UK Social Security and Child Support Commissioners' Decisions

 


[2005] UKSSCSC CCS_29_2005 (07 June 2005)

DECISION OF THE CHILD SUPPORT COMMISSIONER
1. My decision is given under section 24(2) and (3)(d) of the Child Support Act 1991. It is:

I SET ASIDE the decision of the Preston appeal tribunal, held on 8 November 2004 under reference U/06/075/2004/00926, because it is wrong in law.

I REMIT the case to a differently constituted appeal tribunal and DIRECT as follows.

The appeal tribunal must investigate and determine the parent with care's application for a variation which was referred to it for determination by the Secretary of State. In doing so:

The appeal tribunal must conduct a complete rehearing of the issues that are raised by the appeal and, subject to the tribunal's discretion under section 20(7)(a) of the 1991 Act, any other issues that merit consideration.

The appeal tribunal must not take account of income taken as dividends in deciding whether to agree to a variation under regulation 20 of the Child Support (Variations) Regulations 2000 (life-style inconsistent). However, it may do this when considering whether to agree to a variation under regulation 19 (income not taken into account and diversion of income). From and including 16 March 2005 6 April 2005, it must take account of the amendments made by regulation 8 of the Child Support (Miscellaneous Amendments) Regulations 2005.

Before this case is listed for rehearing, it must be put before a district chairman to consider whether it is necessary or appropriate to give directions under regulation 38(2) of the Social Security and Child Support (Decisions and Appeals) Regulations 1999. In particular, the district chairman will need to consider

setting a timetable for the production of any further evidence that may be relevant to the rehearing; and

whether a financially qualified panel member should be included on the tribunal for the rehearing.

The appeal to the Commissioner

2. This is one of a number of appeals that have been received by the Commissioners which raise the issue of how income that is taken in the form of dividends is treated under the child support scheme as reformed under the Child Support, Pensions and Social Security Act 2000. This case concerns an application for a variation from the calculation of maintenance under Schedule 1 to the Child Support Act 1991.
3. In terms of the child support legislation, the appellant is parent with care who applied for a variation and the second respondent is the non-resident parent. I shall refer to them in those terms. The Secretary of State has supported the appeal, but not in a way that benefits the parent with care. Both parents have made observations.

The relevant factual background

4. I will say as little as possible about this in order not to prejudice the investigation into the facts and circumstances of the case, including the non-resident parent's motivation in taking income in the form of dividends, that will be necessary at the rehearing. It is sufficient to say that the key facts relevant to this appeal are these. The non-resident parent works in the information technology industry and operates through his own company. The income generated by the work that he does is paid to his company. He takes income from the company as director's fee and as dividends.

The children

5. Both parents have referred to the interests of their children. The purpose of the child support scheme is to ensure proper financial support for children of parents who are not living and caring for their children together. The scheme requires the interests of the children to be taken into account when exercising any discretionary powers (see sections 2 and 28F(2)(a) of the Child Support Act 1991). But apart from that, the interests of the children must be determined in accordance with the statutory scheme and cannot override it.

Variation – the grounds considered by the appeal tribunal

6. The tribunal considered two grounds for a variation – diversion of income and life-style inconsistent. I need to deal with them separately. Both are governed by the Child Support (Variations) Regulations 2000.

Variation – diversion of income

The law

7. This ground for a variation is governed by regulation 19. Regulation 19(4) provides that it applies if

'(a) the non-resident parent has the ability to control the amount of income he receives, including earnings from employment or self-employment, 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-resident parent has unreasonably reduced the amount of his income which would otherwise fall to be taken into account under the Maintenance Calculations and Special Cases Regulations by diverting it to other persons or for purposes other than the provision of such income for himself in order to reduce his liability to pay child support maintenance.'

8. Mr Commissioner Mesher dealt with this ground for a variation in CCS/2433/2004, although it was not necessary to his decision:

'15. I add some very brief comments on the possibility of a variation being made in circumstances like those of the present case. A specific application would have to be made. One set of circumstances set out in the relevant regulations is where a non-resident parent has the ability to control the amount of income he receives and has unreasonably reduced the amount of the income that would otherwise count under the MCSC Regulations by diverting it into a form that will not count, in order to reduce his liability to pay child support maintenance (Child Support (Variations) Regulations 2000, regulation 19(4)). Those cumulative conditions will be often be difficult to show, perhaps especially the requirement as to the purpose of the diversion of income, "in order to reduce his liability to pay child support maintenance". However, they will not be quite as difficult to show as suggested at some stages of this case. First, the representative of the Secretary of State was probably right to say in the submission of 29 November 2004 that it would not have to have been a non-resident parent's sole purpose to reduce the amount of his child support liability, but that it would be enough if that was a significant operative purpose. Second, the application of regulation 19(4) would not automatically be excluded by the fact that the non-resident parent here had first adopted the practice of paying himself dividends 10 years ago, well before any question of child support maintenance arose. That is because, as director of the company, he has to decide each year how much to pay himself by way of salary and whether to declare any dividends, and their amount, through each year. Thus, it seems to me that the difficult questions about diversion and about purpose must, if an application for variation has been made, be asked each time decisions about payments are made.'

I respectfully agree with those comments. However, as I will explain, they are irrelevant under the reforms made by the Child Support (Miscellaneous Amendments) Regulations 2005.

What the tribunal did

9. The tribunal found that the non-resident parent's income taken in the form of dividends was so taken for 'sound commercial reasons' and was not an unreasonable deduction of the income that would otherwise have been taken into account for the maintenance calculation.

How the tribunal went wrong in law

10. The question whether the non-resident parent's reasons for taking income as dividends were commercially sound was a matter of judgment for the tribunal. So was the question whether the reduction was unreasonable. The tribunal made its judgments with the benefit of the experience and knowledge of the legally qualified panel member and financially qualified panel member who comprised the tribunal. Their judgment is entitled to respect and it is not part of my function to substitute my view for theirs. However, their judgment has to be explained and justified. The chairman has not explained the basis on which the tribunal made its judgments on these matters. Nor has she set out the facts on which they were based. Nor, so far as her record of proceedings shows, was the issue investigated at the hearing. Given the distribution of income between director's fee and dividends plus the instalments in which the dividends were paid, the tribunal's judgments were not self-evident. I consider that its reasons were inadequate to explain, let alone to justify, its conclusions.

Variation – life-style inconsistent

The law

11. This ground for a variation is governed by regulation 20. Regulation 20(1)(b) provides that it applies if

'the Secretary of State is satisfied that the income which has been, or would be, taken into account for the purposes of the maintenance calculation is substantially lower than the level of income required to support the overall life-style of the non-resident parent.'

12. There are restrictions on the additional income that may be taken into account. There are two that are relevant to this case. They are set out in regulation 20(3).
13. One restriction covers:

'(a) income which is or would be disregarded for the purposes of a maintenance calculation under the Maintenance Calculations and Special Cases Regulations'.

Income which is taken in the form of dividends and is derived from the ownership of the qualifying shares is not income for the purposes of the maintenance calculation: see the decision of Mr Commissioner Mesher in CCS/2433/2004.

14. The other restriction covers:

'(c) assets as defined for the purposes of regulation 18, or income derived from those assets'.

'Assets' are defined in regulation 18(2) and include shares. Income taken in the form of dividends is, as Mr Commissioner Mesher explained, derived from the ownership of shares and as such is caught by this restriction.

What the tribunal did

15. The tribunal found that the non-resident parent's earnings 'could not possibly support the life-style based on the figures produced to the tribunal, and [the non-resident parent's] own evidence was that his life-style was financed by his salary, or director's remuneration, plus dividends paid by the company.' Accordingly, the tribunal found that the grounds for agreeing to a variation were made out.

How the tribunal went wrong in law

16. The tribunal went wrong in law by failing to take account of the restrictions on the sources of income in regulation 20(3). It should not have taken into account any income that the non-resident parent took in the form of dividends.

The 2005 reforms

17. The Child Support (Variations) Regulations 2000 have been amended by regulation 8 of the Child Support (Miscellaneous Amendments) Regulations 2005 with effect from 16 March 2005 6 April 2005.
18. Regulation 19 is amended in a way that allows a variation to be given in respect of income taken in the form of dividends. A new paragraph (1A) is inserted which provides for a variation if

'(a) the non-resident parent has the ability to control the amount he receives from a company or business, including earnings from employment or self-employment; and

'(b) the Secretary of State is satisfied that the non-resident parent is receiving income from that company or business which would not otherwise fall to be taken into account under the Maintenance Calculations and Special Cases Regulations.'

This only applies if the income is at least £100. Regulation 19(4)(b) is also amended to remove the words 'in order to reduce his liability to pay child support maintenance'.

19. Regulation 20 is amended to prevent any overlap with regulation 19. This is done by inserting a new subparagraph (aa) into regulation 20(3) which expressly excludes from regulation 20 'income which falls to be considered under regulation 19(1A)'.
20. This case came before the appeal tribunal on a referral by the Secretary of State under section 28D(1)(b) of the Child Support Act 1991. Accordingly, section 20(7)(b) of that Act does not apply and the tribunal must take account of all changes of circumstances down to the date of the rehearing. The amendments to the Child Support (Variations) Regulations 2000 are a change of circumstances for this purpose. The tribunal must apply the amended version of regulation 19, but only with effect from 16 March 2005 6 April 2005.

The maintenance calculation

21. I have confined myself to commenting on the referral of the variation application. The maintenance calculation is not before me. However, when the Secretary of State looks at that again, it may be worth considering whether the income that the non-resident parent takes as dividends is also 'remuneration or profit derived from his employment' for the purposes of paragraph 4(1) of the Schedule to the Child Support (Maintenance Calculations and Special Cases) Regulations 2000. I shall deal with this issue in CCS/0623/2005.

Disposal

22. I allow the appeal, set aside the tribunal's decision and direct a rehearing in accordance with my analysis of the Child Support (Variations) Regulations 2000.

Signed on original on 7 June 2005 Corrected on 17 June 2005

Edward Jacobs Commissioner