UK Social Security and Child Support Commissioners' Decisions

[2008] UKSSCSC CCS_3533_2007 (27 May 2008)

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

I SET ASIDE the decision of the Oxford appeal tribunal, held on 17 July 2007 under reference 048/06/00193, because it is wrong in law.

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

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 chairman may wish to ensure that a financially qualified panel member sits for the hearing.

REASONS
2. This case concerns an application for a variation. It first came before me as an application for leave to appeal. At that stage, it was linked to another case (CCS/3532/2007) that concerned the maintenance calculation. I refused leave to appeal in that case, as the only issues raised in the grounds of appeal concerned the variation. However, the papers for the two cases had, as often happens in linked appeals, become muddled. A legal officer gave directions on the documents relevant to this case and the order in which they were to be assembled. This had the effect that some of the pages were renumbered and that in turn meant that references to pages in other documents were now wrong. Under the legal officer's direction, the numbering ran to 555. Matters were further complicated when someone decided that the numbering for the pages following 555 should begin at 356 instead of 556. I warn the tribunal to take care before believing any reference to a page number.
3. The legal officer's direction is at pages 554-555 and may assist the tribunal in understanding the structure, if not the numbering, of the pages.

The appeal to the Commissioner

4. This case concerns an application for a variation from the maintenance calculation of child support maintenance payable in respect of Nathan, Robson and Cameron. In terms of the child support legislation, the appellant before me is their mother and parent with care and the second respondent is their father and their non-resident parent. I shall refer to them in those terms. The Secretary of State is also a party and has supported the appeal. The non-resident parent has made observations. As they refer mainly to the facts of the case, they are more relevant to the rehearing than to my decision. The parent with care put her case through her representative at the application stage, but has not made observations on the appeal.

A brief background

5. This case concerns an application for a variation, which was made by the parent with care on 5 July 2005 and refused by the Secretary of State on 12 January 2006. The parent with care exercised her right of appeal, raising a number of issues on the non-resident parent's assets and the money held by and taken from his company. That company was incorporated on 1 November 2004 and the non-resident parent became the sole director and shareholder. The first accounts covered the period from incorporation to 31 March 2006 and were not available until September 2006 (pages 281-293). I refer to other facts as necessary to explain my decision.

'Dividend' payments

6. The parent with care has raised an issue over the treatment of these payments under regulation 19(1A) of the Child Support (Variations) Regulations 2000. This came into force on 6 April 2005. It provides:

'(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.'

What the paragraph does and does not say

7. Those provisions break down into these requirements. The non-resident parent must:

•    be involved in a company or business;

•    be able to control the amount of income from that company or business;

•    receive income that would not be taken into account in the maintenance calculation under Schedule 1 to the Child Support Act 1991.

8. The statutory conditions are cumulative, but they are not causatively linked. It is not necessary to show that the income was received outside the scope of the maintenance calculation as a result of the non-resident parent's exercise of control. All that has to be shown is control and receipt. Control and receipt are, though, linked by a common concept: income. The ability to control and the receipt must both concern income, not capital.
9. Nor is the non-resident parent's motivation or purpose an issue. There is no need to show that the income was taken outside the scope of the maintenance calculation in order to reduce, or for the purpose of reducing, the amount of that calculation.

Applying the paragraph to 'dividends'

10. It is known that the paragraph was introduced to deal with dividend income. However, it does not refer to dividends expressly. It is important to focus on the words of the legislation. This is especially so as 'dividend' may mean something different in different companies.
11. There is a spectrum of formality and regularity within companies. At one extreme is the public company quoted on a stock market: Tesco, for example. Companies like this will not make any payment unless authorised by law and then only within the constitution of the company. The dividend will not be paid unless and until it has been declared by the appropriate organ of the company. The Secretary of State has referred me to the decision of Mr Commissioner Turnbull in CCS/2703/2007. It seems that the company in that case operated regularly by not paying a dividend until it had been formally declared.
12. At the other extreme is the one-person or family company. Companies like this may proceed less regularly and the appropriate formality may be applied only retrospectively, if at all. Payments may be taken from the company as and when the owners need them. Later, when the accounts are drawn, they may be treated as dividends. They should also be formally declared, although this is perhaps not always done.
13. Treating all payments that have been labelled as a dividend in the same way is a mistake. Regulation 19(1A) does not depend on the way that the payment is classified at the time it was made or later in the accounts. The only issue is whether the statutory conditions are satisfied. And the focus is on the time of receipt of the payment. If a company is at the informal end of the spectrum, the payments may well have been made during the year. In such a case, a different analysis is appropriate from that undertaken by Mr Turnbull.
14. In this case, the evidence from the non-resident parent's accountant, on the pages now numbered as 334 and 385, is that a dividend was declared on 31 March 2006, but 'Rather than making a payment in respect of this dividend, it was credited to [the non-resident parent's] loan account with the company and therefore set against payments already received'.
15. The accountant's evidence suggests that the payments taken during the year, which are set out on those pages, were drawings from the director's loan account, which would be treated as capital rather than income: Chandler v Secretary of State for Work and Pensions [2007] EWCA Civ 1211. That precludes the possibility that the money taken was remuneration or profit derived from his employment with his company within paragraph 4(1) of the Schedule to the Child Support (Maintenance Calculations and Special Cases) Regulations 2000, in which case no variation issue would arise.
16. The tribunal treated the payments as individual payments and took into account only those that were paid in the period between the dates of the application for the variation and the decision refusing the application. That assumed that the payments were income when made. That was wrong. As I have said, the proper analysis (if I have correctly understood the accountant's letters) is that they were capital payments.
17. On the basis of the explanation provided by the accountant, the dividend declared was not purely a formal regularisation of sums already taken, it took the form of a credit to the loan account. That payment was a dividend payment, albeit that it only involved a change of entries in the accounts, and regulation 19(1A) applied to it. However, the payment was made after the Secretary of State refused to agree to the variation. That brings me to CCS/2703/2007.
18. In that case, Mr Commissioner Turnbull was concerned with an application for a variation. He noted the use of the present tense in paragraph (1A) and said:

'12. … In my judgment the natural meaning, in a case (like this one) where the application is for a variation of a subsisting maintenance calculation one is to look at the period from the effective date of the application for the variation down to the date of the decision (i.e. in this case the period between 15 December 2005 and 7 April 2006.'

The non-resident parent had received a dividend payment that was declared and, on Mr Turnbull's analysis of the evidence, paid on 30 March 2005. The Secretary of State argued that the payment should relate to the period of one year following the date on which it was made. Mr Turnbull rejected that argument. He said that the dividend payment could only relate to the company's accounting year or to the non-resident parent's tax year. As both those years had ended before 15 December 2005, regulation 19(1A) did not apply.

19. The Secretary of State's representative has submitted to me that that case was wrongly decided. With respect of Mr Commissioner Turnbull, I agree.
20. A dividend is a lump sum payment in respect of a past period. Unless the payment is made between the application for a variation and the Secretary of State's decision, there is no point at which 'the non-resident parent is receiving income from that company'. The previous dividend payment has been paid and is not now being received. And the next dividend payment has not yet been paid and cannot yet be known. On this analysis, the operation of regulation 19(1A) depends upon the chance coincidence of the payment and the application. This is the effect of Mr Turnbull's approach. A different analysis would allow the next dividend payment to be taken into account retrospectively once paid. On this analysis, there would be delay and uncertainty in decision-making.
21. I agree with Mr Turnbull that the focus is on the circumstances obtaining in the period between the application for a variation and the date when the Secretary of State decides it. If the Secretary of State agrees to a variation, the start of the period will be the effective date of the variation (as in CCS/2703/2007) rather than the date of the application. However, that has to be applied in the context of the normal approach to adjudication. The decision has to be made on the balance of probabilities and on the evidence available. The parent with care is likely to produce evidence relating to the past and argue that this continues. The non-resident parent is likely to argue that circumstances have changed so that the past is no longer a sound guide to the present or the future. The outcome involves a prediction of what payment, if any, will be made later in the year (however that year may be defined) in respect of the relevant period. But it is nonetheless a circumstance obtaining at that time. The circumstance being the fact, found on the balance of probability and possibly on past evidence, that a payment will cover this period. It is, as Sedley LJ said in Karanakaran v Secretary of State for the Home Department [2000] 3 All ER 449 at page 477, 'part of a pragmatic legal fiction.' But it is a fiction on which adjudication is based.
22. It is, of course, possible that the decision-maker or the tribunal may get it wrong. Circumstances may change and a dividend may not be paid or be lower than in previous years. This may involve some disadvantage to the non-resident parent. However, it will only be short-term, as the variation can be changed or removed on a supersession for a change of circumstances. That will set a new status quo until evidence allows the parent with care to show that circumstances have again changed. The time lag will, no doubt, involve some disadvantage to that parent, but it will again only be short-term. In short, there will be swings and roundabouts with short-term disadvantages being cancelled out (though not with absolute precision) by short-term advantages.
23. In this case, there was no previous dividend to use as evidence. However, the tribunal had the evidence of payments actually be made by the company to the non-resident parent, which were indicative of the dividend likely to be declared. The particular payments made on particular dates were, though, not decisive. They may have reflected the company's cash flow at that time or the non-resident parent's needs. There is certainly no regularity in either the amounts taken or the dates of payment. The tribunal had to take a broad approach and decide, as a weekly amount, the dividend (if any) that obtained during the period between the application and the Secretary of State's decision.

Assets

24. The parent with care has raised a number of issues about the assets available to the non-resident parent.

Money retained in the company

25. The tribunal took no account of the company's reserves, because information about them was not available at the time of the decision under appeal, and only became available when the company's accounts were produced. The parent with care has argued that the tribunal should have made findings on the amount held by the company at the relevant time. The Secretary of State argues that the tribunal was entitled to reach the conclusion it did.
26. I agree in principle with the parent with care's argument. The tribunal should have done its best on the evidence available to decide what reserves were held by the company. The tribunal could not take account of circumstances that first obtained later than the date of the decision under appeal, but the relevant circumstance was the amount of the reserves, not whether they had appeared in the accounts. However, as a practical matter the company had only recently begun trading and it might prove difficult to identify the moneys being held in reserve before any accounts had been produced. The non-resident parent, as director, should have had at least a general idea of the financial position of his company, but I suspect that the tribunal could not have obtained a more accurate picture of the position at the relevant time given the early stage of the company's development.

The property jointly owned by the non-resident parent and the parent with care

27. The tribunal decided that this property was not an asset for regulation 18: 'Because it was in their joint names [the non-resident parent] did not have control over it and it is excluded from regulation 18.' The parent with care has argued that regulation 18(4) shows that jointly held property can be within this regulation. That is correct. However, is the parent with care really saying that the non-resident parent has control over the property despite her interest in it? Moreover, as the Secretary of State has pointed out, the parent with care told the tribunal that she was living in the property with her children (page 527). If that is correct, the property was the home of the non-resident parent's children and, as such, outside the scope of regulation 18 by virtue of regulation 18(3)(e).

The property jointly owned by the non-resident parent, his mother and his sister

28. This property was originally owned by the non-resident parent, but was transferred into the names of himself, his mother and his sister. The tribunal decided, on evidence produced, that there had been a genuine transfer and that only one third of its value could be taken into account under regulation 18. The parent with care has argued that the transaction was a sham. However, the tribunal accepted, as it was entitled to do, the evidence produced and decided that the arrangement was genuine. Moreover, as the Secretary of State has pointed out, the address is given as that of the mother and sister on page 427. If that is correct (and the non-resident parent says it is – the second page numbered 408), it may be that the property was being used for a reasonable purpose and, accordingly, excluded from regulation 18 by regulation 18(3)(b).

Valuation

29. If valuation is an issue at the rehearing, my decision in CCS/0008/2000 will be relevant. It has been added to the papers by the Secretary of State. I also refer the tribunal to CH/1953/2003 and CIS/3197/2003, which contain further discussion on the issue.

The non-resident parent's bank account

30. There was an issue whether this account had been closed. The tribunal decided that it had been and accepted the non-resident parent's oral evidence of the amount it contained on closure, despite his failure to produce documentary evidence as the tribunal had directed. The parent with care has argued that the tribunal should have considered drawing an adverse inference from the non-resident parent's failure to produce the closing statement. The Secretary of State argues that the tribunal was entitled to accept the non-resident parent's evidence if it considered it to be reliable. I agree. The tribunal had to make an assessment of the evidence before it. If it considered that it was reliable and complete there was no basis for drawing an adverse inference. Adverse inferences are not drawn as a punishment for failure to comply with a direction to produce evidence. Nor do they limit the evidence that the tribunal is entitled to consider. They are drawn as part of the process of the analysis of the evidence in order to supplement the evidence available where that may not be reliable or complete. See R(CS) 6/05. Here the tribunal was satisfied that the evidence was complete.

Life-style inconsistent

31. There was an issue whether regulation 20 of the Child Support (Variations) Regulations 2000 applied. The tribunal decided it did not, because the non-resident parent lived on dividends, drawings from his director's loan account and draw downs from his mortgage. The parent with care has argued that the draw downs were income not capital. The Secretary of State argues that the tribunal did not go wrong in this respect.
32. I accept the parent with care's argument. It is possible that the draw downs were income and the tribunal should at least have explained this aspect of its reasoning on regulation 20. At the rehearing, the tribunal must analyse the evidence in accordance with the decision of the Court of Appeal in Morrell v Secretary of State for Work and Pensions reported as R(IS) 6/03.

Disposal

33. I allow the appeal and direct a rehearing.

Signed on original on 27 May 2008

Edward Jacobs Commissioner