Upper Tribunal (Administrative Appeals Chamber)

DECISION OF THE UPPER TRIBUNAL

ADMINISTRATIVE APPEALS CHAMBER

The absent parent’s appeal to the Upper Tribunal is disallowed. The decision of the tribunal of 7 July 2010 did not involve any material error on a point of law, and therefore stands.

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. This is the case relating to the Secretary of State’s decision dated 11 September 2008 making a maintenance assessment of £6.10 per week with effect from 9 May 2008 in respect of the two qualifying children, reducing to nil from 20 June 2008. The mother appealed against the amount of that assessment. There was also before the tribunal of 7 July 2010 appeals by the mother and the father against the decision of 4 November 2009 imposing a departure direction on the ground of lifestyle inconsistent with declared income with effect from 24 June 2009, the mother arguing that the increase in the child maintenance liability under the direction was too low and the father arguing that no direction should be imposed. Since the tribunal of 7 July 2010 allowed the father’s appeal in relation to the departure direction, in the light of what it had decided about the formula maintenance assessment, and disallowed the mother’s appeal, the father’s subsequent appeal to the Upper Tribunal is only against the tribunal’s decision as to the formula maintenance assessment.

3. The written submission on behalf of the Child Maintenance and Enforcement Commission (CMEC) dated 17 June 2011 did not support the father’s appeal. The making of that submission had been deferred on my direction when giving the father permission to appeal to await the decision of Judge Howell QC in DB v CMEC (CSM) [2011] UKUT 202 (AAC), which had the file number CCS/814/2010. The mother concurred with that submission. The father has not sent in any comments in response within the month allowed to him from 14 July 2011. In those circumstances I can give relatively brief reasons.

4. What the tribunal of 7 July 2010 decided about the formula maintenance assessment was that as at 9 May 2008 the father’s annual net income, after deduction of income tax and national insurance contributions, was £18,300, giving a weekly figure of £351.92, rather than the weekly figure of £151.37 on which the decision of 11 September 2008 had been based. It directed a recalculation of maintenance assessment on that basis. It also directed a recalculation on the basis of an increase in the father’s housing costs that I do not need to consider further. The tribunal rejected the father’s accounts as a self-employed sole trader undertaking work as a handyman for the years ending 31 March 2007 and 31 March 2008, which had underpinned the figures put in his 2007 – 2008 tax return, including the figure for total taxable profits. The figures in the accounts had been adopted in the Secretary of State’s decision. The tribunal took the view, after a close and detailed analysis, largely relying on his charge-out rate and the number of hours and weeks likely to have been worked, that the accounts significantly understated the father’s profits. The tribunal also considered that that conclusion was supported by the evidence of the level of the father’s personal expenditure.

5. In his application for permission to appeal to the Upper Tribunal the father made a number of points about the provisions on departure directions that did not bite on the tribunal’s conclusion about the formula maintenance assessment. But in relation to that he denied that his accounts had understated his profits. Although that was in terms an attempt to re-argue a matter of fact, I gave permission to appeal on 31 March 2011. The reasons for doing so included the following:

“5.  I have given permission to appeal because a question of law potentially arises to which an authoritative answer has not yet been given by the Upper Tribunal. That is, very much in brief, whether the tribunal was entitled to rely on an evaluation of the father’s actual profits from self-employment in the relevant period, rather than the figures submitted to the Her Majesty’s Revenue and Customs (HMRC) in his tax return for 2007/2008, in the light of the amendments to Chapter 2 of Schedule 1 to the Child Support (Maintenance Assessments and Special Cases) Regulations 1992 with effect from 1 August 2007. Those amendments removed the previous power to look at actual profits if the figures submitted to HMRC did not accurately reflect average weekly earnings, but allow that to be done if it is not practicable for the parent to provide on demand a copy of a tax calculation notice or revised tax calculation notice issued by HMRC. A complication in the present case is that the father appears never to have been asked for a copy of HMRC’s tax calculation notice for 2007/2008.

6.  A decision was made by the Upper Tribunal in KB v CMEC (CSM) [2010] UKUT 434 (AAC), a copy of which is to be issued with this notice to form part of the papers, holding that the August 2007 amendments did not prevent a tribunal using what it determined to be the actual figures for receipts and expenditure, instead of those used by HMRC, provided it used the income tax rules for computing taxable profit. CMEC has argued in other cases that that is not the correct approach in law, in particular in an appeal with file number CCS/814/2010. There was an oral hearing of that appeal earlier this week, so that a decision is expected within the next month or so. Once that decision has been given, the parties to the present case will need to have the opportunity to comment on its relevance and effect here, as well as that of KB. That will most conveniently be done within the procedural structure that follows once permission to appeal has been given.”

6. The decision in DB (CCS/814/2010) was to follow the principles stated in KB and to decide that the form of the Child Support (Maintenance Calculations and Special Cases) Regulations 2000 (the MCSC Regulations) in force from 1 August 2007, which uses exactly the same form of words as in the Child Support (Maintenance Assessments and Special Cases) Regulations 1992 (the MASC Regulations) from the same date, allows tribunals and decision-makers to make their own judgments on all available evidence about what a parent’s “taxable profits” were in any relevant year. What paragraph 7(1A) of Schedule 1 to the MCSC Regulations (paragraph 2(5) of Schedule 1 to the MASC Regulations, as applicable in the present cases) means when providing that a person’s “gross earnings” are to be “his taxable profits calculated in accordance with Part 2 of the Income Tax (Trading and Other Income) Act 2005” is that that method of calculation must be used, not that whatever calculation has in fact been made or accepted by HMRC must be adopted for child support purposes.

7. I should follow the principles laid down in KB and DB unless satisfied that those appeals were wrongly decided. That is a conclusion that would not lightly be reached, especially in view of the fact the DB was decided after an oral hearing at which the case for KB having been wrongly decided was fully argued by the legal representative of CMEC, but rejected. In the event, I find the reasoning of Upper Tribunal Judges Jacobs and Howell cogent and convincing and endorse the conclusions of law that they reached.

8. The result, as fully set out in the submission of 17 June 2011 on behalf of CMEC, is that the First-tier Tribunal here did not go wrong in law in making its own independent judgment of what the amount of the father’s properly taxable profits was in the year ending 31 March 2008, rather than simply accepting the amount declared in his 2007/2008 tax return. Although the father disagrees with that judgment, that does not indicate any error of law. The tribunal did not go outside the area of reasonable judgment allowed to it in reaching the conclusion that it did and it gave a full and clear explanation of its reasoning.

9. Judge Howell held in paragraph 35 of DB that the First-tier Tribunal in that case had acted properly in taking the amount of the parent’s undeclared net annual income into the maintenance calculation without any further statutory deductions for income tax or national insurance in relation to that additional income. He said that no real provision was needed for such liabilities as they had been evaded by the parent’s non-declaration of the income. The same approach was taken by the tribunal of 7 July 2010 here in directing that the father’s annual net income after deduction of income tax and national insurance contributions was to be taken as £18,300. That figure was reached by taking first the net profits as shown in the accounts for year ending 31 March 2007 (£9,018), reduced to £7,893 after deductions for income tax and national insurance. Those were the amounts that had been adopted by CMEC in the decision of 11 September 2008 to produce the figure of £151.37 for weekly net income. The tribunal considered that the father had understated his income by at least £10,080 on the labour element of his profits alone, without taking any account of the uplift that he would receive on the cost of materials. The figure of £18,300 was adopted as equivalent to the father’s annual personal expenditure, but the tribunal was clear that no further deductions for amounts of income tax or national insurance were to be made.

10. DB certainly endorsed that approach, but that part of the decision is perhaps not so securely based as the rest. I say that in particular because in a later decision (WM v CMEC (CSM) [2011] UKUT 226 (AAC) Judge Turnbull has, without mentioning Judge Howell’s decision in DB, held that there is no escape under the equivalent in the MCSC Regulations to paragraphs 2A to 3 of Schedule 1 to the MASC Regulations from making deductions representing income tax and national insurance contributions from the amount of the taxable profits identified. That difficulty was not addressed in the submission of 17 June 2011 on behalf of CMEC. However, I have decided that the resolution of the present case should not be delayed to allow further submissions to be made on the point. I take the view that if (and it is still only an “if” in the absence of some further decision from the Upper Tribunal) the tribunal of 7 July 2010 should have calculated some additional deductions for income tax and national insurance contributions, in practice it would still have adopted the annual figure of £18,300 for net income after making such deductions. That could have been by following through in a more extensive way the logic of its reasoning on the additional income likely to have been obtained through the uplift on materials costs as well as what it found to be a realistic charging rate for hours worked. It could also have been through the way out found by Judge Turnbull in WM of adding back the amount of the notional deductions through the mechanism of a departure direction (or variation in the case of WM) on the ground of lifestyle inconsistent with declared income. Therefore, in my judgment, if there was an error of law involved in the tribunal’s decision, it was not material to the outcome in practice and would therefore not justify the setting aside of the decision. By virtue of section 12(2)(a) of the Tribunals, Courts and Enforcement Act 2007, the Upper Tribunal need not set aside a decision of the First-tier Tribunal even if it involved an error of law.

11. Accordingly, I conclude that the decision of the tribunal of 7 July 2010 involved no material error of law such that would justify setting it aside. The father’s appeal must therefore be dismissed.

Signed: J Mesher

  Judge of the Upper Tribunal

Date: 13 September 2011