Upper Tribunal (Administrative Appeals Chamber)

 

DECISION OF THE UPPER TRIBUNAL

ADMINISTRATIVE APPEALS CHAMBER

 

The decision of the Ashford appeal tribunal of 1 September 2008, dated 1 May 2009, involved errors on points of law, for the reasons given below, and is set aside. It is appropriate for the Upper Tribunal to re-make the decision on the parent with care’s appeal against the amount of the maintenance assessment made on 12 July 2006 (Tribunals, Courts and Enforcement Act 2007, section 12(2)(b)(ii)). That decision is to allow the appeal and to give the directions as to the calculation of the maintenance assessment with effect from 2 May 2006 set out in paragraph 37 below, in which directions 1 and 3 to 8 of the directions set out on the appeal tribunal’s decision notice dated 1 May 2009 are confirmed and a new direction 2 is substituted.

 

 

REASONS FOR DECISION

 

1. In the language of the relevant child support legislation the appellant is the absent parent of the qualifying child. From now on I shall call him the father and I shall call the second respondent, in the language of the legislation the parent with care, the mother.

 

2. An oral hearing of the appeal to the Upper Tribunal was held, at the request of the father. Unfortunately some months had elapsed before both parents could be available. The father attended and was represented by Claire Miskin of counsel, instructed by Brachers solicitors. The mother attended without a representative. The Child Maintenance and Enforcement Commission (CMEC) was represented by Leo Scoon of the Office of the Solicitor to the Department for Work and Pensions. I am grateful for all the submissions in identifying the issues still in dispute on which I have then been able to focus in this decision. I later directed further submissions on a consequential point that arose. Unfortunately those submissions were completed at a time when my availability was restricted and there has been undue delay in the subsequent completion of this decision.

 

The background in brief

3. The appeal tribunal was carrying out the rehearing of the mother’s appeal against the maintenance assessment made on 12 June 1996, as directed in my decision as a Child Support Commissioner on file no CCS/2342/2007, now reported as R(CS) 9/08. There is therefore no need to set out all the background again. The main reason why the father’s appeal to the Commissioner succeeded in R(CS) 9/08 was that the appeal tribunal of 10 January 2007 had calculated his earnings as if his “salary sacrifice” of £48,375 per year, in return for his employers making contributions of £48,000 per year into a pension scheme and £375 into a permanent health insurance scheme, had not reduced the amount of his gross earnings from employment (therefore taken as £60,000), but that half of the £48,000 was to be deducted as employee’s pension contributions. In brief, that was wrong in law because if the salary sacrifice was legally effective it reduced the amount of the father’s earnings to which he was entitled to £11,625 and, since the whole arrangement was based on the pension contributions being made as employer’s contributions, the £48,000 could not be regarded as employee’s contributions.

 

4. However, if that conclusion was borne out by the evidence, it would be necessary for consideration to the given to paragraphs 26 and 27 of Schedule 1 to the Child Support (Maintenance Assessments and Special Cases) Regulations 1992 (the MASC Regulations). Paragraph 26 provides:

 

"26. Where the Secretary of State is satisfied--

 (a) that a person who has performed a service either--

 (i) without receiving any remuneration in respect of it; or

(ii) for remuneration which is less than that normally paid for that service;

 (b) that the service in question was for the benefit of--

 (i) another person who is not a member of the same family as the person in question; or

(ii) a body which is neither a charity nor a voluntary organisation;

 (c) that the service in question was performed for a person who, or as the case may be, a body which was able to pay remuneration at the normal rate for the service in question;

 (d) that the principal purpose of the person undertaking the service without receiving any or adequate remuneration is to reduce his assessable income for the purposes of the [Child Support Act 1991]; and

 (e) that any remuneration foregone would have fallen to be taken into account as earnings,

the value of the remuneration foregone shall be estimated by the Secretary of State and an amount equal to the value so estimated shall be treated as income of the person who performed those circumstances."

 

That income counts as part of the parent’s earnings.

 

5. Paragraph 27 applies, "otherwise than in the circumstances set out in paragraph 26", when a person has intentionally deprived himself of income or of capital that would otherwise be a source of income with a view to reducing the amount of his assessable income. Then the person’s:

 

“net income shall include the amount estimated by the Secretary of State as representing the income which that person would have had if he had not deprived himself of or failed to secure that income, or as the case may be, that capital.”

 

If paragraph 1(3) of Schedule 1 does not allow the deduction of the amounts of income tax that would have been deducted from that deemed income if it had actually been paid, paragraph 2 of Schedule 2 allows the appropriate amount to be disregarded.

 

6. The directions in R(CS) 9/08 to the new appeal tribunal if it found that the father’s actual earnings after the salary sacrifice were £11,625 were as follows:

 

“30. The new appeal tribunal must then go on to consider the possible application of, first, paragraph 26 of Schedule 1 to the MASC Regulations and, if and only if it finds paragraph 26 not applicable, paragraph 27. In relation to paragraph 26, the approach of law set out in paragraphs 23 and 24 above must be followed. In relation to paragraph 27, the only direction of law that I give is about what appears to be the crucial condition of whether any deprivation of income was "with a view to reducing the amount of his assessable income". If the new appeal tribunal is considering that condition it should take into account the authorities mentioned in paragraph 19 of Commissioner's decision R(CS) 3/00 suggesting that that phrase might require the identification of a person's dominant intention, as well as what is said in paragraph 24 above about purpose/intention. It will be relevant, in relation to both paragraphs, to ask why the father chose to make his pension provision in the form that he did, rather than in another form (such as through a personal pension scheme or a stakeholder scheme) that did not involve a reduction of cash remuneration, but the making of tax-deductible payments out of that cash remuneration.”

 

7. The district chairman who was to constitute the appeal tribunal that would carry out the rehearing issued directions on 20 July 2008 in which the scheduled date of 1 September 2008 for the rehearing was mentioned. The father wrote to the Tribunals Service on 4 August 2008 to say that he would not be able to attend on that date. That day was a Monday. He would be on leave for the previous week, during which he would be having contact with the qualifying children, but then would need to be back at work on the Monday and was unable to get that day off. He said further that if the tribunal needed to contact him during its calculations it could do so on a mobile phone number. It appears that no reply was sent to that letter. It is not clear whether or not it was referred to the district chairman prior to 1 September 2008.

 

The appeal tribunal’s decision

8. The mother attended the hearing on 1 September 2008, as did a representative of what was then still the Child Support Agency. The appeal tribunal decided to proceed in the father’s absence. In paragraph 12 of the statement of reasons, this was said about the father’s letter of 4 August 2008:

 

“[The father] attended the hearing before the first tribunal and would therefore have been aware that there was no question of the Tribunal’s contacting him on his mobile phone if it required further information from him. Tribunal hearings are judicial proceedings and are held for determining the legal rights and obligations of the parties to the appeal. They are not meetings or negotiations. They are therefore subject to procedural rules, one of which is that any oral evidence given to a tribunal by one party must be heard by all the parties who are to have the opportunity to ask questions about it. That could not be achieved by telephoning [the father’s] mobile phone in the hope that he could spare the Tribunal some of his time. In my judgment, had he tried hard enough, [the father] could have got time off work. For an employer to prevent or impede an employee’s attendance at a judicial hearing would be a contempt of court. I do not accept that a responsible employer such as Brewin Dolphin would behave in such a manner. I conclude that [the father] did not attend the hearing on 1 September 2008 because he chose not to do so.”

 

9. The appeal tribunal decided first that the father’s gross earnings from his employment were £11,625 per year, having determined that the salary sacrifice arrangement had to be accepted as having contractual effect. However, it went on to direct that the maintenance assessment was to be calculated on the basis that the father’s actual net earnings were nil. That was:

 

“because, to the extent that he has [earnings as an employed earner] they are reduced by one half of the contributions he made to the Brewin Dolphin Senior Staff Pension Fund … , being an occupational pension scheme under paragraph 1(3)(b) of [Schedule 1 to the MASC Regulations]. One half of [the father’s] pension contributions is £24,000 and his gross earnings are £11,625. Therefore his earnings are nil.”

 

10. The appeal tribunal went on, in accordance with the directions in R(CS) 9/08, to consider paragraphs 26 and 27 of Schedule 1 to the MASC Regulations. It decided that the conditions for the operation of paragraph 26 were not met, because it was not satisfied that the father’s “principal purpose” in entering the salary sacrifice arrangement was to reduce the amount of his assessable income. Paragraph 21 of the statement of reasons was as follows:

 

“Applying [the test set out in the directions], it is impossible to conclude that [the father’s] principal purpose in working for Brewin Dolphin without receiving adequate remuneration (ie by sacrificing his salary) was to reduce his assessable income for the purposes of the [Child Support Act 1991]. No-one reduces their income by £48,000 per year with the principal purpose of avoiding a liability to child support maintenance of a little more than £175.00 per week. [The father’s] principal purpose when he sacrificed his salary was to obtain the benefits that would accrue to him from the Pension Fund”

 

11. In relation to the operation of paragraph 27, the appeal tribunal’s detailed reasoning needs to be set out, as it is the focus of the challenge to its decision. In paragraph 24 of the statement of reasons, it was said that the authorities on a provision in the Bankruptcy Act 1914 mentioned in the direction in paragraph 19 of decision R(CS) 3/00 and in R(CS) 9/08 were not in fact of assistance in the interpretation of paragraph 27. The statement continued:

 

“25. It is not just that the statutory context of fraudulent preferences by bankrupts is so far removed from the context of liability to pay child support maintenance under a statutory scheme (as it undoubtedly is). It is also that if one interprets ‛with a view to’ in paragraph 27 as requiring the Secretary of State or tribunal to identify the absent parent’s dominant intention, then paragraph 27 adds little if anything to paragraph 26, the former becoming merely a particular instance of the latter. This is because there would be no practical difference between the principal purpose in paragraph 26 and the dominant intention in paragraph 27. Indeed, Re Cutts, to which Mr Mesher refers, actually states the bankruptcy test as being ‛the principal or dominant intention’. …

 

 26. In my judgment, paragraph 27 was not intended to be so interpreted and I do not think that either R(CS) 3/00 or R(CS) 9/08 means that I am bound by precedent to do so. Again with genuine respect to those who take a different view, I consider that assistance with the meaning of paragraph 27 can be found closer to home than the law of bankruptcy. As with so much else in child support, an analogy can be found in the law of social security. In this case, paragraph 27 is directly derived from the notional income rule in the regulations governing income-related benefits that were introduced following the coming into force of the Social Security Act 1986 (and indirectly from predecessor rules under the supplementary benefit scheme). It is only necessary to refer to one such rule and it will be convenient to choose regulation 42(1) of the Income Support (General) Regulations 1987, which, so far as is relevant, states:

 

‛42.—(1) A claimant shall be treated as possessing income of which he has deprived himself for the purpose of securing entitlement to income support or increasing the amount of that benefit.’

The case law of the Commissioners has established that the purpose required by regulation 42 (and the equivalent provision relating to capital) is not the sole or predominant purpose but only ‛a significant operative purpose’ – see R(SB) 38/86 and R(SB) 40/85.

 

 27. It is true that paragraph 27 and regulation 42(1) are not identically worded. One difference is that under paragraph 27, the deprivation must be ‛intentional’. However, nothing turns on that in this case: [the father’s] decision to sacrifice his salary was clearly ‛intentional’. The relevant distinction (if it be a distinction) is between `for the purpose of’ in regulation 42 and ‛with a view to’ in paragraph 27. In my judgment the phrases are synonymous, but if I am wrong about that, then I would regard the words ‛with a view to’ as imposing a less stringent test than `for the purpose of’.

 

 28. Therefore, in my judgment, paragraph 27 is satisfied if ‛reducing the amount of his assessable income’ was a significant operative purpose of [the father’s] sacrificing his salary. It is important in this context to realise that it is the sacrifice of the salary at source that amounts to the deprivation of income. Had [the father] received his income in full and then contributed £48,000 of it to approved pension schemes, he would have been spending his income not depriving himself of it. (The latter course of action might in some circumstances amount to a deprivation of capital but that is not an issue I need to pursue in this case). Therefore, the question I have to decide is not whether reducing the amount of his assessable income was a significant operative purpose of [the father’s] contributing to a pension fund but whether it was a significant operative purpose of his doing so by salary sacrifice.

 

 29.  On the basis that that is the legal test, the only conclusion open to me is that reducing the amount of his assessable income was a significant operative purpose. I rely, in particular, on the following:

 (a) [The father] made enquiries of the Child Support Agency about salary sacrifice before he made it;

 (b) The salary sacrifice made was extreme. As my findings of fact show, it left [the father] with a salary that was below the level of the minimum wage and only slightly above the level at which there would be a potential entitlement to income-related benefits. Once his share of housing costs and the council tax and his fares to and from work had been paid, it is hard to see how he was left with sufficient disposable income to cover the necessities of life;

 (c) The level of sacrifice need not have been so extreme. The payments only need to be as high as they are if the mortgages are to be redeemed when [the father] reaches 60. As my findings of fact show, [the father’s] mortgages do not need to be repaid until December 2023 when [the father] will be 66. Similarly, the normal retirement date under the rules of the Pension Scheme is the member’s 65^th birthday. That would hardly be the case if Brewin Dolphin required its employees to retire at 60. I regret that [the father] has attempted to mislead the Tribunal into believing that he has to retire at 60 and that the mortgages therefore have to be repaid by then. That attempt inevitably colours the view I take of his evidence.

 (d) I accept that [the father] could not have contributed to the Pension Fund other than by salary sacrifice. However, it was not compulsory for him to contribute to the Pension Fund; other schemes may have been just as good or even better. In particular, this was not a case in which by contributing to his employers’ scheme he gained the advantage of additional contributions from the employers.

 (e) Of the advantages that accrued as a result of the salary sacrifice one may safely assume that [the father] was not motivated by the national insurance saving for his employers in which he would not be sharing. The tax advantage would have accrued to him however he made his pension contributions. That leaves the personal national insurance saving of £44.71 per week (slightly more if, contrary to the assumption I have made, he did not contract out of the state second pension) and the reduction in his liability to pay child support maintenance which, as I have demonstrated, was substantially larger [calculated in paragraph 10(y)(iv) at £175.34 per week compared with making the same level of contributions not by salary sacrifice]. Particularly as he had made enquiries about the effect of salary sacrifice on child support and must have been aware that the effect would be to reduce his liability (as it could scarcely increase it), it is not credible that [the father] contributed to a pension scheme through salary sacrifice (rather than by making contributions from his salary once he had received it) solely to receive the small financial benefit of a national insurance saving and that it was no part – or only an insignificant part – of his purpose to achieve the much larger child support saving.

 (f) The only factor that weighs against the conclusion I have reached is that [the father] was paying his liability under the previous assessment promptly and showed no sign of seeking to evade his responsibilities. That factor is of relatively little weight. I am sure that [the father] pays his tax and national insurance too. Nevertheless, the facts of this case show that when he is presented with an opportunity lawfully to reduce the amount he is required to pay in tax and national insurance he takes it he avails himself of it. I consider that the same is true of child support: the fact that [the father] pays what he is legally required to pay does not show that he would not prefer, or that he would not take steps to promote, a situation in which he was required to pay less.”

 

12. Accordingly, the appeal tribunal directed that the maintenance assessment effective from 2 May 2006 was to be calculated on the basis that the father had net income of £48,000 less the amounts of income tax and national insurance that he would have paid on that sum if he had not sacrificed it. Paragraph 30 of the statement noted that Part III of Schedule 1 to the MASC Regulations contained no provision allowing a deduction in calculating “other income” for pension contributions, but there was no further explanation for taking into account income tax and national insurance beyond this in paragraph 2(c) of the decision notice:

 

“(i) The Tribunal is not stating that Part III of the Schedule permits the deduction of income tax and national insurance from other income (which it does not) but that, had [the father] not sacrificed his salary he would only have received the net sum and therefore can only have deprived himself of the net sum. Therefore that part of the gross sum of £48,000 that would have been deducted in respect of income tax and national insurance is not Other Income in the first place;

 (ii) However, Part III of the Schedule does not permit the deduction of 50% of the balance of [the father’s] pension contributions that has not been deducted from his earnings from the sum treated as Other Income under paragraph 2(b) above.”

 

There were a number of other directions that are not in dispute.

 

The appeal to the Upper Tribunal

13. The father now appeals with limited permission granted by the district tribunal judge (as he now is) who had constituted the appeal tribunal, later enlarged by me to unlimited permission. After a round of written submissions in which the representative of CMEC did not support the appeal, I granted the father’s request for an oral hearing.

 

The agreed error of law

14. Before discussing the arguments made for the appeal tribunal’s having made errors of law against the interests of the father, I should establish one significant error made against the interests of the mother. This was in the direction set out in paragraph 9 above. Having decided that the effect of the salary sacrifice arrangement on the father’s contractual salary was to reduce it to £11,625 per year, there was no basis on which the appeal tribunal could go on to apply a reduction of half of the amount of the pension contributions represented by £48,000 of the sacrifice. That is because the authority for such a reduction in paragraph 1(3)(b) of Schedule 1 to the MASC Regulations is limited to “sums paid by the parent towards an occupational pension scheme”. The whole essence of the salary sacrifice arrangement was that the £48,000 contribution was paid as an employer’s contribution (see paragraphs 17 and 18 of R(CS) 9/08). It was not deducted on the father’s pay-slip from what would otherwise have been paid to him as earnings. It never formed part of his earnings at all. It could not therefore be regarded as paid by him towards the pension scheme. There was no other provision in the MASC Regulations allowing the amount of an employer’s contribution to a pension scheme to be deducted from what would otherwise count as income derived from earnings.

 

15. This point was raised as part of the reasons given on 24 August 2009 for making the permission to appeal unlimited. At the oral hearing, Mr Scoon for CMEC submitted that the appeal tribunal had been wrong in law to make any deduction under paragraph 1(3)(b) of Schedule 1 to the MASC Regulations from the claimant’s contractual earnings of £11,625 per year. Ms Miskin accepted at least that it was probably wrong. I find the legal position clearly as set out above. Since I have concluded below that there were other errors of law that would on their own justify setting the appeal tribunal’s decision aside, I do not have to grapple with the question of whether it would have been right, on the father’s appeal, to set the decision aside solely on the present ground that the appeal tribunal had gone wrong in law against the interests of the mother. The public interest in securing that children are properly supported in accordance with the child support legislation would have provided a powerful reason for doing so, as Ms Miskin very properly recognised.

 

Natural justice

16. Ms Miskin submitted that it had in the circumstances been unfair for the appeal tribunal to proceed to make a decision when the father had been absent from the hearing on 1 September 2008. In effect the submission was that there had been a breach of the principles of natural justice in that the father had been deprived of a fair opportunity to make his case and to meet the case against him. A central element of that submission was that in R(CS) 9/08 I had directed the new tribunal to adopt the interpretation of the words “with a view to” in paragraph 27 that they required the identification of the parent’s dominant intention, but that the appeal tribunal of 1 September 2008 had adopted a different interpretation. Therefore, it was said, the father, who could reasonably have thought from the terms of the directions that there was little need for the provision of further evidence or argument, should have been given an opportunity to respond to a case based on what was a significant operative purpose of his entering the arrangements. Another central element was that if the appeal tribunal was going to make findings that the father had told untruths (that could then only have been deliberate), as it had been put in findings of fact, or had attempted to mislead the tribunal, it should have given him the opportunity to meet those charges, with their acknowledged wider effect on the assessment of the general credibility of the father’s evidence. Ms Miskin also submitted that the district chairman’s reaction to the terms of the father’s letter of 4 August 2008 was over-strong and that in the real world employers did not always agree to give time off to employees for their own tribunal proceedings.

 

17. There is plainly force in those submissions taken as a whole, but I do not accept them. First, the directions given in R(CS) 9/08 did not, contrary to the assertion for the father, instruct the new tribunal to apply a test of dominant or principal intention under paragraph 27 of Schedule 1 to the MASC Regulations. They merely, because the issue was not decided and had not been the subject of submissions in either R(CS) 9/08 and R(CS) 3/00, instructed the new tribunal to “take into account” the authorities, ie the Bankruptcy Act cases, supporting that interpretation. The new tribunal was plainly being required, if it reached the stage of considering paragraph 27, to determine for itself the proper interpretation of “with a view to”, taking into account those authorities along with all other relevant factors. And even if the father had thought that the appeal tribunal of 1 September 2008 was only going to be looking at his dominant intention or principal purpose under both paragraphs 26 and 27, he could not have known in advance what view it was going to take of the evidence and must have been aware that it would have to consider and evaluate his intentions and purposes in entering into the salary sacrifice arrangement. Therefore, there is nothing in the argument that the appeal tribunal of 1 September 2008 based its decision on a different test from that from that so far assumed in a way that required the father to be given an opportunity to meet an altered case.

 

18. Second, I am satisfied that the district chairman’s response to the father’s letter of 4 August 2008, although robust, did not indicate any prejudice against the father or any straying outside the area of reasonable judgment allowed in determining to proceed with the hearing on 1 September 2008 and not to contact him on his mobile phone. That was especially so in view of the facts that this was a second-time-around appeal and that over three years had elapsed since the decision under appeal had been made. The Tribunal Procedure (First-tier Tribunal) (Social Entitlement Chamber) Rules 2008 were not in force on 1 September 2008. However, it was legitimate for the appeal tribunal to have regard to similar factors to those now identified as relevant to the “overriding objective” of dealing with cases fairly and justly, including “avoiding delay, so far as compatible with the proper consideration of the issues” (rule 2(3) and (2)(e)).

 

19. The only issue over which I have hesitated at all is whether the appeal tribunal was bound not to make findings that the father had not been telling the truth or had attempted to mislead the tribunal without having given him a specific opportunity to explain those matters. It was certainly not an inevitable conclusion from the evidence before the appeal tribunal that there had been an attempt to mislead, particularly in the father’s letter of 27 September 2006. Copies of all three statements of mortgage arrangements, on an interest-only basis, were enclosed with that letter, which plainly showed terms of 18 years running to December 2023, so there was no attempt to mislead on that point. Then the letter stated that if the mortgage term extended beyond the father’s retirement date the mortgagees required an investment vehicle to be in place that would provide a lump sum to cover the father’s share of the capital repayment (£110,000) at retirement date. The father could well have declared to the mortgagees an intention of retiring at 60. He could also have maintained such an intention within the scope of the Brewin Dolphin Scheme. Although the normal retirement date was defined in the Scheme as a member’s 65^th birthday, there was scope for early retirement after the age of 50 with the consent of the employer and with an immediate pension at the discretion of the trustees (page 99 of the papers). The nature of the scheme was such that there would have been no actuarial reduction in benefits for retiring before the normal retirement date. It would just be that the fund would have had fewer years to build up contributions and investment growth. Thus the extent of any misleading could only be restricted to whether the father had to retire at 60 rather than choosing to aim at that age and to build up a fund in the scheme that would cover his share of the repayment of the mortgages at that time and leave him with a substantial fund for the provision of a pension. However, in relation to paragraph 29(c) of the statement of reasons, the appeal tribunal’s conclusion was really no more than a statement to similar effect, that the need to have a fund built up by the age of 60 was not one imposed by the mortgagees or by the father’s employer, but stemmed from the father’s own choice. It did not appear to affect that conclusion whether there was any deliberate attempt to mislead or not. Then, although the district chairman said that his view of the father’s evidence had been coloured, I cannot see any other part of the decision or reasons where a more than ordinarily sceptical view of the father’s evidence came into play. I therefore conclude that the appeal tribunal’s view that the father had told untruths and attempted to mislead had no material effect on the decision beyond the conclusion that would have been reached even if the view had been otherwise. There was nothing in this point to make it unfair for the appeal tribunal to have proceeded in the father’s absence on 1 September 2008.

 

The meaning of paragraph 27 of Schedule 1 to the MASC Regulations

20. In earlier written submissions it had been argued for the father that paragraph 27 could only apply where the income of which the parent has deprived himself was not remuneration for services. It was said that paragraph 26 dealt with earnings from employment or self-employment and paragraph 27 dealt with income other than earnings, as well as with capital. Some support for that proposition could be drawn from the terms of paragraph 32 about how amounts brought in under the two paragraphs are to be treated. However, in her skeleton argument and as confirmed at the oral hearing, Ms Miskin indicated unreservedly that the father no longer pursued that argument. She accepted that the words “otherwise than in the circumstances set out in paragraph 26” in paragraph 27 were insufficient, given the restricted scope of paragraph 26, to limit paragraph 27 in the way that had previously been suggested. I think that that must be right. It would be an unacceptable result if, for instance, a parent who declined to accept a job offer or who resigned from a job or ceased to trade as a self-employed person or who voluntarily reduced the hours worked, who would therefore fall outside paragraph 26, did not have to have his intentions scrutinised under paragraph 27, without the need for any application for a departure direction.

 

21. The central submission for the father was then, accepting that the application of paragraph 27 was not ruled out in this case, that the appeal tribunal had gone wrong in law by failing to apply the test of dominant or principal intention, which would inevitably have led to the same result as under paragraph 26. Ms Miskin also submitted that, even if the test of significant operative purpose applied by the appeal tribunal was the right one, there was a perverse inconsistency between its conclusion on paragraph 26, with its acceptance that no-one would reduce their income by £48,000 with the principal purpose of avoiding a child support liability of £175 per week, and its conclusion on paragraph 27 that that was a significant operative purpose of the father. There was, she said, insufficient direct evidence of the father’s actual intentions. I deal with that argument separately in the following section.

 

22. I do not accept Ms Miskin’s submission that the context of paragraph 27 of Schedule 1 to the MASC Regulations and the Bankruptcy Act 1914 authorities mentioned in paragraph 19 of R(CS) 3/00 show that the words “with a view to” impose a test of dominant or principal purpose. First, I find the reasoning of the appeal tribunal in paragraphs 25 to 28 of its statement of reasons persuasive in general. I am not so sure that the analogy with regulation 42(1) of the Income Support (General) Regulations 1987 is helpful. If the same effect had been intended in the MASC Regulations why were the same words “for the purpose of” not used? However, the points in paragraphs 25 and 27 have force.

 

23. But, much more important, second, we now have the benefit of the decision of Upper Tribunal Judge Jacobs in AC v CMEC [2009] UKUT 152 (AAC), in which, in contrast to R(CS) 3/00 and R(CS) 9/08, a concluded decision on the meaning of paragraph 27 had to be reached after full argument. Judge Jacobs authoritatively rejected the dominant or principal intention test, partly by reference to other pertinent decisions of which I was not aware when I signed the decision in R(CS) 9/08. His conclusion in paragraph 25 was as follows:

 

“I can see no reason to exclude any case in which the reduction of assessable income was an operative purpose or intention behind the deprivation. Whenever a parent intentionally acts so as to bring about the reduction in assessable income, paragraph 27 applies. This is a permissible meaning for `with a view to’, it is an appropriate interpretation for the language of paragraph 27 as a whole, it strikes a fair balance between the interests of parents and their children, and it gives effect to the twin functions of deterrence and protection.”

 

In paragraph 33 Judge Jacobs said that he did not consider “significant operative purpose” to be an appropriate formulation and continued:

 

“First, although that interpretation of the social security legislation is well-established, the reason for adopting it was not analysed in the authorities. Second, I am not sure that ‛significant’ adds much, if anything, to ‛operative’. The possibility of an operative reason that is not significant is more theoretical than real. If the reduction of assessable income was operative, it will in practice have been important enough to have been significant. And if it is not that important, it will probably be simply something that gave satisfaction rather than caused the parent to act.”

 

Judge Jacobs had earlier made the important points that the test is subjective, depending on the parent’s actual state of mind, which has to be identified as a fact, either by direct evidence or by inference (paragraph 21), and that a deprivation does not fall within paragraph 27 just because the parent is aware that it may or will result in a reduction of assessable income or is satisfied or pleased with that result (paragraph 22).

 

24. I find the conclusions and reasoning in AC v CMEC convincing and compelling. I endorse them as expressing the correct interpretation in law of paragraph 27. Accordingly, the appeal tribunal here did not adopt a wrong principle of law. Ms Miskin suggested that that was not so, because the appeal tribunal asked whether reducing his assessable income was a significant operative purpose of the father, a formulation rejected by Judge Jacobs. However, the answer at the end of paragraph 29(e) of the statement of reasons was that it was not credible either that the father entered the salary sacrifice arrangement solely to receive the small benefit of a national insurance saving or that it was no part, or only an insignificant part, of his purpose to achieve the much larger child support saving. It is in my judgment clear that the appeal tribunal there was applying essentially the test identified by Judge Jacobs. And, in any case, either, as Judge Jacobs thought, the word “significant” adds nothing to “operative purpose” as he explained it or its removal makes the test slightly easier to meet. The appeal tribunal’s conclusion that paragraph 27 applied cannot be impugned on the basis that it applied a narrower test than it should have done.

 

The application of paragraph 27 by the appeal tribunal

25. Ms Miskin challenged the relevance and/or evidential basis of the factors specifically identified by the appeal tribunal in paragraph 29 of the statement of reasons. In relation to sub-paragraph (a) she said that the significance of the father’s having made enquiries of the Child Support Agency had to lie in what he was told and that there was no evidence about that. I disagree. I consider that the significance that the appeal tribunal found was that the father had in mind what the consequences of his choice on his child support liabilities might be. In relation to sub-paragraph (b) and (c), on the extremity of the sacrifice, Ms Miskin said that no account had been taken of what other pension provision, if any, the father had in place and that there was no evidence of how the level of sacrifice would have been affected if the father had chosen a later retirement date. It seems to me that the appeal tribunal was prepared to operate on the assumption in favour of the father that he had no pension provision in place beyond perhaps some qualifying years towards basic state retirement pension entitlement. I do not think that the appeal tribunal was required to ask for evidence or to make estimates about what levels of contribution would have been needed to build up the same sort of capital fund at age 65. The extreme nature of the salary sacrifice that actually happened remained and was a relevant factor. In relation to sub-paragraph (d), Ms Miskin said that there was no evidence of the existence of other schemes that might have been just as good into which the father could have contributed without a salary sacrifice. I consider that the existence of a very wide variety of personal pension and stakeholder schemes was sufficiently within common knowledge that there was no need for the appeal tribunal to receive evidence on the point when taking into account a general factor of the kind in sub-paragraph (d). It was not as if the precise terms of some particular scheme or type of scheme were in issue. In relation to sub-paragraph (e) and the finding that the father must have been aware that the effect of the salary sacrifice would be to reduce his child support liability, Ms Miskin stressed that awareness of the effect was not the test. That of course is true, but does not mean that such awareness is not a relevant factor in determining, by inference in this case, whether the reduction of assessable income was an operative purpose, possibly among others, of the deprivation of income.

 

26. Ms Miskin submitted that relevant factors had been ignored, in particular that the father was under no positive duty to choose the scheme that led to the largest liability for child support and that he had followed financial advice in a reasonable way. On the first point, that is not a factor arising from the circumstances of the case, but an element of the overall assessment of the statutory test. I see nothing to indicate that the appeal tribunal took any contrary view. In relation to the taking of financial advice, the only evidence about that so far as I can see was in the father’s oral evidence to the earlier appeal tribunal of 10 January 2007, where a financial advisor was mentioned. Especially as the father would be expected in the nature of his employment to have a good deal of financial sophistication, there was no need for the appeal tribunal of 1 September 2008 to mention the minor point that a financial advisor was involved in some way before the father entered the salary sacrifice arrangement. In my judgment the appeal tribunal did not fail to take into account any relevant and material factors.

 

27. So far as the appeal tribunal’s general evaluation of the evidence under paragraph 27 of Schedule 1 to the MASC Regulations and the explanation of the result is concerned, I have no doubt that the appeal tribunal was entitled to conclude by inference from the evidence before it that it was an operative purpose of the father to reduce the amount of his assessable income. Contrary to Ms Miskin’s submission, the appeal tribunal did not have to have direct evidence from the father as to his actual intentions. Findings as to his actual intentions could be established by inference. Then the appeal tribunal gave a full and clear explanation from which the father could have been in no doubt why the decision had gone against him.

 

The effect of the application of paragraph 27

28. The appeal tribunal directed that the sum of £48,000 of which the father had deprived himself (less income tax and national insurance contributions that would have been paid on that amount if had not been sacrificed) was to be treated as income other than earnings and part of his assessable income. It has been revealed in the submission dated 28 July 2010 on behalf of CMEC that that direction was implemented by CMEC in the following way.  The whole of the father’s annual income tax personal allowance was set against the £48,000 (remembering that the appeal tribunal had wrongly directed his actual earnings were to be regarded as nil) and notional income tax of £10,934 for the year assumed, together with earnings-related national insurance contributions, giving a net income of £649.28 per week. That produced a maintenance assessment of £194.92 with effect from 2 May 2006. Although no specific points have been made about the identification of the relevant amounts, once the conditions for the application of paragraph 27 of Schedule 1 to the MASC Regulations were met there are a number of problems that should be addressed.

 

29. First, the appeal tribunal had stressed in paragraph 28 of the statement of reasons that what it was comparing was making the contributions to the pension scheme by way of a salary sacrifice of £48,000 with taking the gross earnings of £60,000 per year in full and then contributing £48,000 out of those earnings into a pension scheme. It was said that in the latter case the father would not have deprived himself of any income, but would have spent income that he had already received. Paragraph 30 of the statement of reasons continued:

 

“30. In those circumstances [that the conditions for the application of paragraph 27 were met], regulation 27 requires me to treat [the father’s income as including an amount representing the income which he would have had had he not deprived himself of the sum of £48,000 he sacrificed into the Pension Fund in respect of pension contributions. As Mr Mesher explains at paragraph 31 of his decision in this case, paragraph 32 [of Schedule 1] requires me to treat that income as “Other Income” within Part III of the Schedule and therefore, unfortunately for [the father], it is not possible for a deduction to be made in respect of 50% of the pension contributions because that deduction can only be made under paragraph 1(3)(b) of Part I of the Schedule.”

 

30. The difficulty arising from that reasoning stems from the absence from Part III of Schedule 1 of any provision expressly allowing a deduction for income tax and national insurance contributions any more than of a proportion of pension contributions. Yet the appeal tribunal had in its decision notice directed the deduction of income tax and national insurance contributions that would have been payable if the father had received the £48,000 as salary. At the oral hearing it was pointed out that paragraph 2 of Schedule 2 to the MASC Regulations requires the disregard of an amount of income tax applicable to any income where not otherwise allowed for under the Regulations, but has no provisions for the disregard of national insurance  or pension contributions. Ms Miskin submitted for the father that the appeal tribunal’s general approach was justified in the light of the provision in paragraph 27 for treating the parent as having the income which he would have had if he had not deprived himself of it. The implication was that the aim was to put the parent in the position that he would have been in for child support purposes if he had not deprived himself of the income, which entailed taking account of deductions that would have been made in reaching an amount of net income to be taken into account in the assessment. On that basis, it did not matter that Part III of Schedule 1 does not itself contain provisions allowing deductions. Mr Scoon for CMEC did not dissent from that approach. However, when considering my decision after the oral hearing issues arose whether that overall approach ought to lead to some deduction for pension contributions as well as for income tax and national insurance and how in practice the amount of income tax to be deducted should be calculated. Should it be calculated as it turns out CMEC had done, on the basis that all of the £48,000 was subject to income tax, in addition to the £11,625 actually received, after taking account only of the personal allowance or should it be assumed that the father would in the hypothetical circumstances still have put £48,000 into a pension scheme, so that that amount was excluded from his taxable income? I gave the parties the opportunity to make further written submissions on those difficult issues.

 

31. CMEC’s submission was, in brief, that income tax was properly deducted and should be calculated on the receipt of £48,000 in addition to the £11,625 of actual earnings and taking into account that the father’s personal allowance would already have been used up in calculating the actual income tax payable on the latter amount (relying on Commissioner’s decision R(CS) 1/05), but that there could be no deduction for national insurance contributions. Although the matter was not argued in detail it was submitted that there should be no assumption that the £48,000 would not have been taxable because it would have been expended on employee’s contributions to a registered pension scheme and that there should be no deduction or disregard of a proportion of those contributions because there was no provision for that in Part III of Schedule 1 or in Schedule 2. Ms Miskin for the father, in the submission dated 23 September 2010 argued in paragraph 3.1 that if paragraph 27 was to be applied:

 

“the same deductions should be made from the father’s deemed income as would have been made from his real income. In this case the deductions that would have been made in this father’s particular case would have been income tax, national insurance and his pension contributions.”

 

However, her submission did not grapple with the question of how the amount of income tax to be deducted was to be calculated and whether or not it was to be assumed that the father would have made employee’s contributions of £48,000. The mother, very understandably, did not wish to make any comment on these difficult questions.

 

32. It seems to me that the appeal tribunal did not follow through the full logic of its approach in the way advocated by Ms Miskin. If in effect one is to look under paragraph 27 of Schedule 1 at the amount of what would have counted as net income for child support purposes if the father had not deprived himself of it, then it would need to be explained why there should not be a deduction, in addition to the income tax and national insurance that would have been deducted if he had actually received the additional £48,000 salary, of  50% of the contributions that the father was to be assumed to make to a registered occupational pension scheme. On the logic apparently accepted by the appeal tribunal the absence of provision in Part III of Schedule 1 would not supply a sufficient explanation. But if such a deduction was made, it seems to me inevitable that one would then have to calculate the income tax payable on the notional additional income on the basis that those pension contributions had been made. If the assumption was that father would have contributed £48,000, his taxable income would, under the income tax regime in effect from 6 April 2006, have been reduced by that amount. The result would be that there would be no additional income tax payable in addition to that payable on the £11,625 actually received and nothing extra to be deducted under that head. The questions that have to be asked are whether that approach is compatible with the words of paragraphs 27 and 32 and, if so, whether it involves taking hypothetical projections further than is warranted.

 

33. The words of paragraphs 27 and 32 are of course not helpful. It is plain that circumstances like the present were not in contemplation when the Regulations were drafted. The provision in paragraph 32 that the amount to which paragraph 27 applies is to be determined as if it were other income to which Part III of Schedule 1 applies cannot legitimately be stretched to mean that the amount is to be determined under whichever Part of the Schedule would have been applicable to the income of which the person has deprived himself. The contrast within paragraph 32 itself between the rule laid down for paragraph 26 (to determine the amount as if it were earnings from employment as an employed earner) and the rule laid down for paragraph 27 is too stark to allow such an interpretation. When in addition paragraph 27 refers to treating the amount of income (not net income) which the person would have had but for the deprivation as part of net income, it seems to me that the principle cannot simply be of notionally putting the person back in the position he would have been in but for the deprivation. He is to be put back in that position on the assumption that the income of which he has deprived himself falls within Part III. Part III in general refers to the gross amount of receipts in the categories listed, subject only to the disregards set out in Schedule 2, eg for income tax. That is consistent with the decision of Mr Commissioner Jacobs in CCS/185/2005 and others (relied on in the CMEC submission of 28 July 2010), although he also would not have had circumstances like those of the present case in mind at all. And by the same token, the plain words of paragraph 2 of Schedule 2, in the context of the Regulations as a whole, cannot by any stretch of the imagination be interpreted as requiring the disregard of amounts of national insurance contributions where not otherwise allowed for as well as income tax.

 

34. The result would be that the appeal tribunal erred in law, against the interest of the mother, by directing the deduction of national insurance contributions from the notional £48,000 income under paragraph 27. The only deduction should have been in respect of income tax, as required by the disregard in paragraph 2 of Schedule 2 to the MASC Regulations. However, the combination with the error identified in paragraphs 14 and 15 above must be considered. The appeal tribunal was wrong to exclude the actual gross earnings of £11,625 (subject to deductions for income tax and national insurance contributions) from inclusion in the calculation of the father’s net income. But including them would absorb the whole of his annual income tax personal allowance and probably all of the 10% rate band and some part of the 22% rate band. Therefore, the income tax calculated on the whole of the notional additional £48,000 would be at a rate of not less than 22% and much more of it than in the CMEC calculation mentioned in paragraph 28 above would be subject to the 40% rate. There would therefore be much more to be deducted on account of income tax from the £48,000, although I have not attempted to do the sums to see if that would wipe out the effects of not deducting national insurance contributions from the £48,000 and of taking into account the actual earnings. However the sums work out, it seems to me that on the father’s appeal the appeal tribunal’s decision should be set aside.

 

35. That conclusion may seem harsh in some ways, in that it does involve treating the father’s notional income in a different way from that in which his “real” income would have been treated if he had not deprived himself of it. However, it is important, first, that the legislation is setting out what the consequences are to be of what the parent actually did, while the question of what he would have done if the deprivation had not happened is hypothetical. And second, the practical difference in result may not be as much as at first appears. As noted in paragraph 32 above, the full logic of Ms Miskin’s position, if it is proper to accept (which may be doubtful) that the father would have made the same level of pension contribution to a registered scheme if he had received the full salary, leads to pluses and minuses for the father. On her argument, £24,000 (50% of £48,000) should be deducted from the total amount of earnings assumed to be taken into account in the maintenance assessment. But that assumption would entail there being no additional liability to income tax on top of what was already payable on the £11,625 actual earnings. So none of the deduction for income tax on the £48,000 allowed under the approach in paragraph 34 above would be allowable on this basis. £24,000, less only national insurance contributions, would be left to go into the calculation. And finally, it might have been necessary to consider how far making such substantial payments into a pension scheme as employee’s contributions constituted a deprivation of capital caught by paragraph 27 of Schedule 1 to the MASC Regulations, leading to the father being treated as having the income that would have been earned on the capital in question.

 

Conclusion and the Upper Tribunal’s decision

36. For the reasons given in paragraphs 14 and 15 and 32 to 34 above the appeal tribunal’s decision involved an error of law and is to be set aside. I have found nothing to undermine the appeal tribunal’s findings of fact or its conclusion on issues of judgment underlying the application of paragraph 27 of Schedule 1 to the MASC Regulations to the circumstances as found. The errors of law related to the effects of the application of that provision, in conjunction with an agreed error of law on undisputed facts. It is therefore appropriate for the Upper Tribunal to substitute (“re-make” in the statutory language) the decision on the mother’s appeal against the amount of the maintenance assessment made on 12 June 2006.

 

37. That decision is to allow her appeal. I confirm directions numbered 1 and 3 to 8 on the appeal tribunal’s decision notice dated 1 May 2009. In place of the direction numbered 2 I substitute the direction that the father’s net income from the effective date of 2 May 2006 is to be calculated in accordance with the principles set out in paragraphs 14 and 15 and 35 above. If there is any disagreement about the arithmetic of that calculation, any party may refer the case back to me (or to another judge of the Administrative Appeals Chamber if necessary or expedient) for further decision.

 

38. I also, for the sake of completeness, confirm what was said by the district tribunal judge in paragraphs 3 and 4 of the directions notice dated 5 August 2009 (page 295), following an application by the mother. The appeal tribunal, and equally the Upper Tribunal in substituting a decision, is prohibited by section 20(7)(b) of the Child Support Act 1991 from taking into account any changes of circumstances occurring after 12 June 2006, and in particular the father’s further sacrifice into the pension scheme of a bonus paid to him on 25 December 2006.

 

 

Signed on the original: J Mesher

  Judge of the Upper Tribunal

 

Date: 10 December 2010