Upper Tribunal (Administrative Appeals Chamber)

Decision of the Upper Tribunal
(Administrative Appeals Chamber)

As the decision of the First-tier Tribunal (made on 5 July 2012 at Walsall under reference SC053/11/05038) involved the making of an error in point of law, it is SET ASIDE under section 12(2)(a) and (b)(ii) of the Tribunals, Courts and Enforcement Act 2007 and the decision is RE-MADE.

The decision is: the claimant is not entitled to a carer’s allowance on and from 18 April 2011.

Reasons for Decision

A.        The award of carer’s allowance

1.         The claimant was awarded a carer’s allowance from and including 12 June 2000. In 2008, she took up self-employment in partnership with a 25% share. The issue in this case is the amount of her earnings that should be taken into account. She provided her accounts for 2010-2011. They showed:

·                Sales of £197,076

·                Opening stock of £20,000

·                Purchases of £123,696

·                Closing stock of £11,000

·                Other expenses of £49,277

In addition, she was liable for Class 2 national insurance contributions of £130.

2.         On the basis of those figures, the decision-maker decided that the claimant’s weekly earnings were £113.37. That was calculated like this:

·                £197,076 (sales)

·                Minus £123,696 (purchases) and £49,277 (other expenses)

·                Equals £24,103

·                25% of which is the claimant’s share of the partnership = £6,025.75

·                Minus £130 national insurance contributions = £5,895.73

·                Converted to a weekly amount by dividing by 52 = £113.37.

3.         As that exceeded the £100 limit on earnings that is allowed for carer’s allowance, the decision-maker terminated the award from and including 18 April 2011.

B.        The appeal to the First-tier Tribunal

4.         The claimant exercised her right of appeal to the First-tier Tribunal, arguing that the difference between opening and closing stock (£9,000) should be taken into account as an addition to the cost of purchases. The effect of doing so would be to reduce the claimant’s weekly earnings well below the £100 threshold.

5.         The First-tier Tribunal allowed the appeal. The judge’s reasons are short and contain no reference to, let alone analysis of, the legislation set out in the Secretary of State’s submission to the tribunal. The reasoning is contained in this passage:

It is correct to say that depreciation is not a deductible item from the gross takings when calculating net profit. However the normal accountancy practice in valuing stock should be applied so that the cost of sales (the cost of any opening stock plus purchases less any closing stock) should be set against actual sales. This the Decision maker has failed to do. This practice is accepted by HM Revenue and Customs and I can see no reason in law why it should not apply here.

C.        The appeal to the Upper Tribunal

6.         The Secretary of State’s representative applied for permission to appeal to the Upper Tribunal, arguing that this approach disregarded the legislation and a number of decisions by the Social Security Commissioners. Judge Thomas gave permission to appeal. The claimant has maintained her argument that the First-tier Tribunal’s approach was correct and consistent with the approach taken by the Revenue. The case was referred to a visiting judge for decision, but she decided to direct further argument. The Secretary of State’s representative has responded to her direction, but the claimant has not replied. The case has now come before me for decision.

D.       The legislation

7.         Carer’s allowance was formerly known as invalid care allowance. It is governed by section 70 of the Social Security Contributions and Benefits Act 1992:

Invalid care allowance

(1) A person shall be entitled to a carer’s allowance for any day on which he is engaged in caring for a severely disabled person if-

…

(b) he is not gainfully employed; …

…

(8) Regulations may prescribe the circumstances in which a person is or is not to be treated for the purposes of this section … as gainfully employed …

8.         The relevant Regulations are the Social Security (Carer’s Allowance) Regulations 1976 (SI No 409). Regulation 8 deals with gainful employment:

Circumstances in which a person is or is not to be treated as gainfully employed

(1) For the purposes of section 70(1)(b) of the Contributions and Benefits Act … a person shall not be treated as gainfully employed on any day in a week unless his earnings in the immediately preceding week have exceeded £100 and … shall be treated as gainfully employed on every day in a week if his earnings in the immediately preceding week have exceeded £100.

9.         The calculation of earnings for this purpose is governed by the Social Security Benefit (Computation of Earnings) Regulations 1996 (SI No 2745). Regulation 11(1)(a) provides that a person’s earnings ‘shall be determined by reference to his average weekly earnings … over a period of one year’. Regulation 12 provides that earnings ‘means the gross receipt of the employment’. Regulation 13(1)(b) provides for partners that ‘the earnings of a claimant to be taken into account shall be … the net profit derived from the employment less’ income tax, national insurance and half of any pension contribution. Regulation 13(5) then provides that:

(5) For the purposes of paragraph (1)(b), the net profit of the employment shall be calculated by taking into account the earnings of the employment over the period determined under regulation 11 less … any expenses wholly and exclusively defrayed in that period for the purposes of that employment.

To summarise: the claimant’s earnings taken into account are her share of the gross receipts, reduced by (i) expenses wholly and exclusively defrayed in the appropriate period for the purposes of that employment, (ii) any income tax and (iii) any national insurance. If opening and closing stock are to be taken into account, they must fit within (i).

E.        The caselaw on opening and closing stock

10.      R(FC) 1/96 is a decision of Mr Commissioner Goodman. He was concerned with regulation 22(3A) of the Family Credit (General) Regulations 1987 (SI No 1973), which dealt with the calculation of net profit of self-employed earners:

(3) For the purposes of paragraph (l)(a) the net profit of the employment shall, except where paragraph (3A) ... applies, be calculated by taking into account the earnings of the employment received in the assessment period, less-

(a) subject to paragraphs (5) to (7), any expenses wholly and exclusively defrayed in that period for the purposes of that employment; …

(3A) For the purposes of paragraph (1)(a), in a case where the assessment period is determined under regulation 15(1)(b), the net profit of the employment shall … be calculated by taking into account the earnings of the employment relevant to that period (whether or not received in that period) less-

(a) subject to paragraphs (5) to (7) any expenses relevant to that period (whether or not  defrayed in that period) and which were wholly and exclusively incurred for the purposes of that active employment; …

The Commissioner decided that opening and closing stock had to be taken into account if paragraph (3A) applied, as they were expenses relevant to the appropriate period, regardless of whether or not the expenditure was defrayed in that period. He noted the contrast with paragraph (3) under which the expenses had to be defrayed in the appropriate period. See paragraph 13 of his decision. Regulation 13(5), which applies in this case, uses the language of regulation 22(3), not of regulation 22(3A).

11.      CIS/2216/2000 is a decision of Mr Deputy Commissioner Mark. He was concerned with the Income Support (General) Regulations 1987 (SI No 1967), which adopt the same wording as the Social Security (Carer’s Allowance) Regulations. In particular, regulation 38(4) of the Income Support (General) Regulations 1987 provides:

(4) For the purposes of paragraph (1)(b), the net profit of the employment shall be calculated by taking into account the earnings of the employment over the period determined under regulations 30 less … any expenses wholly and exclusively defrayed in that period for the purposes of that employment.

The Commissioner distinguished R(FC) 1/96 in this way:

6. On 24 January 2000, the tribunal concluded on the authority of commissioner’s decision CFC/19/93 (reported as R(FC)1/96) and of a starred decision of an Irish commissioner (*76/99) that the starting and closing stock valuations also had to be taken into account in calculating the wife’s earnings. 

7. The representative of the secretary of state contends that the tribunal was wrong to follow these cases because they were both concerned with family credits under the Family Credit (General) Regulations 1987 and the Irish equivalent, and the provisions of those regulations which were considered in those cases were materially different from the regulations in the Income Support (General) Regulations 1987 dealing with self-employed earners.

8. I agree with that submission.  Regulation 22(3A) of the Family Credit Regulations, with which CFC/19/93 was concerned, expressly provides that the net profit should be calculated by taking into account the earnings of the employment relevant to the period in question less “any expenses relevant to that period (whether or not defrayed in that period)” (emphasis provided).  The commissioner concluded that the cost of purchases was a relevant expense and therefore ought to be taken into account whenever the expense was paid.

9. There is no equivalent provision in relation to self-employed earners in the Income Support (General) Regulations 1987 …

Just a small point: CFC/19/1993 was not reported as R(FC) 1/96, although it was cited and approved in that decision. The unreported number for that case was CFC/41/1993.

12.      CG/2583/2000 is a decision of Mr Deputy Commissioner Barry, made one month after CIS/2216/2000. He was concerned with regulation 13(5). He decided that the difference between  opening and closing stock values could not be taken into account. He said:

18. I derive particular help from the decision reported as R(FC) 1/96, which includes a detailed analysis of the application of regulation 22 of the Family Credit (General) Regulations as it stood after the 1988 amendment.  In that case the Commissioner concluded that it was appropriate to take into account the cost of opening stock less closing stock in calculating earnings.  However, that conclusion was reached by specific reference to the 1988 amendment, which required both earnings and expenses to be taken into account which were “relevant to” the accounting period whether or not received, or as the case may be defrayed, in that period.  The contrast between that phraseology, and the phraseology of the Computation of Earnings Regulations discussed above, is obvious.  As the Commissioner points out, in that decision, it would appear that the new paragraph introduced by the 1988 amendment was introduced for the very purpose of bringing the assessment of earnings into line with normal accounting procedures.

19. In my judgment the omission from the Computation of Earnings Regulations of any reference to earnings and expenses ‘relevant’ to the accounting period but not either received or defrayed in that period is fatal to an argument that the difference between opening and closing stock values must be taken into account.  That difference is clearly not an expense wholly and exclusively defrayed during the accounting period and the phrase “gross receipts” could not be interpreted as referring to gross receipts less the cost of sales as conventionally calculated.  It follows that in my judgment decision 2 was correct in excluding from the assessment the difference between opening and closing stock valuations.  It does not appear to be in contention that it was appropriate for depreciation and profit on sale of capital assets to be excluded, and again I am satisfied that the adjudication officer was correct in excluding those sums.

13.      CG/2258/2002 is a decision of Mr Commissioner Lloyd-Davies. He was concerned with regulation 13 and expressly approved of the reasoning in CG/2583/2000:

6. … As was demonstrated by the Deputy Commissioner in his comprehensive discussion in CG/2583/2000, it is not normally appropriate for accounts prepared on normal accountancy principles to be used for the purposes of the computation of a claimant’s gross receipts and allowable expenses. The computation is normally to be made on the basis of accounts prepared on a ‘cash’ basis and if any departure from this is to be made, an explanation should be given.

7. The claimant himself raised a number of objections before the tribunal. first, he objected to the failure to take account of opening and closing stock. For the reasons given in CG/2583/2000, opening and closing stock are irrelevant to the calculation of earnings under regulation 13 of the 1996 Regulations.

14.      CG/0623/2006 is a decision of Mr Deputy Commissioner Burns QC. He was concerned with regulation 13; he referred to CG/2583/2000 and quoted CG/2258/2002, both obviously with approval.

F.        Caselaw on defrayed

15.      CIS/0212/1989 is a decision of Mr Commissioner Rice. He was concerned with regulation 38(4) of the Income Support (General) Regulations 1987, which I have already quoted. The Commissioner said:

7. Now, it is quite clear that the word ‘defrayed’ is not the same as ‘incurred’. Manifestly, an expense is not defrayed until it is discharged. Accordingly, an expense cannot be deductible unless it has been discharged.

G.       The visiting judge’s direction

16.      The visiting judge said:

5. At present I am not wholly persuaded by the reasoning in CG/2583/2000 on the following grounds.

6. Mr Deputy Commissioner Barry said that he derived particular help from the decision of Mr Commissioner Goodman in R(FC) 1/96. That case concerned the Family Credit (General) Regulations 1987, SI 1987 No 1973, as amended. The amendments included provisions enabling net profit to be calculated on the basis of conventionally prepared accounts, as opposed to accounts on the cash basis. As a result of the amendments, the Regulations provided that when conventionally prepared accounts were used, expenses relevant to the accounting period in issue, whether or not defrayed in that period, could be taken into account. Mr Commissioner Goodman decided that the Regulations thereby permitted the cost of opening stock less the cost of closing stock to be taken into account, since that was the sum needed to buy the goods sold at a profit. He distinguished accounts prepared on a cash basis, which permitted only expenses defrayed in the accounting period itself to be deducted.

7. Clearly the cost of opening stock is not as such an expense defrayed in the accounting period itself. To that extent I understand why Mr Deputy Commissioner Barry found assistance in R(FC) 1/96. In fact, however, as I understand the accounting process, the actual expenditure required to produce the opening stock will have appeared as ‘purchases’ in the previous accounting year (or even years) and what is really being taken into account, where opening stock exceeds closing stock, is the reduction in the value of the current assets of the business represented by stock in trade, the value being prima facie measured by the purchase price. That reduction occurs in the course of the accounting period itself. From an economic point of view the effect on the gross receipts is the same whether the owner of the business pays cash to buy from a third party the item that is sold on or takes the item out of stock and reduces the value of his current assets in that way.

8. As I understand the decision in CG/2583/2000, it proceeds on the basis that an expense can only be defrayed if cash is paid to meet the expense. That may be correct, but the argument that an expense can be defrayed by the application of current assets other than cash does not seem to have been considered.

17.      The judge concluded by noting that the issue was of wider significance than carer’s allowance, as there was equivalent provision in the income support legislation and regulation 13(5) was not limited to carer’s allowance.

H.       My reasoning

18.      I accept the argument by the Secretary of State’s representative that the visiting judge’s concerns are misplaced. The essence of that concern is whether a reduction in the value of stock in trade is an expense that is defrayed in the period on which the claimant’s earnings are calculated. I accept the representative’s argument for these cumulative reasons.

19.      First, there is the language used. The legislation does not define defray. As such it bears its natural meaning in the context. Dictionary definitions are not always perfect in capturing that meaning, but in the case of defray there is unanimity among the major dictionaries that I have consulted. They all treat this word as relating to the payment out of money. The definition in Chamber’s 21^st Century Dictionary gives this definition: ‘to provide the money to pay (someone’s costs or expenses).’ That is how Mr Commissioner Rice interpreted the word in CIS/0212/1989.

20.      Second, there is the purpose of the legislation. The same language is used in respect of different benefits. Some of them are income-related in the sense that their purpose is to increase the claimant’s income to a minimum level. Others are not income-related in that sense, but are subject to an earnings threshold, so that someone earning over that threshold does not qualify. In either case, the purpose of the benefit is to provide financial assistance for those who have access only to limited funds to meet their day-to-day needs. The cash basis for calculating income helps to fulfil that purpose by identifying how much money the claimant actually has available throughout the period. It looks at money as it flows through the business. A reduction in value of stock in trade may be a relevant accounting factor, but it is not relevant to the practical need that the law seeks to meet. It does not affect the claimant’s ability to buy food, pay utility bills or whatever as the need arises from day to day.

21.      Third, there is the focus on the period used. This is really another aspect of the point that I have just made. The focus is on the appropriate period in order to take account of the claimant’s cash flow during that period. I have to admit that I find it difficult to follow the visiting judge’s argument. She assumes that there is an expense that is being defrayed during the period. I do not understand what that expense is. I do not understand how the reduction in value of stock in trade represents an expense in the sense that it affects the cash that the claimant has to hand from day to day. . 

22.      Fourth, there are the authorities I have cited. The visiting judge was right that they did not address the issue she identified. But it is implicit that they considered that a change in the value of stock in trade was not an expense defrayed during the appropriate period. This is not the case of an issue being overlooked in an isolated decision. It is something that has been implicitly accepted by a number of judges in different contexts over a number of years.

23.      Fifth, there is the economic reality that the visiting judge mentioned. There are different realities. The reality with which the relevant social security legislation is concerned looks at the immediate needs of individuals. That is their economic reality. It generates an immediate need that the law seeks to alleviate. 

24.      For those reasons, which as I say are cumulative, the Secretary of State was right to supersede the decision awarding the claimant a carer’s allowance and decide that she was no longer entitled to that allowance.