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[1997] UKSSCSC CIS_11482_1995 (31 January 1997)

R(IS) 2/98

Mr. J. Mesher CIS/11482/1995

Notional income - payments in kind - whether to be taken into account when determining notional earnings

The claimant was in receipt of income support. It came to light that his wife was working twelve hours per week in a shop for which she received £5 cash and goods to the value of £36. It was accepted by the Department of Social Security that £41 was equivalent to comparable employment in the area. An adjudication officer issued a decision altering the claimant's entitlement to income support on the grounds that "... the customer's wife should be treated as receiving notional earnings." Regulation 35(2)(a) of the Income Support (General) Regulations 1987 provided that "(2) "Earnings" shall not include – (a) any payment in kind;". Regulation 42(6) of the 1987 General Regulations provided that "Where (a) a claimant performs a service for another person; and (b) that person makes no payment of earnings or pays less than that paid for a comparable employment in the area, the adjudication officer shall treat the claimant as possessing such earnings (if any) as is reasonable for that employment ..." (subject to some exceptions which do not apply in this case). The appeal tribunal allowed the claimant's appeal, deciding that payments in kind were not to be disregarded under regulation 42(6) when considering whether or not a person is paid less for his or her services than that paid for comparable employment in the area. The Chief Adjudication Officer appealed to the Commissioner, contending that under regulation 42(6) payments in kind were to be disregarded.

Held, allowing the appeal, that:

in the phrase "no payment of earnings" in regulation 42(6) the term "earnings" had to be defined as in regulations 35 or 37 of the Income Support (General) Regulations 1987, (payments in kind being excluded from the definition of earnings in regulation 35 by virtue of paragraph (2)(a)), and payments in kind were therefore to be disregarded (para. 11);

similarly, payments in kind were also to be disregarded when considering the phrase "pays less than that paid for comparable employment in the area" in regulation 42(6) as the reference to a payment must be taken to mean a payment of "earnings" (para. 12);

when calculating notional earnings, the test under regulation 42(6) is such earnings (if any) as are reasonable for comparable employment. In cases where there is some cash payment and some payment in kind, any actual cash payment should be deducted from the amount of notional earnings which would have been calculated if no cash at all had been paid, that approach being derived from the inclusion of the word "reasonable" in regulation 42(6) (para. 13);

however, the inclusion of the term "reasonable" in regulation 42(6) does not allow for the adjustment of notional earnings where earnings in kind are paid as this would involve the difficult issue of putting a monetary value on payments in kind, instead the regulation operates so as to avoid giving payments in kind an actual value by deeming the claimant to be receiving whatever is a reasonable local rate for the services provided net of any cash earnings actually received (para. 14).

The Commissioner set aside the tribunal's decision and remitted the case to a differently constituted tribunal.

DECISION OF THE SOCIAL SECURITY COMMISSIONER

The adjudication officer's appeal is allowed. The decision of the Stockport social security appeal tribunal dated 17 January 1995 is erroneous in point of law, for the reasons given below, and I set it aside. The appeal is referred to a differently constituted social security appeal tribunal for determination in accordance with the directions given in paragraph 18 below (Social Security Administration Act 1992, section 23(7)(b)).

The basic facts were found by the appeal tribunal as follows:

"[The claimant] is a married man living with his wife. They have a dependent child and live in their own accommodation. He has been in receipt of income support since 11 January 1993. [His wife] works twelve hours per week in a general store called Spic and Span and she is paid the sum of £5 in cash and goods to the value of £36 per week. [She] works as a shop assistant doing general duties and the DSS agree that the sum of £41 per week is equivalent to that paid for a comparable employment in the area. The tribunal accepts this fact."

The course of decision making is rather difficult to establish. In the claim form relating to the claim of 11 January 1993 the claimant recorded that his wife was not working and had last worked on 18 December 1992. It appears that income support was awarded on that basis. The adjudication officer's decision under appeal in the present case was made on 30 July 1993 and appears to have followed receipt of a letter dated 5 July 1993 from the proprietor of "Spic and Span" confirming that the claimant's wife was working for her on a temporary part-time basis for twelve hours per week and that she was paid a cash sum of £5 and the remainder was taken in goods to the value, based on £3 per hour. It is not clear what prompted that letter to be obtained, although there have been suggestions from the claimant that the problem arose on a different office taking over his case. The adjudication officer's decision is recorded on the first page of the form AT2 as follows:

"On the claim for income support the customer is treated as having the sum of £36 as income. This is because the adjudication officer considers that the customer's wife should be treated as receiving notional earnings."

That is a completely unsatisfactory form of decision. There is no indication of the date from which the decision is intended to have effect. Nor, though it seems that the decision must be purporting to alter an existing entitlement to income support, is there any identification of the decision which is being reviewed or of a ground for review.

The claimant appealed against the decision of 30 July 1993. The adjudication officer's written submission on form AT2 did not set out or discuss any of the relevant legislation. In order to understand the argument put forward it is necessary to set out a number of provisions from the Income Support (General) Regulations 1987. Regulation 35(2)(a) provides:

"(2) "Earnings" shall not include-

(a) any payment in kind;"

Regulation 35(1) defines what is included in the category of "earnings" in the case of an employed earner. Regulation 42(6) provides, as in force on 30 July 1993:

"(6) Where-

(a) a claimant performs a service for another person; and

(b) that person makes no payment of earnings or pays less than that paid for a comparable employment in the area,

the adjudication officer shall treat the claimant as possessing such earnings (if any) as is reasonable for that employment unless the claimant satisfies him that the means of that person are insufficient for him to pay or to pay more for the service; but this paragraph shall not apply to a claimant who is engaged by a charitable or voluntary body or is a volunteer if the adjudication officer is satisfied that it is reasonable for him to provide his services free of charge."

Paragraph 21 of Schedule 9 to the regulations provides for the disregard as income other than earnings of "any income in kind" (subject to exceptions which are not relevant in the present case). Those provisions were mentioned by regulation number on the first page of the form AT2. It is also necessary to mention regulation 40(4):

"(4) For the avoidance of doubt there shall be included as income to be taken into account under paragraph (1) any payment to which regulation 35(2) or 37(2) (payments not earnings) applies."

Regulation 40(1) and (2) provides that income other than earnings is to be taken into account in the calculation of income support, subject to the categories disregarded in Schedule 9.

The adjudication officer's argument was that the provision of goods to the claimant's wife was not a payment of "earnings": the only payment of "earnings" was the £5 in cash. Therefore she was paid less for the service which she provided than for comparable employment, for which £41 was accepted as reasonable for twelve hours. She should be treated as receiving £36 per week as earnings. There was no evidence that the proprietor of Spic and Span could not afford to pay the £36 as wages.

The appeal tribunal allowed the claimant's appeal. Its reasons were as follows:

"In calculating [the claimant's wife's] income from earnings, any payment in kind is not included by virtue of regulation 35(2) of the Income Support General Regulations. The provisions of regulation 42(6) of the General Regulations are not satisfied because the tribunal has decided that when considering whether a person is paid less for his or her services than that paid for a comparable employment in the area, payments in kind should not be disregarded."

The chairman recorded in his notes of evidence that that view was put to the presenting officer, who said that he did not agree with it, but offered no further argument.

The Chief Adjudication Officer was granted leave to appeal to the Commissioner by the appeal tribunal chairman. I directed that there should be an oral hearing of the appeal, in order to discuss the proper construction of regulation 42(6). At the hearing the adjudication officer was represented by Miss Hartridge of the Office of the Solicitor to the Department of Social Security. The claimant did not attend, but was represented by a friend of the family, Mr. Leahy. I am grateful to both for their assistance, although Mr. Leahy understandably felt that he had little to say on technical legal matters.

Miss Hartridge submitted that the appeal tribunal adopted a false proposition of law and that the correct position under regulation 42(6) is that in considering whether a person is paid less than in comparable employment any payments in kind are to be disregarded. She contrasted the position under the old Supplementary Benefit (Resources) Regulations 1981. There the equivalent provision, regulation 4(3), applied where a person made "either no payment or a payment less than that paid for comparable employment" and it was held in Commissioner's decision CSB/92/1984 (confirmed in R(SB) 13/86) that payments in kind should be taken into account. Regulation 42(6) of the Income Support Regulations refers specifically to "no payment of earnings" and "earnings" is defined in regulation 35(2). Under the Resources Regulations the value of any earnings in kind counted in calculating the amount of supplementary benefit. Miss Hartridge suggested that the different general policy of the Income Support Regulations (taking earnings in kind out of the category of earnings and then disregarding them as income) might have been prompted by the difficulty of giving a monetary value to earnings in kind. Then she said that there was no such difficulty where regulation 42(6) applies, because the earnings in comparable employment supply the standard. She submitted that there was no inconsistency between what she said was the correct approach to regulation 42(6) and the provisions in the Income Support Regulations for disregarding earnings in kind, and was prepared to accept that, in every case where services were provided in return for payments in kind, regulation 42(6) would have to be considered. This was in accord with the policy intention of preventing employers making payments in kind instead of in cash, with a subsidy from income support.

It seems to me that the problem of consistency with the other parts of the Income Support Regulations is more difficult than admitted by Miss Hartridge. The chain from regulation 35(2)(a) to regulation 40(4) to paragraph 21 of Schedule 9 in disregarding earnings in kind as income is very clear. There is no suggestion in any of those provisions that they are subject to regulation 42(6), in contrast to the careful express provision made in paragraph 21 of Schedule 9 for the interaction with regulation 42(4)(a)(i). Yet the practical effect of the interpretation argued for by Miss. Hartridge is that, in every case where earnings are paid in whole or in part in kind, regulation 42(6) has at least an initial operation. It could be argued that her interpretation of regulation 42(6) has the practical result of bringing earnings in kind into the calculation of income support, not by attempting to put a value on goods or vouchers supplied, but by adopting the standard of comparable employment, and that that is inconsistent with the general treatment of earnings in kind.

We have recently been reminded, in Commissioner's decision R(SB) 1/94, of the principle that the words of legislation must be construed so as to avoid absurdity, repugnance or inconsistency. But would that sort of inconsistency result from accepting Miss Hartridge's interpretation? After giving full weight to the argument of inconsistency, I have concluded that it would not.

It is necessary to examine the words of regulation 42(6) very closely. First, I think that the reference to making "no payment of earnings" in regulation 42(6) must be to making no payment of earnings as defined in regulation 35 (where the appropriate comparison is with employment as an employed earner) or 37 (where the appropriate comparison is with employment as a self-employed earner). Although the definition of "earnings" in regulation 2(1), by reference to regulations 35 and 37, only operates unless the context requires otherwise, the provisions of regulations 35 and 37 do not have that qualification and would seem to operate for the regulations to do with income. Nor is there anything in the context of regulation 42(6) which indicates otherwise. There is one oddity in that in regulation 37 on self-employment there is nothing to exclude earnings in kind from the gross receipts to be taken into account. If so, the value of payments in kind to someone who provides services in the way that a self-employed person would then have to be taken into account under regulation 42(6). But that seems to stem from the fact that the special treatment of earnings in kind is limited to earnings from employment as an employed earner under regulation 35. However, there is no problem in the present case, where the claimant seem clearly to have been an employed earner.

Second, it seems to me that there is no room for an argument that earnings in kind should be taken into account when considering whether a person pays "less than that paid for comparable employment", if they are not to be taken into account when considering whether no payment at all of earnings is made. Although the language is clumsy, probably as a result of adapting the words of regulation 4(3) of the Supplementary Benefits (Resources) Regulations 1981, the reference can only be to making a payment of "earnings" whose amount is less than the "earnings" paid for comparable employment in the area.

However, a real difficulty arises in calculating the amount of notional earnings which the claimant is to be assumed to possess. Regulation 42(6) makes the test such earnings (if any) as are reasonable for the comparable employment. That can work relatively easily if the person for whom the services are provided makes no payment or only a payment in kind. But it is not so easy where, as in the present case, the person makes some cash payment which is less than the amount which would be paid for comparable employment. The adjudication officer seems to have assumed here that the £5 paid in cash was to be taken into account as actual earnings and that £36 should be assumed to be possessed as notional earnings. But that involves calculating the notional earnings as less than the amount paid for comparable employment i.e. £41. The alternative would be to calculate the notional earnings at £41 and to disregard the actual earnings of £5, but there is absolutely no hint in the regulations of a power to disregard actual earnings in this way. Thus the only way to avoid an unfair double counting is to deduct any actual cash payments from the amount of notional earnings which would have been calculated if no cash at all had been paid. That solution must rest on the force of the word "reasonable", allowing the amount of earnings which would be paid for comparable employment to be adjusted where the circumstances make it reasonable.

Could it therefore be argued that, since there can be an adjustment in the amount of notional earnings where some cash payment is made, there can also be an adjustment where earnings in kind are paid? At some points in my consideration of the case I have been attracted by this argument, but I have concluded against it. It would not be "reasonable" to adjust the amount of the notional earnings where earnings in kind have been paid. To explain that conclusion entails going back to the general structure of the regulations and the arguments on inconsistency.

Miss Hartridge was right to emphasise the difficulty of putting a monetary value on payments in kind. No method of doing so was suggested by the Commissioner in CSB/92/1984. There is a variety of possible solutions, and there might be different approaches according to how easy it is for goods or vouchers to be exchanged for money. If the scope of regulation 42(6) extends not just to the case of a person who is paid in money at less than the going rate, but also to the case of a person providing services in the way in which an employee would who is paid in kind instead of in money, then the problem of valuation is sidestepped. The person is deemed to be receiving whatever is a reasonable local rate for services of the kind provided, net of any cash earnings actually received. That does not involve a double counting of the amount of earnings, as would occur if there was no adjustment between actual cash earnings and notional earnings. That is precisely because the actual value of earnings in kind is disregarded. Once it is accepted that regulation 42(6) applies in cases of payments in kind so as to avoid the problem of giving them an actual value, the structure of the regulations hangs together. And the argument that it is unreasonable not to deduct the actual value of the payments in kind from the notional earnings is undermined by the disregarding of the actual value of the payments in kind. If it is said that there is an unfairness in treating a claimant as receiving a level of earnings which exceeds the real value of what is actually received, when the claimant may have no power to alter that situation, I am afraid that that is an unfairness which is inherent in the overall operation of regulation 42(6).

On that approach, there is no inconsistency between the operation of regulation 42(6) and the general provisions on the disregarding of the actual value of earnings in kind. On the contrary, the disregard of the actual value is necessary to the operation of regulation 42(6), in order to avoid a double counting of actual and notional earnings. Regulation 42(6) does not strictly involve giving an actual or notional value to earnings in kind, but operates by treating the claimant as receiving cash earnings appropriate to a different employment. Therefore, there is strictly no need to make regulation 35(2)(a), regulation 40(4) or paragraph 21 of Schedule 9 expressly subject to regulation 42(6). It would have aided understanding of the regulations for there to have been some reference to regulation 42(6), perhaps in paragraph 21 of Schedule 9. As it is, anyone who reads the general provisions on the disregard of payments in kind (on its own involving putting together widely separated bits of the regulations) might well not realise the potential impact of regulation 42(6). But the absence of any reference does not affect the proper interpretation of regulation 42(6).

The result is that I agree that the appeal tribunal adopted a legally wrong approach. For that reason, I must set aside its decision dated 17 January 1995. However, it would not be right for me to substitute my decision for that of the appeal tribunal. That is partly because of the complete failure of the adjudication officer to establish the conditions to review and revise a decision awarding income support on an indefinite basis. But, more importantly, at the oral hearing before me Mr. Leahy told me that the state of trade for the shop "Spic and Span" at the relevant time was such that the proprietor could not afford to pay the claimant's wife at the cash level of £3 per hour, and could only afford to pay her by taking stock off the shelves. That did not come out in evidence before the appeal tribunal, where only the claimant and not his wife attended. In those circumstances, they should have the opportunity of bringing evidence about that to a new appeal tribunal.

Accordingly, the appeal is referred to a differently constituted social security appeal tribunal for determination in accordance with the following directions. Before the rehearing, the adjudication officer is to prepare a fresh written submission clarifying whether the decision issued by the adjudication officer on 30 July 1993 was an initial decision on the claim or was a decision purporting to alter an existing award of income support made in an earlier decision. If. the latter is the case, the adjudication officer must identify the decision which he or she seeks to have reviewed, put forward the grounds of review which are relied on and say from what date they are submitted to be effective. The new appeal tribunal must consider whether it is satisfied on those matters. Assuming that the new appeal tribunal comes properly to determine the basis of entitlement in the light of the claimant's wife's work at Spic and Span, it must adopt the legal approach approved above. On the basis of the facts which appear not to be in dispute, there will be no difficulty in applying that approach. However, the new appeal tribunal must consider any evidence put forward on behalf of the claimant about the means of the proprietor to make cash payments at the relevant time. The claimant must bear in mind that regulation 42(6) requires him to produce evidence to satisfy the appeal tribunal, on the balance of probabilities, that the means of the proprietor were insufficient for her "to pay or to pay more for the service". Only then will the exception to the normal operation of regulation 42(6) apply. There may, I think, be legal difficulties in working out the precise meaning of the words in quotation marks. However, I have had no submissions on that and I cannot predict what view the new appeal tribunal might take of the evidence, so that it is better if I give no further directions of law.

Date: 31 January 1997 (signed) Mr. J. Mesher

Commissioner