UK Social Security and Child Support Commissioners' Decisions

 


1. This appeal, brought with my leave, fails. The decision of the Appeal Tribunal on 15 1 02 was not erroneous in point of law, as explained below.
2. The appeal concerns the appellant's council tax benefit (CTB) on his claim made on 16 11 00. On his claim form he stated that his and his wife's joint salary from their employment as company directors of WC Ltd was £57 per week. The company accounts were still with the auditors and would be produced when received.
3. The appellant produced the trading and profit and loss and the directors' loan accounts for the company for the year 1 4 99 to 31 3 00 at the Town Hall on 29 1 01. The accounts were signed by him and showed as an overhead "Directors' emoluments" of £6400. The appellant explained that this figure was not, however, the amount he and his wife had actually drawn, this being only £2964.57. The higher figure was simply the maximum amount he could have drawn without paying income tax and was included as recommended by his accountants to reduce the company's net profit and subsequently the amount carried forward, year on year, which is set against losses made by the company in previous years. The loan account showed the difference between the actual drawings and £6400 as "salaries grossed up" of £3435.43 (and added to the loan account). The loan account represented the amount owed to the appellant and his wife by the company, and the undrawn balance of £3435.43 was credited to the loan account to improve the company's cashflow position. This explanation was later confirmed by the accountants in a letter of 23 7 01.
4. The local authority got itself mixed-up and at first termed the appellant and his wife "self-employed" and thought the loan account represented amounts owed by them to the company rather than the other way about. I can understand the annoyance these mistakes caused and the further correspondence to which they gave rise. However, by the time the calculation appealed against was made, and the matter came before the tribunal, the appellant and his wife were correctly treated as employed earners and the true position about the loan sorted out.
5. What the local authority did, however, was take the "directors' emoluments" figure of £6400 from the signed accounts as the correct earnings figure in accordance with regulation 19 of the Council Tax Benefit Regulations and apportion it between the couple so as to extinguish CTB entitlement for the year 1 4 00 to 31 3 01. It observed that the appellant's decision to redirect some of the available amount for the benefit of the company, rather than drawing it himself, could not be taken into account.
6. The appeal reiterated that the appellant and his wife had actually drawn only £2964.57, as that was all the company could afford. The appellant also produced the company accounts for 1 4 00 to 31 3 01 showing only £3130 as directors' remuneration, and indeed a CTB award for that year was made. Doubtless, however, the company did not in that year derive the advantage from which it had benefited in the previous year.
7. The appellant argued at the tribunal hearing that the accountants who prepared the 1999-2000 company accounts had been interested only in the bottom line and that he himself had simply signed the accounts that were presented to him. The device had been described to him as "creative accounting". He had not really understood the mechanism of crediting the difference to the loan account. He conceded that he might benefit "in due course" from the company's improved finances, but not in the year under consideration. He felt very strongly that his CTB should be calculated only on the amount he actually drew.
8. The tribunal confirmed the local authority's decision. It accepted that the appellant had drawn only £2964.57, the remainder being "added to the Director's Loan Account for [the appellant]". That account was a liability of the company and available to the appellant if he so chose. He had signed the accounts and must be deemed to have adequate knowledge of their contents, and had accepted that he might gain an advantage from the loan account at some time in the future. The definition of "earnings" in regulation 19(1) was "in the case of employment as an employed earner, any remuneration or profit derived from that employment", and R(SB)21/86 (a supplementary benefit case dealing with a similar definition) had held that "derived from" was to be given the wide meaning of moneys "having their origin in" the employment.
9. On the appeal to me, the appellant again argued that the difference between the £6400 shown in the accounts and the £2964.57 he and his wife actually received would be of only the most hypothetical benefit to him; he would derive any benefit only if the company became sufficiently profitable to repay him the loan, so that he could repay the mortgagee from whom he borrowed the money in 1988. His understanding of the accounting device was therefore irrelevant, and anyway the CEO of Enron had recently escaped liability by saying he was a manager not an accountant. R(SB)21/86 was also irrelevant, as it dealt with entirely different facts.
10. On giving leave to appeal I asked the appellant a number of questions, the answers to which turned out not to be relevant, and I apologise for troubling him with them. I also asked the local authority whether it had applied various other of the Council Tax Benefit Regulations, including regulation 26 on notional income. It said it had not, because it had taken the figure actually shown in the accounts. Both parties agreed that there had been no appeals in previous years because the amounts shown in the accounts and the amounts drawn had coincided, as they did also for the following year. Neither party wanted an oral hearing.
11. I have no difficulty (as indeed the tribunal did not) in accepting that the appellant and his wife in fact drew only £2964.57 in the relevant year. But the figure of £6400 was what appeared in the accounts, signed by the appellant, and that figure was put there for the immediate purpose of improving the company's cashflow position and ultimately to be of at least possible benefit to the appellant (and his wife). The company is the vehicle through which the appellant and his wife trade. The item "directors' emoluments" or "directors' remuneration" clearly derives from services to the company "past, present or future" (Hochstrasser v Mayer [1959] Ch 22); it is a recurring item, even though its amount may vary, and this supports its treatment as part of the directors' "earnings" derived from their employment by (or their holding of office with) the company: Blakiston v Cooper [1909]AC 104. These are tax cases and the wide interpretation of earnings "derived from" employment is a tax as well as a benefit concept.
12. It is not possible to put forward one set of figures to obtain a tax advantage and a different one to obtain a benefit advantage. In the tax credit Social Security Commissioner's decision CTC/626/01, a couple had set up a partnership under which the husband did nearly all the work for nothing and the wife earned all the money working an hour a day. This was a legitimate and no doubt successful tax-saving device, but it meant that under the working families' tax credit rules neither partner qualified: the husband did not earn any money, and the wife worked too few hours. Mr Commissioner Williams upheld the tribunal's decision which in its turn upheld that of the original decision maker.
13. I cannot accept the appellant's argument that he signed the accounts without understanding what he was doing, and that if this was good enough for the Enron CEO it was good enough for him. He was running the company, not merely managing it, with a finance director to deal with the sums, and the tax authorities and Companies House will have relied on his signature. It is unfortunate that for that particular year the tax device led to disadvantageous consequences for CTB, but that is the effect of CTC/626/01.
14. My conclusion, and I am sorry for the disappointment it will cause, is that the tribunal's decision was correct, for the reasons it gave.

(signed on original) Christine Fellner

Commissioner

21 October 2002