Upper Tribunal (Administrative Appeals Chamber)

 

Before: Upper Tribunal Judge PA Gray

 

 

Upper Tribunal Judge Powell having granted permission to appeal, and submissions and further comments made following his directions having been received, I have consolidated the appeal designated as the lead appeal with the linked appeal and made a decision on both appeals upon the papers before me.

 

Decision: The mother’s appeals to the Upper Tribunal are allowed. The decisions of the First-Tier Tribunal sitting at Bournemouth on 29/9/11 were erroneous in law, and I set them aside.  I remit both cases to be reheard by a freshly constituted First-Tier Tribunal.

 

 

REASONS FOR DECISION

 

1.     The appellant and the second respondent are the parents of Charlie, born on 17/5/06 and now 7 years of age. Charlie lives with his mother, the Parent with Care, and his father, the Non-Resident Parent in the terms of the applicable legislation, is liable to make child support maintenance payments for him.  I will refer to Charlie’s parents as the mother and the father in this decision.

 

2.     The Secretary of State for Work and Pensions is the respondent, the functions of CMEC (formerly the CSA) having been transferred to the DWP from 14/8/12.  I will refer to that body as the Agency in this decision.

 

3.     From the effective date in the second appeal, CCS/739/2012, The father is, in legislative terms, part of another child support assessment unit, which is to say that he has a child by another relationship with whom he does not live, and the mother of the child in that unit is the third respondent in both appeals, as she has an interest in the outcome of each since it may affect her entitlement. She supports the appeals, but has played no part.  As any findings that the new First-Tier Tribunal (FTT) make when the appeals are re-decided may have an impact upon her assessment she is entitled to play a part, should she wish to do so, in the re-hearing. 

 

4.     The grounds of appeal centre upon the treatment by the tribunal of evidence concerning the father’s earnings from employment, in which there were legal and procedural complexities. I have looked at these and at the Secretary of State’s submission, and also considered the Record of Proceedings and the Statement of Reasons produced by the tribunal judge. 

 

5.      Child support maintenance for Charlie is based on the statutory scheme which came into place on 3/3/2003, still referred to as the "new rules". 

 

 

 

The grant of permission to appeal

 

6.     The District Tribunal Judge who had made the decisions on 29/11/11 granted permission to appeal upon the issue as to the contractual position of the father as an employee of Morgan Sindell Investments Ltd. That had been the central issue in two appeals by the father to the FTT from decisions of the Agency.  

 

 

The procedure in the Upper Tribunal

 

7.     Judge Powell in his observations designated appeal number CCS/738/2012 as the lead appeal, and directed that submissions be filed in respect of that appeal only. He gave the parties an opportunity to indicate whether they felt that there were any differences between the two appeals apart from the different effective dates, and if so to apply for directions that both appeals should proceed. There has been neither an application for that to occur, nor any indications as to any differences between the two appeals. I am satisfied that the appeals concern the same central issues and the difference is only as to the period under consideration.  It is appropriate that I now consolidate the appeals under Tribunal Procedure (Upper Tribunal) Rules 2008 rule 5(3)(b).

 

8.     The Secretary of State’s submissions supported the decision of the FTT.  The father made no submissions.  The third respondent indicated her support for the appeals but made no separate submission.  No party has requested an oral hearing, and I am satisfied that I am able to decide all matters fairly on the papers before me.

 

 

The procedural history below

 

9.     The appeal to the FTT in the lead case was made by the father against a decision of the Agency dated 2/12/10.  The decision was stated to be a supersession decision made under section 17 of the Child Support Act 1991. Since it rendered the father liable to pay £179 per week for Charlie from an effective date of 9/11/09, that is to say it was retrospective in its remit, it was in fact a revision decision, however the difference is not material; the agency, if their decision is correct, would have been entitled to revise the earlier decision as being made in error of fact.  That is a matter which can be perfected by a FTT.

 

10. The fresh decision had come about because there had been an initial maintenance assessment on 5/10/09 directing the father to pay £14 a week for Charlie from an effective date of 21/9/09. That was the original effective date. Subsequent to that on 13/11/09 the father had applied to the agency for a supersession of that decision because he said that his circumstances had changed. The change related to his income.  The mother queried the assessment that was made, in particular the father's income which had from the outset been assessed as £148.47 per week.

 

11. She made the point at that early stage that when the couple lived together they had an expensive lifestyle including frequent holidays, and as examples of the father’s lifestyle in that regard continuing she stated that he had taken a seven-day holiday to Florida in October 2009 and had recently enjoyed a skiing trip to France. Between April 09 and February 2010 she said that he had admitted to spending £5500 on overseas holidays.  On the basis of the Agency's calculation of course, that would have been more than his income during that period.  The mother also said that the father had access to large sums of money through companies and limited liability partnerships that he controlled,  and that since October 2008 he had been earning some £10,000 per month through a consultancy business.  There were other allegations of high finance, but of a capital nature.

 

12. The Agency decision under appeal was made on 2/12/10 upon the basis that the father's income had previously been significantly underestimated, (the error of fact) and it was recalculated based upon their acceptance that he had earnings as an employed earner in the sum of £8500 per month.  The child support maintenance derived from that was at the maximum payable for Charlie, and that continued to be the case bearing in mind that this later became a split assessment unit because of the third respondent's child.  There is some relevance in that maximum award. Other than to protect her own position in the event of a successful appeal, something very few people would think about, there was nothing to be gained by the mother pursuing a variation application of any type; however overwhelming a case she might make out, she would receive no extra money. 

 

13. The father appealed that Agency decision.  His argument was that his income was not £1495.42 pence per week as calculated, but £299.89 per week, that being monies received as an employed earner for two companies, Wessex Park Ltd and Synergy Group. He said that at that stage he was earning £8400 per annum gross from Wessex Park, and £10,500 per annum gross from Synergy. He said he was not employed by Morgan Sindell Investments Ltd.  He held shares in a number of other companies but said that he had received no dividend payments in either 2009/10 or 2010/11.  His 2009/10 accounts were in preparation, but he had been advised that no tax would be due because of the large losses incurred by Wessex Delivery LLP in which he was a 40% partner.  The other 60% of that company was held by Morgan Sindell Investments Ltd,  Wessex Delivery having been (as later found by the FTT) set up for the purpose of holding some land that Morgan Sindell Investments Ltd purchased from the father, in which he was to retain a stake.

 

14. The appeals before the FTT were linked and proceeded together.  Directions were given for the production of various documents, and the tribunal bundle by the date of the hearing ran to in excess of 400 pages but the statement of reasons and the record of proceedings show that really the only issue was as to the father's employment status vis-a-vis either Morgan Sindell Investments Ltd or Wessex Delivery LLP.  The decision of the CSA was that the father, as an employed earner, was in receipt of gross income of some £8500 per month in addition to the other earnings from employment that he had declared.  Amongst the documents before the FTT were letters from Mr Battey the Chief Executive of Morgan Sindell Investments Ltd to the mother’s solicitors and to the CSA in which he set out the basis of a Service Level Agreement between Wessex Park Ltd and Wessex Delivery LLP.   A copy of that agreement was also in the bundle.

 

15. The second appeal was against an Agency decision made on 21/3/11 reducing the father’s liability to £119.50 per week from an effective date of 14/3/11.  This was a supersession decision to reflect an assessment having been made in relation to the third respondent’s child.  Due to that there was an apportionment process in respect of a second assessment unit which needed to be undertaken. That is a practical and non-contentious matter; the father’s appeal against that decision repeated the arguments as to the calculation of his net income that he had made in respect of the previous decision. The legal issues for determination by the new FTT in relation to the lead appeal will be mirrored in this second appeal save that there may be features which alter any net income assessment over this later period. 

 

 

 

The employment issue

 

16. There was and remains for the new FTT a legitimate question as to whether the father was in fact an employee of either Morgan Sindell Investments Ltd or Wessex Delivery Ltd.  That issue was not sufficiently addressed by the tribunal.

 

17. It is trite law to say that a person cannot be an employee under a contract to which they are not a party.  Prima facie the only contract was between Wessex Park Ltd and Wessex Delivery LLP.  For the father to be employed by Wessex Delivery LLP he would need to be treated as a party to the service level agreement in addition to or instead of Wessex Park Ltd.  The recent decision of the Supreme Court in VTB PLC-v- Nutritek International Corp [ 2013]UKSC 5 would seem to make that argument problematic: at paragraphs 140 Lord Neuberger rejects the argument that Mr M should be treated as if he were party to an agreement  "in circumstances where… at the time the agreement was entered into, none of the actual parties to the agreement intended to contract with him and he did not intend to contract with them ..."

 

18. It would be a matter of fact for the tribunal to decide whether in this case any other party to the contract did intend to contract personally with the father, however, the earlier evidence of Mr Battey (which is more supportive than his later account on the point) indicates that although there may have been a prior intention for Morgan Sindell investments Ltd to contract directly with the father there was then a change of mind. If the new FTT was of the view that the original intention remained despite that evidence, in VTB PLC-v- Nutritek International Corp the leading judgement of Lord Sumption contains an analysis of the highly restrictive circumstances in which the corporate veil may be pierced which the FTT re-hearing the case would need to consider.  In my view it would be a brave FTT decision to the effect that these circumstances are envisaged in that analysis. 

 

19.  The real question for the new FTT is, it seems to me, whether the contract between Wessex Park Ltd and Wessex Delivery LLP was a sham, made to deceive others into believing that the contract was not in fact one of the direct employment of the father by Morgan Sindell Investment Ltd.  This is the construction of the mother asks to be placed upon it, and the case of Autoclenz Ltd –v- Belcher [2011]UKSC 41 is cited in support of it. 

 

20. Making reference to the leading authority on the concept of a sham in the judgement of Diplock LJ (as he then was) in Snook-v-London and West Riding Investments Ltd, in Autoclenz Lord Clark went on to develop a more extensive approach to the sham concept for the purposes of employment law.  This was derived from the inequality of bargaining power between employer and employee, and on this basis it was held that it was permissible for courts and tribunals to ignore terms in contracts, for example substitution clauses, that gave the impression that the relationship is one of customer and provider whereas in fact the true intention of the parties was to create a contract of service. The FTT will have to decide whether this has any application to the present case, where there has been no suggestion of inequality of bargaining power; the agreement may be seen as one between essentially equal parties participating jointly in a commercial venture, thus the extension of the doctrine may not be considered applicable. The Snook doctrine in its pure form however, as quoted at paragraph 23 of the Autoclenz case, is that a sham must be "intended by [ the parties] to give to third parties or the court the appearance of creating between the parties legal rights and obligations different from the actual rights and obligations (if any) which the parties intend to create".  The words "if any" would seem to be of particular significance here; the argument would need to be accepted that the contract between Wessex Park Ltd and Wessex Delivery Ltd was a fiction, intended to conceal the existence of a completely different contract, i.e. a contract of employment between the father and Morgan Sindell Investments Ltd.

 

21. Of critical importance in resolving that issue is the evidence of Mr Battey. The FTT had written evidence in the form of the two letters to which I have referred, to the effect that the initial intention had been for the father to be paid £8500 per month for a period of two years by Morgan Sindell Investment Ltd.  According to Mr Battey's letter to the CSA (at page 359-60) the father had then asked

 

"at the last minute that rather than be paid by Morgan Sindell investments directly as an employee he would prefer to be paid through his company Wessex Park (the funds are rooted through Wessex delivery so that the costs can be defrayed against profits on the land). In order to ensure that Mr Curtis understood that in undertaking this convoluted approach I still regarded him as a full-time employee, on the service level agreement we wrote in manuscript that he would work for 35 hours a week specifically on what was intended as though he were a Morgan Sindell employee. At the time it was immaterial to me whether he was paid directly, or by his own company as long as it was understood he was still in effect a full-time employee."

 

In evidence to the tribunal Mr Battey resiled from that position.

 

 

 

The error of law in relation to the employment issue

 

22. The FTT should, in furtherance of its inquisitorial function, have questioned Mr Battey about the differences in his accounts, made a judgement as to which account was more likely to represent the business intentions of the parties at the time the contract was made, considering all the evidence including that of the father on the issue, and explained the reasons for its findings. As it is the statement of reasons indicates that the judge had difficulty in reconciling the different accounts from Mr Battey, but it gives insufficient reason for preferring that given orally to the tribunal to the letters in the bundle.  Reliance is placed on the fact that the terms of the agreement between Wessex Park Ltd and Wessex Delivery LLP reflect what was said by Mr Battey in evidence to the FTT but that does not address the central argument that the creation of that service level agreement was a sham designed to mask the true position, a contract of employment between the father and Morgan Sindell Investments Ltd. I broadly accept the arguments set out in the grounds of appeal in relation to the errors of the tribunal on that issue.

 

23. The FTT should also, in light of that unexpected difference in Mr Battey’s evidence, have raised the issue of adjourning for the parties affected by that change (namely the mother and the agency, the third respondent playing no real part), to consider the effect of that change, and how they needed to address it in both questions and submissions. Expecting them to deal on the hoof with this very critical change in position in what was apparently the only issue in the case was not fair. 

 

24. In those respects the FTT erred in law, but there is a wider and important further aspect. 

 

25. If the contract is not found to be a sham, the issue of the father's income does not stop there as was understood by the FTT.  

 

The bigger picture

 

26. The essential error of law lies in the narrow approach taken by the FTT in its focus upon the employment issue.  The view of the FTT was that if it decided in favour of an employment relationship with Wessex Delivery LLP or Morgan Sindell Investments Ltd  the father paid substantial child maintenance (the maximum possible) whereas if it was decided against such a contract of employment existing his payment would be rather less than the average.

 

27. These two possible outcomes before the FTT created a starkly different picture for Charlie. This was because the all or nothing approach assumes either that the father was earning £8500 per month as well as the £18,900 declared from his other two employments or that he was simply earning the £18,900 declared. Following a finding that the father was not so employed it was the task of an inquisitorial tribunal to ask itself whether or not the outcome which that finding produced reflected the truth of the father's financial position. That enquiry was warranted because of the mother’s allegations that the father had an expensive lifestyle, because of his accepted involvement with a number of business entities and his possible ability to control his earnings due to that, and on the basis of the accounts produced for Wessex Park Ltd, which raised further questions.  That latter point is one to which I will return.  There was also the fact that the father’s declared earnings from those employment relationships that he acknowledged amounted to significantly less than the average full time earnings for a male employee (some £27,500 in the tax year to April 2008 based on the ONS Annual Survey of Hours and Earnings)  and one would of necessity enquire why he would choose to work, particularly in the way he did within a myriad of complex company structures requiring the use of accountants and so forth, for such low reward.

 

Formula or Variation-are they mutually exclusive?

 

28. As to the power of the FTT to carry out such an enquiry there is a misconception, perhaps because of what is perceived to be the rigidities of the statutory scheme, that when dealing with net income in a formula case the FTT is confined to the figures declared as income from employment even where accepting those flies in the face of other evidence, unless there is a variation application. 

 

29. In this case the mother didn't think she had made an application for a variation and the Agency did not treat her as having done so. The judge says in the full statement that he was constrained by the mother’s lack of application for a variation.  Without that he saw the possibilities only in terms of the dichotomy that I have highlighted above, but he was less hampered than he understood by the lack of a variation application. The position before the FTT is more flexible; even where there is no variation application the tribunal must enquire as to the accuracy of the actual net income using evidence which can include that which might be relevant in relation to a variation application.  This approach goes back to the early days of child support legislation and the authorities referred to below deal with the departure scheme rather than the variation scheme which came in as an adjunct to the new rules in 2003. Nonetheless they are relevant in relation to new rules cases.

 

 

The authorities

 

30. In CCS/12420/96 Mr Commissioner Howell (as he then was) explained that there is a positive duty on the tribunal to ascertain the true level of income rather than simply accept the figures in the accounts, and that evidence of a person's lifestyle can be used within the formula assessment to that end. That was a case in which the father was a self-employed property developer who also rented out property. The mother contended that the accounts gave an incomplete and misleading picture of the father’s true income in view, amongst other things, of the expensive personal lifestyle which she said he continued to lead. The Commissioner said

 

“The points raised by the child’s mother and suggested by the accounts themselves were enough to put the tribunal on enquiry and under a duty to consider and make their own findings on the true amount of the father’s income instead of simply taking the position as stated in the accounts…..  there were numerous matters apparent from the evidence before the tribunal which required further scrutiny, and that the tribunal in this very difficult matter erred by not enquiring into them for themselves more fully"

 

31. Building on that in CCS/3368/1997 he directed a child support officer to reassess net income “taking into account the father’s style of living and expenditure if the required details continue to be unforthcoming.”

32.  In R(CS)3/01 the overlap between the departure scheme and the formula assessment was discussed by Mr Commissioner Jacobs (as he then was).  He observed the narrow approach of the Child Support Agency, then the agency concerned, under which reliance was placed upon documentary evidence such as wage slips in relation to the formula assessment leaving issues of lifestyle to be taken into account only where there was a departure application. He commented

"this clear distinction is not maintainable before appeal tribunals and Commissioners, as they take a broader approach to evidence of income for a formula assessment….The appeal tribunal must admit the evidence of life-style and determine what level of income can be inferred from it "

He went on to explain

"The legislation has created an overlap. Evidence of life-style may be used to show income either for a formula assessment or for a departure direction. Mr. Commissioner Williams dealt with a case of misunderstood accounts in CCS/4247/1999. The Commissioner decided that a case had not been shown under regulation 25 and referred the case to the Secretary of State, drawing attention to the doubts about the accuracy of the formula assessment. He explained the basis of this approach in paragraph 29:

“If the assessment is wrong it should be reviewed … I do not accept that the departure direction procedure is there to circumvent the review and appeals procedure or to make good a failure to apply the rules for assessment properly. In other words, it is inappropriate to use a departure direction to arrive at what should have been the starting point.”

 

33. The recent case of Gray v Secretary of State for Work and Pensions and James [2012] EWCA Civ 1412 (Court of Appeal, 5.11.12), whilst concerned with self-employed earnings and specifically with the statutory interpretation of the August 2007 amendments following the judgement of the House of Lords in the case of  Smith v Secretary of State for Work and Pensions [2006] UKHL 35  adumbrated the wider approach that  decision makers, whether within the  Agency or at the FTT, may decline to be constrained by the figures submitted to HMRC and are able, without the intervention of the variation provisions, to ensure that the net income figures reflect the true picture, including under or undeclared income if that is appropriate. 

 

34. Arguably the mother’s correspondence in June 2010 may have amounted to a variation application, in that she specifically alleges that the father had diverted income and that he was living a lifestyle that could not have been funded from his declared income, but it was not acted upon by the Secretary of State. Given the authorities above, however, that is not fatal as the right result, by which I mean a proper enquiry into the father’s income from all sources, can be achieved without the need for formal consideration under the variation process. 

 

35. The father may need to answer the question why he felt it necessary, at the last minute according to one account from Mr Battey, to change the nature of his proposed working arrangement and put that through a company on a consultancy basis via a service level agreement. 

 

36. The FTT will need to consider whether this may have been because he would gain some financial advantage through Wessex Park Ltd, a company by which he is employed and with which he is intimately connected, which may equate or approximate to the alleged value of the proposed contract of service with Morgan Sindell Investment Ltd but without problems which may have resulted from the monies being directly attributable to earnings from employment.  Any perceived advantages need not be concerned with the child support position. 

 

37. Alternatively there may be other financial benefits that accrue from the father’s acknowledged employment or his involvement with other business entities. At page 206 is a letter from his accountants to the mother's solicitors which gives information as to a number of legal entities which it was stated were formed for specific projects or other commercial purpose. Thirteen are mentioned, in relation to five of which the accountants played no part, but were aware of their existence.  No doubt in the father's work involving property development such proliferation of companies for project specific reasons or as other legitimate vehicles is commonplace.  Nonetheless it may be that a person with a significant degree of control in relation to a number of such entities has benefits which arise from that control which an inquisitorial tribunal can and should consider in the context that I outline.

 

38. As to the position in relation to the father’s declared employment CCS 2623 2005 reminds us as to the wide meaning of the term "remuneration". In that case a parent, employed by a company with which she had no intimate connection, was paid at minimum wage level for her earnings, but received in addition in the same pay period additional money as a "dividend". It was likely that this method of payment had some tax advantages for the company. Mr Commissioner Jacobs, rather than debating whether or not the ancillary payment was truly in the nature of a dividend, which had been the FTT approach, took the view that the payment was ‘remuneration or profit derived from that employment’ under paragraph 4(1) of the Schedule to the Child Support( Maintenance Calculations and Special Cases) Regulations 2000 and was therefore to be taken into account despite its apparent designation as dividend which would appear at first blush to have excluded it from consideration under the 2003 scheme. He said

 

‘Derived from’ are words that are wide in their import and mean simply ‘have their origin in’ (R(SB) 21/86 at paragraph 12). ‘Remuneration’ is also wide in its import and means ‘a quid pro quo … whatever consideration he gets for giving his services’ (Blackburn J in The Queen v Postmaster General (1876) 1 QBD 658 at 663).

 

39. If there is a finding that the father's remuneration is in excess of his declared earned income of £18,900, then the tribunal must take care to apply the case of Gray (op cit) and assess any excess as net income, that is to say using net figures (for example expenditure figures) or less notional deductions of national insurance and taxation as appropriate. 

 

 

Recommendations for the re-hearing

 

40. I recommend that the DT J directs that a financial member sits together with the judge bearing in mind the issues relating to interrelated companies which have a clear accountancy element, as well as the possibility of an estimation of lifestyle costs (within the formula calculation to establish the true picture of earnings) or assessment of likely income bearing in mind the father’s business activities, an issue upon which a financial member will have expertise. 

 

41. There are also matters which arise in relation to the accounts of Wessex Park Ltd which are already in the bundle.  This is the matter to which I said I would return in paragraph 26 above.  There is the rise of some £235,000 in administrative costs (stated at page 400 to include £208,000 odd worth of sundry expenses) between the years 2009 and 2010, despite a drop in turnover of some £800,000.  The profits of the service level agreement, £102,000, are included in those accounts, but the administrative costs of some £283,000 dwarf them and the turnover additional to the receipts under the service level agreement is only £52,000.  The accounts seem to suggest that the company spent £283,000 in administrative costs to earn £154,000, and this coupled with the evidence from Mr Battey that Morgan Sindell Investment Ltd paid office costs to Wessex Delivery LLP in addition to the £120,000 employee fee is perplexing.  The expertise of a financial member may assist in assessing any evidence given as to this, and may highlight other issues which are properly within the purview of the tribunal enquiry, which may, depending upon the answer to the question in relation to the contract of employment with Morgan Sindell Investment Ltd, be relevant as to whether the father might have been able to fund his lifestyle through Wessex Park Ltd, Wessex Delivery LLP or any other company or companies with which he has association and influence, and accordingly as to his true level of remuneration or other income within the child support legislation.  A proper analysis of the accounts may also assist in relation to ‘the employment issue’ itself, as shedding light on the question of what is likely to have been the true business intentions of the parties at the time that the contract was made. 

 

42. All these matters are issues of fact for the tribunal to decide on all of the available and relevant evidence.

 

43. This matter will now be put before the District Tribunal Judge who will make appropriate listing directions.  To enable the father to assist the FTT in its enquiry the DTJ may wish to issue him with a pro-forma lifestyle sheet and, perhaps with the financial member make directions as to disclosure of time-relevant financial documents in relation to other organisations in which he has an interest.

 

44.  The fact that the mother's appeal has succeeded at this stage not an indication of success on rehearing. 

 

45. I remit the case to a fresh FTT accordingly.

 

 

 

 

 

 

(Signed on the original) PA Gray

Judge of the Upper Tribunal

7 August 2013