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[2008] UKSSCSC CCS_2656_2007 (02 May 2008)

CCS/2656/2007

DECISION OF THE CHILD SUPPORT COMMISSIONER

An outline of the decision of the Child Support Commissioner

The net result of this decision is not in favour of the appellant to the Child Support Commissioner (the mother). True, I agree with her that the decision of the Fox Court appeal tribunal on 5 June 2006 is wrong in law, although not for the reasons that she argues. I must therefore in any event set aside the tribunal's decision. For the reasons explained in detail below, I am substituting my own decision to dismiss the mother's appeal to the tribunal against what I describe as the mother's second variation application. The decision which the appeal tribunal should have given is as follows:

The mother's appeal against the decision of the Secretary of State dated 7 June 2005 to refuse the mother's variation application dated 26 May 2005 is dismissed. As at the date of the Secretary of State's decision there were no grounds to agree to a variation based on regulation 19(1A). This is because there was no evidence that the father was in receipt of dividend income after the date that regulation 19(1A) came into force (6 April 2005). In addition, there is no evidence that the father has the ability to control the amount of income he receives from the company in question.

I acknowledge that this decision will be a deep disappointment to the mother. However, the task of the Child Support Commissioner is to ensure that the appeal tribunal has correctly applied the relevant law as it is, not as perhaps it might be in some ideal world. In the present case this is not a happy outcome, given the father's apparent persistent failure to make any payments of child support over some considerable period of years.

The background to this appeal to the Commissioner

In the technical language of the child support legislation, the appellant is the parent with care under the maintenance calculation, the first respondent is the Secretary of State and the second respondent is the non-resident parent. For convenience, however, I shall refer to them in this decision as the mother, the Secretary of State and the father respectively. For all practical purposes the Secretary of State's functions in relation to child support are carried out by the Child Support Agency (the CSA)

The CSA is at present required by legislation to operate two child support schemes in parallel, an "old scheme" and a "new scheme". This is a new scheme case, governed by the Child Support Act 1991, as amended by the Child Support, Pensions and Social Security Act 2000 in March 2003, and by the relevant regulations. This is because an application was first made in November 2003. The application concerns a young girl who is now aged nearly 10.

The two linked appeals

This appeal to the Child Support Commissioner is in fact one of two appeals, as the London Fox Court tribunal was itself considering two appeals brought by the mother against decisions of Secretary of State (in practice, as mentioned above, the Child Support Agency). The appeal tribunal heard both her appeals together on 5 June 2006.

This first appeal to the Commissioner, under file reference CCS/2656/2007 (this appeal), is against the decision of the tribunal under reference U/42/160/2005/02878. This was in turn an appeal against the Agency's decision (dated 7 June 2005) to dismiss the mother's (second) variation application of 26 May 2005.

The second appeal to the Commissioner, which is "travelling with CCS/2656/2007" in the language of the Commissioners' Office, has been dealt with separately under file reference CCS/2657/2007. That appeal was against the decision of the tribunal under reference U/42/160/2005/01521. That tribunal decision was in turn an appeal against the Agency's earlier decision (dated 18 April 2005) to dismiss the mother's (first) variation application of 22 March 2005.

I am treating this appeal to the Commissioner as the lead decision and will refer to the common factual background only in this decision in the interests of brevity. Inevitably, therefore, the two decisions will be need to be read together to some extent. All references are to documents on case file CCS/2656/2007 unless otherwise stated.

Child support maintenance calculations and dividend income

This appeal is in part about the treatment of dividend income. This has been a contentious area in child support law and policy. In cases governed by the old child support scheme dividend income is in principle taken into account as "any other payments or amounts received on a periodical basis" (Child Support (Maintenance Assessment and Special Cases) Regulations 1992 (SI 1992/1815), Schedule 1, paragraph 15).

There is no equivalent provision in the simplified formula for the new child support scheme. There are undoubtedly some cases where payments described as dividends may in fact be thinly disguised remuneration from employment (CCS/623/2005). But as a matter of general principle, absent such special circumstances, dividend income is derived from share ownership, not from employment, and so does not count as new scheme formula income (R(CS) 4/05).

This position resulted in some concern in official circles that "The way in which some non-resident parents receive their income is reducing their liability for maintenance in the new child support scheme by an unacceptable degree" (Explanatory Memorandum to the Child Support (Miscellaneous Amendments) Regulations 2005 (SI 2005/785) Annex A, page 8). Regulation 8(5) of the 2005 Regulations therefore inserted a new regulation 19(1A) of the Child Support (Variations) Regulations 2000 (SI 2001/156). This reads as follows:

"(1A) Subject to paragraph (2), a case shall constitute a case for the purposes of paragraph 4(1) of Schedule 4B to the Act where –

(a) the non-resident parent has the ability to control the amount of income 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."

Regulation 19(2), which qualifies this provision, stipulates that the income concerned must amount to at least £100 a week. Furthermore, and crucially in the context of the present case, it is important to note that regulation 19(1A) was inserted with effect from 6 April 2005. In this decision I refer to that date as "D Day".

The history of this case

This appeal and its associated appeal have a long and convoluted history. Shorn of unnecessary detail, the key events are as follows. The mother applied to the Agency for a maintenance calculation in November 2003). She appealed against the resulting assessment.

On 25 August 2004 an appeal tribunal adjourned her appeal with directions that both the father and his employer (a family company) disclose certain information (doc 11 on file CCS/2657/2007). The tribunal was evidently (and understandably) troubled by the disparity between the low Agency assessment and the fact that the father was a director and shareholder of a family company with a turnover of more than £11 million and total directors' remuneration of more than £0.5 million.

The appeal tribunal allowed the mother's appeal on 23 February 2005 (doc 88). However, the outcome was only to increase the child support assessment from £41 a week to £44 a week. There appears to have been no appeal to the Child Support Commissioner against this tribunal decision. However, this may well be because it appears that the mother was advised at the tribunal to apply for a variation (doc 115 on file CCS/2687/2007).

On 22 March 2005 - about a fortnight before D Day – the mother formally applied for a variation on two grounds (docs 89-93). One was on the basis of lifestyle inconsistent with income (doc 90). The other was on the basis of diversion of income, the mother alleging that the father had "dividends paid into trust" (doc 91). The Agency rejected the application based on diversion of income on 18 April 2005. It would seem that this was for lack of evidence (doc 14 on file CCS/2657/2007). The mother appealed against that decision on 21 April 2005 (docs 16-18 on file CCS/2657/2007).

On 26 May 2005 – and so after D Day – the mother made a further application for a variation, it now appears at the suggestion of the CSA. This application was solely on the basis of diversion of income (docs 94-98). This application was also dismissed for want of evidence on 7 June 2005 (docs 103-105). However, the tone of the Agency's letter to the mother was clearly sympathetic and effectively encouraged her to appeal. This she duly did on 16 June 2005 (docs 106-108).

The tribunal chairman issued detailed directions, principally directed towards requiring the father to disclose certain financial details, on 4 October 2005 (docs 144-145). There is no evidence at all that the father complied with any of these directions.

The decisions of the appeal tribunal

The tribunal – comprising the same chairman and a financially qualified member – heard the mother's two appeals together on 5 June 2006. The mother but not the father attended the hearing. The tribunal issued a single Decision Notice covering both appeals (doc 150).

The tribunal allowed the mother's appeal against the Agency's decision of 18 April 2005 (to refuse her first variation application, now dealt with under CCS/2657/2007). The tribunal ruled that the father had diverted income of £1,569 in the 2003/04 tax year, with the aim of reducing his child support maintenance, by way of taking various benefits in kind (see tax return at doc 85) rather than increasing his remuneration. The tribunal also concluded that the father's net weekly income was therefore £320.41 and that he was liable for child support maintenance of £48 a week as from the effective date of 26 November 2003.

The tribunal concluded that the second appeal (this appeal, under CCS/2656/2007), against the Agency's decision of 7 June 2005 (to refuse her second variation application), lapsed due to the favourable outcome in the parallel first appeal.

The mother then applied for the tribunal decisions of 5 June 2006 to be set aside (doc 151). The District Chairman who had sat on the tribunal refused that application (doc 178). The mother then applied for a full statement (doc 179). The District Chairman concerned issued a Statement of Reasons (docs 180-182).

The District Chairman conceded frankly that this was "a case which has always given me the gravest of concerns" (para. 2). The basis for those concerns was spelt out in the rest of the Statement of Reasons. In summary, the father came from a wealthy family, which operated several laundry businesses. The father was a director of one company and a minority shareholder of another family company. On the mother's account he enjoyed a lifestyle "including hunting and other country pursuits" (para. 25). Yet he had a modest net weekly formula income of £290 a week. Moreover he had paid no child support and wholly failed to co-operate with the Agency's assessment process. He had also not attended the various tribunal hearings. It is hardly surprising that the tribunal took a sceptical view about the father.

The tribunal ruled that it could not take into account the dividend income on the mother's first variation application as the payment preceded the date the legislation changed (or D Day). There was also insufficient evidence to support a lifestyle application. Accordingly, the tribunal made a limited diversion variation on the basis of the benefits in kind amounting to £1,569, derived from the tax return in the bundle. The District Chairman indicated that she would "welcome the view of the Commissioners upon this case, which seems to expose a lacuna within the child support system" (para. 27).

The submissions to the Commissioner

At this point I shall refer solely to the parties' submissions in relation to this first appeal to the Commissioner, which actually relates to the tribunal's decision on the mother's second variation application (the one after D Day). The mother has two main grounds of appeal against this decision. First, she argues that the tribunal erred in stating that she had made two variation applications and that the first one had been lost by the CSA. Secondly, she says that the tribunal erred in stating that the relevant law changed on 6 June 2005, when what I have described as D Day was actually 6 April 2005.

I agree that the tribunal erred on both points but I do not regard either error as an error of law. As to the first point, the tribunal reached the conclusion it did presumably because that was what the mother told them at the hearing (Record of Proceedings, doc 147). I do not think the tribunal can be criticised for making a finding of fact based on what they were told by a party whose evidence they clearly found compelling in other respects. As to the second point, I am satisfied that the reference to 5 June 2005 in para. 19 of the Statement of Reasons was a "slip of the pen" rather than an error of law.

The father has at last engaged with the appeals process by sending a four-page letter to the Commissioner's Office. This letter does not, however, address the legal issues directly relevant to the appeal relating to the mother's second variation application. He writes at length about his problems with the mother (e.g. over contact) and his (in his view) unfair treatment within the family company.

The Secretary of State's representative argues that the tribunal's decision in relation to the second variation application is flawed. He contends that in the circumstances this appeal could not have lapsed, and the tribunal should have reached a substantive decision on this appeal. I agree that the tribunal's decision discloses an error of law in this respect.

The reason why the appeal tribunal erred in law

The reason is this. The tribunal explained (at para. 6 of its Statement of Reasons) that the second variation application was based on the same ground as the former, and so lapsed due to the favourable application on the former. However, this reasoning fails to take account of the fact that the second application was made against the background of a change in the law with the introduction of regulation 19(1A) on D Day. The decision on the first application was made on the basis of diversion via benefits in kind (presumably on the basis of regulation 19(4)), whereas the second application was directed at diversion by payment of dividends within regulation 19(1A). I do not accept that section 16(6) of the Child Support Act 1991 (or indeed any other principle governing lapsing of appeals) applies in such circumstances.

The disposal of this appeal to the Commissioner

As I find the tribunal to have committed an error of law on this point, I have no option but to set aside its decision (Child Support Act 1991, section 24(2)). The question then is how to proceed. The Secretary of State's representative invites the Commissioner to send the case back with directions for rehearing by a fresh tribunal. I do not regard this as an appropriate course of action. It will merely prolong matters unduly and unfairly raise the mother's expectations. There are three reasons why I take this view.

First, the fundamental problem is that there was no evidence before the tribunal that the father was himself in receipt of dividend income after D Day. There is the terse report of a conversation with the company accountant in September 2004 that "the father did not receive any dividend income – placed in trust" (doc 87). As the dividends were going into a trust, it is difficult to see how the father "is receiving income from that company or business" within regulation 19(1A)(b). The father may have received dividend income himself at an earlier date, but this would by definition have been before D Day and so could not be taken into account under regulation 19(1A), even if the variation application were made after that date (see the decision of Mr Commissioner Turnbull in CCS/2703/2007).

There is a second reason why I regard it as futile to send this case back for rehearing. Regulation 19(1A) applies only if the father "has the ability to control the amount of income he receives from a company or business" (reg. 19(1A)(a)). The company accounts state clearly that the father holds 667 shares out of a total of over 15,000 shares in the company. Even in a family company, it is hard to see how this can amount to a controlling interest. The company accountants also confirm that the father "plays no active managerial role", performing relatively unskilled manual work, and that as a result he has always been paid "significantly lower than other members of the family" (doc 14).

The third reason is that regulation 19(1A) applies only where the non-resident parent's dividend income exceeds £100 a week (see regulation 19(2)). There is absolutely no evidence that this threshold has been exceeded.

The decision substituted by the Commissioner for that of the appeal tribunal

In all the circumstances I take the view that there is no realistic prospect of a fresh tribunal reaching a conclusion that regulation 19(1A) can apply to the mother's second variation application. I therefore make findings of fact to that effect and give the decision that the tribunal should have given (Child Support Act 1991, section 24(3)(b)). That decision is as follows:

The mother's appeal against the decision of the Secretary of State dated 7 June 2005 to refuse the mother's variation application dated 26 May 2005 is dismissed. As at the date of the Secretary of State's decision there were no grounds to agree to a variation based on regulation 19(1A). This is because there was no evidence that the father was in receipt of dividend income after the date that regulation 19(1A) came into force (6 April 2005). In addition, the father does not have the ability to control the amount of income he receives from the company in question.

A final comment on the appeal tribunal's "lacuna"

I have indicated above that the appeal tribunal was understandably concerned about the outcome of this case. The tribunal asks whether it exposes a lacuna (or gap) in the child support system. Ultimately this is a question of policy for others to determine. In a sense the tribunal has answered its own question. As the tribunal stated, "child support legislation is designed to ascertain proper levels of child support maintenance based upon income, and specifically, in relation to the new scheme, earned income" (para. 25 of its Statement of Reasons).

The father's letter to the Commissioner's Office suggests that matters may be rather more complex than might have been assumed by the tribunal. But the father's past failure to engage with the appeals process puts him in a poor position to complain now about the tribunal's findings. There is, however, no legal obligation on the father's wider family, however wealthy, to support his daughter by a previous relationship. The tribunal therefore had no option but to proceed on the basis of the father's earned income as declared to the tax authorities. For better or worse, the tribunal achieved the best outcome it could in the light of the existing child support legislative framework. It is the task of the Agency to enforce that assessment in the best interests of the young girl who should be at the heart of this case.

(signed on the original) N J Wikeley

Deputy Commissioner

2 May 2008