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[2008] UKSSCSC CIS_2287_2008 (15 September 2008)

DECISION OF THE SOCIAL SECURITY COMMISSIONER

My decision is given under section 14 of the Social Security Act 1998:

The decision of the Blackpool appeal tribunal under reference 064/08/00365, held on 15 May 2008, is not erroneous in point of law.

REASONS

This is an appeal, brought by the claimant with my leave, against the decision of the appeal tribunal dismissing his appeal against the refusal of his claim for income support. It concerns the calculation of his capital when he was found to have more capital than he admitted.

A. The issues

I have decided these issues:

• the decision of the Court of Appeal in Leeves v Chief Adjudication Officer, reported as R(IS) 5/99, applies to the classification of an asset as capital;

• there is no formal diminishing rule for actual capital, but a similar result can be attained using inferences in the fact finding process; and

• regulation 14 of the Social Security (Payments on account, Overpayments and Recovery) Regulations 1988 reduces the amount of an overpayment that is recoverable. It does not affect the fact of the amount of capital that the claimant retains for the purposes of a later claim.

B. History and background

The claimant claimed income support on 13 December 2007. He declared £750 in savings. The decision-maker refused the claim on the ground that the claimant had previously possessed a large amount of capital and had not explained how he had disposed of the money to reduce it to £750.

The claimant had received income support from 3 February 2003, but this was terminated retrospectively on 19 September 2007 on the ground that he had been in possession of capital in excess of the capital threshold throughout the award. At its peak, that capital amounted to £44,468.75. This is the money to which the decision-maker referred in refusing the December 2007 claim. The decision-maker went on to calculate an overpayment of £19,364.48 that was recoverable from the claimant.

There was also a decision that the claimant had been overpaid housing benefit of £6,181.91.

The claimant did not pursue his appeal against the September 2007 decision, but appealed against the decision refusing the December 2007 claim. His representative argued that his capital should be reduced: (i) under regulation 14; (ii) in respect of an overpayment of housing benefit; and (iii) to take account of the difference he had to pay between his housing benefit and his rent.

The tribunal dismissed the claimant's appeal. There were three elements to its decision. First, it found, in the absence of any explanation of what had happened to the money he had previously possessed, that the money remained in his possession. Second, it decided that regulation 14 was relevant to the amount of an overpayment that was recoverable, but did not affect the amount of the claimant's actual capital on a later claim. Third, it decided that there was no legal mechanism for notionally reducing actual capital.

The claimant appealed against that decision, essentially on the same grounds of his appeal to the appeal tribunal.

C. Income that is repayable

The Income Support (General) Regulations 1987 do not define income, although earnings are defined in regulation 35. There are provisions relating to calculation and disregard. For income other than earnings, there is a general provision on calculation in regulation 40(1) – 'the income of a claimant to be taken into account … shall, subject to paragraphs (2) to (3B), be his gross income and any capital treated as income under regulation 41'. Regulations 49 and 50 then make specific provision for calculation of capital in the United Kingdom and outside the United Kingdom respectively. As to disregard, regulation 40(2) provides that any income specified in Schedule 9 is to be disregarded.

Leeves v Chief Adjudication Officer has provided a recent focus of discussion in Commissioners' decisions. The claimant had been a student and had received a grant for the summer term of his course on 24 April 1995, the first day of that term. Under the legislation then in force, the lump sum was attributable to the claimant as income in weekly amounts.

On 27 April 1995, the claimant abandoned his course and applied for a review of his entitlement to income support. That review was carried out on 9 May and the adjudication officer decided that the weekly amount of the grant was attributable to the claimant as income despite that: (i) he had abandoned the course; and (ii) he would have to repay any overpaid element of the grant. On 24 May, the local authority invoiced the claimant for repayment.

The Commissioner decided that the claimant held the balance of the grant attributable to the period after he abandoned the course on constructive trust. The Court of Appeal accepted counsel's concession that that reasoning was wrong. The claimant was entitled to spend the money paid to him as and when he pleased. The local authority retained no proprietary right in the money and there was no fiduciary relationship created in respect of it. Consequently, no constructive trust could arise. Moreover, he had spent the money by the time he abandoned the course, so there was no money to which a resulting trust could apply.

As explained by Potter LJ, 'the question of whether, as at the date of their notional payment, the weekly sums are income in the hands of the claimant, falls to be decided on the basis of ordinary notions as to the nature of income.' The money that was not repayable was clearly income. But 'monies accruing, or required to be treated as received or accruing, under a certain obligation of immediate repayment (i.e. an equivalent debt) do not amount to income'. Applying that distinction to the facts of the case produced this result:

'On the other hand, it seems plain to me that, following demand made by Hampshire County Council in its letter of 24 May, at which point the claimant became under an obligation of immediate repayment in respect of his grant, that part of the claimant's grant required to be taken into account over the weeks which followed under regulation 29 thereby lost its character as "income" on any ordinary understanding of the word.'

The claimant had given an undertaking to 'repay such sum as may be determined' if he ceased to attend his course. The Court held that this was too vague to found an immediate obligation.

The Court distinguished the decision of the Court of Appeal in R v Bolton Supplementary Benefits Appeal Tribunal, ex parte Fordham [1981] 1 WLR 28. The issue was whether an overpayment of salary was a resource of the claimant for the purposes of the supplementary benefit legislation. The overpayment arose as a result of an industrial dispute. The claimant was a fire-fighter. He was paid on 15^th of each month. Each payment covered four weeks – the two weeks before the date of payment and the two week after it. The overpayment occurred because the claimant went on strike during the period covered by the payment. The Court of Appeal held that the overpayment was nonetheless a resource available to the claimant in the weeks in respect of which it was paid. The obligation to repay was irrelevant. As Lord Denning MR explained at page 31:

'I take a different view from the judge. He seemed to think that Mr Fordham's obligation to repay meant that he had not earned anything during the relevant period - and that he had not had any payment in advance, and the like. I take a different view because of the indefinite, uncertain and almost unforeseeable obligation to refund the money. It was so far ahead that it would not affect the immediate resources available to Mr Fordham.'

The Court in Leeves did not regard this case as a binding authority, for the reasons explained by Potter LJ:

'The problem before the court in the Bolton was whether or not the wages paid and in hand in respect of the weeks concerned were part of the "resources" of the applicant in relation to his requirements over the same period. The court was not concerned with the proper meaning of the word "income", nor was it concerned with a notional payment of income attributable on a weekly basis under a statutory formula.'

However, the issues were comparable:

'That decision was expressly based on the uncertainty of the claimant's position as to repayment, namely whether and when the claimant would have to repay the wages previously received in respect of the period of benefit.'

Taking these cases together, the focus in respect of income is on the moment of receipt or notional attribution. Income that should in law be immediately repaid is not income. The courts have not referred to the disregards of income in Schedule 9 to the Income Support (General) Regulations 1987. Those provisions do not apply unless and until a payment is characterised as income. Leeves and Bolton dealt with that prior question of classification.

D. Capital that is repayable

As with income, the Income Support (General) Regulations 1987 do not define capital. There are provisions relating to calculation and disregard. As to calculation, there is general and specific provision. Regulation 46(1) is a general provision on calculation – 'the capital of a claimant to be taken into account shall, subject to paragraph (2), be the whole of his capital calculated in accordance with this Part and any income treated as capital under regulation 48'. Regulations 49 and 50 then make specific provision for calculation of capital in the United Kingdom and outside the United Kingdom respectively. In particular, regulation 49(a)(ii) provides that capital is to be calculated at its current market or surrender value less the amount of any incumbrance secured on it. As to disregard, regulation 46(2) provides that any capital specified in Schedule 10 is to be disregarded.

In R(SB) 2/83, a Tribunal of Commissioners considered regulation 5 of the Supplementary Resources (Resources) Regulations 1980, which was to the same effect as regulation 49. Regulation 5(a) provided for capital resources asset to be valued at their current market or surrender value, minus (i) the expenses of sale and (ii) 'any outstanding debt or mortgage secured on them'. And regulation 6 provided for disregards, including the value of the claimant's home. The claimant had capital of more than £2,000, but he owed tax of about £2,000. The issue was whether the capital he actually held should be reduced by the amount of tax he owed. The Tribunal decided that it should not. It set out regulation 5 and continued:

'14. Now, there is nothing to indicate in the above regulation that capital resources are anything other than the gross capital resources. Indeed, this would seem to be reinforced by paragraph (1)(ii) which makes specific allowance for a debt secured on a particular asset. Moreover, that asset might be a home and the home is itself disregarded in any event under regulation 6(1)(a)(i). It would seem from this that the draftsman had considered the question of indebtedness and had provided for deduction only in the circumstances mentioned in regulation 5(a)(ii).'

That decision remains an authority under the equivalent income support provisions. But it is important to appreciate what it is an authority for. It deals with the issue of calculation of capital (resources). It decides that the relevant resources are gross, not net. In other words, it does not take account of liabilities, except for those expressly provided for in the legislation. It does not, though, decide what does and does not constitute capital. It does not decide whether a particular asset forms part of 'the whole of his capital', to quote regulation 46(1).

That leaves the issue whether Leeves applies to capital. That case dealt with the issue whether money received or attributed to the claimant was income. If it applies to capital, it is permissible to ask whether money received by the claimant was capital and it will not be if it was subject to an immediate and certain liability to repay.

I am aware of three cases in which the application of Leeves to capital has been considered.

In CIS/3655/2006 at paragraph 6, I said that the case applied to income and capital. But that was a passing remark and in the circumstances of that case Leeves did not apply. That takes the matter no further.

In CIS/2943/2000, Mr deputy Commissioner Teagle applied Leeves to capital. In that case, the claimant had sold her home for £20,852.82, but had quickly repaid loans of £13,168 that she had taken in order to purchase the whole of the beneficial interest in the property and to carry out remedial works preparatory to a sale. The loans were made on the understanding that they would be repaid as soon as the property was sold. The deputy Commissioner analysed the position in this way:

'14. … The liability to repay the loans arose, "crystallised", when the house was sold. The loans had previously been part of her capital contained within the value of her home, disregarded in calculation of capital under Sch 10; once the house was sold the debts became repayable and ceased to be part of her capital.'

The deputy Commissioner referred to Leeves and continued:

'16. … Similarly in this case, once the house was sold, the debts became repayable, there was an undisputed and immediate obligation to pay, and so the money for so long as it remained in the claimant's account lost the character of being part of her capital from that date. I am content to rely on this approach thus relieving myself of the need to explore further the question of whether or not any form of trust arose over [once?] the monies existed.'

In CH/3729/2007, Mrs deputy Commissioner Ramsay decided that Leeves did not apply. The claimant had capital over £16,000, but she also had rent arrears, the amount of which was disputed. The issue on her claim for housing benefit was whether the capital she actually held should be reduced by the amount of the arrears she owed. The deputy Commissioner decided that it should not. This passage summarises her reasoning:

'7. The Secretary of State was joined as a party to the appeal in view of the importance of the point at issue. The Secretary of State supported the appeal, though accepted, which the local authority did not, that the principle in Leeves could be equally applicable to capital as to income. I do not think that this can be right. The only debt which I understand can be set against the net value of capital is one which has been secured on it: regulation 47 Housing Benefit Regulations 2006, and the same applies in respect of Income Support: see R(IS) 21/93. This principle also underlies the decision in R(SB) 2/83. But even if that were not the case, for this claimant it does not seem there was any crystallised liability. Disputed outstanding rent arrears are not the same as an immediate liability to repay a certain amount.'

I also note that the authors of the commentary in Social Security Legislation 2007 – Volume II – Income Support, Jobseeker's Allowance, State Pension Credit and the Social Fund treat Leeves say in their commentary on regulation 46:

'Note that money that a claimant is under a "certain and immediate liability" to repay will not count as his capital after the date of the demand for repayment …'

My view is that Leeves applies to capital. I can see no reason either in principle or in the legislation why it does not. However, as with income, it is relevant only to the classification of money or an asset as capital. It only applies if the capital never became a resource in the claimant's hands from the moment of receipt or attribution. A claimant may receive capital in circumstances that render it immediately subject to a bare trust for the transferor. If so, the capital never comes into the beneficial ownership of the claimant. But if the circumstances do not create a trust, it is possible that the claimant is under a certain and immediate obligation to return the asset transferred. If so, Leeves applies. I, therefore, agree with Mr Teagle and the authors of Social Security Legislation 2007 – Volume II when they say that that case applies to capital and disagree with Mrs Ramsay when she says that it does not.

However, it only applies at the moment of receipt or attribution and for the purpose of classification. It does not apply thereafter. In particular, it does not apply to reduce the amount on account of liability that has arisen after the payment (or attribution) but in respect of, or otherwise connected with, it. I, therefore, agree with Mrs Ramsay that in the circumstances of her case Leeves did not apply. As to Mr Teagle's case, I doubt whether he was correct to apply Leeves, because the liability arose to a third party and, at least as explained by the Court of Appeal, that case is limited to repayment. However, the result in Mr Teagle's case might have been justified on the basis of a trust. I disagree with the authors of Social Security Legislation 2007 – Volume II that Leeves applies after a demand for repayment. That was a relevant feature of Leeves, but only because the demand created the certain and immediate liability to repay and (this is important) it did so before the relevant income was attributed to the claimant. A demand for repayment after something has become capital in the claimant's hands, is outside the scope of Leeves.

E. Did the tribunal go wrong in law on Leeves?

No. The tribunal did not apply Leeves in this case and that was correct in law.

As so often in social security cases, it is not possible to start with a clean slate and include on it all the dealings that have affected the claimant's capital. The claimant has not explained how he came by his capital. Nor has he explained what happened to it. The focus of his representative's argument has been on the payments, their recovery and the impact of payment and recovery on the amount of his capital as found by the decision-maker and later the tribunal. Such evidence as there is leads to this analysis.

When the claimant received benefit, it became his income on payment. He was entitled to it by virtue of the awarding decisions. He was not properly entitled to it, but his entitlement remained until it was removed on revision or supersession of those decisions. Any liability to repay was future and potential. It is impossible to argue that at that point the money he received was subject to a certain and immediate liability to repay. In so far as the claimant did not spend the money he received as benefit, it became part of his capital at the end of the period to which it related: R(IS) 3/33.

As to the overpayment decisions, these created liabilities. However, they did not affect the character of the assets held by the claimant. Those that were already capital remained capital. Any that he received thereafter were not affected by it. What the overpayment decisions did was to create new liabilities that reduced the net worth of the claimant's assets. That is outside the scope of Leeves, because they did not prevent the assets becoming capital at the moment they were received by the claimant or metamorphosed into capital. The decisions did not create an incumbrance secured on the capital under regulation 49(a)(ii), and their amount is not disregarded under Schedule 10.

F. Reducing actual capital

If a claimant has notional capital under regulation 51 of the Income Support (General) Regulations 1987, the amount is treated as reducing under regulation 51A. That provision replaced the rule that had been developed by the Commissioners in R(SB) 38/85 and R(SB) 40/85.

In granting leave, I asked:

'On the basis that the claimant has failed to explain what happened to his £44,468.75 in actual capital, why should he not be treated as using this for living expenses if he is unable to show that he is spending money for that purpose from any other source? Is that not part of the fact-finding process? Should not the tribunal have reduced the actual capital by that amount in any event?'

In response, the Secretary of State's representative noted that there was no diminishing actual capital formula and continued:

'There is, however, still scope for actual capital to be reduced but the amount by which it is reduced must be established by the available evidence. I agree that during periods when no benefit has been received, the decision maker should make some estimation of the claimant's likely living expenses and reduce the capital by that amount. He should also take into account any other spending that evidence shows has taken place. By failing to do so, the tribunal has erred in law.

'However, I submit that no such deduction for living expenses should be made when the claimant was in receipt of benefit, even when that benefit is subsequently found to be an overpayment. The claimant's living expenses were covered by his benefit during such periods. The fact that the claimant should have been living off his capital is taken into account in determining the extent of the overpayment but the fact remains that the claimant did not spend it on living expenses and should therefore still possess it unless he can show that it was disposed of in some other way.'

I broadly accept the Secretary of State's submission.

The context is a case in which a claimant has denied having capital but been found to do so. This will occur when the claimant provides no explanation of what has happened to the money or provides an explanation that is not accepted. Either way, the claimant will not be co-operating in providing an acceptable explanation of what has happened to the capital. The decision-maker and the tribunal will only be able to make findings by inference on the probabilities. General living expenses are one obvious possibility. If the claimant was not in receipt of benefit and there is evidence of other income, the decision-maker and the tribunal may be able to infer that the claimant has drawn on the capital for living expenses. If the claimant was in receipt of benefit, that money will have been available for those expenses. However, I do not put the matter quite as dogmatically as the Secretary of State's representative. The evidence may show that the income available (whether from benefit or other income) was not sufficient to pay for the claimant's life-style. It may, then, still be possible to infer some expenditure from capital.

The inferences that are permissible and appropriate will depend on the particular circumstances of the individual case. Decision-makers and tribunals should draw such inferences as they properly can. This applies even if a claimant is refusing to co-operate. However, depending on the circumstances, the lack of co-operation may suggest that there is information to the claimant's detriment which has not been disclosed: see R(CS) 6/05. However, this depends on the amounts and time scales involved. There is no need to embark on a process of inferring expenditure on general expenses if the outcome will have no effect on the claimant's entitlement to benefit.

G. Did the tribunal go wrong in law on actual capital?

The tribunal said: 'The Regulations contain no mechanism for notionally diminishing actual capital'. Strictly speaking, that was correct. However, the tribunal was wrong to imply that there was no means by which this could be achieved. Consequently, it did not consider drawing any inferences about the claimant's use of the money in this case.

However, those were not material errors. In other words, they did not affect the outcome of the appeal. The amount involved and the timescale was such that any inferences that the tribunal drew about reasonable expenditure in addition to benefit income could not have reduced the capital below the threshold for entitlement to income support.

The claimant's representative has argued that this result is unjust:

'The Secretary of State states that the claimant's living expenses were covered by the benefit he received. This benefit which he received is having to be repaid. Once it has been repaid he in effect lived off nothing as the Secretary of State says these expenses cannot be used to reduce the capital. That would appear to be unjust.'

I understand the point the representative is making, but I am sorry to say that the claimant has brought this upon himself. The tribunal must proceed on the facts that it finds on the evidence before it. Given the claimant's failure to give a complete account of his dealings with his capital, the tribunal had no choice but to find as it did with the consequences that in law inevitably follow.

H. The significance of regulation 14

Regulation 14 applies to reduce the amount of a recoverable overpayment that has arisen on account of the amount of the claimant's capital by making a quarterly diminution of that capital equivalent to the amount of benefit overpaid. This is a concession to the claimant. It works on the assumption that the claimant would have drawn on the capital if the benefit had not been paid. By its terms, it only applies for the purposes of the overpayment decision. It is notional in its effect. It does not treat the capital as reduced for any other purpose, let alone for all purposes. It is a notional reduction that applies for a particular purpose only. If the claimant claims benefit later, that claim must be decided on the circumstances obtaining at that time, including the amount of capital actually held by the claimant.

I. Did the tribunal go wrong in law on regulation 14?

No. It correctly identified the significance of regulation 14.

J. Disposal

I dismiss the appeal.

Signed on original
on 15 September 2008

Edward Jacobs
Commissioner