UK Social Security and Child Support Commissioners' Decisions

 


DECISION OF THE CHILD SUPPORT COMMISSIONER

1. The absent parent's appeal to the Commissioner is allowed. The decision of the Oxford appeal tribunal dated 10 January 2002 is wrong in law, for the reasons given below, and I set it aside. The case is referred to a differently constituted appeal tribunal for determination in accordance with the directions given in paragraph 12 below (Child Support Act 1991, section 24(3)(d)).
2. Both the parent with care's representative and the absent parent requested an oral hearing before the Commissioner. I reject that request, as I am satisfied that the appeal to the Commissioner can properly be determined without a hearing (Child Support Commissioners (Procedure) Regulations 1999, regulation 21(2) and (3)). I am satisfied on the papers that the appeal tribunal of 10 January 2002 went wrong in law. That means that the reference of the departure direction application has to be reheard by someone, with a full evaluation of all the existing and new evidence. That rehearing can most effectively be carried out by a new appeal tribunal, which can also have the benefit of the presence of a financially qualified panel member. Commissioners are primarily concerned with questions of law.
3. The parent with care's appeal was supported by the representative of the Secretary of State in the submission dated 7 August 2002, but that submission did not go into the legal issues in any detail. The submissions on behalf of the parent with care and by the absent parent went into the background of the case and into many hotly disputed areas of fact, but did not really touch the legal issues.
4. The appeal tribunal was dealing with a reference to it of the parent with care's application made on 6 December 2000 for a departure direction on the grounds of diversion of income, lifestyle inconsistent with income, unreasonable housing costs and partner's contribution to housing costs. The current maintenance assessment as at that date was effective from 19 April 2000. The main argument made on diversion of income was against the treatment for the purposes of calculating the maintenance assessment under the ordinary formula of the absent parent's earnings from a car sales business. The business had been run as a partnership with his current wife ("W") since 1997. The basis of the business accounts was the partnership shares were equal and tax returns had been made to the Inland Revenue (and apparently accepted) on that basis. The absent parent's earnings from his self-employment in the partnership were taken for the purposes of the ordinary formula as a half-share of the total taxable profits, less the appropriate deductions for income tax, national insurance etc. The parent with care argued that the business was mainly the absent parent's in terms of capital provided and of control and supervision, so that there had been a diversion of income.
5. The appeal tribunal said in its statement of facts and reasons that it could not understand the basis on which the Child Support Agency had concluded that the absent parent and W were equal partners. It mentioned the accounts and, having discussed the capital it found had been put into the business, the time and expertise each partner contributed and the degree of control exercised, concluded that W's share must have been considerably less than 50%. It found her interest to be 20% and stated that it was "therefore appropriate to impose a departure direction on grounds of diversion of income, the proper apportionment being 80% to [the absent parent] and 20% to [W]." The appeal tribunal also imposed a departure direction for a partner's contribution to housing costs, attributing a 20% share of the costs to W.
6. When I granted leave to appeal I said this:

"The general legal principles on the sharing of profits among partners is set out as follows in paragraph 116 of Volume 35 of Halsbury's Laws of England (4th ed reissue):

"Subject to any agreement express or implied between the partners, all the partners are entitled to share equally in the capital and profits of the business. This presumption may be negatived either by express agreement or by implication, which may arise from the course of dealing by the partners, although the burden of proof is on the partner who alleges inequality. Even where one partner does much more work than another, the rule of equality applies in the absence of any previous arrangement between the partners."

The presumption of equality derives from section 24(1) of the Partnership Act 1890. It is also the case that the rules in paragraph 2A of Schedule 1 to the Child Support (Maintenance Assessments and Special Cases) Regulations 1992 (the MASC Regulations), as in force with effect from 4 October 1999, make the earnings of a self-employed earner for child support purposes depend on total taxable profits as submitted to the Inland Revenue. The amount of drawings taken from the business is irrelevant.

In those circumstances it is hard to see what evidence or reasoning supported the appeal tribunal's conclusion that the absent parent had unreasonably reduced the amount of his income which would otherwise have been taken into account under the MASC Regulations by diverting it to other persons or for other purposes than the provision of income to himself (regulation 24(b) of the Child Support Departure Direction and Consequential Amendments Regulations 1996).

It is possible that a case might have been made for a departure direction on other grounds, but the appeal tribunal relied on the ground of diversion of income. It is arguable that that reliance was legally flawed."

7. The Secretary of State agrees that the appeal tribunal went wrong in law in making a departure direction on the grounds of diversion of income. I think that there are two main elements to that. First, in the light of the legal principles I have briefly set out above as to the shares of partnership income, the appeal tribunal's reasoning in concluding that the absent parent was entitled to 80% of the income was plainly flawed. It did not start from the statutory presumption of equal shares and did not rely on any evidence to show that there had been an agreement, express or implied, between the absent parent and W for the shares to be other than equal. The second element is more difficult to explain. It rests on the fact that under Schedule 1 to the MASC Regulations the earnings of self-employed earners are defined in terms of the net profits of the business (and from 4 October 1999 by reference to total taxable profits submitted to the Inland Revenue, except in unusual cases). That means that in the case of a partnership, once the shares in income have been identified, it is almost impossible for there to be any diversion of income.
8. I attempted to explain this in another case (CCS/3156/2000) last year, which concerned dates before the amendment of the MASC Regulations in October 1999. In paragraphs 13 to 17 of that decision I said:

"13. Second, and more fundamentally, the factual basis adopted by the CSAT could not possibly justify a departure direction on the ground of diversion of income in relation to the partnership profits. As noted in paragraph 2 above, the absent parent was a self-employed earner and not an employed earner. Paragraph 3(1) of Schedule 1 to the MASC Regulations provided at the dates in question:

"(1) Subject to subparagraphs (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 ..."

Subparagraph (2) excludes some enterprise allowances and cases where the main income is from providing board and lodging. Subparagraph (3) provides for the deduction from the gross receipts of (a) reasonable expenses wholly and exclusively defrayed for the purposes of the business (subject to detailed rules in subparagraph (4)); (b) any excess of VAT paid over VAT received; (c) income tax (as calculated according to subparagraph (5)); (d) class 2 and 4 national insurance contributions (as calculated in accordance with subparagraph (6); and (e) 50% of premiums under retirement annuity contracts or personal pension schemes. Subparagraph (7) makes specific provision for partnerships:

"(7) In the case of a self-employed earner whose employment is carried on in partnership or is that of a share fisherman within the meaning of the Social Security (Mariners' Benefits) Regulations 1975, subparagraph (3) shall have effect as though it requires--

(a) a deduction from the earner's estimated or, where appropriate, actual share of the gross receipts of the partnership or fishing boat, of his share of the sums likely to be deducted, or, where appropriate, deducted from those gross receipts under heads (a) and (b) of that subparagraph; and

(b) a deduction from the amount so calculated of the sums mentioned in heads (c) to (e) of that subparagraph."

14. The most important point about those provisions is that the amount taken by a partner in a "salary" or in any other drawings of income or capital is irrelevant to the calculation of earnings for self-employed earners. Drawings of income or capital are not permissible deductions in the calculation required by paragraph 3. Nor can payments of "salary" in themselves count as income within Schedule 1 to the MASC Regulations. I am satisfied that they do not come within paragraph 15 (other amounts received on a periodical basis which are not otherwise taken into account under Schedule 1). They are taken into account by the method of calculation of the earnings of self-employed earners.

15. It is then necessary to look at the terms of regulation 24 of the Departure Direction Regulations:

"24. A case shall constitute a case for the purposes of paragraph 5(1) of Schedule 4B to the [Child Support Act 1991] where--

(a) the non-applicant has the ability to control the amount of income he receives, including earnings from employment or self-employment and dividends from shares, whether or not the whole of that income is derived from the company or business from which his earnings are derived; and

(b) the Secretary of State is satisfied that the non-applicant has unreasonably reduced the amount of his income which would otherwise fall to be taken into account under regulation 7 or 8 of the Maintenance Assessments and Special Cases Regulations by diverting it to other persons or for purposes other than the provision of income for himself."

16. Plainly, whatever view was taken of the absent parent ability to control the amount of income he received, he could not, by taking a lower than necessary "salary", reduce the amount of income which would otherwise be taken into account under regulation 7 of the MASC Regulations, which refers on to Schedule 1. The amount of income properly to be taken into account was fixed according to the absent parent's share of the gross receipts less deductions and was not affected by the amount of "salary" taken. Thus the condition in regulation 24(b) could not have been satisfied in that respect, even if paragraph (a) was satisfied (which is doubtful). It does not affect that conclusion that the maintenance assessment current at the date of the application for a departure direction was calculated on a wrong basis. Sometimes, an appeal tribunal can in effect "correct" a maintenance assessment through the mechanism of a departure direction. However, that can only be done if the circumstances fall within one of the cases in which a departure direction is allowed. In the present case they do not. And where the current maintenance assessment is calculated on a fundamentally wrong basis it seems to me that an appeal tribunal simply cannot use it as the starting-point from which to make a departure direction.

17. For those reasons, no CSAT properly instructed as to the law could have made a departure direction under regulation 24 of the Departure Direction Regulations on the basis of the absent parent's share of the partnership profits."

9. Exactly the same reasoning applies to the form of Schedule 1 to the MASC Regulations in force from 4 October 1999, and it does not matter that there is no equivalent to paragraph 3(7) in paragraphs 2A to 2C on using total taxable profits submitted to the Inland Revenue. A partner's individual share of total taxable profits of the partnership will be in accordance with the terms of the partnership. In the present case, the absent parent's self-employed earnings to be taken into account under regulation 7 of the MASC Regulations could not be reduced by anything which he did, once his share of the partnership profits had been properly identified and used in the ordinary formula to calculate the maintenance assessment. And if the appeal tribunal had concluded on an application of the right legal principles (which I have already decided it did not apply) that the share of the partnership profits used in the ordinary formula did not correspond to the terms of the partnership, steps should have been taken to see that that was dealt with by changing the maintenance assessment under the ordinary formula. That was not a failing which could be "corrected" through the use of regulation 24 of the MASC Regulations.
10. I add that the appeal tribunal also went wrong in law, not only in using the 20/80 split to calculate the extent of W's contribution to housing costs, but also in failing to explain the reasons why it concluded that a departure direction was justified at all under regulation 27 of the MASC Regulations (partner's contribution to housing costs).
11. For those reasons, the decision of the appeal tribunal of 10 January 2002 must be set aside as wrong in law. As there are many factual issues in dispute, the only possible course is for there to be a rehearing by a new appeal tribunal. The Secretary of State's reference of the parent with care's application for a departure direction is remitted to a differently constituted appeal tribunal for determination in accordance with the directions given below. Consideration should be given to having a financially qualified panel member as a member of the new appeal tribunal.
12. There is to be a complete rehearing of the case on the evidence presented and submissions made to the new appeal tribunal, which will not be bound by any findings made or conclusions expressed by the appeal tribunal of 10 January 2002. The evidence will include the documents produced and submissions made in the course of the appeal to the Commissioner. The new appeal tribunal must apply the legal approach set out in paragraphs 6 to 9 above to the identification of the extent a partner's legal entitlement to a share in the partnership profits and to the application of regulation 24 of the MASC Regulations. As I said when granting leave to appeal, some of the other grounds put forward by the parent with care for a departure direction might have been arguable. The new appeal tribunal must consider all the grounds put forward by the parent with care and reach and record reasoned findings of fact and conclusions on the relevant evidence. If the new appeal tribunal concludes that the circumstances fall within one or more of the cases in which a departure direction can be given, it must go on to consider whether, taking into account the factors prescribed in the legislation, it is just and equitable to give a

direction. I should give no further directions of law. The evaluation of all the evidence will be entirely a matter for the judgment of the member or members of the new appeal tribunal.

(Signed) J Mesher

Commissioner

Date: 5 December 2002