UK Social Security and Child Support Commissioners' Decisions

 


[2005] UKSSCSC CCS_623_2005 (08 June 2005)

DECISION OF THE CHILD SUPPORT COMMISSIONER
1. My decision is given under section 24 of the Child Support Act 1991. It is:

The decision of the Fox Court appeal tribunal under reference U/42/158/2004/00001, held on 10 November 2004, is not wrong law.

The appeal to the Commissioner

2. This is one of a number of appeals that have been received by the Commissioners that 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 a calculation of maintenance for Hannah under Schedule 1 to the Child Support Act 1991 as amended.
3. In terms of the child support legislation, Hannah's mother is her non-resident parent and her father is her parent with care. I shall refer to them in those terms. The Secretary of State has supported the appeal and both parents have made observations.

The legal issue

4. The legal issue is whether particular income received by the non-resident parent is 'earnings' as defined by the Schedule to the Child Support (Maintenance Calculations and Special Cases) Regulations 2000. More specifically, the issue is whether the income is 'remuneration or profit derived from that employment' under paragraph 4(1) of that Schedule. The issue arises because of the form in which her income from her employing company is calculated or, at least, presented.

The non-resident parent's income

5. The non-resident parent's employer set out in a letter to her the basis on which she was paid:

'Further to our telephone conversation please take this letter as confirmation that your wage is made up of two parts,

1) The minimum wage/basic pay – This part of your wage is based on the minimum wage which is £4.50. The minimum wage section of your pay is subject to PAYE tax. This part of your weekly pay is shown in the top section of your wage slip.

2) Dividend – The remainder of your wage is paid in the form of a dividend. All temporary workers being paid via PAYE composite are set up as a shareholder, this enables [us] to pay part of their wage as a dividend. The dividend is subject to Corporation Tax, which is set at 19%. [We] do not issue shareholders information, all temporary workers are set up under a single token share scheme. The scheme operated by [us] does not allow shareholders to vote. The dividend information is shown in the middle section of your wage slip.'

6. The papers contain four of the non-resident parent's payslips. Each sets out her income and deductions for one week. They are all divided into three sections, headed PAYE Details, Dividend Details and Expense Details. For convenience, I will quote the figures from the payslip dated 16 January 2004. The terminology is that of the payslips. Under PAYE Details, she was paid a basic wage of £182.25, made up of 40.5 hours @ £4.40 per hour. She also received £15.18 holiday pay, making a total gross basic income of £197.43. Under Dividend Details, she received a distribution of a gross income of £799.88, made up of 40.5 hours @ £19.75. From this was deducted her total gross basic income of £197.53, leaving a gross profit of £602.45.
7. Those figures show that the amount of the dividend income is based on the amount of number of hours that the non-resident parent worked and that it is paid at a considerably higher rate than her basic wage.
8. This method of payment reduces the rate at which the non-resident parent has to pay income tax on the dividend part of her income. It also benefits the employer in the amount of national insurance on that part of her income. I do not know what attitude Her Majesty's Revenue and Customs takes to this arrangement and it is not my concern. The issue for me is how the dividend part of the non-resident parent's income is treated when calculating the amount of her liability to pay child support maintenance.

The tribunal's decision

9. The Secretary of State disregarded the dividend income in determining the non-resident parent's net income. The parent with care exercised his right of appeal and the appeal tribunal decided that the payments received by the non-resident parent were not dividends and were to be taken into account as part of her net income.

The tribunal's reasoning

10. The tribunal approached this case by deciding whether the payments were properly classed as dividends. It decided that the payments were not dividends and treated them as earnings. The chairman set out her reasoning in this passage:

'A dividend is a "reward" to a shareholder for risking his capital. It is dependent on profit. It is declared at the end of a financial year, if the company wishes to distribute profit to the shareholders, rather than retaining it in the company for other purposes. The distribution is in proportion to the shareholding, not to the hours worked. For the reasons set out in the decision notice this payment had none of those characteristics. It was paid weekly, not at the year-end. It appeared to bear a relationship only to the hours worked as it varied in direct proportion to them, and not to the shareholding, which, as stated [in] the literature from the employers was a standard one share for each employee participating in this payment scheme. The share gave neither entitlement to voting rights, nor to information about the company. Workers had the opportunity to opt in or out of this method of payment. There is no indication that the [non-resident parent] would have received just the minimum wage for her efforts had she not agreed to opt into this scheme, indeed there was a "self-employed" option, in which the [non-resident parent] could have accounted to the inland revenue herself for tax and related matters. All this smacks of a scheme to avoid national insurance payments by the company. No criticism is made or intended of that practice; the issue for the tribunal was only whether or not the payments should be treated as dividend or net income with the child support legislation.'

The Secretary of State's submissions

11. The Secretary of State's representative argues that the tribunal went wrong in law in failing to investigate sufficiently whether or not the payments received by the non-resident parent were paid as dividends.
12. The representative first argues that payments of dividends are not covered by the Schedule to the 2000 Regulations. In support, the representative cites the decision of Mr Commissioner Mesher in CCS/2433/2004. Mr Mesher wrote:

'9. The line that had been taken in the Secretary of State's submission of 30 June 2004 was that, since dividends did not appear in the list in paragraph 4(1) of the Schedule to the MCSC, they could not count as earnings. That line was misconceived, for the reason given in paragraph 2.5 of the appeal tribunal's statement of reasons and as recognised in the Secretary of State's submission of 29 November 2004. A payment not included in the list is earnings if it falls within the meaning of "any remuneration or profit derived from employment". The argument in the latter submission was that the dividends did not "derive from", ie have their origin in (paragraph 12 of Commissioner's decision R(SB) 21/86), the non-resident parent's employment as an employed earner (either as an employee of the company or as the holder of the office of director), but from his ownership of the shares in the company. Therefore, they could not count as income under paragraph 4. Several supporting reasons were given (including references to the principles accepted for income tax and national insurance contribution purposes), but I do not think that they really add anything to the simple and straightforward proposition that if payments are truly paid as dividends on shares in a company they must be regarded as derived from the ownership of the shares and the company's decision to pay a dividend, rather than from being an employee or holding the office of director. I agree. Once that proposition is accepted, I can see no room for distinguishing between dividends paid on shares in "unrelated" companies and those paid on shares in a company by which a non-resident parent is employed or of which he is a sole or controlling director, as the appeal tribunal did. Accordingly, I conclude that the appeal tribunal, although right to say that the dividends were not other income within paragraphs 14 to 16 of the Schedule, went wrong in law in defining what counted as earnings under regulation 4.'

The reference to 'regulation 4' at the end of that paragraph should be to 'paragraph 4'.

13. The representative refers in support of Mr Mesher's analysis to a reference in Hansard, in a debate on the draft Child Support (Miscellaneous Amendments) Regulations 2005. (For an explanation of the effect of those Regulations, see my decision in CCS/0029/2005 at paragraphs 17 to 20.) Chris Pond, the Parliamentary Under-Secretary of State for Work and Pensions said that 'the new scheme does not take into account income in the form of dividends'.
14. Finally, the representative argues that the tribunal failed to investigate sufficiently in accordance with the guidance given by Mr Mesher in paragraph 12 of his decision. That paragraph consists of a statement of an extract from the National Insurance Manual used by Her Majesty's Revenue and Customs. For convenience, I have downloaded the relevant section and included it as an Appendix to this decision. The representative argues that the tribunal should have investigated in accordance with the guidance towards the end of the extract.

Analysis

15. I reject the Secretary of State's argument that the tribunal did not investigate sufficiently into the facts of the case. The matters for investigation that Mr Commissioner Mesher adopted from the National Insurance Manual are not essential matters that must be before a tribunal in any case involving a payment in the form of dividends. That that is so is shown by CCS/2433/2004 itself, in which Mr Mesher decided (paragraph 13) that further investigation was not required as the relevant facts were was sufficiently plain. Likewise in this case, I consider that the relevant facts are sufficiently clear to require no further investigation.
16. I have considered, as did Mr Mesher (paragraph 11), whether the dividend arrangement was a sham. I have come to the conclusion that it was not. An arrangement is only a sham if it does not represent the true intentions of all the parties to it (see R(H) 3/03). In this case, there is no evidence to suggest that the non-resident parent does not intend her arrangement with her employer to be as it purports to be.
17. I consider that the chairman took too limited a view of the nature of a dividend. I accept her analysis of the nature of a dividend as broadly correct. But she concentrated too closely on the classic model of a dividend and did not allow sufficiently for the range of variation that is possible. In particular, there is no reason: (a) why a dividend cannot be declared on an interim basis; (b) why it cannot be paid in regular instalments; and (c) why a class of share cannot be defined as carrying rights to a dividend that depend on the service given to the company, whether measured in hours of work or some other way.
18. The chairman also dealt with the case by concentrating on whether the payments were properly classified as a dividend. Her approach would have been correct if remuneration derived from an employment and dividends were in all circumstances mutually exclusive categories of payment. They may be so in many, perhaps even in most, cases. But there is nothing inherently impossible in a payment being both a dividend and remuneration derived from an employment.
19. I would be astonished is a company of the size and nature of the non-resident parent's employer had not taken the proper steps to authorise these payments and to clear their form with Her Majesty's Revenue and Customs. I proceed on the basis that the dividend was properly authorised both under the company's constitution and in company law. But it is also clear that the payment is intimately connected with the non-resident parent's work for the company. It is sufficient closely connected to be also a payment of remuneration derived from her employment with that company. 'Derived from' are words that are wide in their import and mean simply 'have their origin in' (R(SB) 21/86 at paragraph 12). 'Remuneration' is also wide in its import and means 'a quid pro quo … whatever consideration he gets for giving his services' (Blackburn J in The Queen v Postmaster General (1876) 1 QBD 658 at 663). The width and generality of those terms is such that they can include payments that happen to be made in the form of dividends.
20. I am not going to attempt to lay down a specific test for distinguishing those payments in the form of dividends that are derived from an employment from those that are not. The issue is one of fact and degree in each case. The only sound guidance I can give is to apply the wording of paragraph 4 to the facts of the case. In this case, the whole factual matrix of the payments shows, as the tribunal found, that they are derived from employment. By that, I refer to the amount of the payment, its method of calculation, its frequency of payment, its value comparative to the basic wage, and the choice of payment arrangements offered to employees by the company. The lack of a right to vote and to receive the usual shareholder information serve to underline the connection between the payment and the service to the company as employee.
21. As regards the extract from Hansard, I do not consider this to be relevant or decisive. As to relevance, it does not comply with the requirements of Pepper v Hart [1993] AC 593. Just to give one reason why not, it was not made in a debate on the 2000 Regulations, which is the legislation that I have to interpret and apply. As to its decisiveness even if it were relevant, I accept that the classic case of a payment of dividends is not earnings for the purpose of the Schedule to the 2000 Regulations for the reasons given in CCS/2433/2004. However, the Schedule does include all forms of 'remuneration … derived from' a parent's employment. If a payment presented as a dividend nonetheless comes within those terms, it is within the express terms of the legislation, whatever may have been the policy or ministerial intention.

Disposal

22. The parent with care asked for an oral hearing of this appeal. I have not held one, because I have decided the appeal in his favour and the other parties did not consider that one was needed.
23. There are some defects in the approach taken by the tribunal, but the substance and outcome of its analysis are sound despite those defects. It would be, as the former Commissioner Mr Mitchell used to say, an empty exercise to set aside the tribunal's decision in those circumstances only to substitute a decision to the same effect. I dismiss the appeal.

Signed on original on 8 June 2005

Edward Jacobs Commissioner

APPENDIX

NIM02115 - Class 1 NICs : Earnings of employees and office holders : Dividends

Companies pay dividends to shareholders as members of that company. Normally a company declares dividends annually at the Annual General Meeting (AGM). The dividend may be derived from both

•    capital profits (profits from investments); and

•    profits from trading.

Shareholders may receive interim dividend payments between AGMs in anticipation of the final declaration. You should treat interim dividends exactly as final dividends.

Dividends are derived from a shareholding and not employment. They cannot therefore be classed as earnings and do not attract NICs.

For dividends to be lawful they must meet two conditions:

•    the company must have sufficient profits to finance the dividend; and

•    the dividends paid to shareholders, or to a particular class of shareholder, must be paid according to the rights laid down in the Articles of Association for that type of shareholding.

The onus is on the employer to show that dividends meet the conditions. However, even if the dividends do not meet these conditions, this is a matter which can only be taken up by the shareholders themselves under company law. There is no action open to you under social security legislation. The fact that a dividend has not met the requirements of company law does not make it earnings for NICs purposes.

To decide whether a dividend is genuine rather than a disguised payment of earnings you need to see :

•    the Memorandum and Articles of Association

•    the Minutes of the meeting at which the dividend declaration was made; and

•    the profit and loss account/balance sheet for the years in question

For further information on dividends see CT1520 and CT2007a.