QUEEN'S BENCH DIVISION
Strand, London, WC2A 2LL
B e f o r e :
| The Queen (on the application of (1) Sharon Pantellerisco (2-4) SN,JN and NN (Children, by their litigation friend SP))
|- and -
|The Secretary of State for Work and Pensions
Edward Brown and Stephen Donnelly (instructed by Government Legal Department) for the Defendant
Hearing dates: 12th May 2020
Crown Copyright ©
Mr Justice Garnham:
i) As a matter of statutory construction, Reg.54 and Reg.61(2)(a) of the Regulations compelled the conclusion that money earned but not paid during an assessment period was nonetheless 'income' from that assessment period. The Secretary of State's contrary interpretation constituted an error of law.
ii) The combined effect of Reg.54 and Reg.82(1)(a) produces an unreasonable and irrational result.
iii) The Regulations are discriminatory in breach of Article 14 ECHR because they discriminate against UC claimants who are paid on a lunar rather than calendar monthly basis.
"A year has 13 4-week periods in it, but 12 monthly assessment periods. Therefore, like the First Claimant, everyone paid on a 4-weekly cycle will, each year, have eleven UC assessment periods in which they receive one thirteenth of their annual salary, and one assessment period in in which they receive two thirteenths of their salary."
The Legal Framework
"8 Calculation of awards
(1) The amount of an award of universal credit is to be the balance of—
(a) the maximum amount (see subsection (2)), less
(b) the amounts to be deducted (see subsection (3)).
(3) The amounts to be deducted are—
(a) an amount in respect of earned income calculated in the prescribed manner (which may include multiplying some or all earned income by a prescribed percentage), and
(b) an amount in respect of unearned income calculated in the prescribed manner (which may include multiplying some or all unearned income by a prescribed percentage)."
"(1) The calculation of a person's earned income in respect of an assessment period is, unless otherwise provided in this Chapter, to be based on the actual amounts received in that period."
"(1) Unless paragraph (2) applies, a person must provide such information for the purposes of calculating their earned income at such times as the Secretary of State may require.
(2) Where a person is, or has been, engaged in an employment in respect of which their employer is a Real Time Information employer—
(a) the amount of the person's employed earnings from that employment for each assessment period is to be based on the information which is reported to HMRC under the PAYE Regulations and is received by the Secretary of State from HMRC in that assessment period; and
(b) for an assessment period in which no information is received from HMRC, the amount of employed earnings in relation to that employment is to be taken to be nil.
(3) The Secretary of State may determine that paragraph (2) does not apply—
(a) in respect of a particular employment, where the Secretary of State considers that the information from the employer is unlikely to be sufficiently accurate or timely; or
(b) in respect of a particular assessment period where—
(i) no information is received from HMRC and the Secretary of State considers that this is likely to be because of a failure to report information (which includes the failure of a computer system operated by HMRC, the employer or any other person); or
(ii) the Secretary of State considers that the information received from HMRC is incorrect, or fails to reflect the definition of employed earnings in regulation 55, in some material respect.
(4) Where the Secretary of State determines that paragraph (2) does not apply, the Secretary of State must make a decision as to the amount of the person's employed earnings for the assessment period in accordance with regulation 55 (employed earnings) using such information or evidence as the Secretary of State thinks fit.
(5) When the Secretary of State makes a decision in accordance with paragraph (4) the Secretary of State may—
(a) treat a payment of employed earnings received by the person in one assessment period as received in a later assessment period (for example where the Secretary of State has received the information in that later period or would, if paragraph (2) applied, have expected to receive information about that payment from HMRC in that later period); or
(b) where a payment of employed earnings has been taken into account in that decision, disregard information about the same payment which is received from HMRC.
(7) In this regulation "Real Time Information Employer" has the meaning in regulation 2A(1) of the PAYE Regulations3."
"(1) Unless regulation 82 or 83 applies, the benefit cap applies where the welfare benefits to which a single person or couple is entitled during the reference period exceed the relevant amount [determined under regulation 80A (relevant amount)].
(2) The reference period for the purposes of the benefit cap is the assessment period for an award of universal credit." (Emphasis added)
"(1) The relevant amount is determined by dividing the applicable annual limit by 12.
(2) The applicable annual limit is—
(a) £15,410 for a single claimant resident in Greater London who is not responsible for a child or qualifying young person:
(b) £23,000 for—
(i) joint claimants where either joint claimant is resident in Greater London;
(ii) a single claimant resident in Greater London who is responsible for a child or qualifying young person;
(c) £13,400 for a single claimant not resident in Greater London who is not responsible for a child or qualifying young person;
(d) £20,000 for—
(i) joint claimants not resident in Greater London;
(ii) a single claimant not resident in Greater London who is responsible for a child or qualifying young person…"
"(1) Where the benefit cap applies in relation to an assessment period for an award of universal credit, the amount of the award for that period is to be reduced by—
(a) the excess; minus
(b) any amount included in the award for the childcare costs element in relation to that assessment period.
(2) But no reduction is to be applied where the amount of the childcare costs element is greater than the excess.
(3) The excess is the total amount of welfare benefits that the single person or the couple are entitled to in the reference period, minus the relevant amount [determined under regulation 80A]"
"(1) The benefit cap does not apply to an award of universal credit in relation to an assessment period where—
(a) the claimant's earned income or, if the claimant is a member of a couple, the couple's combined earned income, is equal to or exceeds the amount of earnings that a person would be paid at the hourly rate set out in regulation 4 of the National Minimum Wage Regulations for 16 hours per week, converted to a monthly amount by multiplying by 52 and dividing by 12; or
(b) the assessment period falls within a grace period or is an assessment period in which a grace period begins or ends.
(2) A grace period is a period of 9 consecutive months that begins on the most recent of the following days in respect of which the condition in paragraph (3) is met—
(a) a day falling within the current period of entitlement to universal credit which is the first day of an assessment period in which the claimant's earned income (or, if the claimant is a member of a couple, the couple's combined earned income) is [less than—]
(i) where the assessment period began before 1st April 2017, £430; or
(ii) in any other case, the amount calculated in accordance with paragraph (1)(a)];
(b) a day falling before the current period of entitlement to universal credit which is the day after a day on which the claimant has ceased paid work.
(3) The condition is that, in each of the 12 months immediately preceding that day, the claimant's earned income or, if the claimant was a member of a couple, the couple's combined earned income was equal to or [exceeded—]
(a) in any month beginning before 1st April 2017, £430; and
(b) in any other case, the amount calculated in accordance with paragraph (1)(a)].
(4) "Earned income" for the purposes of this regulation does not include income a person is treated as having by virtue of regulation 62 (minimum income floor)."
Government Policy and Related Evidence
"designed as a measure with a far-reaching social purpose. In particular, it was intended to bring about significant behavioural changes, incentivise work and increased earnings and to make the system simpler and fairer. It was designed to address both the complexity and perverse incentives inherent in the legacy benefit system, which had arisen as a result of its piecemeal development over a number of years…
Therefore, the policy objectives of UC included:
(a) developing a system that was affordable, rewarding work and personal responsibility;
(b) establishing a fairer relationship between benefit recipients and those who pay for them, particularly between out-of-work benefits and those receiving low pay;
(c) targeting financial support more efficiently, by supporting those in vulnerable circumstances;
(d) establishing a simpler system for individuals to understand and for the Government to administer.
(e) Designing a system that will operate for all classes of case, straddling in work and out of work cases, which is essential if the system is to have strong work incentives."
"Entitlement is assessed by reference to a claimant's circumstances during a monthly assessment period. Recipients usually receive their first UC payment around five weeks after their claim - made up of a one-month assessment period and up to seven days for the payment to reach a claimant's account. Their UC entitlement is then calculated for each assessment period in the same way. Changes in circumstances can therefore be taken into account from month to month."
"21. The calculation of UC in each monthly assessment period is a cornerstone of UC policy. All changes that occur in the assessment period are applied to the whole assessment period, and each policy consideration is looked at across the assessment period - such as the inclusion of disability elements, child elements, childcare costs, carer's element, conditionality arrangements, the treatment of income, capital, deductions, etc.
22. The assessment period is calculated as a calendar month. A calendar monthly basis is used as it is considered to best reflect the most common payment cycles (whether in terms of income, such as salary, or outgoings, such as bill payments).
23. The objective of workability and efficiency requires the same structure to operate for the whole population, notwithstanding that there are, of course, different types of payment cycles (such as irregular pay or weekly or lunar monthly pay).
24. The calendar month structure reflects the general position in modern working life, where individuals, even in more precarious employment, are usually paid monthly. Where claimants are unemployed, monthly assessment and payment of UC creates the discipline of budgeting and managing money on a monthly basis, which is considered to help improve skills which would reduce poverty whether in work or not. The same approach is applied whether a claimant is employed, unemployed or self-employed. This allows UC to be calculated on the same basis whether a person moves in and out of work or whether their earnings are composed of mixed employed and self-employed earnings."
"... I need to make the point about the difference between assessment periods and payment periods, which is important to bear in mind. Currently, existing out-of-work benefits are made on an assessment period of a week, with a fortnightly payment cycle. That is fairly typical. The universal credit benefit represents a new approach focused clearly on work, which encourages out-of-work households to budget on a monthly rather than a fortnightly basis in the belief that it will better prepare people for the reality of working life. The figures have already been used. Currently, 75 per cent of all those in employment and 51 per cent of those earning less than £10,000 a year receive earnings monthly. In addition, monthly direct debits for household bills are often cheaper than more frequent billing options.
Many noble Lords raised the evidence base. As noble Lords know, we are conducting qualitative and quantitative research with claimants on many issues but particularly on the payment frequency issue. As some noble Lords have pointed out, on 7 October we published a report, Perceptions of welfare reform and Universal Credit. This outlines findings from research we conducted with claimants, the public, employers and staff in December 2010 and January 2011. There were critical findings in that piece of research that we are looking at with great attention.
I understand that many people on low incomes will be used to managing the fortnightly payment of benefits, and I am determined to ensure that there will be appropriate budgeting support to meet the needs of claimants. We want families to be able to manage their financial affairs in a manner that best reflects the demands of modern life, whether they are in work or out of work, and we are working with stakeholders and benefit experts to that end. We are setting up a series of demonstrator projects, as they are called, with housing associations and local authorities to look at how to structure the payment of rents to landlords. These demonstrator projects will look at a wide range of budgeting support. We need to make sure that budgeting advice and support is available for those who need it in order to help them manage the change.
If you separate assessment from payment, the monthly assessment is intended to reduce the burden on claimants and reduce the risk of overpayments compared with a system where benefits are reassessed on a weekly basis, so there is a separation between the assessment period and the payment period."
"31. The earnings calculation involves the use of "real time information" ("RTI"). Under RTI, information about tax and other deductions under the PAYE system is transmitted to HMRC by the employer every time an employee is paid. Regulation 54(1) enables us to use RTI data feeds to establish a claimant's earnings, thereby automating the UC calculation, removing error, potential fraud and attribution rules which would result in over and under payments."
"a) It is based upon an assessment period, as is the case for all other aspects of the calculation.
b) It supports a fundamental principle of UC by reflecting the cash-flow of the household in the assessment period rather than the number of hours that a person is working.
c) It uses RTI, which allows for an automatic calculation and is therefore efficient. UC is not designed to collect information regarding number of hours worked.
d) It provides for additional flexibility where, for example, a person might be able to secure employment at a higher rate and therefore choose to work fewer hours.
e) A fixed amount can be changed in future with minor adjustments.
f) The original fixed amount … was a clear comparison with the level at which lone parents could access Working Tax Credit. It was recognised that the benefit cap would apply to lone parents to a greater extent and as such this approach would assist with smooth transition between the old and new systems."
"49. It is of course the case that this particular decision will not be to the benefit of every claimant. The Claimant is an example of a person who would be in a more advantageous position under the old system which uses a different methodology (essentially hours worked per week) rather than a methodology based on received earnings.
50. The earnings threshold for UC is prescribed in regulation 82 of the Universal Credit Regulations 2013. This regulation originally provided an exemption from the benefit cap where monthly earnings were £430 or more in each assessment period. The sum of £430 was calculated by multiplying 16 hours by the expected National Minimum Wage (NMW) for October 2012 of £6.19 and rounding up the monthly equivalent (£429.17). Accordingly, even at the outset, it would in fact be necessary to work slightly more than 16 hours per week at the NMW in order for the exemption to apply."
"66. The application of the earnings threshold to the benefit cap policy as applied to the Claimant is noted by the DWP. However, the policy and the legislation are clear that in order to be exempt from the benefit cap a prescribed level of earnings must be received in an assessment period and not a prescribed number of hours of work. The Claimant's earnings are not sufficient in each assessment period for the exemption to apply. If the Claimant were to increase her hours by a small amount (around 1.5 hours per week) the exemption would apply and the claimant would not be capped. Alternatively, if the Claimant were able to find paid employment at a slightly higher rate, the exemption also would apply. The Claimant is also entitled to apply for additional support through Discretionary Housing Payments from her local authority."
"9. DWP uses a system called Real Time Earnings (RTE) to obtain a relevant subset of earnings information from the RTI database. For the purpose of calculating UC, the DWP receives a subset of the earnings information in order to calculate a person's UC award in each assessment period. The system is built upon the basis that all relevant information is fed into the RTE system for the calculation of UC. There are data protection issues that regulate the information that can properly be processed by DWP.
10. The information that is communicated to the UC system to calculate the UC award does not include 'payment pattern' or pay cycle information. This information is not routinely accessible to operational delivery staff when viewing what has been accounted for in determining the UC award"
"It is not therefore possible with the current arrangements to process the 'pay cycle' data as part of the UC award. As I indicated in my first statement, the DWP is considering reforms in relation to pay cycles. However, this requires considerable input from policy, legal and technical stakeholders. It is not realistic to rely on the fact that HMRC is able to capture pay cycle data to conclude that UC decision makers can approach the calculations in the way suggested by the Claimants (i.e. by assuming that any salary payment which is paid with a 28-day 'indicator' will inevitably be paid in the same way on an ongoing basis)."
"The fundamental problem remains the need to maintain the integrity of the monthly Assessment Period structure which underpins UC and the need to base calculations upon actual data rather than predictions as to future earnings (which, in this context, are notoriously uncertain). Any reform needs to have regard to the complications of fluctuating pay patterns, multiple employment arrangements (with different patterns), and other forms of earnings and income."
The Court of Appeal's decision in Johnson
The Argument after Johnson
"We accept that in principle it was open to the Lord Chancellor to adopt a policy response which did not directly correspond to the problem which it was designed to meet. A policy-maker may reasonably decide that the disadvantages of a finely tuned solution to a problem outweigh its advantages and that a broader measure is preferable, even if the broader measure is both over- and under-inclusive in that it catches some cases in which there is no or no significant problem and fails to catch some cases in which the problem occurs. Such an approach is in any event consistent with the nature of the Scheme, which uses criteria such as PPE as proxies for the complexity of cases. It is inherent in the use of such proxies that they will result in under-compensation in some cases. But this does not cause unfairness if it is off-set by overcompensation in other cases. What matters is that overall a reasonable balance is struck."
"That, I believe, provides a helpful framework for how to approach irrationality in this case too. We need to consider what are the disadvantages of deciding not to "finetune" the Regulations thereby allowing the non-banking day salary shift problem to persist unresolved; what are the disadvantages of adopting a solution to the nonbanking day salary shift problem; would a solution be consistent or inconsistent with the nature of the universal credit regime; and has a reasonable balance been struck by the SSWP - or rather is it possible to say that no reasonable Secretary of State would have struck the balance in the way the SSWP has done in this case?"
The disadvantages of allowing the lunar month problem to persist unresolved
"It is … no part of the policy underlying universal credit to encourage claimants to base their employment choices on the salary payment date offered by a prospective employer. Yet that is what is happening for these Respondents."
The disadvantages of adopting a solution to the lunar month problem
"i) The supposed irrationality is based on a misconception because it aligns the assessment period with the period of a calendar month.
ii) There is a need for bright lines to ensure that the universal credit system operates in a coherent way.
iii) It is important to ensure that the calculation of the monthly award of universal credit can take place in an automated way without the need for "manual intervention" by a DWP officer carrying out an individual calculation of the amount of the award."
"In my judgment that argument was a strong point when construing the wording of the general principle in regulation 54 but has less merit when considering the rationality of failing to make an exception for this particular group of people. In fact, there are already several exceptions to the bright lines set out in the Regulations where it is clear that a policy imperative has overridden the need for simplicity. Regulation 76 provides that where a person receives a payment from an approved scheme providing compensation or support such as that given to people diagnosed with variant Creutzfeldt-Jacob disease or who suffered forced labour during the Second World War or who were victims of the Manchester bombing on 22 May 2017, such payment whether it is capital or income is to be disregarded when calculating unearned income."
"It is inevitable that in any scheme designed to simplify and reduce the cost of delivering benefits there will need to be bright lines. I agree that there will often be hard cases with people falling just on the wrong side of the line where their needs and circumstances are otherwise indistinguishable from those falling just on the right side - the requirement that the claimant be 18 years old is an obvious example. It may well be rational to introduce such a requirement on the ground that the benefits outweigh the disadvantages arising from those bright lines. In my judgment, however, those situations are readily distinguishable from the significant, predictable but arbitrary effects on benefit of a regular monthly salary which frequently falls into different assessment periods because of the non-banking day salary shift."
"In my judgment the wording of regulation 56 is designed to avoid the need for that kind of examination of the relationship between the work done and the amount received in any one assessment period. That is essential because…the system of universal credit is intended to be automated so that the calculation of the monthly amount can be performed by a computer rather than a DWP officer able to make an evaluative determination."
"…It must be the case that the computer programme is sophisticated enough to enable that to happen. If this problem had emerged for the first time as a result of the experience of some of the first migrated cohort of 10,000, I cannot accept that the Department would have responded by saying that it was now too late to modify the scheme and that nothing could be done to resolve it without throwing away all the money so far spent."
Would a solution be consistent or inconsistent with the nature of the universal credit regime?
"… It is no part of the policy underlying universal credit to encourage claimants or employers to adopt a non-monthly salary cycle; on the contrary the choice of monthly assessment periods was based in part on the increasing prevalence of that salary cycle amongst the working population and because many household bills are payable monthly. Indeed, the alignment of the duration of the assessment period with household outgoings is intended to encourage responsible budgeting by low income claimants."
Other relevant factors
"at the beginning of May I received a letter saying that I had been overpaid because the benefit cap had not been applied and that DWP would seek recovery of that overpayment. I could not believe it. … I disputed the fact that the benefit cap was being applied to me given that I was working 16 hours at national minimum wage …Ultimately, DWP's position remained that .. despite working 16 hours at national minimum wage, I did not earn enough to meet the exemptions threshold… At the same time given that I am working exactly the same number of hours and earning the same amount as somebody working 16 hours at national minimum wage who happens to be paid monthly I do not understand why my family's budget should be subject to the cap. It is difficult to explain to somebody not in my situation just how devastating an impact it has had and continues to have."
Can it fairly be said that no reasonable Secretary of State would have struck the balance in the way the SSWP has done in this case?
An objectionable extension of Johnson?
'…I regard this as a case which turns on its own very particular circumstances. It has no impact on the lawfulness of the universal credit system more generally.'