Upper Tribunal (Administrative Appeals Chamber)

IN THE UPPER TRIBUNAL Case No.  CTC/2520/2010

ADMINISTRATIVE APPEALS CHAMBER

 

Before Judge Robin C A White

 

Decision: The decision of the tribunal of 2 March 2010 is erroneous in law, and I set it aside. I remake the decision which the tribunal should have made .

 

 

My substituted decision is that the appellant is entitled to payment of child tax credit in Iceland.

 

 

REASONS FOR DECISION

Context

1.       The appellant is one of a married couple to whom I will refer as “Mr W” and “Mrs J”. They have two children under 16 years of age, and were in receipt of child tax credit in respect of them.

2.       Mr W and Mrs J moved permanently to Iceland in February 2009, and Her Majesty’s Revenue and Customs (HMRC) stopped payment of child tax credit on the grounds that the Mr W and Mrs J were no longer in the United Kingdom.

3.       Mr W is in receipt of a Category A State retirement pension.

The issue in this appeal

4.       The dispute in this appeal centres on whether child tax credit in the circumstances of this case is an exportable benefit under Regulation 1408/71, as applied to Iceland, one of the three countries of the European Economic Area (Iceland, Liechtenstein, and Norway).

5.       Regulation 1408/71 is extended to the three EEA countries under the European Economic Area Agreement.

The national legislation

6.       Child tax credit was introduced by the Tax Credits Act 2002, generally from 6 April 2003. It is a means-tested social security benefit for those responsible for children up to 31 August after their sixteenth birthday, or for children under 20 who are in full-time education or approved training.

7.       Child tax credit replaced a number of ways in which support for children was provided within the social security system including child dependency increases under sections 80 and 85 of the Social Security Contributions and Benefits Act 1992.

8.       Section 3(3)(b) of the Tax Credits Act 2002 provides:

A claim for a tax credit may be made—

(a) jointly by the members of a couple both of who are aged at least sixteen and are in the United Kingdom (and neither of whom are members of a polygamous unit);

The European legislation

9.       Article 77 of Regulation 1408/71, which is within chapter 8 of the regulation entitled “Benefits for dependent children of pensioners and for orphans” provides:

1.       The term “benefits” for the purposes of this Article, shall mean family allowances for persons receiving pensions for old age, invalidity or an accident at work or occupational disease, and increases or supplements to such pensions in respect of the children of such pensioners, with the exception of supplements granted under insurance schemes for accidents at work and occupational diseases.

2.       Benefits shall be granted in accordance with the following rules, irrespective of the Member State in whose territory the pensioner or the children are residing:

(a)     to a pensioner who draws a pension under the legislation of one Member State only, in accordance with the legislation of the Member State responsible for the pension;

(b)     …

10.   Article 1(u)(ii) defines “family allowances” as follows:

family allowances means periodical cash benefits granted exclusively by reference to the number and, where appropriate, the age of members of the family.

11.   Article 79 of Regulation 1409/71 provides:

1. Benefits, within the meaning of Articles 77 and 78, shall be provided in accordance with the legislation determined by applying the provisions of those Articles by the institution responsible for administering such legislation and at its expense as if the pensioner or the deceased worker had been subject only to the legislation of the competent State.

However:

(a) if that legislation provides that the acquisition, retention or recovery of the right to benefits shall be dependent on the length of periods of insurance or employment, such lengths shall be determined taking account where necessary of Articles 45 or 72 as appropriate;

(b) if that legislation provides that the amount of benefits shall be calculated on the basis of the amount of the pension, or shall depend on the length of insurance periods, the amount of these benefits shall be calculated on the basis of the theoretical amount determined in accordance with Article 46 (2).

12.   Case 313/96 Lenoir v Caisse d’allocations familiales des Alpes-Maritimes, [1988] ECR 5391 considered the interpretation of Article 77.

13.   Olivier Lenoir, a French national, was in receipt of a French State old-age pension. He was married with two children. He was also in receipt of two benefits payable in respect of his children: a single wage allowance (allocation de salarie unique) and a schooling expenses allowance (allocation de rentrée scolaire).

14.   The family moved from France to Eastbourne in England. The French authorities stopped the payment of the two benefits referred to above, although they continued to pay the old-age pension.

15.   The French courts referred questions to the Court of Justice on the proper interpretation of Article 77. The Court of Justice ruled:

… Article 77 of Regulation No 1408/71 … must be interpreted as giving a person entitled to family benefits who is a national of a Member State and resides in the territory of another Member State entitlement to payment by the social security institutions of his country of origin only of ‘family allowances’, to the exclusion of other family benefits such as the ‘rentrée scolaire’ allowance and the ‘salaire unique’ allowance provided for by French legislation. (para. 11)

United Kingdom authorities

16.   The proper interpretation of Article 77 has been considered in two decisions of the Upper Tribunal.[1]

17.   PF and SF v HMRC (TC) [2010] UKUT 49 (AAC) concerned the stopping of child tax credit when a retired police officer and his family moved from the United Kingdom to Sweden. The father was in receipt of a police pension. It appeared that he did not receive incapacity benefit because his income was greater than the level at which payments are made.

18.   The Judge ruled that child tax credit was not a family allowance within the meaning of Article 77 and Article 1(u)(ii) of Regulation 1408/71 since it was not granted exclusively by reference to the number and ages of the children in question. It was a means-tested benefit.

19.   It was noted in this decision that HMRC had originally taken the view that child tax credit was a family allowance but had changed its view on receipt of legal advice.

20.   EM v HMRC (TC) [2010[ UKUT 323 (AAC) concerned the stopping, when the couple moved to live in Spain, of child tax credit for a man and his wife who had been granted a residence order in respect of their grand-daughter. The man was aged 60 and in receipt of incapacity benefit.

21.   The Judge agreed that child tax credit in the circumstances of this case was not a family allowance within the meaning of Article 77 and Article 1(u)(ii) of Regulation 1408/71 for the same reasons as the Judge in PF and SF v HMRC.

22.   Significantly for the case before me, the Judge went on to observe:

10. However, if [the child] had been the Claimant’s child, as opposed to grandchild, it is possible that the case might have fallen within the subsequent words of Article 77.1: “and increases or supplements to such pension in respect of the children of such pensioners.” In para. 11 of HMRC’s submission it is stated that:

“It is crucial to this appeal that Article 77.1 confines the meaning of benefits in relation to dependant children of pensioners strictly to family allowances within the meaning of Article 1(u)(ii) of the Regulation.”

That seems to me, at any rate as a matter of immediate impression, not to be right in that Article 77.1 goes on to include the additional wording which I have just referred to. The relevant “pension” in the present case was incapacity benefit. In view of the way in which it is calculated, it may possibly be correct to regard child tax credit as an “increase or supplement to” incapacity benefit. This is not a matter which has been canvassed before me, and neither does it seem to have been canvassed in [PF and SF v HMRC], in which Upper Tribunal Judge Williams held that the claimants there could not rely on Article 77.1. The point is not material in the present case because [the child in question] is not the Claimant’s child, and so in any event does not fall within the words “the children of such pensioners.” However, it would have been material in [PF and SF v HMRC], where the claimants were the parents of the child. That case would therefore have been wrongly decided if this is a good point. It is unnecessary for me to express any further view on the point.

The progress of this appeal

23.   The appellant took issue with the HMRC decision not to pay child tax credit in Iceland. He appealed against it on the grounds that Iceland “is in the EEC” and that he was in receipt of a State retirement pension and still paid tax in the United Kingdom.

24.   The appeal came before a tribunal for a paper hearing on 2 March 2010. The outcome was that the decision to stop the payment of child tax credit was upheld. A statement of reasons was subsequently provided.

25.   The appeal now comes before me with the permission of a Judge of the Upper Tribunal.

26.   Prior to the granting of permission, both parties were invited to comment on the implications of the decisions of the Upper Tribunal in PF and SF v HMRC and EM v HMRC.

The appellant’s grounds of appeal

27.   The appellant continues to argue that the couple are entitled to payment of child tax credit under European Union law. Mr W notes that, after some contestation, he is being paid his pension and other benefits in Iceland.

Submissions by HMRC

28.   Much of the argument put to me by HMRC is based upon child tax credit not falling within the definition of “family allowances” in Article 1(u)(ii). This view is said to be supported by the decisions in PF and SF v HMRC and EM v HMRC.

29.   HMRC does not accept that, in the particular circumstances of this case, child tax credit comes within the words in Article 77(1) “increases or supplements to such pensions in respect of the children of such pensioners.” HMRC says:

61. … there is no provision in the Category A retirement pension for supplements to be payable in relation to a pensioner’s dependent children.

62. … where the pension legislation … makes no provision within a Category A retirement pension for an addition or supplement in respect of a dependent child of a pension, CTC cannot be considered to be such a supplement.

30.   Following receipt of the submission which contained the words quoted above, further case management directions were made in the following terms:

It is arguable that the respondent has misunderstood the comments of the judge in [EM v HMRC] and that in fact the judge was saying that CTC would be regarded as an increase or supplement to IB in view of the way that CTC is calculated (not in view of the way that IB is calculated).

31.   In their response to this direction, HMRC appear to have completely missed the point. Although the submission correctly notes that the benefit in payment to Mr W is State retirement pension, the response focuses on increases or supplements to incapacity benefit. The issue in this appeal is whether, in the circumstances of this case, child tax credit is an increase or supplement to retirement pension having regard to the way in which State retirement pension is used in calculating child tax credit.

32.   There is, however, a helpful description of the means by which child tax credit is calculated as well as a statement of the benefits which tax credits abolished and superseded:

41. By s1(3) TCA, tax credits abolished and superseded

(a)   children’s tax credit under section 257AA of the Income and Corporation Taxes Act 1988 (c. 1),

(b)   working families’ tax credit,

(c)   disabled person’s tax credit,

(d)   the amounts which, in relation to income support and income-based jobseeker’s allowance, are prescribed as part of the applicable amount in respect of a child or young person, the family premium, the enhanced disability premium in respect of a child or young person and the disabled child premium,

(e)   increases in benefits in respect of children under sections 80 and 90 of the Social Security Contributions and Benefits Act 1992 (c. 4) and sections 80 and 90 of the Social Security Contributions and benefits (Northern Ireland) Act 1992 (c. 7), and

(f) the employment credit under the schemes under section 2(2) of the Employment and Training Act 1973 (c. 50) and section 1 of the Employment and Training Act (Northern Ireland) 1950 (c. 29 (N.I.)) known as New Deal 50plus”.

33.   HMRC appears to be arguing that, because the benefits listed in paragraph 32 above were abolished with effect from 6 April 2003, they have no relevance to this appeal. Furthermore, child tax credit has no links with retirement pension and cannot be considered an increase or supplement to it.

The appellant’s submissions

34.   The appellant has, understandably, not engaged with the technicalities of the arguments put by HMRC, simply describing them as “verbose”, and re-asserting an entitlement to payment of the benefit in Iceland under European Union law.

The Upper Tribunal’s assessment

35.   Article 77 of Regulation 1408/71 encompasses two categories of benefits:

(a)  family allowances for persons receiving pensions for old age, invalidity or an accident at work or occupational disease; and

(b)  increases or supplements to such pensions in respect of the children of such pensioners, with the exception of supplements granted under insurance schemes for accidents at work and occupational diseases.

36.   For the reasons set out by the Court of Justice in Case 313/86, Lenoir v Caisse d’allocations familiales des Alpes-Maritimes, [1988] ECR 5391, and by the Upper Tribunal in PF and SF v HMRC (TC) [2010] UKUT 49 (AAC) and EM v HMRC (TC) [2010[ UKUT 323 (AAC), child tax credit does not constitute a family allowance within the meaning of that term in Article 77.

37.   But is child tax credit in certain circumstances capable of constituting an increase or supplement to a pension received by Mr W?

38.   So far as I have been able to discern, there is no direct authority on this point either among the European authorities or among the United Kingdom authorities.

39.   The words ‘benefits and pensions’ are defined in Article 1(t) of Regulation 1408/71 as follows:

benefits and pensions mean all benefits and pensions, including all elements thereof payable out of public funds, revalorization increases and supplementary allowances, subject to the provisions of Title III, as also lump-sum benefits which may be paid in lieu of pensions, and payments by way of reimbursement of contributions;

40.   That is a very wide definition of benefits and pensions. It certainly includes a State retirement pension, which would be categorised under the Regulation as an old-age pension.

41.   There is no dispute that the appellant falls within the personal scope of the Regulation.

42.   Mr W is in receipt of a State retirement pension. Child tax credit was previously in payment in respect of his children.

43.   The issue before me is accordingly whether, in the particular circumstances of this case, child tax credit can be regarded as an increase or supplement to Mr W’s State retirement pension. If it is, then it is exportable under the provisions of Regulation 1408/71. If it is not, then it is not exportable, and HMRC were entitled to withdraw payment of child tax credit when Mr W and Mrs J moved to Iceland.

44.   The words ‘increase or supplement’ in Article 77 do not bear any special meaning, and so the ordinary meaning must be ascribed to them. In applying an interpretation to these words, I am conscious that the words are drafted to apply to the social security systems of the 27 Member States of the European Union, plus the three Member States of the European Economic Area, and to Switzerland to which countries the provisions of Regulation 1408/71 have been extended.

45.   It has long been established that how a benefit is to be classified for the purposes of Regulation 1408/71 is not dependent upon its classification within any national legal order. It is substance and not form which determines whether a benefit falls within the scope of the Regulation. For example, the Court of Justice has consistently said that whether a benefit is within the material scope of the Regulation “rests entirely on the factors relating to each benefit, in particular its purpose and the conditions for its grant.”: Case 9/78 Gillard, [1978] ECR 1661, paragraph 12.

46.   It is possible for a particular national benefit to fall within the terms of a particular provision of Regulation 1408/71 for some purposes but not for others.

47.   Child tax credit is a broadly based benefit which may be paid as a free-standing means-tested benefit for those in work, or in addition to some other social security benefit. Where it is paid in addition to some other benefit, if that benefit is a pension for old-age or invalidity, the second limb of Article 77(1) will need to be considered.

48.   In this context, the history of tax credits may be of assistance. The introduction of tax credits brought various payments together in a new system in respect of children which had previously been dealt with under a variety of statutory provisions. The benefits abolished and superseded by tax credits are summarised in the submission of HMRC which I have quoted at paragraph 32 above.

49.   Among the provisions repealed and replaced by the Tax Credits Act 2002 is section 80 of the Social Security Contributions and Credits Act 1992, the salient parts of which read:

Beneficiary’s dependent children

80.—(1) Subject to section 61 above and to the following provisions of this Part of this Act, the weekly rate of any benefit to which this subsection applies shall, for any period for which the beneficiary is entitled to child benefit in respect of a child or children, be increased in respect of that child, or each respectively of those children, by the amount specified in relation to the benefit in question in Schedule 4, Part IV, column (2).

(2) Subsection (1) above applies to—

…

(d) Category A, Category B or Category C retirement pension.

50.   Were these to be the operative provisions in this case, I would have no hesitation in regarding the increase for a beneficiary’s dependent children in section 80 as falling within the second limb of Article 77 of Regulation 1408/71. Does the introduction of a different system for determining payments for dependent children through the Tax Credits Act 2002 result in a change from the position when increases for dependent children were governed by the quoted provision of the Social Security Contributions and Benefits Act 1992?

51.   The consultation paper[2] which preceded the introduction of the legislation stated that its purpose was as follows:

The introduction of the new tax credits marks the latest phase in the programme of reform and is intended to rationalise and streamline the existing systems of support for children and of in-work support for families and people with disabilities. (p. 9, para. 5)

52.   Furthermore the consultation paper says in respect of support for families with children:

From 2003, the integrated child credit will become the single income-related system of support for children and this provides an opportunity to rationalise how support is delivered. A small number of families with children who are currently receiving certain benefits (for example, Widowed Parent’s Allowance) may also have a child dependency increase included in the amount they get. There are complex rules surrounding child dependency increases and, in most cases, they do not adequately reflect a family’s financial need. We therefore propose that the integrated child credit should replace all future child dependency increases when introduced. But we are considering how best to protect the entitlement of existing recipients. (p. 14, para. 24)

53.   All this confirms my view that child tax credit is the direct successor of the increases in retirement pension provided for in section 80 of the Social Security Contributions and Benefits Act 1992.

54.   But can it still be said that child tax credit where a retirement pension is also in payment is an increase or supplement to that retirement pension having regard to the method of calculation of child tax credit?

55.   Paragraphs 24 to 40 of the submission by HMRC in response to Judge Levenson’s direction of 11 April 2011 summarise the method of calculation of child tax credit. State retirement pension is taken into account in making the calculation. The overall position is summarised at paragraph 40 of this submission:

In short summary then, the method of calculation of CTC involves the determination of a maximum possible rate according to the claimant’s […] family circumstances and a progressive reduction of that maximum rate once the claimant’s household income exceeds a prescribed threshold. The eventual outcome of that progressive reduction of the maximum rate can give rise to circumstances where there will be claimants who are entitled to CTC by virtue of their being responsible for a child or qualifying young person but whose income will result in an award rate of £00.00.

56.   Taking all these factors into account, I conclude that, in the particular circumstances of this case, namely, where Mr W is in receipt of a State retirement pension, child tax credit constitutes an increase or supplement to that pension payable in respect of children of the pensioner. This brings child tax credit within the second limb of Article 77.

57.   Since the child tax credit falls within Article 77, it is payable in Iceland.

Did the tribunal err in law?

58.   I have left this discussion late in my decision. The tribunal only considered the first limb of Article 77, that is, whether child tax credit constitutes a family allowance. They did not consider whether child tax credit in the circumstances of this case fell within the second limb of Article 77 as an increase or supplement to the State retirement pension payable to Mr W.

59.   Since the tribunal (for perfectly understandable reasons) failed to consider an area of enquiry directly relevant to the appeal, they erred in law. Accordingly, I set their decision aside.

My substituted decision

60.   This is a case in which it is appropriate for me to remake the decision which the tribunal should have made.

61.   My decision is that Mr W and Mrs J remained entitled to receive child tax credit following their move to Iceland.

62.   HMRC must now determine their entitlement to child tax credit and pay this to them in Iceland. I leave this for determination by HMRC, but either party is free to revert to me if agreement cannot be reached on that entitlement. I cannot see any obvious reason why it should be necessary for me to be further involved.

The position from 1 May 2010

63.   In a supplementary response in January 2010 (at pages 2 and 3 of the bundle before me), HMRC state:

HMRC would like to confirm that they have no jurisdiction in the tribunal’s decision to stay further consideration of the instant case however would like to advise [Mr W] and [Mrs J] that the issue will be resolved when the new EC co-ordinating regulation (883/2004) enters into force because, in general, pensioners will be entitled to ‘family benefits’ from the Member State paying their pension. So from the date of implementation, UK state pensioners living elsewhere in the EEA will be able to claim both Child Benefit and Child Tax credit. This new regulation is anticipated to enter into force in March 2010, although I would strongly advise that they consider taking advice nearer the time with a view to submitting a fresh claim on the basis of the new law.

64.   Regulation 883/2004 entered into force on 1 May 2010. But it entered into force only for the 27 Member States of the European Union, and not for the three additional countries which make up the European Economic Area, one of which is Iceland. The advice quoted above is accordingly erroneous.

65.   So far as I can discover, the necessary legislation at European level has not yet been adopted to extend the provisions of Regulation 883/2004 to Iceland, Liechtenstein and Norway. Until that happens, the position of those living in the three EEA countries will continue to be governed by Regulation 1408/71.

66.   Until Regulation 883/2004 is extended to the three EEA countries, the more advantageous position which HMRC describes (and which flows from a broader definition of family benefits in the new regulation) will only apply to nationals of the 27 Member States of the European Union.

 

 

 

 

 

Signed on the original Robin C A White

on 8 August 2011 Judge of the Upper Tribunal