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Cite as: [2013] UKUT 484 (AAC)
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Commissioners for H.M. Revenue and Customs v CB (TC) [2013] UKUT 484 (AAC) (26 September 2013)
Tax credits and family credit
other
IN THE UPPER TRIBUNAL Case No. CTC/2363/2012
ADMINISTRATIVE APPEALS CHAMBER
Before Judge of the Upper Tribunal Miss E. Ovey
Attendances:
For the Appellant: Ms. Galina Ward
For the Respondent In person
Decision: The decision of the First-tier Tribunal given on 23rd March 2013 contained an error on a point of law. Accordingly, I allow the appeal and set the decision aside. In exercise of the power given by s.12(2)(b)(ii) of the Tribunals, Courts and Enforcement Act 2007, I substitute my own decision. It is that the Respondent and his wife, as joint claimants of working tax credit, ceased to be entitled to the childcare element of working tax credit with effect from 18th December 2009.
REASONS FOR DECISION
Preliminary
1. As I shall explain further below, the sole issue on this appeal was whether or not the amount of working tax credit (“WTC”) which the Respondent and his wife, as joint claimants, were entitled to receive for the tax year 2009-2010 should be calculated on the footing that it included the childcare element for the period 19th December 2009 to 16th January 2010.
2. The issue was determined in favour of the Respondent by the decision of the First-tier Tribunal on 23rd March 2012. The basis of the decision was a pure point of law, namely, the true construction of the Working Tax Credit (Entitlement and Maximum Rate) Regulations 2002, S.I. 2002 No. 2005 (“the WTC Regulations”). The Appellant (“HMRC”) sought permission to appeal on the ground that the First-tier Tribunal’s construction was wrong in law. The Tribunal Judge gave permission to appeal on 27th June 2012, stating that there was an arguable point of law which should be determined by the Upper Tribunal.
3. I held an oral hearing of the appeal on 23rd September 2013. At the hearing Ms. Ward of counsel appeared for HMRC and the Respondent appeared in person. Ms. Ward also produced in advance of the hearing a skeleton argument dated 16th September 2013, while the Respondent, in the course of these proceedings, has produced detailed and pertinent written submissions, the most recent being his submission on this appeal dated 26th November 2012. I have carefully considered both the written and the oral arguments and am grateful to Ms. Ward and the Respondent for the way in which they have clarified and focused the issue.
The facts
4. There is no dispute as to the facts of this matter, but I set the facts out briefly to explain the context in which the issue arises.
5. At the times material to this appeal, the Respondent and his wife had been in receipt of WTC continuously since 11th August 2007. In accordance with the procedure envisaged by ss.3 and 5 of the Tax Credits Act 2002, they made a joint claim for the tax year 2009-2010 and a provisional award was made, on the basis of which payments for that year began on 6th April 2009.
6. That award was made on the footing that the Respondent’s wife was engaged in “qualifying remunerative work” for at least 16 hours a week and satisfied the conditions of entitlement to the basic element of WTC set out in reg. 4 of the WTC Regulations. The Respondent and his wife also satisfied the requirements of entitlement to the second adult element under reg. 11 of the WTC Regulations. That has been the case at all material times.
7. On 22nd June 2009 the Respondent began qualifying remunerative work for 40 hours a week. As a result, he and his wife became entitled to the 30 hour element of WTC in addition to the basic element and the second adult element, by virtue of reg. 10 of the WTC Regulations.
8. They also became entitled to the childcare element by virtue of reg. 13 for as long as they satisfied two conditions:
(1) at least one of them was incurring “relevant childcare charges” (see the main body of reg. 13(1)); and
(2) they continued to be members of a couple where both were engaged in qualifying remunerative work (see reg. 13(1)(b)).
(Reg. 13(1) also specifies alternatives to the condition set out in sub-paragraph (2) above, but those possibilities are not material for present purposes.)
9. The Respondent and his wife have two children. When the Respondent notified HMRC of his full-time employment, he also notified HMRC of the childcare costs being incurred for the children. Those costs constituted relevant childcare charges and the childcare element was awarded from 22nd June 2009 as part of an amended provisional award.
10. The amount of the childcare costs changed with some frequency and HMRC issued a number of amended provisional awards. Finally, the Respondent notified HMRC that his employment had ended on 20th November 2009. The issue with which I am dealing is the consequences of the termination of the Respondent’s employment for the inclusion of the childcare element in the award of WTC.
11. The issue emerged as one of a number of points taken by the Respondent when he appealed by letter dated 8th October 2010 against the final tax credits decision, dated 29th September 2010, for the tax year 2009-2010. Those arguments included arguments that:
(1) although the Respondent’s qualifying remunerative work had ended on 20th November 2009, reg. 7D of the WTC Regulations had the effect that he was deemed to have continued in such work until 18th December 2009 and the entitlement under the joint claim was to be determined accordingly;
(2) reg. 16(1) and (5) had the effect that payments in respect of relevant childcare charges should continue to be made until the first day of the week following the four consecutive weeks in which, as the Respondent puts it, his relevant childcare charges were reduced to nil within the meaning of that regulation. The reduction to nil, says the Respondent, took effect on 18th December 2009 when he ceased to be deemed to be in qualifying remunerative work, and so payment of the childcare element should continue until 16th January 2010.
12. HMRC has accepted all the arguments in the Respondent’s letter other than the argument I have summarised in paragraph 11(2), and did so before the appeal reached the First-tier Tribunal. The First-tier Tribunal decided that the Respondent was right on that point as well.
The First-tier Tribunal’s decision
13. The tribunal identified the relevant written contentions of the Respondent as those at paragraphs 56 onwards of the undated submission at p.29 and following of the bundle and the relevant written contention of HMRC, by the time of the hearing, as that at page E of its supplementary response (following p.41 of the bundle). Both arguments, as the tribunal recognised, centre round reg. 7D and reg. 16 and the relationship between them.
14. The Respondent’s argument, in summary, was that reg. 7D and reg. 16 provide two separate “run on” periods, which HMRC was wrongly trying to treat as running concurrently, whereas in fact the two periods ran consecutively. He accepted that that might not have been what was intended when the Regulations were drafted, but contended that they had to be construed by reference to the words used and not to the intention of the draftsman. In oral submissions to the tribunal, the Respondent pointed out that reg. 16 had been included in the WTC Regulations as originally drafted, whereas reg. 7D had been added in 2007.
15. HMRC’s argument was that it was correct to say the two regulations were separate provisions but not that they were to be applied separately, because they covered different possible scenarios. It included the following:
“The provisions within reg. 16(5) are to allow a period of run on in cases where the child care has ended but the other elements of WTC are still due. The Tribunal will appreciate that this is intended to allow a run on of the child care element in circumstances separate to the question of the run on of overall WTC entitlement. However, since the childcare element is itself dependent on WTC entitlement being in place because it is an element of WTC, it is still restricted to the four week run on laid out in reg. 7D.
… His childcare element of WTC could not run on any further [i.e., after four weeks] because [the Respondent] was no longer entitled to any element of WTC after those four weeks. It is certainly not the intention that a claimant should receive an eight week run on of the child care element of WTC when qualifying remunerative work has ended. If the claimant were due an eight week run on then the regulations would specify this.”
16. The way in which those arguments were put is unsurprisingly reflected in the tribunal’s reasons, the material parts of which read as follows:
“Regulation 7D was added in July 2009. It provides that for the 4 week period after [the Respondent] ceased remunerative work, he was to be treated as being engaged in qualifying remunerative work, for the purposes of the conditions of entitlement in Part II of the Regulations. When he ceased to be treated as in remunerative employment, the relevant childcare charges would be nil (Regulation 13(1)). Regulation 16(1)(b)(iii) provided there was a relevant change of circumstances if during the period of an award, the relevant childcare charges are nil. When that occurred the amount of the childcare element of working tax credit was to be recalculated with effect from the specified date. Regulation 16(5)(b)(ii) provides that for the purposes of Regulations 16(1) the specified date where the childcare charges are decreased is the first day of the week following the four consecutive weeks in which the change occurred.
…
The Tribunal applied the ordinary meaning of the words used in the regulations. No exclusion was made for the circumstances of [the Respondent’s] case… The Tribunal found that the combined effect of Regulations 7D and Regulations 16(1) with 16(5) did provide an additional 4 week run-on for the childcare element beyond the date that it would otherwise have ceased when [the Respondent’s] remunerative employment was treated as having ended. It is recognised that this might not have been intended when Regulation 7D was added to the then existing regulations, but that was not the issue in this case.”
The arguments before me
17. At the heart of Ms. Ward’s argument was the proposition that the tribunal went astray in stating that when the Respondent ceased to be treated as in remunerative employment the relevant childcare charges would be nil, and in referring to reg. 13(1) in that context. On Ms. Ward’s analysis:
(1) reg. 13(1) specifies the conditions on which an award of WTC must include the childcare element, namely, that:
(a) in all cases, the claimant or one of joint claimants must be incurring relevant childcare charges; and
(b) in circumstances such as the present, both claimants must be engaged in qualifying remunerative work;
(2) reg. 14 defines “relevant childcare charges” for the purposes of reg. 13(1). They are charges for childcare which as a matter of fact are incurred by a person, or at least one of joint claimants, responsible for a child. The regulation does not require that the person who incurs the charges should be entitled to receive the childcare element of WTC before the charges become “relevant childcare charges”;
(3) reg. 15 explains how the amount of relevant childcare charges is to be calculated. It involves determining an average weekly charge from actual amounts incurred or to be incurred;
(4) reg. 16 provides that if there is a relevant change in circumstances, the amount of the childcare element of WTC must be recalculated from the specified date. There is a relevant change of circumstances if the weekly relevant childcare charges, determined under reg. 16, exceed the average weekly charge calculated under reg. 15 by more than £10, or are less than the average weekly charge by more than £10, or are nil. Reg. 16 is dealing with changes to actual charges and specifically refers to changes “during the period of an award”. There is nothing in reg. 16 which would enable it to be construed as if it provided that where entitlement is lost, the weekly relevant charges are to be calculated as nil. It follows that reg. 16 does not apply on a loss of entitlement, when there is no longer an award.
18. On the specific question of the effect of reg. 7D and the relationship with reg. 16, Ms. Ward says, in effect, that reg. 16 has never applied to give a run on period after entitlement has ended. In the absence of reg. 7D, entitlement to the childcare element would have ended on 20th November 2009, when the Respondent ceased to be in qualifying remunerative work. Reg. 7D extended the period of entitlement to 18th December 2009, but had no effect on the operation of reg. 16. Whether reg. 7D is there or not, reg. 16 does not have the effect of reducing relevant childcare charges to nil when entitlement ends.
19. At the heart of the Respondent’s submissions was the proposition that the relevant childcare charges do become nil for the purposes of reg. 16 when entitlement to the childcare element ends. In paragraph 9 of his written submission on the appeal, he says:
“After 18 December 2009, since I was no longer treated as being in work under regulation 7D, we no longer qualified for the childcare element under regulation 13(1)(b), and our relevant childcare charges became nil. At this point there is a relevant change in circumstances under Regulation 16(1)(b)(iii), requiring the amount of the childcare element to be recalculated from a specified date.”
He points out that the four week periods in reg. 7D and reg. 16 are not the same periods (paragraph 13).
20. The Respondent also submits that HMRC, in their submission to the tribunal, in fact agreed with his approach. He says:
“17. In their original evidence submission, (bundle page G, point 25), HMRC have stated that “[my] relevant child care charges ceased on the 20 November 2009, when [I]ceased work.” Therefore they have admitted in their submission to Tribunal that the point at which relevant childcare charges become nil is the point at which work ceases.
18. The date that they have stated for this is however wrong, because I am treated as working until 18 December 2009, under regulation 7D.”
21. In his oral submissions the Respondent again referred to paragraph 25, and I note that it continues:
“HMRC treated him as though he was still in qualifying employment for the four week run on (as provided by the regulations described above [i.e., reg. 7D] and this is why he and [his wife] received the childcare element up until 18 November 2009. However the actual change is the ending of the work (and so the end of relevant childcare charges) and the ending of our paying the childcare element is not a change of circumstances as intended by the regulations. This is why all the elements end on the same date.”
22. The substance of paragraph 25 was also repeated by HMRC in its supplementary submission to the tribunal, and the Respondent comments on that as follows in his written submissions:
“30. HMRC are quite clear that relevant childcare charges end when work ends, which means that they agree with me that I have relevant child care charges until the point at which I cease work and do not have relevant childcare charges thereafter, so that my relevant childcare charges must become nil at the point at which I cease work.
…
33. HMRC further state “the ending of our paying the childcare element is not a change in circumstances as meant by the Regulations”… it is clear from this statement that HMRC as applying the regulations as they are “meant” to be applied. They should however be applying them with the effect that they have as they are written and enacted, and their ending of the paying of the childcare element should be as the regulations require (four weeks after relevant childcare charges become nil) not at the point at which work ceases, which HMRC think is what is “meant” by the Regulations.”
23. The Respondent sets out his view of the relationship of regs. 7D and 16 as follows:
“41. Regulation 16 was part of the original [WTC Regulations] …
42. Its effect was to extend payment of the childcare element of Working Tax Credit at a previous higher rate until the end of the tax credit week that was four weeks after a reduction in, or ending of, relevant childcare charges. As a result, it required that the childcare element was paid for four weeks after the other elements of WTC ceased to be paid, and thus the child care element has always been treated differently from other elements of WTC, with an additional four weeks being paid after a change in circumstances which affects WTC entitlement and relevant childcare charges being included.
43. Regulation 7D was introduced into the [WTC Regulations] by the Working Tax Credit (Entitlement and Maximum Rate) (Amendment) Regulations 2007. No modification was made to Section 16 at that time, by that amendment legislation, so it seems that the provision in regulation 7D was not intended to replace that in regulation 16, but to supplement it.
44. The effect of Regulation 7D, which deemed a person to be in employment for four weeks, was to introduce a four week run on from when employment for the otherwise required number of hours finished, during which an entitlement to all elements of WTC previously being paid was maintained, including the childcare element. Please note that this is an extension of entitlement to WTC, not a run on of any particular element.
45. No amendments of Regulation 16 were made, the effect of which was to maintain the status quo that the childcare element of WTC would then be paid for a further four weeks after relevant childcare costs became zero when the entitlement to WTC ended and the payment of other elements of WTC finished.
…
51 My understanding of the WTC Regulations maintains the effect that Regulation 16 always had, since the Regulations were first enacted, and before Regulation 7D was introduced i.e. that the childcare element continues to be paid for the four week period after other elements would cease to be paid, following a change in circumstances that mean the entitlement to it, (and other elements of WTC) ceases, when relevant childcare charges become nil.”
24. At the hearing, the Respondent explained his understanding that the exceptional treatment given to the childcare element, on his analysis, was to meet the possibility that a person responsible for a child who ceased to be entitled to the childcare element of WTC might nevertheless be committed contractually to continue to pay the charges which were previously being incurred and so might require the protection of a buffer period. He asked rhetorically what the point of regulation 16 was if it was not related to having to pay charges.
My conclusions
25. In my view, a degree of confusion has been generated by the fact that unfortunately HMRC did not originally apply reg. 7D to the Respondent’s case. It is now agreed on all sides that reg. 7D applies and the Respondent and his wife continued to be entitled to both the 30 hour element and the childcare element until 18th December 2009.
26. It is also agreed that reg. 7D did not alter the construction of reg. 16. HMRC, through Ms. Ward, contends that reg. 16 has never had the effect which the Respondent attributes to it; the Respondent contends that it has always had that effect. In those circumstances, I do not need to consider reg. 7D further.
27. I agree with the Respondent that in the passages which he has drawn to my attention HMRC has expressed itself in a manner which suggests that on the true construction of the WTC Regulations “relevant childcare charges” themselves cease at the point that entitlement to the childcare element ceases and that they are therefore nil. If such a construction is not correct, however, any mistaken form of expression by HMRC at an earlier stage cannot affect my decision.
28. I have concluded that Ms. Ward’s analysis is correct, for the following reasons.
29. S.12 of the Tax Credits Act is the provision in primary legislation which relates to the childcare element of WTC. Subs. (1) provides for the maximum rate of WTC to include a childcare element in prescribed circumstances and subs. (2) defines a childcare element as an element in respect of a prescribed proportion of so much of any relevant childcare charges as does not exceed a prescribed amount.
30. Reg. 13 of the WTC Regulations prescribes the circumstances in which a person is or a couple are entitled to the childcare element. It reads as follows, so far as material:
“(1) The determination of the maximum rate must include a childcare element where that person, or in the case of a joint claim at least one of those persons, is incurring relevant childcare charges and –
…
(b) is a member or are members of a couple where both are engaged in qualifying remunerative work;
…
(2) For the purposes of paragraph (1), a person is not treated as incurring relevant childcare charges where the average weekly charge calculated in accordance with regulation 15 is nil …”
31. It is thus clear that:
(1) there are two conditions to be satisfied in order to establish entitlement to the childcare element;
(2) whatever the level of the Respondent’s relevant childcare charges, the conditions for entitlement ceased to be satisfied when the Respondent was no longer in or treated as in qualifying remunerative work;
(3) there is nothing in reg. 13(1) or (2) which affects the calculation of relevant childcare charges;
(4) to the extent that there is any reference to relevant childcare charges being nil, it is in paragraph (2), which clearly depends on the outcome of calculation in accordance with reg. 15 and not on any automatic reduction.
32. Subject to the effect of reg. 13(2) in the limited circumstances to which it applies, whether a person is incurring relevant childcare charges is to be determined by applying the definition of “relevant childcare charges” in reg. 14. Reg. 14(1) reads, so far as material:
“… for the purposes of section 12 of the [Tax Credits] Act 2002 charges incurred for childcare are charges paid by the person, or in the case of a joint claim, by either or both of the persons, for childcare provided for any child for whom the person, or at least one of the persons, is responsible within the meaning of regulation 3 of the Child Tax Credit Regulations 2002. In these Regulations, such charges are called “relevant childcare charges”.
Relevant childcare charges are thus simply charges which are paid. Whether the person making the payment is entitled to any element of WTC, and in particular whether the person is entitled to the childcare element is irrelevant to the definition of relevant childcare charges.
33. It follows that a person may incur relevant childcare charges without being entitled to the childcare element, consistently with the fact that incurring such charges is only one of the conditions of entitlement. The Respondent himself says at paragraph 28 of his submission at p.29 and following of the bundle (see p.32) that his child care costs were continuing after he had stopped working. Those continuing costs were relevant childcare charges while he continued to incur them.
34. The prescribed proportion and prescribed amount referred to in s.12(2) of the Tax Credits Act are to be found in reg. 20 of the WTC Regulations, which at the material time prescribed that the maximum rate of the childcare element was 80% of a weekly maximum of £175 for one child or £300 for more than one child. In order to determine the actual childcare element in any case, it is therefore necessary to calculate the relevant childcare charges, to determine whether or not they exceed the maximum and then to apply the 80% proportion to the relevant childcare charges if they do not exceed the maximum or to the maximum if they do.
35. The method of calculating the relevant childcare charges is set out in reg. 15 and, as Ms. Ward submits, involves determining an average weekly charge in the light of charges actually paid or in the light of the estimate provided by the person who is to give the childcare under an agreement for the provision of childcare. The method of calculation will not produce a nil rate unless no charges are in fact being paid or are agreed to be paid. In the Respondent’s case, the application of reg. 15 to the child care costs he was incurring would not have resulted in a nil figure either from 20th November 2009 or from 18th December 2009 unless he had ceased to incur such costs.
36. Reg. 16 deals with the possibility of a change in the amount of the relevant childcare costs. Paragraph (1) provides that there is a relevant change of circumstances if:
“(b) during the period of an award, the weekly relevant childcare charges, rounded up to the nearest whole pound -
(i) exceed the average weekly charge calculated in accordance with regulation 15 by £10 a week or more;
(ii) are less than the average weekly charge calculated in accordance with regulation 15 by £10 a week or more; or
(iii) are nil.”
The expression “the weekly relevant childcare charges” is explained in paragraphs (2) and (3) in terms which make clear that the regulation is looking at actual or anticipated charges.
37. It is thus clear that reg. 16 is dealing with actual changes in the charges payable. Again there is no provision for treating charges as reduced to nil. In the absence of an actual change in the charges payable, there can be no relevant change in circumstances.
38. Further, what reg. 16 does is to determine the date from which the recalculation of the amount of the childcare element is to take effect if a relevant change in circumstances has occurred. It does not purport to deal with entitlement as distinct from amount. If there is a relevant change in circumstances but entitlement ceases before the specified date from which the recalculation is to take effect, there will be no recalculation as a result of the change.
39. It follows that, having examined the relevant provisions, I can find nothing which supports the Respondent’s central proposition that his relevant childcare charges automatically became nil when entitlement to the childcare element ceased. The amount of relevant childcare charges is always a matter of calculation based on actual charges.
40. Even supposing, however, that as a matter of fact the Respondent’s relevant childcare charges, determined in accordance with regs. 15 and 16, became nil on 19th December 2009 (so that the week then beginning was the first of four consecutive weeks of change), there is nothing in reg. 16 which would have the effect that HMRC is obliged to continue paying the Respondent at the old rate for four weeks despite the fact that he has no entitlement under reg. 13 to the childcare element. The effect of reg. 16 is to give a four week period of grace before the recalculation of the childcare element takes effect when a person continues to be entitled to the childcare element but the charges have been significantly reduced or have become nil. (If the charges have increased, the recalculation can take effect from the date when the increase took effect, if HMRC has been promptly notified.).
41. Similarly, if as a matter of fact the Respondent’s relevant childcare charges, determined in accordance with regs. 15 and 16, had been reduced by £10 a week or more after he ceased to be employed on 20th November 2009, reg. 16 would apply to protect the Respondent and his wife against immediate recalculation for the period of their continued entitlement to 18th December 2009. It would not give them a right to continue to be paid the childcare element after their entitlement ceased.
42. The purpose of reg. 16, in so far as it appears from the regulation itself, is thus:
(1) to identify when a relevant change in circumstances occurs. This brings into play the notification provisions of s.6 of the Tax Credits Act and the notification obligation imposed by reg. 21 of the Tax Credits (Claims and Notifications) Regulations 2002, S.I. 2002 No. 2014. It is part of the machinery for making changes to the amount of the credit during the currency of an award;
(2) to determine the date from which the recalculation following a change is to take effect. In doing so, it does provide a degree of protection to a claimant when childcare charges are reduced.
43. This is, in my view, the answer to the Respondent’s question about the point of reg. 16. Included in its purpose is a limited protective element. What reg. 16 does not do is to entitle a claimant to the childcare element if the claimant is not entitled to it under reg. 13. Reg. 13 determines entitlement; reg. 16, in conjunction with reg. 15, determines the amount of the childcare element when entitlement is established.
44. In the light of the foregoing, I can deal very shortly with the tribunal’s reasoning. There are two difficulties with it:
(1) it is clear that the tribunal accepted the proposition that the relevant childcare charges became nil when the respondent ceased to be treated as in qualifying remunerative work, not as a matter of fact but by operation of, or possibly as set out in, reg. 13. For the reasons I have given, in my view that proposition is wrong;
(2) the tribunal also accepted the implied proposition that reg. 16, by specifying the date from which a recalculation was to take effect, conferred continuing entitlement to the childcare element until the specified date, even where the entitlement conditions of reg. 13 were not satisfied. Again, for the reasons I have given, in my view that proposition is also wrong.
45. It follows that the decision of the tribunal was wrong on a point of law. I set it aside and substitute my own decision. On the basis of the view I have formed as to the true construction of regs. 13 to 16 of the WTC Regulations, that decision is that the Respondent and his wife ceased to be entitled to the childcare element of WTC with effect from 18th December 2009, the date on which they ceased to satisfy the entitlement conditions in reg. 13. There is no additional entitlement by virtue of reg. 16.
(Signed) E. Ovey
Judge of the Upper Tribunal
(Dated) 26th September 2013