Upper Tribunal (Administrative Appeals Chamber)

Decision of the Upper Tribunal
(Administrative Appeals Chamber)

As the decision of the First-tier Tribunal (made on 31 March 2009 at Enfield under reference 921/08/02223) involved the making of an error in point of law, it is SET ASIDE under section 12(2)(a) and (b)(i) of the Tribunals, Courts and Enforcement Act 2007 and the case is REMITTED to the tribunal for rehearing by a differently constituted panel.

DIRECTIONS:

A.          The tribunal must undertake a complete reconsideration of the issues that are raised by the appeal and, subject to the tribunal’s discretion under section 20(7)(a) of the Child Support Act 1991, any other issues that merit consideration.

B.          In particular, the tribunal must investigate and decide on the non-resident parent’s income from the effective date of 17 March 2008 in accordance with the analysis in my reasons below.

C.          In doing so, the tribunal must not take account of circumstances that were not obtaining at the time of the decision under appeal, which was made on 21 April 2008: see section 12(8)(b) of the Social Security Act 1998. Later evidence is admissible, provided that it relates to the time of the decision: R(DLA) 2 and 3/01.

D.          The district tribunal judge will need to consider whether a financially-qualified member should sit on the panel.

Reasons for Decision

1.           How should a tribunal calculate a non-resident parent’s self-employed income if it has Her Majesty's Revenue and Customs’ tax calculation, but also has evidence that the figures used in that calculation may not be reliable? That is the key issue that I have decided in this appeal.

A.          The parties

2.           The non-resident parent in this case is liable to make child support maintenance payments in respect of two children by different parents with care. He is the second respondent. One of the parents with care is the mother of Sean. She is the appellant. The other parent with care is the third respondent, but has taken no part in the proceedings. I shall not refer to her, but she may be affected by the ultimate outcome. The other party is the Child Maintenance and Enforcement Commission.

B.          History and background

3.           The non-resident parent was liable to pay £27.50 a week in respect of Sean from 16 October 2006. In March 2007, the parent with care asked for his earnings to be investigated. This led to a decision that the non-resident parent was liable to pay £55.50 a week from 17 March 2008. The parent with care exercised her right of appeal to the First-tier Tribunal, which dismissed her appeal. The judge commented that the parent with care had no evidence to support her allegations about the non-resident parent’s bank accounts and savings. I have dealt with this appeal, as I must, on the basis of the evidence that was before the First-tier Tribunal. If the parent with care has evidence that the non-resident parent has other accounts or additional income, she will be able to produce it for the rehearing.

C.          The calculation of the non-resident parent’s income

What the decision-maker did

4.           The decision-maker’s calculation was based on the evidence of the transactions on the non-resident parent’s account with the Nationwide Building Society (pages 15-22). They cover the period from 9 February 2007 to 1 April 2008.  The pages are not in the right order and one page (page 21) for late December 2007 to mid-February 2008 is incomplete.

5.           The basis of the calculation is shown on pages 23 and 24. The decision-maker added together the receipts for 38 weeks, which were equivalent to an annual amount of £38,572.56 for the tax year 2007-2008. This annual figure converted to a weekly figure of £737.73 before the deduction of income tax and national insurance.

6.           Why did the decision-maker use 38 weeks? One possibility is that the officer did not have access to the missing entries on page 21. However, they do not account for the whole of the remaining 14 weeks. Another possibility is that the officer counted as the missing weeks those between the bottom of page 20 and the start of the entries on page 21. That would come to close to 14 weeks. However, as the pages are out of order, some of those weeks actually appear on page 17. I do not know, of course, the order in which the pages appeared in the decision-maker’s file.

The accountant’s documents

7.           On 30 April 2008, the non-resident parent’s accountant provided the non-resident parent’s income and expenditure account and a tax calculation notice. The latter was evidently based on the former. The documents showed a gross income of £23,000, which after deduction of £8,889 expenses produced a pre-tax profit of £14,111.

8.           These documents related to the tax year 2006-2007, the year before that used by the decision-maker. The officer who wrote the submission to the First-tier Tribunal noted that, unlike the bank statements, the income and expenditure account included expenses and that they were, therefore, preferable.

What the tribunal did

9.           The First-tier Tribunal confirmed the calculation made by the decision-maker. The judge referred to that calculation as set out in the submission to the tribunal and stated that ‘there was supporting documentary evidence from an accountant and HMR&C, appearing at pages 25-27, which the C S A used to support its calculations.’

10.        The judge was wrong to say that the accountant’s documents supported the decision-maker’s calculation. They related to the previous tax year and included expenditure. The judge did not refer to the submission that the documents should have been used in preference to the bank records. To be fair to the judge, he was writing his reasons almost eight months after the hearing, through no fault of his own.

D.          The errors of law

11.        I gave permission to appeal on the ground that the tribunal may not have taken the correct approach to the calculation of the non-resident parent’s income. I asked specifically whether it should have used the documents produced by the account.

12.        The tribunal made an error of law in failing to explain how it dealt with the evidence as a whole, by which I mean the bank account evidence together with the documents produced by the account. The tribunal also made an error of law by failing to approach the issue of the non-resident parent’s income in accordance with the legislation, which I now explain.

E.          The legislation

13.        The relevant legislation is contained in paragraphs 7 and 8 of the Schedule to the Child Support (Maintenance Calculations and Special Cases) Regulations 2000 (SI 2001 No 155):

‘7 Net weekly income of non-resident parent as a self-employed earner

(1) Subject to sub-paragraph (6) and to paragraph 8, the net weekly income of the non-resident parent as a self-employed earner shall be his gross earnings less the deductions to which sub-paragraph (3) applies.

(1A) In this paragraph and paragraph 8 a person's “gross earnings” are his taxable profits calculated in accordance with Part 2 of the Income Tax (Trading and Other Income) Act 2005.

(2) The non-resident parent shall provide to the Secretary of State on demand a copy of-

(a) any tax calculation notice issued to him by Her Majesty's Revenue and Customs; and

(b) any revised tax calculation notice issued to him by Her Majesty's Revenue and Customs.

(3) This paragraph applies to the following deductions-

(a) any income tax relating to the gross earnings from the self-employment determined in accordance with sub-paragraph (4);

(b) any National Insurance contributions relating to the gross earnings from the self-employment determined in accordance with sub-paragraph (5); and

(c) any premiums paid by the non-resident parent in respect of a retirement annuity contract or a personal pension scheme or, where that scheme is intended partly to provide a capital sum to discharge a mortgage or a charge secured upon the parent's home, 75 per centum of the contributions payable.

(4) For the purpose of sub-paragraph (3)(a), the income tax to be deducted from the gross earnings shall be determined in accordance with the following provisions-

(a) subject to head (d), an amount of gross earnings calculated as if it were equivalent to any personal allowance which would be applicable to the earner by virtue of the provisions of Chapter I of Part VII of the Income and Corporation Taxes Act 1988 (personal relief) shall be disregarded;

(b) subject to head (c), an amount equivalent to income tax shall be calculated in relation to the gross earnings remaining following the application of head (a) (the “remaining earnings”);

(c) the tax rate applicable at the effective date shall be applied to all the remaining earnings, where necessary increasing or reducing the amount payable to take account of the fact that the earnings related to a period greater or less than one year; and

(d) the amount to be disregarded by virtue of head (a) shall be calculated by reference to the yearly rate applicable at the effective date, that amount being reduced or increased in the same proportion to that which the period represented by the gross earnings bears to the period of one year.

(5) For the purposes of sub-paragraph (3)(b), the amount to be deducted in respect of National Insurance contributions shall be the total of-

(a) the amount of Class 2 contributions (if any) payable under section 11(1) or, as the case may be, (3) of the Contributions and Benefits Act or under section 11(1) or (3) of the Contributions and Benefits (Northern Ireland) Act; and

(b) the amount of Class 4 contributions (if any) payable under section 15(2) of that Act, or under section 15(2) of the Contributions and Benefits (Northern Ireland) Act, at the rates applicable at the effective date.

(6) The net weekly income of a self-employed earner may only be determined in accordance with this paragraph where the earnings concerned relate to a period which terminated not more than 24 months prior to the relevant week.

…

(8) Any request by the Secretary of State in accordance with sub-paragraph (2) for the provision of information shall set out the possible consequences of failure to provide such information, including details of the offences provided for in section 14A of the Act⁷ for failing to provide, or providing false, information.

8 Figures calculated using gross receipts less deductions

(1) Where-

(a) the conditions of paragraph 7(6) are not satisfied; or

(b) the Secretary of State accepts that it is not reasonably practicable for the self-employed earner to provide information relating to his gross earnings from self-employment in the forms submitted to, or as issued or revised by, the Inland Revenue;

…

net income means in the case of employment as a self-employed earner his earnings calculated by reference to the gross receipts in respect of employment which are of a type which would be taken into account under paragraph 7(1) less the deductions provided for in sub-paragraph (2).

(2) The deductions to be taken from the gross receipts to calculate net earnings for the purposes of this paragraph are-

(a) any expenses which are reasonably incurred and are wholly and exclusively defrayed for the purposes of the earner's business in the period by reference to which his earnings are determined under paragraph 9(2) or (3);

(b) any value added tax paid in the period by reference to which his earnings are determined in excess of value added tax received in that period;

(c) any amount in respect of income tax determined in accordance with sub-paragraph (4);

(d) any amount of National Insurance contributions determined in accordance with sub-paragraph (4); and

(e) any premium paid by the non-resident parent in respect of a retirement annuity contract or a personal pension scheme or, where that scheme is intended partly to provide a capital sum to discharge a mortgage or a charge secured upon the parent's home, 75 per centum of contributions payable.

(3) For the purposes of sub-paragraph (2)(a)-

(a) such expenses include-

(i) repayment of capital on any loan used for the replacement, in the course of business, of equipment or machinery, or the repair of an existing business asset except to the extent that any sum is payable under an insurance policy for its repair;

(ii) any income expended in the repair of an existing business asset except to the extent that any sum is payable under an insurance policy for its repair; and

(iii) any payment of interest on a loan taken out for the purposes of the business;

(b) such expenses do not include-

…

(ii) any capital expenditure;

…

(vi) any expenses incurred in providing business entertainment.

(4) For the purposes of sub-paragraph (2)(c) and (d), the amounts in respect of income tax and National Insurance contributions to be deducted from the gross receipts shall be determined in accordance with paragraph 7(4) and (5) of this Schedule as if in paragraph 7(4) references to gross earnings were references to taxable earnings and in this sub-paragraph “taxable earnings” means the gross receipts of the earner less the deductions mentioned in sub-paragraph (2)(a) and (b).’

F.           Analysis

14.        I am grateful to Mr Christopher Ellis who has represented the Child Maintenance and Enforcement Commission. I accept his analysis of the law, although I do not entirely accept his analysis of what the tribunal should have done.

Which paragraph applies?

15.        Paragraphs 7 and 8 make alternative provision; either one or the other applies. Paragraph 7 is the default position; it applies unless one of the conditions in paragraph 8(1) is satisfied. The condition in paragraph 8(1)(b) has not been updated to reflect the amendments to paragraph 7. In particular, it continues to refer to ‘forms submitted to’, which mirrored the previous wording of paragraph 7. The words ‘submitted to’ are now redundant.

16.        The first issue for the tribunal to decide was whether paragraph 7 or paragraph 8 applied. This depended in turn on the period over which the non-resident parent’s income was to be assessed. If the relevant year was 2006-2007, the tribunal had to use paragraph 7 as it had the tax calculation notice for that year. If the relevant year was 2007-2008, the tribunal had to use paragraph 8, as it was not reasonably practicable for the non-resident parent to produce a tax calculation notice for that year. Accordingly, paragraph 8(1)(b) was satisfied.

17.        The tribunal failed to deal with this issue. The judge should have noticed that the non-resident parent’s receipts for 2006-2007 were much lower than for 2007-2008. As the latter was closer to the effective date than the former, it would have been rational to use those figures. The tribunal might have been able to justify using paragraph 7, but it simply did not deal with the issue.

18.        The figures for 2007-2008 did not include expenditure, but the tribunal could have applied the 2006-2007 figures with appropriate adjustments.

On what figures does paragraph 7 apply?

19.        If paragraph 8 applies, the decision-maker and the tribunal must make their own findings on both receipts and expenditure. What is the position if paragraph 7 applies?

20.        If paragraph 7 applies, gross earnings are the non-resident parent’s taxable profits. These must be calculated in accordance with Part 2 of the Income Tax (Trading and Other Income) Act 2005. I accept Mr Ellis’ submission that ‘in accordance with’ does not mean that all the provisions of Part 2 of that Act have to be applied. It does not mean that the tribunal (or decision-maker) has to accept the figures used by Her Majesty's Revenue and Customs, whether for receipts or expenditure. Paragraph 7 could have so provided, but it does not. If the parent with care can prove that the non-resident parent had receipts in excess of those taken into account in the tax calculation, the tribunal can and must apply the provisions of Part 2 to that amount. The same applies if the parent with care can prove that the expenditure accepted in the tax calculation is excessive. This is a realistic interpretation, as it is well known that most self-employed accounts that show low earnings are not subject to detailed scrutiny by Her Majesty's Revenue and Customs.

21.        Paragraph 8(1)(c) used to provide that paragraph 8 could be used if the figures used for paragraph 7 did not accurately reflect the non-resident parent’s normal weekly earnings. That provision has been repealed. I accept Mr Ellis’ argument that the repeal has not affected the power for decision-makers and tribunals to substitute figures for those used in a tax calculation.

22.        This does not mean that those figures are irrelevant. Paragraph 7(2) imposes a duty on a non-resident parent to provide copies of any original or revised tax calculation notice. The function of this provision is to provide evidence of how Part 2 of the 2005 Act has been applied. That may be the only evidence available, especially at the stage when the matter is before a decision-maker. Even if there is other evidence, it may still be preferable. This will depend on the content of the evidence and on the degree of scrutiny involved in the tax calculation. But none of this means that the tribunal must accept the information supplied to or used by Her Majesty's Revenue and Customs.

23.        Applying this analysis to the circumstances of this case produces this result. The tribunal could have used the 2006-2007 tax year, but it could have altered the figures that were submitted to, and relied on, by the Her Majesty's Revenue and Customs. The only evidential basis on which that could be done would be the increase in receipts shown by the bank account evidence. The tribunal could have made inquiries of the non-resident parent to establish whether there had been an upturn in his work for 2007-2008. If he could not account for the different figures, the tribunal could have decided that he was under-reporting his receipts to his accountant. 

How should the tribunal have applied paragraph 8?

24.        As it was, the tribunal seems to have made its decision on the basis of the tax year 2007-2008. I say ‘seems’, because the tribunal clearly believed that the accountant’s documents for 2006-2007 supported the calculation for 2007-2008, which suggests some confusion. The tribunal was entitled to accept the bank account evidence. However, two issues then arose.

25.        First, there is the question of the total receipts for the periods shown in the bank account evidence. The figures are easy, but what about the decision-maker’s calculation based on 38 weeks? That issue required investigation and findings. The tribunal did not identify the issue and, therefore, did not investigate and made no findings.

26.        Second, it is unlikely that there was no expenditure related to that income. The tribunal could have made enquiries of the non-resident parent to establish what that expenditure had been for 2007-2008. Alternatively, it could have scaled up the expenditure for 2006-2007 to reflect the increase in work. Ideally, the tribunal should have done both, using each as a check on the other. It did neither.

G.         The grounds of appeal

27.        I have not so far mentioned the parent with care’s grounds of appeal. They cover a range of topics that clearly show her feelings and frustrations that have built up over a number of years. A number of them do not relate to the matters that were not legally relevant to the proceedings before the First-tier Tribunal. These are not matters for the Upper Tribunal. The other matters criticise various aspects of the proceedings before the First-tier Tribunal. I refused permission to appeal in respect of these matters. Some are without any support in substance. Specifically, there is no evidence whatsoever to support the serious allegation that the judge was biased. Others demonstrate a misunderstanding of the procedure. For example, the judge was entitled to decide who should be present while evidence was given. And yet others reflect the parent with care’s perception. She may feel as if she has been called a liar, but she has not; the tribunal merely decided the case on the evidence available to it, as it had to do.

H.         Disposal

28.        The parent with care has asked for an oral hearing of this appeal. That is not necessary, as I have been able to identify an error without hearing oral argument. Mr Ellis has suggested substituting a decision for that of the tribunal. That would justify holding an oral hearing, but I do not feel confident to do that on the papers and without the assistance of a financially-qualified member. In those circumstances, I have directed a rehearing before the First-tier Tribunal.

 

Signed on original on 7 December 2010

Edward Jacobs Upper Tribunal Judge