduction for capital depreciation or capital allowances?"

10. His decision made on 6^th October 2003 was that the figure to be used for the formula assessment was to be calculated in accordance with his Basis (A). The Commissioner refused permission to appeal, so did my Lord, Wall L.J., considering the matter on the papers but permission was reluctantly granted by Thorpe L.J. on a renewed oral hearing before him and Pill L.J.

The Child Support Act 1991 and the regulations made thereunder.

11. The Child Support Act 1991 was enacted on 25^th July 1991 but came into force on 5^th April 1993. The Child Support (Maintenance Assessments and Special Cases) Regulations 1992 (SI 1992 No. 1815) (the "MASC regulations") governed the calculation of child support maintenance and Schedule 1 provided for the calculation of the absent parent's net income. As originally promulgated Part 1, Chapter 2 dealt with the "earnings of a self-employed earner" and paragraph 3 provided as follows, omitting parts which are immaterial to this decision:-

"(1) Subject to sub-paragraphs (2) and (3) and to paragraph 4, "earnings" in the case of employment as a self-employed earner means the gross receipts of the employment …

(3) There shall be deducted from the gross receipts referred to in sub-paragraph (1) –

(a) any expenses which are reasonably incurred and are wholly and exclusively defrayed for the purposes of the earner's business …

(b) any value added tax …

(c) any amount in respect of income tax determined in accordance with sub-paragraph 5;

(d) any amount in respect of National Insurance contributions …

(e) one-half of any premium paid in respect of a retirement annuity contract or a personal pension scheme.

(4) For the purposes of sub-paragraph (3)(a) – …

(b) such expenses do not include – …

(ii) any capital expenditure;

(iii) the depreciation of any capital asset; …

(5) For the purposes of sub-paragraph (3)(c) the amount of income tax to be allowed against earnings shall be calculated as if those earnings, less any personal allowance applicable to the earner under Chapter 1 of Part VII of the Income and Corporation Taxes Act 1988 (Personal Relief) … were assessable to income tax at the rates of tax applicable at the effective date. …"

12. It will be seen that the burden on the Child Support Agency officer was quite extensive. He had to ascertain gross receipts, deduct business expenses, and then work out the income tax to be paid. What is, however, abundantly clear is that depreciation is to be excluded as is capital expenditure. Tax counsel, Mr James Henderson, who has appeared for the appellant in this court and has given us concise but considerable assistance for which I am grateful, resists all temptation to argue that capital allowances are not to be treated as falling within "capital expenditure". For present purposes it is, therefore, common ground that capital allowances, being part and parcel of the self-employed earner's capital expenditure, must not be deducted for the purposes of the calculation carried out under paragraph 3.
13. As I have already indicated, if the calculation is correctly made, there is no effective appeal by either party who might be aggrieved by the assessment. The Secretary of State has no discretion to vary it. This caused widespread hardship and deep dissatisfaction, especially from the absent parents who felt that the high levels of assessment often made life impossible. They were not the only dissatisfied customers. The parents with care of their children found the delays equally intolerable. Although in his White Paper Improving Child Support (January 1995, Cm. 2745) the Secretary of State valiantly contended that the government believed that the principles underlying the system were right and that they commanded support both from the general public and Parliament, he had to bow to the pressure to make changes. As paragraph 2 of the Introduction to that White Paper acknowledged:-

"The government believes that changes are needed to the system to ensure that it is more widely acceptable to absent parents and that more maintenance is actually paid to parents with care."

14. Thus it was accepted in paragraph 3 of the Introduction that:-

"The government has decided that changes are needed to prevent undue hardship and to enable the Child Support Agency to operate effectively."

15. One of the changes which it was recognised had become essential was to give "some discretion to depart from the maintenance formula assessment". Thus it was proposed that:-
Peres the child support officer to make a fresh maintenance assessment. In practice the Secretary of State refers applications for departure directions to the Appeal Tribunal as that enables both parties to appear, to be represented and fully and properly to put their respective cases. Unfortunately it all takes time as this case has demonstrated.
16. Most of the special cases alleviate hardship suffered by the absent parent. For example, under paragraph 2 of Schedule 4B a departure direction may be given with respect to special expenses of the applicant which were not and could not have been taken into account in determining the current assessment, those special expenses including among other things costs in travelling to work, costs in maintaining contact with the child and so forth. Under paragraph 3 a departure direction may be given if the court had made prescribed property or capital transfers. Paragraph 5 listed additional cases which the Secretary of State could prescribe by regulation and these operated largely to the benefit of the parent with care in that for example a departure could be sought where assets which had not in fact produced income were nonetheless capable of doing so and, relevantly to this appeal, where under paragraph 5(2)(b):-

"A person's life-style is inconsistent with the level of his income."

17. These changes were carried into effect by the Child Support Departure Direction and Consequential Amendments Regulations 1996 (SI 1996 No. 2907) regulation 25 of which provided:-

"(1) Subject to paragraph (2), a case shall constitute a case for the purposes of paragraph 5(1) of Schedule 4B to the Act where the Secretary of State is satisfied that the current maintenance assessment is based upon a level of income of the non-applicant which is substantially lower than the level of income required to support the overall life-style of that non-applicant. …"

18. An investigation brought under this case would typically, no doubt, require production of the absent parent's bank statements, building society passbooks etc., his credit card statements and all other material from which an assessment could be made of the amount of money he had in fact been spending to maintain his lifestyle and an assessment would be made on the basis of that expenditure. In this case Mrs Smith would be able to demonstrate from Mr Smith's accounts alone that his drawings in the years in question were £31,923 and £28,393, averaging over the previous four years something approaching £31,000 per annum. She would no doubt assert that that was at least the starting point for the assessment. This kind of enquiry may produce a fairer result but the process is no doubt both time-consuming and expensive.
19. As presaged by the White Paper, changes were also introduced to simplify the definition of earnings. These changes were made by the Child Support (Miscellaneous Amendments) Regulations 1999 (SI 1999 No. 977). When laying these before Parliament, the Minister, Baroness Hollis of Heigham told the House of Lords:-

"As I said earlier, these make a small number of amendments to the secondary legislation, which provides the structure of the child support scheme. For the most part, they correct minor errors and clarify the intention of the legislation in cases of doubt. This package of regulations marks a step along the way of improving the CSA. We all know the difficulty that the CSA has is particularly marked in obtaining maintenance from self-employed non-resident parents. Regulation 6 introduces provisions which self-employed parents should find helpful, enabling them to provide the figures which they use for self-assessment of their earnings for tax purposes, for use in calculating maintenance. Only where they are unable to provide them, for example, if the business is a new one, will the agency have to continue the old cumbersome arrangements."

20. The changes contained in regulation 6 to which Baroness Hollis referred were introduced by amendments to Schedule 1, Part 1, Chapter 2 to the MASC Regulations which now provide for the assessments of the earnings of a self-employed earner to be made as follows, omitting parts immaterial to this appeal:-

"2A. – (1) Subject to paragraphs 2B, 2C, 4 and 5A "earnings" in the case of employment as a self-employed earner shall have the meaning given by the following provisions of this paragraph.

(2) "Earnings" means the total taxable profits from self-employment of that earner as submitted to the Inland Revenue, less the following amounts –

(a) any income tax relating to the taxable profits from the self-employment determined in accordance with sub-paragraph (3);

(b) any National Insurance contributions relating to the taxable profits …

(c) one-half of any premium paid in respect of a retirement annuity contract …

(3) For the purposes of sub-paragraph (2)(a) the income tax to be deducted from the total taxable profits shall be determined in accordance with the following provisions –

(a) subject to head (d), an amount of earnings equivalent to any personal allowance … shall be disregarded;

(b) subject to head (c), an amount equivalent to income tax shall be calculated in relation to the earnings remaining …

2B – (1) Where –

(a) a self-employed earner cannot provide the Secretary of State with the total taxable profit figure from self-employment for the period concerned as submitted to the Inland Revenue, but can provide a copy of his tax calculation notice; or

(b) the Secretary of State becomes aware that the total taxable profit figure from the self-employment submitted by the self-employed earner has been revised by the Inland Revenue,

the earnings of that earner shall be calculated by reference to the income from employment as a self-employed earner as set out in the tax calculation notice … [or] by reference to the revised notice.

(2) In this paragraph and elsewhere in this Schedule –

"submitted to" means submitted to the Inland Revenue in accordance with their requirements by or on behalf of the self-employed earner; and

a "tax calculation notice" means a document issued by the Inland Revenue containing information as to the income of a self-employed earner;

a "revision of figures" means the revision of the figures relating to the total taxable profit of a self-employed earner following an enquiry under section 9A of the Taxes Management Act 1970 or otherwise by the Inland Revenue.

2C – Where the Secretary of State accepts that it is not reasonably practicable for the self-employed earner to provide information relating to his total taxable profits from self-employment in the form submitted to, or (where paragraph 2B applies) as issued or revised by, the Inland Revenue, "earnings" in relation to that earner shall have the meaning given by paragraph 3 of this Schedule."

21. Paragraph 3 remains substantially unchanged with the result that where paragraph 3 does apply capital expenditure and depreciation remain among the expenses which have to be excluded.
22. Paragraph 5A is new and provides as follows:-

"(1) Subject to sub-paragraph (2) of this paragraph, the earnings of a self-employed earner may be determined in accordance with the provisions of paragraph 2A only where the total taxable profits concerned relate to a period of not less than 6, and not more than 15 months, which terminated not more than 24 months prior to the relevant week;

(2) Where there is more than one total taxable profit figure which would satisfy the conditions set out in sub-paragraph (1), the earnings calculation shall be based upon the figure pertaining to the latest such period.

(3) Where, in the opinion of the child support officer, information as to the total taxable profits of the self-employed earner which would satisfy the criteria set out in sub-paragraphs (1) and (2) of this paragraph does not accurately reflect the normal weekly earnings of the self-employed earner, the earnings of that earner can be calculated by reference to the provisions of paragraphs 3 and 5 of this Schedule."

The tax background.

23. Capital expenditure, that is to say expenses incurred in the acquisition of capital assets, is not as such deductible in computing the profits of a trade for tax purposes. To mitigate what may seem to be the harshness of that rule a scheme has developed whereby capital allowances can be treated as an expense of the trade. The Victorian device was to introduce a deduction for "wear and tear" to represent the diminished value of plant and machinery used for trade purposes. In the post-War reforms that allowance was replaced by the new system of capital allowances which, crudely summarised, generally operates in this way. A first year allowance of a percentage of the cost of the acquisition of plant and machinery was given to encourage investment in new machinery. Thereafter there was an annual rate of writing-down allowances. When the asset was sold or ceased to exist a balancing adjustment was made in an effort to ensure that the overall relief given equalled the actual reduction in value over the period of ownership. That at least was the theory. The assets acquired would be shown in the accounts as fixed assets of the business.
24. In the years with which we are concerned, the matter was regulated by s.140 of the Capital Allowances Act 1990, a consolidating Act, providing as follows:-

"(1) In computing for the purposes of income tax a person's income for any period of account there shall be made all such deductions and additions as are required to give effect to the provisions of Parts I to VI and this Part which relate to allowances and charges in respect of capital expenditure; and sub-section (2) below and section 141 have effect as respects allowances and charges which fall to be made under those provisions as they apply for the purposes of income tax.

(2) Allowances and charges which fall to be made for any period of account in taxing a trade under the provisions of Parts I to VI and this Part as they apply for the purposes of income tax shall be given effect by treating the amount of any allowance as a trading expense of the trade in that period, and by treating the amount on which any such charge is to be made as a trading receipt of the trade in that period.

(3) Any claim made by a person for an allowance falling to be made to him in taxing his trade shall be made in the return of income for income tax purposes, and s.42 of the Taxes and Management Act 1970 shall not apply to any such claim. …"

25. Although the language of the current Act is different, its effect is the same. Expressing the matter more simply, s.247 of the Capital Allowances Act 2001 provides:-

"If the qualifying activity of a person who is entitled or liable to an allowance or charge for a chargeable period is a trade, the allowance or charge is to be given effect in calculating the profits of the person's trade, by treating

(a) the allowance as an expense of the trade, and

(b) the charge as a receipt of the trade."

26. Three points are to be made about the operation of capital allowances. The first and most important for present purposes is that capital allowances are quite clearly treated as an expense of the trade and as such are deducted from the profits of the trade before subjecting the difference to income tax. Secondly, the actual rules can be quite complicated in working out whether there has to be a claw back of allowances or a grant of additional allowances when there is a disposal of the asset concerned. In Mr Smith's case the motorcars are placed in a pool and the allowances are applied to the value of the pool. Fortunately we are not required to delve into these arcane areas because there is no challenge to the accuracy of the calculation of the capital allowances which Mr Smith has claimed. Thirdly, the system can be and is used by the Chancellor of the Exchequer to stimulate investment in one form of business or another. At present, for example, capital expenditure in the film industry and certain scientific expenditure attracts allowances at rates up to 100% in the first year, as opposed to the more conventional first year allowance of 25%. It is obvious, therefore, that an absent parent carrying on that kind of business may be able to distort the total taxable profits of his trade and produce what may be said to be an unrealistically low return.
27. Another rule of tax law seems to me to be most important in the context of this case. It is the requirement to make an annual tax return. This is contained in s.8 of the Taxes Management Act 1970 which provides:-

"(1) For the purpose of establishing the amounts in which a person is chargeable to income tax and capital gains tax for a year of assessment, [and the amount payable by him by way of income tax for that year,] he may be required by a notice given to him by an officer of the board –

(a) to make and deliver to the officer, on or before the day mentioned in sub-section (1A) below, a return containing such information as may reasonably be required in pursuance of the notice, and

(b) to deliver with the return such accounts, statements and documents, relating to information contained in the return, as may reasonably be so required. …

(2) Every return under this section shall include a declaration by the person making the return to the effect that the return is to the best of his knowledge correct and complete."

28. Mr Smith's tax return for the year ended 5^th April 2001 is before us. It states:-

"This notice requires you by law to send me a tax return for the year from 6 April 2000 to 5 April 2001. Give details of all your income and capital gains …"

29. The return has a capital allowances summary and Mr Smith was able to specify in box 3.14 that the capital allowances claimed in respect of motorcars for the year concerned was £146,946 and, in box 3.16, £1,682 for other business plant and machinery, a total of £148,628 (box 3.22). Then the form requires completion of "Income and expenses". The first box to complete (3.29) is "Sales/business income (turnover)" for which the figure of £284,570 was given. He was able to deduct "Costs of sales, construction industry sub-contract costs, other direct costs" leaving in box 3.49 a "gross profit" of £282,317. Then he had to list in two columns "Disallowable expenses" and "Total expenses". Depreciation of £107,301 was listed in box 3.44 as a disallowable expense. The "total expenses" in box 3.64 including the depreciation figure amounted to £221,012 leaving a "Net profit" in box 3.65 of £61,305. There followed provision for "Tax adjustments to net profit or loss" the first of which in box 3.66 were the disallowable expenses including depreciation and these were treated as "additions to net profit". Then capital allowances were itemised in box 3.70 as "Deductions from net profit". In the result in box 3.73 the "Net business profit for tax purposes" was given in the sum of £20,892 which is calculated by adding back the depreciation figure to the net profit but deducting the capital allowances from it. On the next page there is provision for "Adjustments to arrive at taxable profit or loss". Among them are losses brought forward from earlier years. Box 3.92 is important. This is the box in which the taxpayer returns his "Total taxable profits from this business". Using those figures to demonstrate the point at issue between the parties in this appeal, the question is whether the child support should be assessed on £20,892 given in box 3.92 as the total taxable profits or on net profit plus depreciation, £169,520.

The Commissioner's decision.

30. As the Commissioner said:-

"The alternative interpretations mean that either the whole lot can be deducted, or nothing is deductible at all: the figures … demonstrate how harshly this can bear on one side or the other, depending on which you pick."

31. He was scathing – and with every justification – about the 1999 reforms. He said in paragraph 4:-

"What is unfair to both sides at once, and of course to the children whose maintenance needs are at stake, is for the Secretary of State to have left his legislation ambiguous so that people are uncertain which is meant, and delays and disputes like this one arise which prevent everyone knowing where they stand, and hold up the payments for children's needs which of course arise on a continual weekly or monthly basis, not years after the event. It is I think fair to say it was quite unnecessary, if not unforgivable, for the 1999 changes to have been worded in the ambiguous way they were; and also unnecessary for the question to have to be an "all or nothing" one as it must be at present whichever view one adopts, the provisions for "departures" failing to provide more than a partial solution. I can only recommend that the Secretary of State should reconsider the intended effect of his regulations in this area as a matter of urgency, and attempt to come up with at least a clearer, and I would hope also a more just and equitable, solution in the interests of the children and everyone else involved."

32. He preferred Mr Mostyn's submissions and decided in paragraph 26:-

"As already noted there is nothing in the wording of the provisions themselves or the Parliamentary material to suggest that the introduction of the new system in paragraph 2A of taking the child support figures from those already included in a tax return or shown in an Inland Revenue calculation, was intended as anything other than a means of saving trouble for all concerned, so as to arrive at substantially the same result as the previous "cumbersome" system. Nor is there anything to suggest the intention to introduce a substantive change of such potential magnitude as giving a full deduction under the paragraph 2A system for capital allowances, when such a deduction had never been allowed before and was still expressly excluded in cases where the paragraph 3 system still applied by virtue of paragraph 2C or 5A.

27. However imperfect the system of not allowing anything for capital expenditure or depreciation (it may I suppose have been thought, as in the original Income Tax Rules, that the ability to deduct the annual interest cost on money borrowed for this purpose was sufficient to arrive at the annual "Income profit"), it seems to me Mr Mostyn must be right in saying it would be absurd to impute to the Secretary of State the intention to superimpose on it, or Parliament to approve, something even more capricious whereby the amount to be counted as a parent's "income", and thus the maintenance to be provided for the needs of his children, should vary so widely and erratically according to where one happens to be directed to look for the figures of what ought substantially to amount to the same thing."

33. He therefore refused to deduct the capital allowances. He considered his conclusion was reinforced by the wholly variable treatment of capital allowances e.g. where the expenditure was incurred in the film industry.
34. Because on his interpretation the formula produced the maximum child support maintenance assessment, he did not find it necessary to consider the question of any departure direction though he did observe that for the purposes of regulation 25 where life-style is inconsistent with declared income:-

"the actual comparison required is between the level of income on which the current assessment is based, and that required to support the overall life-style of the person concerned."

My analysis.

35. It is common ground that the phrase "the total taxable profits" is not a term of art. It is nowhere defined in the Child Support Act or in the Taxes Acts.
36. If one begins with a literal approach and gives the words their ordinary – and for the arcane field of tax, a very ordinary – meaning, the humdrum self-employed person and the hard-pressed child support officer would both understand the words to mean: "This is the amount of profit on which liability to tax has to be calculated". Mr Giles Goodfellow Q.C., appearing in this court for Mrs Smith, submits in his written argument that:-

"The reference to "taxable" is intended to import the statutory tax rules used for identifying and quantifying the amount of the NRP's [Non-Resident Parent's] income which is taxable: for example, what receipts are taxable, what items of expenditure are deductible …"

That is the tax lawyer saying the same thing as the man in the street.

37. If then one does import the statutory tax rule used for identifying what items of expenditure are deductible, then one must necessarily apply s.141 of the Capital Allowances Act 1990, now s.247 of the Capital Allowances Act 2001, and treat capital allowances as expenses of the business which make them as deductible as any other item of allowable expenditure. Mr Goodfellow does not dispute that capital allowances are deducted before arriving at the profit of the business which is in fact subject to tax. It seems to me, therefore, inevitable that capital allowances are to be excluded from taxable income. It is quite another matter so far as depreciation is concerned: there the common ground is that depreciation is never excluded before arriving at income which is taxable.
38. Rather than construing the phrase in isolation, it is preferable to look at the words in the whole of their legislative context. Thus reading paragraphs 2A(2) and 2B(2) together, meaning must be given to the words: "total taxable profits from self-employment of that earner as submitted to the Inland Revenue in accordance with their requirements". The only identified requirement of the Inland Revenue is that contained in s.8 of the Taxes Management Act 1970 to make and deliver a return containing such information as may reasonably be required by the notice given to the taxpayer. One must, therefore, look to the tax return to see if that assists in ascertaining "total taxable profits". It does assist. We find the answer in Box 3.92: "Total taxable profits from this business". There it is. QED.
39. This is not a difficult trail to follow in the search for the figure to take for the total taxable profits. Self-employed parents should find it helpful because it enables them to provide the figures they use for self-assessment of their earnings for tax purposes. It avoids the old cumbersome arrangements contained in paragraph 3. It will be recalled that the italicised words are those used by Baroness Hollis. Use of the tax return achieves the purpose spelt out there and in the White Paper as the means to simplify the definition of earnings. The link between taxable income as returned to the Inland Revenue and the earnings upon which child support is to be calculated is deliberately forged in order to ease the administrative burden on the Agency. The calculation requires a deduction to be made for an amount of income tax determined, not precisely in accordance with the Taxes Act, but in accordance with sub-paragraph (3) of paragraph 2A. The task of the assessing officer is simplified because he can turn easily to Box 3.92, ascertain the total taxable profits, deduct the personal allowances and apply the tax rates to the remaining earnings.
40. The general mischief and the purpose of the reform having been identified in the White Paper and Lady Hollis's speech, a teleological approach to construction bolsters the plain and ordinary meaning given to the words.
41. If as Miss Lieven submits, correctly in my judgment, the purpose of the change was to link the child support calculation to the Inland Revenue scheme, then it is right that in arriving at the "total taxable profits" in Box 3.92 of the Inland Revenue return one is able to deduct, if appropriate, losses brought forward from earlier years. If one has to calculate a notional figure for income tax in accordance with sub-paragraph (3), it seems to me perfectly fair and understandable that the tax calculated for that purpose should be based as accurately as possible upon the income upon which the Inspector of Taxes will calculate income tax. Mr Goodfellow does not begin to persuade me that this is so anomalous that I must depart from the ordinary meaning of the words as I have found them to be.
42. The anomaly created by the different treatment of capital allowances under paragraph 2A as I construe it and under paragraph 3(4)(b)(ii) is, however, the peg upon which Mr Mostyn hangs much of his argument. He submits in his skeleton argument that:-

"If the NRP and CSA are right then we have a system bizarre to the point of utter absurdity whereby a CSA official can decide by reference to more or less totally subjective considerations whether or not to allow enormous amounts of capital allowances to be deducted. There surely has to be the same system of principles applying whether this is a paragraph 2A or a paragraph 3 assessment or not. That this is so is a matter of basic logic."

43. Bitter experience in this court does not persuade me that we can rely on departmental draftsmen always to apply basic logic. Regrettably ambiguities and lacunae frequently emerge. Drafting is not always perfect. We have to make what sense of it we can.
44. There certainly is an anomaly here. Miss Lieven does not gainsay it. Her attempt at expiation is not wholly convincing. She points to the difficulties that confront the assessing officer applying paragraph 3. It may well be that the decision maker has no more to work on than a bundle of bills and receipts and the barest information of capital expenditure. He may well not have the fiscal knowledge to compute the capital allowances himself. Those difficulties may explain why a simplified procedure should be adopted but it does not explain why paragraph 3 was left unchanged. The truth, I suspect, is that this is a case of sloppy, untidy drafting where the draftsman simply did not spot what a muddle he was creating.
45. A muddle it is. It is absurd that there can be such a dramatic difference in the result as this case illustrates. An award on Basis (B) seems so far removed from financial reality as reasonably to be regarded as inflicting an injustice on this mother and these children. I have much sympathy for them and share Wall L.J.'s distaste for having to uphold such a result. Nonetheless the crucial question remains whether this anomaly, glaring as it is, compels us to construe "total taxable profits" for paragraph 2A purposes to mean not what that ordinarily means but, by some implication or otherwise, to mean taxable profits which equate to the net earnings calculated in accordance with paragraph 3.
46. I reject that construction for the following reasons. First, if the legislature wished to exclude capital allowances in paragraph 2A, it could easily have said so but chose not to provide for it. It is obviously desirable that the two calculations should be as much in harmony with each other as possible. It would not have been difficult so to provide. I am not willing to infer from what the Minister did not say to Parliament when she failed to observe that the new regime would work very differently from the old regime that the draftsman did not intend to effect a radical change. Such aid as her speech can give to the question of construction is limited to the mischief she identifies and the purpose the changes are intended to achieve. It would be quite extraordinarily dangerous to impute an intention in the mind of the draftsman from what the Minister did not say about the draft. We have to make the best sense of the material Parliament did approve.
47. Secondly, the argument advanced on behalf of Mrs Smith can only succeed if one is driven to accept that paragraph 3 is the dominant paragraph imposing its structure on the subservient paragraph 2A. I reject that view. Paragraph 2A is now the rule and paragraph 3 is the exception. 2A was introduced to simplify the procedure and to be the preferred method of assessment. As Lady Hollis explained, only where the absent parent cannot use the figures in his tax return, for example if the business is a new one, will the Agency have to continue to use the old cumbersome arrangement. That is borne out by the changes which have been made. The Agency must only resort to the paragraph 3 calculation when driven to it by paragraphs 2C or 5A. 2C applies when the Secretary of State accepts that it was not reasonably practicable for the self-employed earner to provide information relating to his total tax profits in the form (my emphasis) submitted to the Inland Revenue. One example (but there may be more than this one) is where the business is too new for a return to be made of its profits. 5C applies where the child support officer is of the opinion that the figures submitted do not accurately reflect the normal weekly figures, for example, where the period chosen is one where the profit is abnormally low for whatever reason, whether the vagaries of the business or the inaccuracy of the accounts. I am satisfied that paragraphs 2C and 5A provide for the exceptional cases. Most assessments will be made with the tax return in hand. The figures in the tax return ought, therefore, to prevail.
48. Thirdly, the assessment under paragraph 3 is in any event likely to be a temporary one because as soon as a tax return is submitted (and the Child Support Agency has the power to demand it) or as soon as an Inland Revenue tax calculation notice or a revised notice is available, then the calculation will be made by reference to the figures for taxable profit referred to therein. The child support assessment arrived at on the basis of those figures will supersede any earlier assessment based on paragraph 3 figures. Consequently as I see the scheme operating, the assessment depends on the figures in the tax return, or the tax calculation notice or the revised notice and those figures control the ultimate result. Eventually paragraphs 2A and 2B prevail over paragraph 3 and in that way, the anomaly which exists is eventually eradicated.
49. Fourthly, that an eventual approximate correlation between the child support calculation and the Inland Revenue calculation is achieved does not seem to me to operate unfairly. I readily appreciate that there is an artificiality and a volatility about capital allowances dependent as they are on the Chancellor's fiscal management of the economy. Nonetheless, whether one invests in plant and machinery or in films, the harsh reality is that it costs money to do so and one cannot wish away the actual expenditure and pretend it is still money burning a hole in the absent parent's pocket. One cannot realistically assess his liability to pay child support as if the money was still there to pay the maintenance. To do so would be unfair. That unfairness may have produced an instance of undue hardship which the changes introduced in 1999 were intended to dispel. That hardship for a businessman in a capital intensive business is compounded by his inability to change the mathematical assessment of his liability. If capital allowances are to be added back to the taxable profits, he will have no appeal against the assessment. None of the cases for a departure direction avails him. He has had to find the money to invest in his business yet now he is irremediably foist with an assessment which totally ignores that expenditure. Capital expenditure is, and always has been, properly excluded from an assessment of taxable income, but the system of capital allowances, rough and ready, artificial and variable, as it is, is at least some recognition of an economic reality. The burden of that economic reality should be for the family to share.
50. Fifthly by contrast to the injustice of the absent parent having no escape from his assessed liability because there is no effective appeal against it, assuming the calculation is correctly done from the effective date the parent with care does at least have an alternative remedy available to her to alleviate her hardship and any injustice perpetrated on her. That is to seek a departure direction under case 5 if she can show that the absent parent's lifestyle is inconsistent with his declared income. If in this case his taxable income is to be taken to be about £20,000 when his average drawings are more like £31,000 per annum, then it seems to me she is well on the way to success which may even be greater if a toothcomb is taken to actual expenditure on maintaining an overall lifestyle. If the stark choice between Basis (A) and Basis (B) which confronted the Commissioner results in one or other suffering hardship, then better the hardship falls on him or her who is better able to take other steps to ameliorate it.

Conclusion.

51. It is appalling to think that the effective date for the assessment in this case is September 2001 and that three years later we are no nearer making it. This family has suffered from that delay and this uncertainty. It is lamentable that this anomaly was not spotted and dealt with at the time these amendments were made. It is another stain on the Child Support Agency's reputation. Though the Secretary of State did not initiate the appeal, he has supported it to the extent that his submissions have coincided with those advanced on Mr Smith's behalf. The Secretary of State has, we have been told, been considering what, if any, further amendments need to be made. To have paragraph 2A and paragraph 3 operating in more or less the same way is self-evidently desirable. This case illustrates why that is so. It is now time to rid the regulations of this absurdity. It is not for me to draft the changes. That is the responsibility of the Secretary of State. I only have to decide how capital allowances are to be treated under paragraph 2A. I am satisfied that they have to be deducted in order properly to arrive at the absent parent's total taxable income. The result in my judgment is that the appeal must be allowed, the matter must be remitted to the Appeal Tribunal to effect the necessary assessment in the light of this judgment, and to conduct the necessary enquiries for the making of any departure directions.
52. I am conscious of the untold misery this will inflict on the parties and particularly the children but I cannot help it. If there were any way in which some compromise could be reached, I would urge it. It has gone on long enough.
53. I cannot end this judgment without paying tribute to Mr Mostyn Q.C. and Mr Goodfellow Q.C. instructed by Family Law Partnership all of whom have acted pro bono for which service and for the help they have given us we are extremely grateful.

Lord Justice Wall :

54. I have been driven, reluctantly, but at the same time ineluctably, to the conclusion that this appeal has to be allowed. I propose to give my reasons for reaching that conclusion quite shortly. Ward LJ has set out all the statutory material, and it is therefore unnecessary for me to repeat it. I shall refer to the Child Support (Maintenance Assessments and Special Cases) Regulations 1992 (SI 1992 No. 1815) as amended by the Child Support (Miscellaneous Amendments) Regulations 1999 (SI 1999 No. 977) collectively as "the Regulations".
55. When I refused permission to appeal on paper, I said this: -

"Whilst this case raises a point of some importance to absent parents who are self-employed, the Commissioner's judgment is both soundly reasoned and lucidly expressed. The conclusion he reached was open to him as a matter of interpretation, and avoids the absurdity and injustice which the rival contention produces.

The Commissioner's reference to Cooke v Secretary of State for Social Security [2002] 3 All ER 279 is apt, as are his comments on accountancy evidence. There is nothing in the Article 6 point. Leading counsel who is an expert in the field had a duty (which the Commissioner held – and the judgment demonstrates - he fully discharged) to bring to the Commissioner's attention all points that might assist the Appellant."

56. The points referred to in the second paragraph of my reasons for refusing permission – and in particular the suggestion that Mr. Smith had been denied the right to a fair trial – were (in my judgment quite rightly) not pursued before us. The sole question for this court was the meaning of the word "earnings" in paragraph 2A(2) of Schedule 1, Part 1, Chapter 2 to the Regulations, and in particular whether or not the definition of "earnings" contained in that paragraph (namely "the total taxable profits from self-employment of that earner as submitted to the Inland Revenue" less three heads of deduction not material for our purposes) permitted the self-employed earner to deduct capital allowances when calculating his earnings.
57. I retain my admiration for the Commissioner's careful judgment and fully echo in particular the sentiments he expressed in paragraph 4 of his judgment, cited by Ward LJ in paragraph 34 of his. We have, however, heard full and careful argument on the point from the parties and from the Secretary of State. I am particularly grateful to Mr. Mostyn QC and Mr. Goodfellow QC for appearing for Mrs. Smith pro bono.
58. There is usually no more serious criticism of either primary or secondary legislation than that it is either ambiguous or obscure or both. The law should be clear, and people should know where they stand in relation to it. However, in the instant case, a third, and in my judgment even more damning criticism of the Regulations has to be added. As the Commissioner held, whichever way we decide this appeal, the result is manifestly unsatisfactory. If we allow the appeal and find for Mr. Smith, the result is that a man who has a business with a turnover in the year ended 31 March 2000 of £131,887, generating a net profit of 45,479 from which he took drawings of £31,923 is assessed under the Child Support Act and the Regulations as liable to pay £11.26 in total per week for his three children then aged 12, 10 and 8. It is not, I think, an overstatement to say, as I said when refusing permission to appeal, that this result is not only unjust: it is absurd.
59. On the other hand, if we find for Mrs. Smith, the result is that Mr. Smith will be assessed to pay the maximum for the band into which his income will be deemed to fall. That may well, in turn, be too much, and an injustice to him. That is the immediate effect of the Regulations when applied to the facts of this case.
60. The soothing words of officialdom, skilfully advanced by counsel for the Secretary of State, were that the Secretary of State recognised that there would be "anomalies". I am not consoled, nor I think are the parties, by this description. This is a scheme devised by Parliament. The unspoken thought behind my refusal of permission to appeal was that if both of the two only available constructions of the Regulations produced either absurdity or injustice, it was for Parliament to address the problem, not the courts. Any scheme can, or should, be able to deal with the easy cases. The real test of any scheme lies precisely in its capacity to deal with the cases which are anomalous.
61. That the initiative lies with Parliament is clear from the decision of this court in R (Kehoe) v Secretary of State for Work and Pensions [2004] EWCA 225, [2004] 2 WLR 1481 (Keehoe). This reinforced the decision of this court in Huxley v Child Support Officer [2000] 1 FLR 898 in relation to the exclusion of the courts from the operation of the Child Support Act, and decided that the scheme of the Act excluded any right of access to the court save judicial review and the consensual right to contract out by those who could afford to do so. Mr. and Mrs. Smith cannot take this course if and so long as Mrs. Smith remains on benefit. As I commented in paragraph 91 of my judgment at first instance in Kehoe ([2003] 2 FLR 578 at 604 and not, I think, an observation criticised in this court): -

"Not all parents are treated in the same way under the scheme. Those who can afford it and reach agreement are enabled to opt out of it altogether, and are given access to the courts both for consent orders and for all subsequent questions of variation or enforcement. PWCs (parents with care) on benefit have none of these options and are required to use the system."

62. All that said, it is, of course, the duty of this court to resolve any point of law properly placed before it, and to interpret the Regulations as best it can. Ultimately, I find my way through the morass with the aid of the clear and cogent submissions of Mr. James Henderson, tax counsel instructed on Mr. Smith's behalf. In order to construe the Regulations, we must look, he says, at the entire phrase at the heart of the dispute: "total taxable profits from self-employment of [an] earner as submitted to the Inland Revenue". This phrase is not defined in either the Child Support legislation, or in the Income Tax legislation. However, the phrase "total taxable profits" does occur in the self-employment section of the Inland Revenue Income Tax Return, examples of which we have in our papers. "Submitted to the Inland Revenue", Mr. Henderson argues, self-evidently means what it says. Accordingly, where the Tax Return makes clear what is meant by total taxable profits (that is to say, taking account of capital allowance) it is that figure which must be used for the purposes of paragraph 2A of the Regulations.
63. The passage in Hansard cited by Ward LJ in paragraph 22 of his judgment, Mr. Henderson argues, supports the point. The objective was to simplify the process of assessment by taking the "total taxable profits" figure in the Non Resident Parent's (NRP) Tax Return as the basis of the assessment in all cases. Where, however, there was no tax return – perhaps because the business was new - the old rules would continue to apply. Hence the two systems running side by side.
64. As a matter of construction, I find this approach difficult to fault. It is not for this court to express a view on whether or not it is sensible for Parliament to have decided to use the NRP's self-declared income tax return as the basis for the assessment of child support, or whether or not it is sensible to have two different meanings for the word "earnings" depending on whether or not a tax return had been filed, if that is what Parliament has done.
65. There remains, however, the absurdity and injustice of the result. Here, although driven to the conclusion that Mr. Henderson's construction of the Regulations is right, I would have found it impossible to think that Parliament intended to leave Mrs Smith and her children as the victims of such a result. What, therefore, finally persuades me that Mr Henderson's interpretation is acceptable is that Parliament has left a way out for Mrs. Smith – namely the power of the Secretary of State to make a Departure Direction under the amendments introduced by the Child Support Act 1995, and implemented by the Child Support (Departure Direction and Consequential Amendments) Regulations1996 (SI 1996 No. 2907), identified and explained by Ward LJ in paragraphs 18 to 21 of his judgment.
66. I have to say that I do not find it satisfactory that the outcome of an assessment such as that which I have identified in paragraph 60 of this judgment should lead; (a) immediately to it being recognised as absurd; and (b) to an investigation of the lifestyle of the NRP, with no doubt further delay and anxiety for both parents. Nonetheless, it does represent a way of righting the injustice otherwise suffered by Mrs. Smith and the children. If we dismiss this appeal, Mr. Smith has no such recourse. Thus, I have to say that it is the existence of the power to make a Departure Direction, which finally persuades me to depart from the Commissioner's conclusion.
67. It is a sad reflection that the only issue for Mrs and (I hope) Mr. Smith is what constitutes a fair sum for him to pay towards the support of his children. The process of resolving that question began in September 2001: it has required 22 assessments and an appeal to this court. It is nowhere near over. The delays have been extensive. I deprecate the Secretary of State washing his hands of the delays by stating through counsel that delays in the appeal system are not his responsibility. By the misfortune of this case being listed at the very end of Summer term, we have added to the delays, since judgment cannot be given until the beginning of October. I regret this additional delay. If the only way we can assist is to direct expedition, I would certainly direct that the re-hearing in the Appeal Tribunal be expedited.
68. Nothing in this judgment is intended to criticise those within the Agency who are, no doubt, doing their conscientious best to make the system work. However, I join with Ward LJ and the Commissioner in inviting the Secretary of State to review the Regulations as a matter of urgency. Although it is outside the Human Rights Act and the European Convention on Human Rights, an administrative system which four years after the initiation of its procedures to assess maintenance for three children seems no nearer a conclusion than when it started brings that system into further disrepute.
69. I would, accordingly, allow the appeal and make the orders Ward LJ proposes.

The Rt. Hon. Sir Martin Nourse :

70. I also agree.