Upper Tribunal (Administrative Appeals Chamber)

 

DECISION OF THE UPPER TRIBUNAL

ADMINISTRATIVE APPEALS CHAMBER

 

The absent parent's appeal to the Upper Tribunal is allowed. The decision of the First-tier Tribunal dated 28 May 2009 involved errors on a point of law, for the reasons given below, and is set aside. The case is remitted to a differently constituted First-tier Tribunal within the Social Entitlement Chamber for reconsideration in accordance with the directions given in paragraphs 38 to 40 below and further directions to be given by a district tribunal judge (Tribunals, Courts and Enforcement Act 2007, section 12(2)(b)(i)).

 

 

REASONS FOR DECISION

 

1. In the language of the child support legislation the appellant is the absent parent of the qualifying children (Aran, for some part of the period in issue, and Tania). From now on I shall call him the father. I shall call the parent with care and second respondent the mother.

 

2. There was an oral hearing before the Upper Tribunal on 20 October 2010, at the mother's request. The father did not attend, but was represented by Mr Martin Henley of counsel, instructed by Ahmed & Co solicitors. The mother attended without a representative. The Child Maintenance and Enforcement Commission (CMEC) was represented by Mr Leo Scoon of Department for Work and Pensions Legal Services. I am grateful to all present for their submissions in a difficult case. I gave the mother a month after the hearing to consider four cases the reports of which were produced by Mr Henley at the hearing and to make any comment on them. In the event, she did not comment directly on those cases in her letter dated 19 November 2010, but made some comments on the state of the evidence in the file in the light of them. CMEC had no further comments to make in the submission dated 26 November 2010. The father's representatives had, in accordance with my direction, until 10 December 2010 to make any comment, but nothing has been received. There has unfortunately been some delay caused by the incidence of other work around the Christmas and New Year break.

 

3. The tribunal of 28 May 2009 was concerned with the decision of 29 August 2007 that the father was liable to pay child support maintenance of £82.32 per week with effect from 16 August 2002 and £54.52 per week with effect from 10 September 2004 (on Aran ceasing to be a qualifying child). The decision was said to be made by way of supersession of the decision of 17 August 2001, under which the father's liability was nil with effect from 2 March 2001, on the ground of a material change of circumstances notified to what was then still the Child Support Agency (CSA) on 21 August 2002, ie that the father was no longer receiving jobseeker's allowance (JSA) after 28 July 2002. The father's representatives have not disputed the submission on behalf of CMEC, in the document dated 22 December 2009, that that decision was properly made to take effect from the start of the week in which the relevant evidence was brought to the attention of an officer of the CSA in accordance with regulation 23(2) of the Child Support (Maintenance Assessment Procedure) Regulations 1992. I accept that. The drafting of regulation 23(2) is not entirely happy but in the circumstances I need say no more about that conclusion. The effective date of the change when Aran ceased to be a qualifying child was properly set under regulation 23(19).

 

4. It is not at all clear to me what went on within the CSA once it had received the form BA 670 referred to on page 85 of the papers. That was apparently a Benefits Agency form informing of the cessation of JSA and was received on 21 August 2002. There does not appear at that time to have been any application from the mother for a supersession. It is apparent from page 13 of the papers, a record of a telephone call to the father on 18 December 2003, that some action was being taken in the months following the notification. The record says that the call was about the figures on his "gambling income" report. No such report is in the papers before me or the tribunal of 28 May 2009. Nor is a copy of a form CS 140 on which the father had apparently mentioned travel costs, which the father said on 18 December 2003 he did not want taken into account. The father is recorded as having said that gambling was his only income, which was low, and that he was technically unemployed. He said that he would pay a higher amount than the assessment direct to the qualifying children, but was told that he needed to pay the maintenance assessment (which is somewhat mysterious as it seems then to have stood at nil).

 

5. The next hint in the papers before me of any action is in 2007. On 16 February 2007 the Nationwide sent the CSA copy bank statements from 2001 onwards in response to a "recent" request (pages 14 to 65). On 17 April 2007 an investigations officer wrote to the father following an interview with him on 11 April 2007 (pages 67 and 68). This "confirmed" that the father's income as a professional gambler could be taken into account as income for child support purposes and set out the gross sums paid into the father's bank account as follows:

 

July 2002 - March 2003 £49,789.12

April 2003 - March 2004 £76,186.24 (excluding a mortgage advance)

April 2004 - March 2005 £81,710.80

April 2005 - March 2006 £101,335.80

April 2006 - February 2007 £69,175.00

 

The letter suggested that those amounts were similar to those given by the father on what he now accepts was a fictitious basis to a building society for the purposes of obtaining the mortgage. The letter continued:

 

"You stated that in addition to your gambling you live off the generosity of your friends. I cannot accept that the level of income revealed can be by way of loans and gifts. Please provide documentary evidence to support your contention of loans from third parties.

Finally it is accepted that in order for you to generate an income from your gambling activities you must invest. Please provide copies of all your records relating to your gaming activities both online and offline.

...

I look forward to receiving your response within the next 14 days failing which we will be re-assessing your case based on your disclosed income having made a notional allowance for costs and expenses."

 

6. There is no evidence before me of any such calculation being carried out or of the father having made any response until a telephone call to him on 21 August 2007. The note made by the officer (page 12) said that the purpose was to agree income figures. It was written that the father claimed that losses were made in two years but had advised that £15,000 per year seemed appropriate. I note here that at the tribunal hearing on 28 May 2009 it was hotly disputed by the father that he had agreed that the figure of £15,000 could be used other than perhaps in relation to one year. However, according to the notes made on 28 August 2007 (page 86), the maintenance assessments were calculated on the basis that the father had an admitted averaged annual income of £15,000 derived from gambling, on which he paid no tax or national insurance. That produced a net income of £288.46 per week and the liabilities set out in paragraph 3 above.

 

The appeal to the tribunal

7. The father's appeal against the amount of those assessments was on the basis that as income from gambling is not income for the purposes of calculating taxable profits in accordance with Part 2 of the Income Tax (Trading and Other Income) Act 2005 it should not have formed part of his gross earnings. Just before the tribunal hearing, the father's solicitors put in a witness statement from him, letters from relatives and friends about financial assistance provided to him and documents about borrowings. At the hearing itself, Mr Henley appears to have put in a schedule (pages 137 and 138) of annual profits and losses based on the payments into and out of the father's bank account.

 

8. Mr Henley made a submission of law, citing cases mentioned later, that income from gambling should not be regarded as earnings from self-employment for child support purposes. The representative of the CSA accepted that that was correct, but submitted that that income had to be taken into account as "other income" in accordance with paragraph 15 of Schedule 1 to the Child Support (Maintenance Assessments and Special Cases) Regulations 1992 (the MASC Regulations):

 

"15. Any other payments or other amounts received on a periodical basis which are not otherwise taken into account under Part I, II, IV or V of this Schedule, except payments or other amounts which--

 (a) are excluded from the definition of "earnings" by virtue of paragraph 1(2);

 (b) are excluded from the definition of "relevant income of a child" by virtue of paragraph 23; or

(c) are the share of housing costs attributed by virtue of paragraph (3) of regulation 15 to any former partner of the parent of the qualifying child in respect of whom the maintenance assessment is made and are paid to that parent."

 

The tribunal's decision

9. The tribunal accepted that view and said this in paragraphs 8 to 10 of its statement of reasons:

 

"8. It is apparent that any payments or other amounts which are received on a periodical basis can be considered as long as they do not fall within the exceptions actually provided for within [paragraph] 15. From the details provided by [the father] to the CSA the sums were received periodically (see pages 69 to 73) and would fall within the Regulation unless it can be established otherwise.

 9. The Tribunal noted that Mr Henley's submission based on the authorities cited was that no tax was payable on the amounts received, however the [CSA] had initially dealt with the calculations without deducting any tax and now request that the case should be remitted for recalculation so that tax and national insurance can be deducted. To this, the Tribunal's response was that it would amount to reimbursing him for something he has not paid.

 10. [The father], through his representative, indicated that he had expenses which should have been taken into account in the calculation. In the Tribunal's view, this could be considered only on the basis of the production of properly documented/original receipts."

 

10. Accordingly, the decision notice had stated that the appeal was allowed in part and directed that if the father wanted any expenses to be taken into account in a possible recalculation he was to provide proper verification with original receipts. According to the CMEC submission of 23 August 2010 and the notepad entries attached there was no further calculation of the father's net income following the tribunal's decision, but CMEC simply allowed the existing assessments to stand pending the provision of evidence of expenses by the father, which did not happen.

 

The appeal to the Administrative Appeals Chamber of the Upper Tribunal

11. The father was given permission to appeal against the tribunal's decision by a district tribunal judge. CMEC supported the appeal in the submission of 22 December 2009 on the ground that no reasonable tribunal could have concluded on the evidence that the amount received by the father from gambling was received on a periodical basis so as to fall within paragraph 15 of Schedule 1 to the MASC Regulations. It was also suggested, relying on guidance on Her Majesty's Revenue and Customs (HMRC's) website, that winnings from simply playing card games for money could not constitute earnings from self-employment. There was then a long delay while the mother sought, and was granted by a Registrar, extensions of time for making a full submission, which was eventually received on 30 March 2010. She said that as the father's sole means of income was his profits from gambling they should be taken into account for child support purposes as earnings from self-employment. The father's solicitors had no further comment at that stage.

 

12. When granting the mother's request for an oral hearing (made on her OSSC 3 signed on 31 January 2010) I asked some further questions about the proper treatment for child support purposes of winnings from gambling, which produced the further submission of 23 August 2010 from CMEC.

 

Paragraph 15 of Schedule 1 to the MASC Regulations

13. I need spend little time on this point. Even the mother did not really try to support the tribunal's decision on the basis that the income identified constituted amounts received on a periodical basis. I agree with the submission for CMEC in paragraph 6 of the document of 22 December 2009 that it was not at all clear what the stream of figures on pages 69 to 73 represented, other than sums paid into the father's account and that the letter of 17 April 2007 made no attempt to differentiate between sources of income. There was in my judgment nothing in those figures to indicate that any receipts could be related to a period in any way. "Periodical" does not just mean "from time to time". Accordingly, the tribunal adopted a wrong legal basis for its decision.

 

14. In addition the tribunal failed to say what it made of Mr Henley's analysis of the father's net profits and losses over the years in question or of the father's evidence about what he said had been a misunderstanding of what he said on 21 August 2007 about making £15,000 per year (see paragraph 6 above). The assessments under appeal were based on that figure of £15,000 and I therefore understand why the reaction of CMEC to the tribunal's decision was not to carry out any recalculation unless and until the father produced evidence of expenses in accordance with the tribunal's direction. However, the tribunal was apparently relying on the payments in to the father's bank account on pages 69 to 73, which had not in the end formed the basis of the assessments under appeal. In my judgment the tribunal left it unclear whether it was accepting the figure of £15,000, subject to the deduction of further expenses (which does not seem to fit together) or was accepting the amounts of payments in to the father's bank account as on pages 69 to 73, subject to the provision of evidence by the father about which of the payments out amounted to expenses that could be deducted. If the latter was intended, it was not made clear how expenses could be deducted in relation to paragraph 15 of Schedule 1 to the MASC Regulations (in the absence of any provision for a disregard in Schedule 2), except perhaps under the principle of Chief Adjudication Officer (Parsons) v Hogg [1985] 1 WLR 1100, appendix to R(FIS) 4/85, of deducting expenses necessarily incurred in the getting of the income. I rejected the application of that principle to paragraph 15 in paragraph 23 of decision R(CS) 3/00. There is therefore at least doubt about the legal position and if the tribunal was relying on Hogg it seems to me that it needed to specify much more clearly what sorts of expenses might have been accepted as falling within the principles.

 

15. The upshot of all that is that the tribunal failed to make sufficient findings of fact on which to base a conclusion about paragraph 15 of Schedule 1 to the MASC Regulations, as well as adopting a wrong legal basis to the meaning of "periodical". It also certainly failed to make sufficient findings of fact to allow its decision to be supported on some other legal basis, such as counting the father's net profits as earnings from self-employment or as income from capital, even if that were legally possible. There is therefore no question of not setting aside the tribunal's decision on the ground of the decision having been right, but for the wrong reasons. The decision must be set aside and the choice is then, depending on the answers to the questions of law discussed below, between remission to a new tribunal for rehearing or the substitution by the Upper Tribunal of a decision on the appeal against the assessments.

 

16. I add one point arising from the evidence before the tribunal that may need to be taken into account on reconsideration of the appeal. At page 115 is a copy of a letter dated 16 May 2009, apparently from the father's brother and sister-in-law, saying that they had "paid and assisted in paying the mortgage of [the father] for at least the past ten years", as well as making him loans to help with his gambling. That at least raises the question, calling for some explanation from the father, whether, depending on how the payments for the mortgage were made, the father was receiving payments on a periodical basis under paragraph 15 of Schedule 1 to the MASC Regulations or was to be treated as having an income of the equivalent amount under paragraph 31.

 

Earnings from self-employment

17. Mr Henley submitted for the father, relying on the tax cases he had cited to the tribunal of 28 May 2009 (discussed below), that the father was not a self-employed person at all, because he was not by habitual, if not full-time, playing of poker carrying on a trade, business or vocation. Mr Scoon for CMEC took very much the same view.

 

18. It is necessary for this purpose to look at the specific definition of "self-employed earner" in regulation 1(2) of the MASC Regulations, which is that the phrase is, unless the context otherwise requires, to have the same meaning as in section 2(1)(b) of the Social Security Contributions and Benefits Act 1992:

 

"a person who is gainfully employed in Great Britain otherwise than in employed earner's employment (whether or not he is also employed in such employment)."

 

That definition must be taken with the expansion in section 122(1) that:

 

"`employment' includes any trade, business, profession, office or vocation and `employed' has a corresponding meaning."

 

19. That is a very open-ended definition. Anyone who is not an employed earner (and the father here plainly was not) is a self-employed earner if they are "gainfully employed". The expansion in section 122(1) merely confirms that employment in a trade, business etc can be included, but it does not exclude employment that would not be described as a trade, business etc. There is some authority on a previous form of words - "gainfully occupied" - which suggests that the test is not whether the person is making a net profit at any particular time, but whether they hold themselves out or carry out activities for the purpose of gain (Vandyck v Minister of Pensions and National Insurance [1955] 1 QB 29). When significant amendments were made to Chapter 2 of Part I of Schedule 1 to the MASC Regulations (earnings of a self-employed earner) in 1999, in particular introducing the new paragraphs 2A to 2C and 5A and putting the primary emphasis on the total taxable profits from self-employment as submitted by the earner to the Inland Revenue (now HMRC), no amendment was made to the definition of self-employed earner. That remains the social security definition, not the tax definition. It was part of Mr Henley's submissions, I think, that the effect of the 1999 amendments changed the context of Schedule 1, so that that context required the definition of self-employed earner in regulation 1(2) not to be applied, but the general meaning for income tax purposes. I cannot accept that submission. Schedule 1 is the only part of the MASC Regulations to which the definition is relevant. It would require a particularly clear case for the specific definition not to apply there and this is not one.

 

20. A general argument could therefore be made that what the father did amounted to gainful employment. Although the activities of playing poker online or face-to-face or playing other games of chance are often carried on for purely recreational purposes, the evidence before the tribunal of 28 May 2009 of entries and success in many commercially organised poker tournaments in the UK and abroad, as well as private games and on-line, and of the maintenance of a website promoting the father's success and status and offering advice (pages 80 and 81) indicated a degree of expenditure of effort, time and organisation that could be said to amount to the undertaking of an employment. It could be said that in terms of organisation there is no significant difference from the circumstances of a professional sportsperson who takes part in competitions and tournaments and would undoubtedly be treated as a self-employed earner. The fact that a person enjoys what they do does not stop it being an employment. And the father's activities were carried out for the purpose of gain.

 

21. However, Mr Henley submitted that the income tax cases, and in particular Graham v Green (Inspector of Taxes) [1925] 2 KB 37, showed that the mere making of a living from gambling could not amount to a trade, business or vocation or, by necessary implication, a gainful employment within section 2(1)(a) of the Social Security Contributions and Benefits Act 1992. In Graham v Green the taxpayer substantially made his living by betting on horses. Rowlatt J said, in relation to whether the taxpayer was liable to tax on profits or gains arising from any trade, profession, employment or vocation, that it was settled that a bookmaker carried on a taxable vocation and (at 41 - 2):

 

"By calculating the odds in the case of various horses over a long period of time and quoting them so that on the whole the aggregate odds, if I may use the expression, are in his favour, he makes a profit. That seems to me to be organizing an effort in the same way that a person organizes an effort if he sets out to buy himself things with a view to securing a profit by the difference in their capital value in individual cases."

 

He continued:

 

"Now we come to the other side, the man who bets with the bookmaker, and that is this case. These are mere bets. Each time he puts on his money at whatever may be the starting price. I do not think he could be said to organize his effort in the same way as a bookmaker organizes his, for I do not think the subject matter from his point of view is susceptible of it. In effect all he is doing is just what a man does who is a skilful player at cards, who plays every day. He plays to-day, and he plays to-morrow, and he plays the next day, and he is skilful on each of the three days, more skilful on the whole than the people with whom he plays, and he wins. But it does not seem that one can find, in that case, any conception arising in which his individual operations can be said to be merged in the way that particular operations are merged in the conception of a trade. I think all that you can say of that man, in the fair use of the English language, is that he is addicted to betting. It is extremely difficult to express, but it seems to me that people would say he is addicted to betting, and could not say that his vocation is betting."

 

 

22. Rowlatt J had also earlier referred to what he said would be a very startling consequence of accepting gambling as a vocation for income tax purposes. This was that a loss in such a vocation could be set against profits on some other trade etc in calculating amounts liable to income tax. That public policy consideration was strongly relied on by Mr Henley and Mr Scoon.

 

23. The other two income tax cases relied on seem to me to add little in terms of reasoning, but indicate that the validity of the principle in Graham v Green has been accepted for income tax purposes for over 40 years. In Down (Inspector of Taxes) v Compston [1937] 2 All ER 475 (Lawrence J) the taxpayer was a golf professional who made substantial sums of money by making bets on private games of golf. These winning were held not to arise out of his employment or vocation. There was said to be no more organisation by the taxpayer in relation to them than there had been in Graham v Green. In Burdge v Pyne (Inspector of Taxes) [1969] 1 WLR 364 (Pennycuick J) the taxpayer owned a club providing members a bar, dancing, cabaret etc, plus a card room and roulette. He regularly played three-card brag with members in the card room and was generally successful. His argument that his winnings at that game should be excluded from the profits of the club business was rejected. The activity was held to be part of the activities in the course of carrying on the business of the club. Graham v Green was distinguished on the ground that there the taxpayer was not carrying on any trade at all. I reject Mr Henley's submission that the case turned on organisation and an acceptance that in the case of betting that requires the setting of the odds or the employment of people to assist. Down v Compston was distinguished on the ground that there the taxpayer's vocation merely provided the opportunity for making the bets, whereas in Burdge v Pyne the playing of cards was part of the activities of the club. That may, as Mr Henley suggested, reflect the meaning of organisation, but it does not necessarily define the outer limits of that meaning.

 

24. It is certainly not for me in this decision to attempt any definitive exploration of income tax law. However, it seems to me that an acceptance of Graham v Green, even as apparently followed for 40 and more years, as meaning that a "punter" can never have an organisation sufficient to amount to a trade, business or employment can rest only on the unfortunate policy and practical consequences that would flow from allowing the losses of a "professional gambler" to be set off against profits from another business. That is a consequence that does not follow in the child support context. If earnings from some other business are taken into account under paragraph 2A of Schedule 1 to the MASC Regulations, then there can be no set-off of gambling losses because the income tax calculations are applied. If such earnings are taken into account under paragraphs 3 to 5A, then paragraph 3(4)(b)(iv) expressly prohibits the deduction from gross receipts of "any loss incurred in any other employment in which [the self-employed earner] is engaged as a self-employed earner". Nor can losses in a self-employment be set off against earnings from employment as an employed earner (Northern Ireland Commissioner's decision R1/96 (CSC)). When taken with the dangers of taking constructions of one statute as applying to another (Jacob LJ in Chandler v Secretary of State for Work and Pensions [2007] EWCA Civ 1211, [2008] 1 WLR 734, R(CS) 2/08, at paragraph 36) and with the approach of seeking to identify what income is in reality available for the support of the children concerned, I find no reason to depart from the approach set out in paragraph 20 above (see also the discussion in Williams, Social Security Taxation (1982), para 3-49, and in Graham, Taxes on Betting and Gaming [1966] British Tax Review 309). This case cannot be disposed of on the basis that the father could not in law have been a self-employed earner for the purposes of the MASC Regulations.

 

25. There is then a further question whether, if the father was a self-employed earner, any receipts or profits or other amounts are to count as earnings from self-employment under Chapter 2 of Part I of Schedule 1 to the MASC Regulations. As at the effective date of the first assessment under appeal (16 August 2002), paragraphs 2A to 2C were as follows:

 

"2A.--(1) Subject to paragraphs 2B, 2C, 4 and 5A, `earnings' in the case of employment as a self-employed earner shall have the meaning given by the following provisions of this paragraph.

 (2) `Earnings' means the total taxable profits from self-employment of that earner as submitted to the Inland Revenue, less the following amounts--

 (a) [income tax on the taxable profits];

 (b) [national insurance contributions];

 (c) [half of retirement annuity or person pension premiums].

 (3) [calculation of income tax deduction].

 (4) [calculation of national insurance contributions deduction].

 

 2B.--(1) Where--

 (a) a self-employed earner cannot provide the Secretary of State with the total taxable profit figure from self-employment for the period concerned as submitted to the Inland Revenue, but can provide a copy of his tax calculation notice; or

 (b) the Secretary of State becomes aware that the total taxable profit figure from the self-employment submitted by the self-employed earner has been revised by the Inland Revenue,

the earnings of that earner shall be calculated by reference to the income from employment as a self-employed earner as set out in the tax calculation notice issued in relation to his case, and if a revision of the figures included in that notice has occurred, by reference to the revised notice.

 (2) [Definitions, including that `submitted to' means submitted to the Inland Revenue in accordance with their requirements by or on behalf of the self-employed earner].

 

 2C. Where the Secretary of State accepts that it is not reasonably practicable for the self-employed earner to provide information relating to his total taxable profits from self-employment in the form submitted to, or (where paragraph 2B applies) as issued or revised by, the Inland Revenue, `earnings' in relation to that earner shall have the meaning given by paragraph 3 of this Schedule."

 

26. With effect from 1 August 2007, just before the date of the decision under appeal to the tribunal, paragraph 2A was amended to remove the reference to submission to the Inland Revenue/HMRC in sub-paragraph (1) and to add new sub-paragraphs (5) and (6), paragraph 2B was revoked and a new paragraph 2C was substituted. The new paragraph 2A(5) and (6) are as follows:

 

"(5) For the purposes of this paragraph, `taxable profits' means profits calculated in accordance with Part 2 of the Income Tax (Trading and Other Income) Act 2005.

 

 (6) A self-employed earner who is a person with care or an absent 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 notice issued to him by Her Majesty's Revenue and Customs."

 

Then the new paragraph 2C requires calculation of earnings in accordance with paragraph 3 where the Secretary of State accepts that it is not reasonably practicable for the person to provide any of the information specified in paragraph 2A(6).

 

27. In the present case, the father never submitted any figure for total taxable profits to HMRC in the period in question nor did he receive any tax calculation notice. I am satisfied that it was therefore not reasonably practicable for him to provide information relating to either of those things, so that paragraph 2C applied, both in its pre-1 August 2007 form and its form in operation from that date. I have considered whether paragraph 2C could be said to operate on an assumption that only earnings that could come within total taxable profits that should have declared to HMRC fall within Chapter 2 of Part I of Schedule 1 to the MASC Regulations, so that it only applies if for some reason the parent could not provide information about such earnings in the particular form of a copy of a tax return or a tax calculation notice. However, I do not see why there should be such a limitation. If such documents do not exist because neither the parent nor HMRC consider that the earnings needed to be disclosed to HMRC, then it seems to me that in the ordinary use of language it is not reasonably practicable for the parent to provide information relating to them. Therefore, the method of calculation in paragraph 3 of Schedule 1 must be adopted.

 

28. That is basically the method as in operation before the 1999 amendments, under which net income is the gross receipts of the self-employment less specified deductions, including income tax, national insurance contributions, half of pension contributions and reasonably incurred expenses that are wholly and exclusively defrayed for the purposes of the business, but not a number of categories including capital expenditure. There was an amendment to paragraph 3 with effect from 1 August 2007, to remove some categories of expenses that were not allowed to be deducted, but the exclusion of capital expenditure remained.

 

29. There is a particular feature of the meaning of "gross receipts" that could have been relied on to support the conclusion argued for on behalf of the father and CMEC. This is that the reference must be to income receipts and not to capital receipts. That stems from the decision of Mr Commissioner Hallett in R(FC) 1/97 on the virtually identical provisions then in regulation 22 of the Family Credit (General) Regulations 1987. The careful reasoning in that case was that the calculation was for the purpose of determining the claimant's income under the Regulations. Then, although the Social Security Act 1998 empowered the making of regulations prescribing circumstances in which capital was to be treated as income, the mere definition of earnings in regulation 22 in terms of "gross receipts of the employment" was held to be insufficient to be an exercise of that power. It would in addition have been anomalous and unfair if capital receipts were included when capital expenditure could not be deducted. Thus, the amounts of a loan received for the purposes of the business (as a self-employed tooling engineer) and of the proceeds of sale of a car and a computer printer did not form part of the gross receipts in calculating the claimant's earnings as a self-employed person.

 

30. The position is the same in relation to paragraph 3 of Schedule 1 to the MASC Regulations. The purpose of Part I of the Schedule is to determine the amount of any earnings of the parent which are to form part of his net income. There is a power in paragraph 9(f) of Schedule 1 to the Child Support Act 1991 to make regulations prescribing circumstances in which capital is to be treated as income. However, by parity of reasoning, the definition of earnings in terms of "gross receipts of the employment" in paragraph 3(1) of Schedule 1 to the MASC Regulations cannot be sufficient to be an exercise of that power. The conclusion that capital receipts cannot form part of the gross receipts is also bolstered by the inability to deduct capital expenditure as part of expenses.

 

31. Can it then be argued that the winnings from playing poker, including the share of the total pots awarded for coming in various places in poker tournaments, are capital receipts, rather than income receipts? There is certainly some authority that ad hoc receipts in the form of gambling winnings constitute capital and not income (the decision of Upper Tribunal Judge Ward in CH/412/2007 and CH/4143/2007). But the claimant concerned there was a hobby gambler, who put money into online casinos in a way that I do not pretend to understand. But as Rowlatt J said in Graham v Green (at [1925] 2 KB 40):

 

"if you set on foot an organised seeking after emoluments which are not in themselves profits, you may create, by way of a trade, or an adventure, or a vocation, a subject matter which does bear fruit in the shape of profits or gains. A different conception arises, a conception of a trade or vocation which differs in its nature, in my judgment, from the individual acts which go to build it up, just as a bundle differs from odd sticks."

 

That is entirely in line with what I understand to be the general approach in income tax law to the identification of an venture in the nature of a trade or business. To take the facts of R(FC) 1/97 as an example, in relation to the business of being a tooling engineer a car was part of the fixed capital, so that the proceeds of its sale were a capital receipt. But if the business had been that of a car dealer, buying in cars with the intention of selling them on at a higher price, the proceeds of sale of cars (sometimes said to constitute circulating capital) would form part of the income receipts of the business. Therefore, if it is once concluded that a parent is in gainful employment as a self-employed earner as a professional gambler or poker player, the winnings from those activities form part of the gross income receipts of the employment.

 

32. I quite accept that there will be great practical problems in identifying the gross income receipts in a case like the present and in identifying reasonably incurred expenses to be deducted from the gross receipts under paragraph 3(3)(a). As pointed out on behalf of CMEC in the submission of 22 December 2009, the analysis on pages 69 to 73 derived from the father's bank statements gave no real clue as to what payments in and out represented. Only in relation to the period from 1 January 2007 to 15 February 2007 were there any records showing the destination of payments out, but of course not the source of cash payments in. It may well also be the case that a professional gambler may have no records of what has been paid out and what has been won to produce a final amount of cash that might get paid into a bank account or simply retained for living expenses, repaying loans or for future gambling. However, those problems cannot be allowed to undermine the conclusion of principle, especially taking into account the interests of qualifying children in having money in fact available for their support counted in the calculations of maintenance assessments. CMEC and tribunals on appeal must simply do the best they can with the evidence that can be made available to reach a conclusion about the net income to be taken into account in the form of earnings from self-employment. If the evidence that can be obtained from the absent parent or otherwise is not sufficient to support any rational conclusion it may be that the fallback has to be a departure direction application by the parent with care on the ground of lifestyle inconsistent with declared income (see further paragraph 41 below).

 

33. Once that process has been gone through, CMEC or the tribunal on appeal must in my judgment consider the proper deductions for income tax and national insurance contributions as determined under paragraph 3(5) and (6) of Schedule 1 to the MASC Regulations. Although the father would not have actually paid any income tax or national insurance contributions during the years when he was carrying out his activities with a view to gain, the form of both sub-paragraph (5) in particular requires the deduction of an amount calculated in accordance with the formula set out, not what would or should actually have been paid. Although, as the tribunal of 28 May 2009 pointed out, that seems to give the father the benefit of deemed payments that he did not actually make, it is a consequence of concluding that he had earnings as a self-employed person.

 

34. Taking first paragraph 3(5) on income tax, "taxable earnings" must be identified, but by head (d) that means "chargeable earnings" after the disregard of any applicable personal allowance. By paragraph 3(8) "chargeable earnings" means not earnings actually liable to income tax, but the gross receipts of the self-employment less any deductions under paragraph 3(3)(a) and (b) for expenses and value added tax. Then the amount of the deduction is (ignoring some unhelpful differences in the terms used in different places) to be calculated by applying the income tax rates in force at the relevant time to the "taxable earnings".

 

35. By contrast, paragraph 3(6) makes the deduction the total of Class 2 and Class 4 contribution, if any, "payable" at the rates in force at the relevant time on "chargeable earnings". That appears to require a judgment about whether there was in fact liability to pay such contributions, but since this stage would not have been reached unless it had already been decided that the parent was a self-employed earner within the social security definition, a judgment can be made for child support purposes on that basis. CMEC and the tribunal on appeal would not be bound by the view taking by HMRC in its responsibility for the collection of contributions about liability for Class 2 and Class 4 contributions (see paragraph 7 of Commissioner's decision R(CS) 6/98).

 

Income derived from capital

36. When granting the request for an oral hearing I raised the question whether poker winnings could be regarded as income derived from capital, to be counted as part of net income by virtue of paragraph 13 of Schedule 1 to the MASC Regulations. Rightly, both the father and CMEC rejected that as a possibility. In view of my conclusions of law on earnings from self-employment I need say no more about the question.

 

Conclusion and directions

37. For the reasons summarised in paragraph 15 above, the decision of the tribunal of 28 May 2009 must be set aside as involving errors on points of law. I am not in a position to substitute a decision on the questions whether the father was a self-employed earner for the purposes of the MASC Regulations and, if so, what amount of earnings should be included in his net income at various times throughout the period in issue. It also seems to me that fairness demands that the parties have the opportunity to put forward further evidence and submissions on those questions in the light of the conclusions of law reached above. Therefore, although I regret the further postponement of a final resolution to a case that has already absorbed a lot of time and concern for all involved, the case must be remitted to a new tribunal for a rehearing.

 

38. The father's appeal against the decision of 29 August 2007 is accordingly remitted to a differently constituted First-tier Tribunal for reconsideration in accordance with the following directions. There must be a complete rehearing of the appeal on the evidence produced and submissions made to the new tribunal, which is to apply the conclusions of law set out above.

 

39. I direct that CMEC is to make a fresh written submission on the questions mentioned in paragraph 37 above in the light of the conclusions of law set out paragraphs 17 to 35 above (self-employed earner and earnings from self-employment) on the basis of the existing evidence and analysis of that evidence on behalf of CMEC and the father and of any further evidence that CMEC considers it appropriate to obtain or seek. The submission should also deal with the matter mentioned in paragraph 16 above. The father and his representatives must have a fair opportunity to reply to that submission in writing in advance of the rehearing and to put forward any additional evidence. The submissions may include requests for the First-tier Tribunal to give directions. A district tribunal judge is, once the file in this case is received by the First-tier Tribunal administration, to give directions as to the time within which the submissions are to be produced and the general procedure to be followed. The evaluation of all the evidence will be entirely a matter for the new tribunal that conducts the rehearing.

 

40. I abridge the time for applying under rule 44 of the Tribunal Procedure (Upper Tribunal) Rules 2008 for permission to appeal to the Court of Appeal to one month after the date on which written notice of this decision is sent to the parties (rule 5(2)(a)). That is so that all parties should be able to know without undue delay whether the next stage of this case is the rehearing directed above.

 

41. At the oral hearing on 20 October 2010 the mother said that she had made applications for departure directions, but had not got any answers. I request CMEC to examine its records as soon as practicable to see if there are any outstanding applications by the mother for departure directions on which decisions have not been given or on which notice has not been sent to her of the decision and to deal with anything that is outstanding without delay. If any appeal were then to be made against any decision it could with advantage be linked to the rehearing directed in the present case.

 

 

 

 

(Signed on original): J Mesher

  Judge of the Upper Tribunal

 

Date: 3 February 2011