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[2009] UKUT 48 (AAC) (09 March 2009)
Main Category: Child support

IN THE UPPER TRIBUNAL Appeal No. CCS/2219/2008

ADMINISTRATIVE APPEALS CHAMBER

1. This is an appeal by the non-resident parent (Mr D), brought with my permission, against a decision of an appeal tribunal sitting at Oxford on 25 March 2008. For the reasons set out below that decision was in my judgment wrong in law and I set it aside. In exercise of the power in section 12 of the Tribunals, Courts and Enforcement Act 2007 I make the findings of fact set out below and substitute the following decision for that made by the Tribunal:

The Secretary of State's decision made on or about 25 June 2007, as revised on 26 September 2007, is set aside. Miss S's application for a variation, made on or about 20 March 2007, is disallowed.

2. I held an oral hearing of this appeal, at which Mr D appeared in person, the parent with care (Miss S) was represented by Ms. Targett-Parker of the Free Representation Unit, and the Secretary of State was represented by Mr Leo Scoon, of the Office of the Solicitor to the Department for Work and Pensions.
3. At the time of directing the oral hearing I put the parties on notice that, if I were to set aside the Tribunal's decision, I might well substitute my own decision rather than remitting the matter to a fresh First-Tier Tribunal, and that they should accordingly come to the hearing prepared to deal also with the issue what decision should be substituted. Mr D in making his submissions in effect gave some evidence, and the other parties' representatives were given the opportunity to cross-examine him.
4. It is convenient to proceed immediately to an explanation of the reasons for the decision which I am substituting, including my findings of fact, and in the course of doing so to explain why the Tribunal's decision was in my judgment wrong in law.
5. Mr D and Miss S separated in December 2006 (p.49). They have one child, Joshua, who was born in January 2006. Pursuant to a residence Order Joshua lives with Mr D for 15 days (and 11 nights) every four weeks, plus four weeks' holiday per annum, and with Miss S for the remainder of the time. Mr D is a solicitor who has not worked in that capacity since October 2006 (p.49). He says that that is because he has found that his property business gives him greater flexibility, which is necessary in view of the time which he spends caring for Joshua.
6. Miss S applied for child support maintenance at about the beginning of February 2007 (p.48). It appears that on 17 March 2007 a decision was made assessing child support maintenance at nil, with effect from 13 March 2007 (p.48).
7. On or about 20 March 2007 Miss S applied for a variation on the ground that Mr D had assets. (p.38).
8. Following the supply, at the CSA's request, of a considerable amount of information by Mr D as to his financial position, a decision was made on or about 25 June 2007 that there should be a variation under reg. 18 of the Child Support (Variations) Regulations 2000 ("the Variations Regulatons") on the footing that Mr D had assets with a net value of £433,000, which meant that £667.00 per week should be added to his income. That resulted in a revised maintenance assessment of £71.43 per week with effect from 13 March 2007.
9. The assets taken into account for the purposes of that variation were four flats with a net value (after deduction of mortgages) of £305,000, and savings of £128,000.
10. Mr D appealed against that assessment on the grounds that the properties were business assets. By a revised decision made on 26 September 2007 it was accepted that the properties were business assets, and the variation was made on the basis that the only assets which could be taken into account were savings totalling £180,000. Applying the statutory rate of 8% to that gave £276.92 per week, with a resulting maintenance calculation of £30 per week from 13 March 2007.
11. Miss S appealed against that decision.
12. The Tribunal held an oral hearing at which both Mr D and Miss S appeared and gave evidence.
13. The Tribunal found that Mr D's assets which could be taken into account for the purposes of the variation were the four flats with a net value of £305,000 as shown in the Schedule at p.65, and cash to the value of £170,000 in bank and building society accounts. As regards the properties, the Tribunal held that, although these were business assets, they were not required to be disregarded by reg. 18(3)(d) of the Variations Regulations because they were producing income (i.e. rental income) which did not form part of Mr D's weekly income for the purpose of assessing his liability to child support maintenance. However, the Tribunal further found that it was reasonable for Mr D to retain a total of £105,000 out of the savings to be used to pay his living expenses (which were estimated at £35,000 per annum) for the next three years, until Joshua went to school and it would be more practicable for Mr D to find work as a solicitor again. The Tribunal therefore found that £105,000 of the savings should be excluded under reg. 18(3)(b).
14. The Tribunal's decision was therefore to allow Miss S's appeal to the extent of directing that the variation should be on the basis of Mr D having assets of £305,000 plus £65,000, making a total of 370,000.
15. Mr D now appeals against the Tribunal's decision.
16. It is in my judgment clear that the decision maker was right to direct that the effective date of the variation was the same as the effective date of the original maintenance assessment – i.e. 13 March 2007. The application for the variation was made under s.28G of the Child Support Act 1991 – i.e. in relation to a maintenance assessment (of nil) which was already in force. Because the application for a variation was made by Miss S within one month of the date when she was notified of the original maintenance calculation decision, her application took effect as an application under s.16 of the 1991 Act for a revision (not as an application under s.17 for a supersession) of the maintenance decision: reg. 3A of the Social Security and Child Support (Decisions and Appeals) Regulations 1999. Such a revision takes effect from the effective date of the original maintenance calculation: s.16(3) of the 1991 Act. Even if the decision of the Secretary of State made on 26 September 2007 were regarded as a decision made pursuant to an application for supersession, it would make little difference. Such a decision would have effect from the date of the application for supersession, i.e. 20 March 2007 (see para. 7 above).
17. However, the Tribunal was entitled to take into account changes in circumstances down to 26 September 2007 (the date of the last decision on the variation application), but not thereafter. Section 20(7)(b) of the Child Support Act 1991 prevents an appeal tribunal taking into account any circumstances not obtaining at the time when the Secretary of State made the decision under appeal. Although an appeal against a decision which has been revised operates as an appeal against the original decision, the Secretary of State had power, on 26 September 2007, to supersede on the basis of circumstances then obtaining, and therefore so did the Tribunal. If there were relevant changes of circumstances between 13 March and 26 September 2007, the Secretary of State (and therefore the Tribunal on appeal) could have directed that any consequential alteration to the maintenance assessment have effect only from that date of change.
18. I find Mr D's financial position as at March 2007 to have been as follows:

(1) Capital

(a) He owned the 4 investment properties shown on the schedule at p.65. These had a combined gross value of £960,000, and a net value after deduction of mortgages of £305,000.

(b) He owned the house (Tunis Road) in which he was living. This he had purchased in 2006 for £516,000 (p.38). It was subject to a mortgage in the sum of £425,000 (p.60). It was purchased for the purpose of letting it, and it was initially let, but Mr D moved into it after the sale, in [ ], of the flat in which he and Miss S had been living.

(c) He had an interest in a room in a hotel then under construction. He had agreed to purchase this in June 2004 for £307,500, of which he had by March 2007 paid £76,000. He paid the balance when the transaction was completed in January 2008, but £125,000 of that balance was financed by means of a mortgage. The remaining £98,000 was paid out of the cash on deposit. (p.134).

(d) He had other assets (mainly bank deposits) in the sum of about £180,000.

(2) Income

(a) The total mortgage interest and running costs of the 4 flats exceeded the total rental by some £338 per month. (p.65)

(b) He was obviously in receipt of interest on the cash assets.

(3) Expenditure

He estimated his personal expenditure at about £35,000 per annum, of which about £21,000 was mortgage interest on the property in which he was living. (p.137). He says that by October 2008 he was living on a budget of £750 per month (p.202). That presumably excluded mortgage interest on his house. I make no findings as to the actual amounts of his expenditure, as I do not think that I need to for present purposes.

19. I find that by March 2007 Mr D was committed to or was contemplating the following material changes in his financial position (see, generally, pp. 52; 124).

(1) From August 2007 one of the flats, the top floor flat at 76 Abdale Road, was vacant, and Mr D had in March 2007 engaged contractors to renovate and convert it into a 2 bedroom flat. The total cost of these works, incurred over the period September 2007 to February 2008, was about £62,000 (pp. 51-2; 124; 168; 179; 202).

(2) He was intending, after May 2008, when an early redemption penalty on his mortgage would cease to apply, to sell the house (Tunis Road) in which he was living and to buy a smaller one with a much smaller mortgage (p. 132). He told the Tribunal that the house was up for sale at that time (p.168c). It may have been his intention also to sell at least one of the investment properties in order to fund this purchase (p.52). (In the event he did not sell Tunis Road, but has let it instead – see below).

(3) He was intending to complete the hotel room transaction, as noted above. As from completion he would become entitled to a fixed and guaranteed income, until 2013, of 6% on the purchase price. That income, less interest on his mortgage, which he told me at the hearing is also at a fixed rate, would give an income of £860 per month before tax. (p.134)

(4) He was working on setting up a property letting website, to be carried on through a company, which would employ him (p.68), and contemplated incurring further expenditure of some £10 – 15,000. That business commenced trading in June 2007, but was at that stage loss-making (p.168E). It was possible that this business would produce an income in the future.

(5) He owed about £15,000 on a previous development on the Isle of Wight (p.52).

(6) He would need some of the capital to fund his living expenses and the deficiency in his income as compared with his mortgage liabilities. By September 2007 the cash deposits had reduced by some £25,000 (p.136). By 25 November 2007 they had fallen to about £123,000 (p.124).

Analysis of the position in respect of the period March to September 2007.

20. The issues for consideration are primarily (a) whether there were assets to which the variation ground in reg. 18 of the Variations Regulations 2000 could apply; (b) whether any other variation ground applied and (c) whether Mr D's income for the purpose of the main formula assessment was calculated on the right basis. The tribunal had jurisdiction (and therefore so do I) to consider (b) because it stood in the shoes of the Secretary of State, and by reg. 9(8) of the Variations Regulations the Secretary of State can treat an application for a variation made on one ground as if it were an application made on a different ground.

(i) The let properties

21. The Tribunal found that the let properties were assets "used in the course of a trade or business" within the meaning of reg. 18(3)(d). It was clearly entitled so to find, having regard to Mr D's evidence at p.63, and I adopt that finding. That meant that reg. 18 did not apply unless the properties fell within the exception to reg. 18(3)(d), which is as follows:

"except where the asset is of a type specified in paragraph (2)(b) and produces income which does not form part of the net weekly income of the non-resident parent as calculated or estimated under Part III of the Schedule to the Maintenance Calculations and Special Cases Regulations."

22. Part III of the Schedule to the Child Support (Maintenance Calculations and Special Cases) Regulations 2000 ("the MCSC Regulations") deals with the calculation of income from self-employment. (The main provisions are set out in paras. 41 and 42 below). The purpose of the exception to reg. 18 is plainly that it is not fair to exclude business assets if they are producing income which is not taken into account under the main formula calculation of maintenance. The reason why the exclusion is confined to land would appear to be, as suggested by Mr Duggan at the hearing, that even if a person is carrying on, as a self-employed person, a business of letting property, income from such a business is not generally taxed as income from self-employment, but rather as income from property. With limited exceptions, the property pages of the self-assessment tax return, and not the self-employment pages, are completed in respect of income derived from letting land, whether the letting is in pursuance of a business or not. (As to this, see further para. 43 below). So far at any rate as the primary method of calculation of income under para. 7 of Schedule 1 to the Child Support (Maintenance Calculations and Special Cases) Regulations 2000 are concerned (i.e. by reference either to the return submitted to HMRC, or to the tax calculation notice), income from letting property will therefore not be included in the maintenance calculation under the formula.
23. However, the Tribunal was in my judgment wrong to say that the let properties were "producing income" within the meaning of reg. 18(3)(d), given that the mortgage interest and other expenses exceeded the rent. Ms Targett-Parker contended that the properties could be regarded as producing income because they were producing rent. However, in my judgment there is no unfairness in treating a let property as within reg. 18(3)(d) if it is not producing a net income. If it is not producing a net income the non-resident parent gains no advantage from the fact that income from property is not included in the main formula assessment.
24. In my judgment, therefore, so long as the mortgage interest and other expenses in respect of the let properties exceeded the rental income the let properties were not within the exception to reg. 18(3)(d), and were therefore business assets which could not be the subject of a variation under reg. 18. The Tribunal was wrong in law in deciding otherwise.

(ii) The house

25. The house (Tunis Road) in which Mr D was living was subject to the exception in reg. 18(3)(e).

(iii) The hotel room

26. As regards Mr D's interest in the hotel room, the Tribunal found, on the basis of Mr D's oral evidence at the hearing, that it had no value as at March 2007. I see no reason not to adopt that finding. On that basis it did not have a value until after the completion of the purchase of the hotel room in January 2008. Even if it had a value, it was in my judgment an asset used for the purpose of a business. Mr D has been ambivalent about this point. At p.130A he stated that it was not strictly a business asset whereas at p.180 he stated the bulk of the cash has been invested "in the property business." I do not see any real reason to distinguish between this asset and the let properties. On the footing that it is a business asset, reg. 18(3)(d) applied, because it was not producing any income. In any event, the exclusion in reg. 18(3)(b) also applied in that it was clearly reasonable to retain it until after completion of the purchase transaction. The hotel room was therefore during the material period not an asset which could be the subject of a variation under reg. 18.

(iv) The sums on deposit

27. That leaves only the cash and other assets totalling about £170,000. Mr D submits that those were "assets used in the course of a business" within reg. 18(3)(d) (p.190). At the hearing I was minded to agree with him, but on further consideration I do not think that that is right. The deposits represented primarily the net proceeds of sale of the flat in which Mr D and Miss S had been living until December 2006. Although I have found that by March 2007 Mr D was intending (and indeed was contractually committed) to spending the bulk of the proceeds in connection with the top floor flat at Abdale Road, and in order to complete the hotel room purchase, I do not think that the cash deposits had become "assets used in the course of a business."
28. However, there is also the exclusion in reg. 18(3)(b), which provides that a variation cannot be made

"in relation to any asset which the Secretary of State is satisfied is being retained by the non-resident parent to be used for a purpose which the Secretary of state considers reasonable in all the circumstances of the case."

29. As noted above, the Tribunal found that it was reasonable for Mr D to retain £105,000 to cover his personal expenditure over the next 3 years. In my judgment that reasoning was flawed (thereby rendering the Tribunal's decision wrong in law on this additional ground) in that Mr D's own evidence was that he intended to spend the majority of the cash on the projects referred to in para. 19 above. I have found above that by March 2007 Mr D was contractually committed to spending about £62,000 on the top floor of Abdale Road and £98,000 on the purchase of the hotel room. That clearly accounted for the bulk of the £170,000. He also intended to spend some money developing the property website (which is up and running, as one can verify by searching on the internet). By 25 November 2007 the balance in the accounts had already fallen to about £123,000 (p.124).
30. Nevertheless, Mr D argues that the fact that as at March 2007 he was retaining the deposits for the purpose of using them (as he did) in connection with the projects referred to above nevertheless meant that reg. 18(3)(b) applied. The question is whether that was a purpose which was "reasonable in all the circumstances of the case".
31. The rationale behind the exclusion in reg. 18(3)(b) appears to be that if an asset is being retained, reasonably, in order to be used for a particular purpose, it cannot (in the case of cash) be used in order to pay child support maintenance, and cannot (in the case of other be assets) be sold in order to obtain money with which to pay child support maintenance. However, it is in my view very arguable that that should not apply (or should not apply with full force) in the case of cash, which can always be put on deposit in order to earn interest, pending its use for other purposes. The interest may not of course be as much as the 8% which reg. 18 currently requires to be applied (and indeed under the conditions presently prevailing certainly will not be). Be that as it may, I find myself compelled to find that the bulk of the cash deposits were being retained by Mr D to be used for a purpose which was reasonable in all the circumstances. The small amount of the deposits to which that may not have applied did not exceed the limit of £65,000 referred to in reg. 18(3)(a).
32. At the hearing I put to Mr D my provisional view that, if (as Mr D contends) the cash deposits were business assets (the business being that of letting property), the interest earned on them should have been included in self-employed earnings under para. 7 or 8 of Schedule 1 to the MCSC Regulations, thus requiring an adjustment of the main formula assessment. However, in view of my finding that they were not assets of the business, a conclusion to that effect would not be correct. Even if they were business assets, I am very doubtful whether the interest can be regarded as having been earnings from self-employment, within para. 8 of Schedule 1 to the MASC Regulations 2000.
33. The decision which I find myself compelled to substitute for that made by the Tribunal is therefore that no variation should be directed under reg. 18 because as at March 2007 (and also September 2007) the let properties were within the exception in reg. 18(3)(d) and the cash deposits were within the exception in reg. 18(3)(b). The hotel room had no value, and in any event fell within both reg. 18(3)(d) and reg. 18(3)(b).
34. Even though that outcome accords with the end result which appears to be suggested in the submission on behalf of the Secretary of State in this appeal (pp. 193-5), I do not consider it a satisfactory outcome. Between March and September 20067 Mr D had net assets totalling in excess of £500,000, and it would seem reasonable, looking at the matter broadly, and even taking into account the contribution which he makes by looking after Joshua for a substantial part of the time, that he should make some contribution by means of child support maintenance. I have considerable sympathy with the deep disappointment which Miss S is bound to feel on receipt of this decision.
35. I have considered whether the variation ground in reg. 19(1A) of the Variations Regulations applied. That provision applies where:

"(a) the non-resident parent has the ability to control the amount of income he receives from a company or business, including earnings from employment or self-employment; and

(b) the Secretary of State is satisfied that the non-resident parent is receiving income from that company or business which would not otherwise fall to be taken into account under the [MCSC Regulations].

36. In my judgment, for the reasons given above, the interest on the cash deposits was not (during the material time March to September 2007) income received from a business, and therefore reg. 19(1A) did not apply. Even if it was, one would in my judgment have to look not simply at the interest earned, but to deduct the net loss being made on the let properties during that period.

The position since September 2007

37. I have no jurisdiction to make any findings or decision in respect of the position since 26 September 2007 (the date of the decision under appeal to the Tribunal). I do not know what further applications to or decision by the Secretary of State have been made since then. The parties expressed concern that there should not be a constant need for further decisions each time Mr D's financial position changed. I think that at the hearing I may have been rather more optimistic about the possibility of being able to be of any assistance in this respect than I should have been. As I have said, I have no jurisdiction to bind the parties or the Secretary of State in respect of the subsequent period. I did, however, receive some evidence from Mr D as to his current position, and I will set out some comments in case they are of any assistance.
38. Mr D told me at the hearing that his position at present is as follows:

(1) He has carried out the following sales of business assets:

top floor Abdale Road for £365,000

bottom floor Abdale Road for £250,000

Woodstock Road flat for £242,000

Assuming that the amounts outstanding on mortgage on those properties at the dates of sale were the same as set out on p.65, he will have received net proceeds of about £355,000 from those sales.

(2) He still retains the following assets:

(a) The interest in the hotel room, which is subject to a mortgage in the sum of £125,000. The hotel room gives him a guaranteed fixed income until 2013 of £860 per month (£10,320 per annum)(before tax). (p.134)

(b) The former home at Tunis Road. This is subject to a mortgage for £365,000. It is let at £2300 per month.

(c) The flat at 10 B the Drive. This is subject to a mortgage in the sum of £153,000, and is let at a rent of £820 per month.

(d) He has bought a further property. I assume that he lives in it.

(e) He told me that he retains very little cash, and that such as he has is earmarked for potential CGT.

(3) The mortgages in (2)(b) and (c) above are "tracker" mortgages, and the interest payable has therefore substantially reduced recently. He told me that those two properties were "making good money". The total income from (a), (b) and (c) is about £48,000 per annum, from which must be deducted interest on the mortgages of (b) and (c) and the other property expenses (such as maintenance etc.). (Mr D will in due course have to supply precise figures to the CSA, if indeed he has not already done so.

39. The first question would be whether that net income should be taken into account under the main formula assessment (i.e. without the need for a variation).
40. Part III of the Schedule to the MCSC Regulations relates to the calculation of the income of a self-employed earner. By reg. 1(2) of those Regulations "self-employed earner" has the same meaning as in section 2(1)(b) of the Social Security Contributions and Benefits Act 1992. By s.2(1)(b) of that act "self-employed earner" means "a person who is gainfully employed in Great Britain otherwise than in employed earner's employment (whether or not he is also employed in such employment)."
41. By para. 7 (in Part III) of the Schedule to the MCSC Regulations:

"(1) Subject to sub-paragraph (6) the net weekly income of the non-resident parent as a self-employed earner shall be his gross earnings calculated by reference to one of the following, as the Secretary of State may decide, less the deductions to which subparagraph (3) applies -

(a) the total taxable profits from self-employment of that earner as submitted to the Inland Revenue in accordance with their requirements by or on behalf of that earner; or

(b) the income from self-employment as a self-employed earner as set out on the tax calculation notice or, as the case may be, the revised notice."

(6) The net weekly income of a self-employed earner may only be determined in accordance with this paragraph where the earnings concerned relate to a period which terminated not more than 24 months prior to the relevant week."

42. However, by para. 8:

"(1) Where –

(a) the conditions of paragraph 7(6) are not satisfied; or

(b) the Secretary of State accepts that it is not reasonably practicable for the self-employed earner to provide information relating to his gross earnings from self-employment in the forms submitted to, or as issued or revised by, the Inland Revenue; or

(c) in the opinion of the Secretary of State, information as to the gross earnings of the self-employed earner which has satisfied the criteria set out in paragraph 7 does not accurately reflect the normal weekly earnings of the self-employed earner,

net income means in the case of employment as a self-employed earner his earnings calculated by reference to the gross receipts in respect of employment which are of a type which would be taken into account under paragraph 7(1) less the deductions provided for in sub-paragraph (2)."

43. Income from letting property is in general taxed under Schedule A, and is entered in the UK property pages of the self-assessment tax return, not in the self-employment pages. The Guidance Notes issued by HMRC in respect of the UK property pages advise that the property pages should in general be completed in respect of "rental income and other receipts from UK land and property" and that the self-employment pages should be used in certain specific cases, for example hotels and guest houses, and "letting furnished accommodation in your home that amounts to a trade."
44. Mr D in fact included the rent, and the expenses relating to the let properties, in the property pages of his tax returns. He did not complete any self-employment pages.
45. Even though income from a "buy to let" business might be described as income from "self-employment", it is therefore clear that in general that income is not of a type which will be included in the earnings referred to in para. 7 of Schedule 1. At the hearing I expressed the provisional view that such income could, however, be treated by the Secretary of State as self-employed earnings by carrying out a calculation of it under para. 8. However, I now think that that view is wrong, because para. 8 is stated to apply only to receipts "which are of a type which would be taken into account under paragraph 7." Rental income is not income of a type which would be taken into account under para. 7
46. However, I note that in CCS/1263/2008 Judge Wikeley took a different view: see paras. 36 to 41 of that decision. I think that he did not sufficiently take into account the wording of para. 8 of Schedule 1 which I have just referred to. It will be a matter for the Secretary of State (or appeal tribunal on appeal) as to which view to follow.
47. But if the position is that Mr D's net income cannot be taken into account under the main formula, it appears to me at present that the variation ground in reg. 19(1A) of the MCSC Regulations (set out in para. 35 above) is applicable, in that Mr D has been receiving income from a business which would not fall to be taken into account under the MCSC Regulations. It would then be a question whether it is just and equitable to made a variation including the whole or part of that net income in Mr D's income for maintenance calculation purposes.
48. If the variation ground in reg. 19(1A) is applied, there would seem to be no reason why the calculation should not be done on an annual basis, by reference to Mr D's tax returns, thus avoiding the need for frequent re-assessments. Depending on when the rental from the business assets began to show a profit, it may be that there was no net income until the tax year 2008-9.
49. An alternative possibility would be a variation under reg. 18, but Mr D would appear to have a strong case for saying that the exception in reg. 18(3)(b) applies, on the ground that it is reasonable to retain the properties and hotel room, given the high net return which is now being achieved, and given the very small interest rate which would be obtainable on the net proceeds were those assets to be sold.

Charles Turnbull

Judge of the Upper Tribunal

9 March 2009