UK Social Security and Child Support Commissioners' Decisions

 


UKSSCSC CIS_672_2004 (05 July 2004)

CIS/672/2004

DECISION OF THE SOCIAL SECURITY COMMISSIONER

1. This is an appeal by the Secretary of State, brought with the permission of the Regional Chairman, against a decision of the Chester Appeal Tribunal made on 13 November 2003. For the reasons set out below I dismiss the appeal.
2. I held an oral hearing of the appeal at which the Secretary of State was represented by Mr. Malcolm Jarvis of counsel, and the Claimant by Mr. Richard Atkinson of the Welfare Benefits Advice Unit of the Borough of Wirrall Social Services Department. I am grateful to both of them for their able submissions.
3. The Claimant or her husband have been in receipt of income support since 1992, and that income support has included amounts in respect of interest under a mortgage on their house which was entered into in 1990, when the lender's standard rate of interest was 15.95%. The mortgage is what is termed by the lender a "stabiliser" mortgage, under which the amount of interest actually required to be paid to the lender is a fixed rate of 10.25%, with any difference between that rate and the lender's interest rate being added to (or, as the case may be, deducted from) the amount of capital outstanding.
4. It is common ground that until 2 October 1995 the amount of housing costs included in the income support payments should have been based on the fixed rate of 10.25% per annum actually paid to the lender. However, a new Schedule 3 to the Income Support (General) Regulations 1987 was substituted with effect from 2 October 1995. One of the features of the new provisions was that mortgage interest payable by way of housing costs ceased to be determined by the interest rate actually payable to the lender but rather by a standard rate of interest fixed in relation to all borrowers. The initial standard rate fixed from 2 October 1995 was 8.39%. But for the transitional protection in paragraph 7 of Schedule 3 the Claimant's housing costs would therefore have reduced from 2 October 1995. That transitional protection had the effect, broadly, that where the amount payable by way of income support housing costs before 2 October 1995 was greater than the amount which (but for the transitional provision) would have been payable from that date, an additional amount equal to the difference (called the "add back") was to be paid. So far, there is no problem. It is common ground that in the present case the initial amount of the add back, attributable to the difference between the fixed rate of 10.25% and the standard rate of 8.39%, was £16.39 per week.
5. However, Schedule 3 further provides for reduction (or, as it has been referred to in this case, erosion) of the add back in the event that the amount of housing costs payable by way of income support (and ignoring the add back) increase after 2 October 1995. It is clear that once such an erosion has taken place, it cannot be reversed, and that once the whole of the add back has been eroded by this means no further amount can become payable by way of add back. The issue which the Tribunal decided was in precisely what circumstances such a reduction of the add back takes place. The Claimant's contention, which was accepted by the Tribunal, is that a reduction in the amount of the add back only occurs when the amount payable by way of housing costs (ignoring the add back) increases above the amount which was payable in the first week when the new regime applied. The Secretary of State's contention, on the other hand, is that a reduction occurs whenever (disregarding the add back) there is any increase in the amount payable by way of housing costs.
6. Suppose, for example, that the standard rate of interest had fluctuated from its initial rate of 8.39% as follows: 7.39%, 8.39%, 7.39%, 8.39%. On the Claimant's contention there would have been no erosion of the add back, because the housing costs would not have increased above the amount payable in the first week of the new regime. The Secretary of State's contention, on the other hand, is that there would have been an erosion of the add back on both the occasions when, by virtue of a 1% increase in the standard rate of interest, there was an increase in the housing costs payable.
7. The effect of the changes in the standard rate which have actually occurred is that on the Secretary of State's contention the add back was completely eroded by December 1998. On the Claimant's contention, however, (and on my understanding of the calculations on pages 38 to 46 of the papers) the add back had even by March 2002 (the date at which those calculations cease) only been eroded by some £6.18 per week, leaving an add back at that date of some £10 per week.
8. The issue is of course one of construction of the relevant provisions of paragraph 7 of Schedule 3, which are as follows:

"(1) Where the amount applicable to a claimant by way of housing costs under regulation 17(1)(e) or regulation 18(1)(f) (as the case may be) in the benefit week which includes 1 October 1995 ("the first benefit week") is greater than the amount which, in accordance with paragraphs 6 and 10, is applicable in his case in the next succeeding benefit week ("the second benefit week"), the claimant shall be entitled to have his existing housing costs increased by an amount (referred to in this paragraph as "add back") determined in accordance with the following provisions of this paragraph.

(2) Where the amount to be met by way of housing costs in the first benefit week is greater than the amount to be met in the second benefit week, then the amount of the add back shall be a sum representing the difference between those two amounts.

(3) Were the amount of existing housing costs, disregarding the add back, which is applicable to the claimant increases after the second benefit week, the amount of the add back shall be decreased by an amount equal to that increase, and the amount of the add back shall thereafter be the decreased amount.

(4) Any increase in the amount of the existing housing costs, disregarding the add back, shall reduce the amount of the add back in the manner specified in sub-paragraph (3), and where the amount of the add back is reduced to nil, the amount of the existing housing costs shall thereafter not include any amount by way of add back."

9. Mr. Jarvis on behalf of the the Secretary of State contends as follows:

(1) Para. 7(3) provides for the add back to be decreased when the amount of housing costs "increases after the second benefit week", and that means quite simply that there is an erosion of the add back whenever (disregarding the add back) the amount of housing costs increases as compared with the previous week.

(2) One cannot arrive at the result for which the Claimant contends without reading in words such as "increases after the second benefit week as compared with the amount payable in respect of that week".

(3) The effect of the Secretary of State's construction is one of gradually phasing out the add back but at the same time not (by virtue of the erosion) leaving a claimant worse off then he was in the preceding week: the add back is only eroded when there would (ignoring the add back) be an increase in the housing costs payable, and the erosion is equal to the amount of that increase. That effect is consistent with the transitional nature of the provision. It is true that a claimant paying a fixed rate of interest will be worse off than he was in the preceding week when the standard rate of interest falls, because the amount payable by way of housing costs will fall but the rate of interest payable by him will not, but that is so under either construction of the provisions and has nothing to do with the add back.

(4) There is nothing anomalous about the position that there is an erosion if the standard interest rate first goes down and then back up to its initial rate. There is no less reason why there should be an erosion of the add back in that situation than in the situation where the standard interest rate first goes up and then back down to its initial rate (where the Claimant accepts that there is an erosion).

10. Mr. Atkinson's primary submission is that the Tribunal was correct, for broadly the reasons which it gave. However, his written submission included what was called an "alternative" submission (which was not put to the Tribunal). This was that para. 7(3) only applies where the "existing housing costs" increase after the second benefit week, and "existing housing costs" means the interest actually payable by the claimant, and not the amount which he or she is allowed by way of housing costs for income support purposes. However, in my view it is plain that "existing housing costs" does not have that meaning in para. 7(3). First, the words "disregarding the add back" in para. 7(3) would have been unnecessary if "existing housing costs" had had that meaning. Secondly, if this contention were right para. 7(3) would be substantially deprived of effect. If correct, this contention would not be an alternative one but but would actually render the Tribunal's decision wrong. In oral argument Mr. Atkinson acknowledged that this "alternative" argument could not be correct and withdrew it.
11. I turn therefore to the question whether the correct construction of para. 7(3) is that preferred by the Tribunal or that put forward by the Secretary of State.
12. I should say first that in its reasons the Tribunal stated (correctly so far as I can see from the Record of Proceedings) that the argument of the Claimant's then representative was that a reduction in the add back would only occur when the standard rate of interest rose above the lender's fixed rate of 10.25%. That is of course not the effect of the construction at which the Tribunal arrived or which Mr. Atkinson contends for, which (looked at solely in terms of rates of interest) is essentially that a reduction only occurs when the standard rate exceeds 8.39%, the rate in the second week. (It may be that the Claimant's then representative intended to submit to the Tribunal that no complete erosion of the add back would occur until the standard rate reached 10.25%, but that is not how it was understood by the Tribunal).
13. I agree with the submission of Mr. Atkinson that the opening words of para. 7(3) "where the amount of housing costs …………increases after the second week" naturally raise the question: "increases as compared with what?" I agree with his further submission that the obvious comparison is with the housing costs in the second week. Para. 7(1) and (2), which determine the initial amount of the add back, require a comparison between the amount of housing costs in the first benefit week and the amount in the second benefit week. The reference in para. 7(3) to the housing costs increasing after the second week seems to me naturally to invite comparison with the housing costs in the second week, not to the housing costs in the immediately preceding week. The more natural meaning of the words therefore seems to me at first reading to be that contended for by the Claimant. I do not think that this meaning requires additional words to be read in, but if and so far as it does so I do not find any difficulty in reading them in.
14. I turn to the question of which construction more closely fits the probable purpose of the provisions. There is an obvious reason why it should have been thought right to provide that an increase in the housing costs above the level payable in the second week should erode the add back. It is, however, far less obvious why it should have been thought right to provide that any future increase in the housing costs above the level payable in the immediately preceding week should erode the add back.
15. The purpose of para. 7 of Schedule 3 (which is headed "Transitional Protection") was to provide transitional protection to those whose housing costs would have been reduced owing to the introduction of the new regime (e.g. because the rate of interest payable under the mortgage was higher than the standard rate of interest).
16. It is clear that it was considered right to fix the maximum amount of such protection at the amount of the difference as at the date of the introduction of the new regime. In particular, it was not considered that a person with a mortgage at a fixed rate of interest should be protected against a subsequent reduction in interest rates generally (and therefore in the standard rate of interest). Put another way, the purpose was to protect against a fall in housing costs directly caused by the introduction of the new regime alone, and not against a fall in housing costs also attributable to other factors, such as a subsequent fall in interest rates.
17. One can see immediately why it would have been thought right to reduce the amount of the add back in the event of housing costs (and in particular the standard rate of interest) increasing above the level applicable on 2 October 1995. As the Tribunal said, an obvious reason for doing that would have been to prevent the add back resulting in a claimant being better off under the new regime than he would have been under the old. Take, for example, the case of a person in the position of the Claimant who on 2 October 1995 was paying a fixed rate of interest in excess of the standard rate. If the standard rate rises after 2 October 1995 such a person needs less by way of add back to put himself in the position which he was in under the old regime. I accept that a provision for reduction in the add back when housing costs increase above their 2 October 1995 level is a somewhat crude means of achieving that objective. It would mean, for example, that a person who on 2 October 1995 was paying a variable interest rate in excess of the standard rate would, in the event of a rise in interest rates, find his add back reduced even though the end result would leave him worse off than he would have been under the old regime. But para. 7(3) as construed by the Claimant is nevertheless a fairly simple and obvious means of ensuring that the add back does not result in a claimant being better off under the new regime than he would have been under the old one. It is simple because it does not require recalculation, on each change in the amount of housing costs, of the amount which would have been payable under the old regime. The fact that any such reduction in the add back is made permanent is consistent with the protection being of a transitional nature: once it has been lost, or partially lost, it cannot be regained.
18. If, on the other hand, the Secretary of State's construction is correct, the rationale for the reduction in the add back would seem to be the rather different one of reducing it whenever this can be done without reducing the level of housing costs payable in the immediately preceding week. In other words, rather than being an (admittedly somewhat crude) means of ensuring that a claimant cannot be better off under the new regime than he would have been under the old, it becomes a means of eroding the protection whenever possible, consistently with the erosion not causing the level of housing benefit payable to fall as comparied with the previous week. Looked at in terms of interest rates, it becomes a means of clawing back the add back whenever an opportunity to do so results from an interest rate rise, rather than a simple means of ensuring that a claimant is not protected to a greater extent than he should be. The latter result would obviously have been thought desirable, but it seems to me much less clear that the former would have been.
19. It was argued by Mr. Jarvis that, even on the Claimant's construction, there would be a reduction of the add back on each occasion when the housing costs rise above the level in the second benefit week, and that this shows that it was intended that there should be a reduction equal to the amount of any increase in the housing costs as compared with the previous week. Take, for example, the position if the housing costs payable in the first benefit week were £100 and in the second benefit week £80, resulting in an add back of £20. Suppose that the housing costs payable (disregarding the add back) then increased to £90, then reduced to £80, and then increased to £90 again. Mr. Jarvis submits that even on the Claimant's construction both of those £10 increases would result in an erosion of the add back by £10, resulting in a complete erosion of the add back, even though the housing costs had never exceeded their second benefit week level by more than £10.
20. I would accept that Mr. Jarvis must be right in submitting that, if it is the case that each increase above the second benefit week level results in an erosion of the add back, that is a very strong indication that the Claimant's construction is not the correct one. It is difficult to see any rational basis on which it should have been considered that every increase above the level in the second benefit week (even an increase which, as it as it were, repeats an increase which has already taken place) should result in an erosion of the add back, but that increases to a level below that in the second benefit week should not result in an erosion.
21. However, after considerable hesitation, I do not think that each increase above the second benefit week level (i.e. even an increase which repeats a previous increase) does result in a reduction of the add back. I think that it probably is the case that, even on the Claimant's construction, both of the occasions when the housing costs increase above the level in the second week must be occasions which fall within the opening words of para. 7(3) ("where the amount of existing housing costs, disregarding the add back, which is applicable to the claimant increases after the second benefit week"). However, para. 7(3) goes on to say that the "the amount of the add back shall be decreased by an amount equal to that increase." It seems to me that it is implicit that the total amount of the reduction in the add back cannot be more than the amount by which the housing costs exceed or have exceeded their second benefit week level – in other words that any given amount of increase above the second week level can only be counted once for the purpose of determining "the amount equal to that increase". I recognise that that view is very arguably open to the objection that it does appear to be intended by para. 7(3) that any increase which qualifies as an increase within the opening words is to result in a decrease in the add back. That impression is strongly confirmed by para. 7(4), stating that "any increase in the amount of the existing housing costs ………….shall reduce the amount of the add back." At the end of the day, however, it does not seem to me that the wording of paras. 7(3) and (4), taken as a whole, compel the result that every increase which falls within the opening words of para. 7(3) (i.e. even an increase which duplicates a previous increase) must result in a reduction of the add back. Whilst para. 7(4), looked at on its own, does most strongly indicate that result, the purpose of para. 7(4) was in my view merely to make clear that once the add back has been entirely eroded it cannot be reinstated.
22. Mr. Atkinson referred me to CIS/16769/1996, a decision of Mr. Commissioner Mesher. The issue there was extremely complex, but as part of his reasoning the Commissioner said in para. 21:

"If the comparison is done assuming the full amount of housing costs in the second benefit week, it works out as follows. In the first benefit week 100% of eligible interest, based on the actual interest rate, would have been £71.98. The full amount based on the standard interest rate under the new Schedule 3 would have been £67.18 (see the AT2A for 8 December 1995). The difference is £4.80 and that is the amount of the add back to be included in the claimant's applicable amount from 7 November 1995. The amount of the add back is not wiped out by the operation of paragraph 7(2) and (3), because an increase in housing costs after the second benefit week can only be judged by reference to the amount of housing costs put into the second benefit week in the calculation of the add back. There was no increase on that basis before 7 November 1995, or indeed down to 26 January 1996."

23. I think that the fifth sentence of that passage may indicate that the Commissioner considered that, in determining whether there has been an increase in housing costs for the purposes of para. 7(3), the comparison is with the level of housing costs in the second week. However, the contrary does not appear to have been argued before the Commissioner, and the oucome of that case would not have been different had the Commissioner been of a different view on that point. It is, however, of some comfort that para. 7(3) seems to have struck Mr. Commissioner Mesher in the same way that it does me.
24. In the result, therefore, difficult though I have found the point, I conclude that the Tribunal's decision was correct.

(Signed) Charles Turnbull

Commissioner

5 July 2004