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[2008] UKSSCSC CPC_3373_2007 (04 April 2008)

Decision

I allow the claimant's appeal. The decision made by Boston appeal tribunal on 21 March 2007 is wrong in law. I set it aside and I give the decision that I consider the tribunal should have given namely:

The appeal is allowed.

The decision issued by the Secretary of State on 30 November 2006 is reversed.

There are no grounds on which to supersede the decision made by Boston appeal tribunal on 10 November 2004. Accordingly, the claimant remains entitled to state pension credit by virtue of that decision and calculated on the basis set out in that decision.

Reasons.

Introduction.

At the time I have to consider, the appellant was 74 years old and lived with his wife who was 75. Despite being many years above pensionable age, the appellant has not retired but continues to work as a self-employed writer, publisher and photographer. Unfortunately, that self-employment has generated a loss in recent years.

Fortunately for the appellant and his wife, they are not entirely reliant on his work to provide them with an income. Each of them has a state retirement pension and a modest annuity from a life assurance company. That income, taken together with the tariff income from their capital, exceeds the appropriate minimum guarantee. The Secretary of State therefore takes the view that the appellant is not entitled to the guarantee credit element of state pension credit (SPC).

The appellant does not agree. He maintains that he is entitled to offset the loss from his self-employment against his other sources of income. If he is correct about that, then the offset would reduce the couple's income below the appropriate minimum guarantee with the consequence that there would be some entitlement to the guarantee credit.

This is the second occasion on which this issue has been litigated. It was first considered by a tribunal on 10 November 2004 (Tribunal 1). Tribunal 1 found in favour of the appellant and directed the Secretary of State to calculate his entitlement on the basis that the losses incurred in his self-employment could be offset against his other income. The Secretary of State did not agree with that decision but, by oversight, did not seek leave to appeal against the decision within the prescribed time. When that oversight came to light, the Secretary of State took the view (correctly) that he was legally obliged to implement Tribunal 1's decision.

The current dispute arose in the autumn of 2006 when the appellant submitted his accounts for the year ending 31 March 2006. These showed that his net loss from self-employment had increased in comparison with the previous year. The Secretary of State took the view that this provided him with grounds upon which to supersede Tribunal 1's decision. The superseding decision was that the appellant was not entitled to SPC from 27 March 2006.

The Secretary of State's decision was upheld by a second tribunal on 13 March 2007 (Tribunal 2). Tribunal 2 accepted that there were grounds upon which to supersede Tribunal 1's decision and also disagreed with Tribunal 1 on the issue of whether the appellant's losses from self-employment could lawfully be offset against his other income when calculating his entitlement to SPC.

The appellant now appeals to the Commissioner with the leave of the acting regional chairman.

I held an oral hearing of the appeal in London on 31 March 2008. The appellant attended that hearing with his wife but was not legally represented. The Secretary of State was represented by Mr Hendron from the Office of the Solicitor to the Department. I am grateful to the appellant and to Mr Hendron for their helpful submissions and for the measured and reasonable way in which they put their opposing cases.

The issues before the Commissioner

There is no dispute about the facts. The decisions of Tribunal 1 and Tribunal 2 both turned on points of law. I have to decide whether Tribunal 2's decision was correct. That in turn requires me to consider two issues:

(a) The first issue is whether the SPC scheme permits a loss from self-employment to be offset against other sources of income.

Consideration of this issue inevitably requires me to decide whether Tribunal 1's decision was correct. I should stress, however, that that decision is not before me and I have no power to set it aside.

(b) The second issue only arises if Tribunal 1's decision was incorrect. It is whether the increase in the loss made by the appellant amount to a "relevant change of circumstances" so as to establish grounds for the Secretary of State to supersede Tribunal 1's decision.

On behalf of the Secretary of State, Mr Hendron supports the appeal on the second issue, but not on the first.

The assessed income period

At the oral hearing, I raised the possibility that I might also need to consider whether, when the Secretary of State implemented Tribunal 1's decision, he should have specified an assessed income period under section 6 of the State Pension Credit Act 2002 (the SPC Act). However, on further consideration, I have decided that it is unnecessary for me to direct further written submissions on this point. The reason is that, under section 7 of the SPC Act, only certain types of income (known collectively as 'retirement provision') are fixed during the assessed income period. A claimant's earnings, whether from employment or self-employment, do not form part of his retirement provision (see section 7(6)). As this appeal is only concerned with the appellant's earned income, nothing turns on whether an assessed income period was specified in this case. However, for the sake of future clarity, I strongly recommend that the Secretary of State should notify the appellant whether an assessed income period has been specified and, if not, explain why not. I should also advise the appellant that, because of what I say in this paragraph, he must notify the Secretary of State promptly if, as he expects, his accounts for the year ending 31 March 2008 (or any future period) show that his business has returned to profit.

Offset of losses.

One of the appellant's complaints is that throughout the process described above, he was given confusing and conflicting information about the legal provisions upon which the Secretary of State relied when making his decision. I have considerable sympathy with that complaint and will therefore take the opportunity to explain the statutory framework in some detail:

(a) The starting point is section 15 of the SPC Act which, so far as relevant, reads as follows:

'Income and capital

15.—(1) In this Act "income" means income of any of the following descriptions—

(a) earnings;

(b) …

(c) retirement pension income;

(d) income from annuity contracts (other than retirement pension income);

(e)-(h) …

(i) income from capital;

(j) ….

(2) Regulations may provide that a person's capital shall be deemed to yield him income at a prescribed rate.

(3) Income and capital shall be calculated or estimated in such manner as may be prescribed.

(4) A person's income in respect of any period shall be calculated in accordance with prescribed rules.

(5) The rules may provide for the calculation to be made by reference to an average over a period (which need not consist of or include the whole or any part of the period concerned).

(6) Circumstances may be prescribed in which—

(a) a person is treated as possessing capital or income which he does not possess;

(b) capital or income which a person does possess is to be disregarded;

(c) income is to be treated as capital; or

(d) capital is to be treated as income.

(7) Subsections (2) to (6) have effect for the purposes of this Act.

(b) Under section 17(1) of the SPC Act, '"prescribed" means specified in, or determined in accordance with regulations'. The relevant regulations are the State Pension Credit Regulations 2002 (the Regulations). Income is dealt with in Part III of the Regulations. The relevant provisions are as follows:

'PART III

Income

Calculation of income and capital

14.—The income and capital of—

(a) the claimant; and

(b) any partner of the claimant,

shall be calculated in accordance with the rules set out in this Part; and any reference in this Part to the claimant shall apply equally to any partner of the claimant.

…

Earnings of self-employed earners

17B.—(1) For the purposes of state pension credit, the provisions of the Computation of Earnings Regulations in their application to the earnings of self-employed earners, shall have effect in so far as provided by this regulation.

(2) In their application to state pension credit, regulations 11 to 14 of the Computation of Earnings Regulations shall have effect as if—

(za) …

(a) "claimant" referred to a person claiming state pension credit and any partner of the claimant;

(b) …

(3)-(4) …

(5) In regulation 13 (calculation of net profit of self-employed earners)—

(a) for paragraphs (1) to (3), the following provision shall have effect—

[Seee text of regulation 13 below];

(b) paragraphs (4) to (12) shall have effect.

(6) regulation 14 (deduction of tax and contributions for self-employed earners) shall have effect.'

(c) The reference to 'the Computation of Earnings Regulations' in regulation 17B(1) is to the Social Security Benefit (Computation of Earnings) Regulations 1996 (the 1996 Regulations)'. For the purposes of this appeal, only regulation 13 is relevant. That regulation is in the following terms:

'Calculation of net profit of self-employed earners

13.—(1) For the purposes of regulation 11 (calculation of earnings of self-employed earners), the earnings of a claimant to be taken into account shall be -

(a) in the case of a self-employed earner who is engaged in employment on his own account, the net profit derived from that employment;

(b) ….

(2)-(3) …

(4) For the purposes of paragraph (1)(a), the net profit of the employment shall, except where paragraph (10) applies, be calculated by taking into account the earnings of the employment over the period determined under regulation 11 (calculation of earnings of self-employed earners) less—

(a) subject to paragraphs (6) to (8), any expenses wholly and exclusively defrayed in that period for the purposes of that employment;

(b) an amount in respect of—

(i) income tax; and

(ii) social security contributions payable under the Contributions and Benefits Act, calculated in accordance with regulation 14 (deduction of tax and contributions for self-employed earners); and

(c) one half of any premium paid in the period that is relevant under regulation 11 in respect of a retirement annuity contract or a personal pension scheme.

(5)-(11) …

(12) For the avoidance of doubt where a claimant is engaged in employment as a self-employed earner and he is engaged in one or more other employments as a self-employed or employed earner any loss incurred in any one of his employments shall not be offset against his earnings in any other of his employments.

As modified for the purposes of SPC, regulation 13 is in a similar form to regulation 38 of the Income Support Regulations, regulation 101 of the Jobseeker's Allowance Regulations 1996 and the equivalent provisions relating to housing benefit and council tax benefit.

The appellant points out—and I accept—that Tribunal 2 misquoted regulation 13(12) in its statement of reasons by failing to include the words "and he is engaged". I do not, however, agree that mistake affected Tribunal 2's interpretation of the regulation or was otherwise material to its decision. In my judgment, it was a simple typographical error.

The appellant submits that, properly interpreted, the law—and in particular regulation 13(12) of the 1996 Regulations—permits him to offset his self-employed losses against his other income. His submission has a number of strands:

(a) First, he says that when he originally claimed SPC, he was advised over the telephone by a member of staff at the Pension Service that, provided his business losses were accepted by the Inland Revenue, they would be applied in the same way for SPC purposes.

(b) Second, he makes the point that for tax purposes it is permissible to offset a trading loss against other income. He maintains that this is fairer and reflects normal accounting practice. In particular, a loss can be viewed as a negative 'net profit' for the purposes of regulation 13(1)(a) of the 1996 Regulations (as substituted by regulation 17B(5)(a) of the Regulations). 'Profit' and 'loss' are no more than different sides of the same coin, both being potential results of the calculation whereby the revenue expenses of a business are deducted from its revenue receipts.

(c) Third, apart from regulation 13(12), the 1996 Regulations are silent about whether a loss from self-employment can be offset against other income. Regulation 13(12) specifies particular circumstances in which such losses may not be offset. The implication is that in other circumstances, offsetting of losses is possible. The appellant is not covered by regulation 13(12) because that regulation only applies where a claimant has at least two employments, one of which must be as a self-employed earner. The appellant only has one such employment. Therefore, he says, his circumstances are covered by the implied general rule that offsetting is permissible.

It is a version of this third argument that appears to have commended itself to Tribunal 1.

I am unable to accept any of the appellant's submissions on this point:

(a) It is certainly unfortunate if the appellant was misadvised about the manner in which his income would be assessed for the purposes of his SPC claim. However, the Secretary of State and the tribunals were—and I am—obliged to apply the law as it is, rather than as a civil servant may have represented it to be. Moreover, this is not a case in which the appellant has suffered a loss as a result of having been given incorrect advice. The combined effect of Tribunal 1's decision and my decision is that the appellant will receive the guarantee credit of SPC for a period of over 4 years during which, if the law had been correctly applied by Tribunal 1, he would not have been entitled to it.

(b) Properly understood, the analogy with the practice of the Inland Revenue harms the appellant's case rather than helps it. The reason that the Revenue allows the offset of a loss from self-employment against a taxpayer's other income is not to reflect normal accounting practice or some general principle of natural law that it is fairer to do so. It is that the Revenue is positively required to do so by Act of Parliament. At the time with which I am concerned, that obligation could be found in section 380 of the Income & Corporation Taxes Act 1988. It can now be found in section 64 of the Income Tax Act 2007. If section 380 did not exist, then the Revenue would not have permitted the appellant's losses to be offset against his other income.

Moreover, to say that it is normal accounting practice to offset losses is to put the cart before the horse. Most accounts are prepared (at least in part) for the purposes of the Revenue and therefore accounting practice follows the Revenue practice, not the other way round.

(c) The calculation of income for SPC is governed by the provisions that I have set out above and not by Revenue rules. Those provisions form a technical scheme. In particular, section 15(3) of the SPC Act provides that income is to be calculated or estimated "in such manner as may be prescribed". It therefore does not assist the appellant that nothing in the scheme forbids the offset of a loss: In the absence of a regulation positively requiring such an offset, either expressly or by necessary implication, that offset is not permitted. The rules for SPC (as set out above) do not contain any provision that is equivalent to section 380.

(d) I accept that if one looks at the matter from a purely mathematical or accounting point of view, then the appellant is correct to say that a loss is no more than a negative profit and vice versa. However, that is not the sense in which those words are used in the 1996 Regulations. When the difference between receipts and expenditure is a positive figure the 1996 Regulations refer to it as a 'profit' and where it is a negative figure, they refer to it as a 'loss' (see, for example, regulation 13(12) itself). It follows that, when a loss is made the net 'profit' of the employment for SPC purposes is nil and not a negative figure.

(e) Finally, it is not possible to imply a general rule that losses may be offset from regulation 13(12). That regulation states expressly that it has been made 'for the avoidance of doubt'. In other words, it is intended merely to clarify the law as it would exist even if the regulation had not been made. It may well be that, as Mr Hendron submits, the position was thought to be doubtful because of the different rules that apply when income is assessed for the purposes of liability to tax.

It follows that the Secretary of State is right to maintain that the appellant's losses from his self-employment do not fall to be offset against his other income. Tribunal 1 was wrong in law to decide the contrary.

Supersession.

However, just because Tribunal 1's decision was wrong does not mean that the Secretary of State was entitled to change it, or that Tribunal 2 was right to uphold his decision when he purported to do so.

The proper course for the Secretary of State to have taken if he believed that Tribunal 1 had misinterpreted the law was to appeal to the Commissioner. He did not do so. In the absence of such an appeal, Tribunal 1's decision is final (see section 17 of the Social Security Act 1998 (the Act)). Moreover, under regulation 17 of the Social Security (Claims and Payments) Regulations 1987, the award of SPC made by Tribunal 1 continues for an indefinite period.

Under section 9 of the Act, the Secretary of State may revise his own decisions in certain circumstances. However, he has no power to revise the decision of a tribunal. On appeal, a tribunal has no power to revise the decision of an earlier tribunal.

It follows that Tribunal 1's decision could only be changed (other than as a result of the annual uprating required by Part X of the Social Security Administration Act 1992) by superseding it under section 10 of the Act. Before a superseding decision can lawfully be made, the party seeking to change the original decision (i.e., in this case the Secretary of State) must establish on a balance of probabilities that there are grounds for supersession what the proper terms of the superseding decision should be.

The circumstances in which grounds for supersession exist are listed in regulation 6 of the Social Security and Child Support (Decisions and Appeals) Regulations 1999 (the Decisions and Appeals Regulations). The real reason why the Secretary of State wanted to change Tribunal 1's decision was that it was wrong in law. However, an error of law by a tribunal is not listed as a ground for supersession in regulation 6. Therefore the Secretary of State either had to establish some other ground or to accept that the appellant is legally entitled to continue to receive SPC.

The Secretary of State's case to Tribunal 2 was that the increase in the appellant's losses disclosed by his accounts for the year ending 31 March 2006 amounted to a "relevant change of circumstances" within regulation 6(2)(a)(i) of the Decisions and Appeals Regulations and that he was therefore entitled to supersede Tribunal 1's decision in a manner that reinstated his own interpretation of the law for the interpretation that Tribunal 1 had decided was correct.

Tribunal 2 accepted that submission. Its statement of reasons stated:

'10. I accept that the Secretary of State was entitled to make enquiries about [the appellant's] income for the period in issue. Those enquiries in this case demonstrated that [the appellant's] financial position had changed. That the change was not significant was not relevant. It was a change of a relevant circumstance sufficient to entitle the Secretary of State to supersede the decision of the previous tribunal in accordance with section 12 of the Social Security Act 1998 and regulation 6 of the [Decisions & Appeals Regulations]. I was not asked, and make no comment, as to what the situation would have been had there been no relevant change of circumstances. The regulations make specific provision for the supersession of decisions of tribunals in such circumstances.'

As the Secretary of State now accepts, Tribunal 2's decision is unsustainable and must be set aside as wrong in law. What regulation 6 required the Secretary of State to establish was not a "change of a relevant circumstance" but a "relevant change of circumstances". In other words it is the change itself that must be relevant. An irrelevant change in a relevant circumstance will not suffice.

It is now well established that the grounds for supersession are "outcome criteria" rather than "threshold criteria". In other words, the mere fact that the Secretary of State can identify a potential ground for supersession is not sufficient to entitle him to reconsider the original decision as a whole and to substitute whatever decision appears to be appropriate. As was accepted by the tribunal of Commissioners in R(IB)2/04 (at paragraph 10(4)):

"(a) There can be no supersession under section 10 unless one of the grounds for supersession specified in regulation 6 is actually found to exist, and

(b) the ground which is found to exist must form the basis of the supersession in the sense that the original can only be altered in a way that follows from that ground." (emphasis added).

As the Tribunal of Commissioners noted, the judgment of the majority of the Court of Appeal in Wood v Secretary of State for Work & Pensions [2003] EWCA Civ 53 (reported as R(DLA) 1/03) is to the same effect on this point.

Applying those principles to the present appeal, the increase in the appellant's losses might be said to be a "change of circumstances" but was it a relevant change of circumstances, i.e., a change that was capable of forming the basis of a superseding decision that removed appellant's entitlement to SPC? In my judgment, it was not:

(a) On the view of the law taken by Tribunal 1, the change was relevant because the losses that had increased fell to be offset against the appellant's other income. However, as the original decision can only be altered in a way which follows from the ground for supersession, that change in circumstances could only form the basis of a decision to increase the rate at which the appellant was entitled to SPC (i.e. because the amount of the offset had increased and his income had thereby reduced): it could not form the basis of a superseding decision that reduced or removed such entitlement.

(b) By contrast, on the view of the law that I have decided is correct, the change of circumstances was not relevant. Indeed, it could be argued that, correctly analysed, there was no change at all. As the appellant's losses from self-employment do not fall to be offset against his other income then his net profit from self-employment for every year in which he sustained a loss (including the years ending 31 March 2005 and 31 March 2006) was nil. That is so irrespective of the size of the loss. It is the figure for net profit that is taken into account in the SPC calculation. That figure was nil for the previous year and is nil for the current year. The only reason that there appears to have been a change is that Tribunal 1 erred in law and, as I have already explained, there is no power to supersede its decision on that ground.

The point can, perhaps, be summarised by saying that the Secretary of State cannot have it both ways. If, as he maintains, the level of the appellant's losses is irrelevant for the purposes calculating entitlement to SPC, then it cannot also be the case that a change in that level is relevant for the purposes of establishing grounds for supersession.

At the hearing of this appeal, Mr Hendron accepted on behalf of the Secretary of State that the above analysis was correct and that the purported supersession carried out by the Secretary of State on 30 November 2006 was not valid. In those circumstances, the appellant remains entitled to SPC by virtue of Tribunal 1's decision and will remain so unless and until a ground for supersession comes into existence that is capable of forming the basis of a decision to remove that entitlement. That is so even though Tribunal 1's decision is wrong in law.

Conclusion

For those reasons, my decision is as set out at paragraph 1 above.

(Signed on the original)

Richard Poynter
Deputy Commissioner
4 April 2008