Upper Tribunal (Administrative Appeals Chamber)

IN THE UPPER TRIBUNAL File No: CCS 814/10

Administrative Appeals Chamber

18 May 2011

 

 

TRIBUNALS, COURTS AND ENFORCEMENT ACT 2007

CHILD SUPPORT ACTS 1991-2000

 

APPEAL FROM DECISION OF FIRST-TIER TRIBUNAL

 

Appellant: [the non-resident parent]

Respondents: (1) Secretary of State (CMEC)

(2) [the parent with care]

First-tier Tribunal: Bristol

Tribunal case ref:  186/09/01426

Tribunal date: 3 December 2009 (reasons issued 29.12.09)

 

 

DECISION OF THE UPPER TRIBUNAL

 

The appeal by the non-resident parent is dismissed and the first-tier tribunal’s decision of 3 December 2009 is confirmed.

 

 

REASONS

 

Mr P L Howell QC:

 

1. This appeal by the non-resident parent must be dismissed, as in my judgment there was no error of law in the decision of the Bristol tribunal on 3 December 2009 (Mrs M Street, First-tier Judge, sitting alone) such as to require that decision to be set aside.  The decision directed recalculation of the appellant’s child support liability for his two sons from 18 August 2008 on the basis that his net weekly income as a self-employed earner was the equivalent of his declared annual income of £14,719 from which provision was to be made for deduction of tax and national insurance contributions, plus further undeclared income equivalent to an annual amount of another £13,801, that being treated as a net figure to which no further deductions were to be applied. 

2. I held an oral hearing of this appeal.  This had been directed by another judge, who had also earlier granted leave for the appeal to be brought.  The non-resident parent and the parent with care each attended and addressed me in person.  The first respondent, the Child Maintenance and Enforcement Commission, which has taken over the Secretary of State’s former functions in relation to child support appeals, appeared by Mr Huw James, solicitor.

3. This case has something of a history and I will attempt only a brief summary of the relevant facts.  The two boys concerned are now aged 11 and 9.  At all material times they have kept their main home with their mother, the parent with care, though they stay regularly with their father, who has since remarried.  From at any rate 11 April 2005 he has been liable to pay her child maintenance for them, his duly assessed liability at that date being £51.43 per week which was based on his then earnings of £297.93 per week from the secure job he had at that time with British Aerospace. 

4. Sometime after that however, he left that employment voluntarily; according to the tribunal’s findings based on his own evidence, in order to earn more by working as a self-employed trader in his own business, which turned out to be successful.  However on his application his child support liability had been reduced from 4 June 2007 to only £5 per week, on the basis of much reduced earnings figures shown in his self-assessment tax return for the period to July of that year.  This led to an earlier appeal to the tribunal by the parent with care against the reduction, and to the tribunal conducting its own examination of the evidence to establish whether he had really suffered such a dramatic drop in his earnings when, as it found, the business was a thriving one and there had been no corresponding drop in his expenditure. 

5. After a lengthy and detailed hearing which took place on 13 June 2008 (also before Mrs Street), the tribunal found his explanations unsatisfactory and concluded his accounts substantially understated the actual receipts of his business.  On the evidence at that time it determined that from the then relevant effective date of 4 June 2007, he in fact had net income from his self-employment at the rate of £375 per week, after expenses and deductions for any tax and national insurance; and the calculation of his child support liability was therefore to be based on that figure. In her comprehensive and detailed statement of reasons issued to the parties on 8 July 2008 (included in the present bundle at pages 83 to 91) the tribunal judge expressed her clear conclusion that “this is in fact a thriving business, misrepresented in the accounts”; and added the further comment that in the light of the evidence she had heard “whatever his next set of accounts actually say, the income can be expected to be higher than now identified, when based on the current year – a period outside the jurisdiction of this Tribunal”.  The non-resident parent had himself said in evidence that what he earned from his business had in fact gone up since his first year: see the judge’s contemporaneous note of the hearing at page 100.

6. That decision was carried into effect, and the revised child support liability (of £64.29 a week from 4 June 2007) notified to the non-resident parent on 23 July 2008.  In less than a month, on 21 August 2008, he applied again for his liability to be reduced, this time on the basis of figures he then submitted for his self-employed earnings down to 31 March 2008; the period partly overlapping those down to July 2007 already considered, and disbelieved, by the tribunal. 

7. It is unclear what accounting or other documents he submitted at that time, and not much seems to have happened in response to his application until January the following year.  At that time he submitted a copy of his tax return for the year to 5 April 2008, signed by him and dated 5 January 2009, which showed his net business profit for the accounting period 23 January 2007 to 31 March 2008 as £17,461, apportioned to an equivalent annual amount for the tax year to 5 April 2008 of £14,719: pages 20 to 35. 

8. This was accepted by the Commission without demur, and resulted in the decision of 28 January 2009 with which these proceedings are concerned, reducing his liability again to £34.29 per week from 18 August 2008 on a calculated “net weekly income” of £200.08.  As later noted by the tribunal this involved a significant error in the non-resident parent’s favour on any footing, even accepting his figures: since whoever was doing the calculation (or feeding the figures into the computer) had failed to notice that the £14,719 derived from the declared profits of his 63-week accounting period was already a scaled-down annual equivalent figure, and scaled it down again.  Thus the “weekly earnings” figure of £200.08 actually used in the calculation was nearly £40 lower than the £239.67-odd it should have been even on his own figures: see  paragraphs 11 to 12 on page 223.

9. The parent with care appealed to the tribunal again, on the broader ground that the reduced liability figure was based on her former husband’s self-employed earnings for the later period being understated just as they had been for the first. She also applied for the calculation to be varied on the ground that he continued to pursue a lifestyle quite inconsistent with the declared level of income on which the reduced liability was based. The Commission declined to alter its calculation and both aspects of the matter came before the tribunal again for a full hearing on 3 December 2009, resulting in the decision now under appeal to me. 

10. Before that hearing took place the tribunal judge had issued two comprehensive directions for the evidence to be produced at and in advance of the hearing, and making quite clear what was expected of the parties.  In the first, issued on 8 August 2009 (pages 78 to 81) she identified the issues as concerned with the non-resident parent’s income: in particular whether there had been grounds for the Commission’s decision to supersede and reduce the previously assessed liability based on the tribunal’s own recent findings as to the actual level of his income; further or alternatively whether there were grounds for a variation on the basis of lifestyle.  She directed the production of full documentary evidence by him including a statement of facts, with an income and expenditure statement; together with all his bank account, savings and building society account statements for the 63 week period to 31 March 2008, all his credit card statements for the same period, and evidence of his partner’s income.  She said in the direction:

“Very shortly after the issue of the statement of reasons prepared by the last Tribunal [the non-resident parent] produced further accounts with his self-assessment tax return.

The period considered by the Tribunal and the period covered by these accounts overlap. The first question is therefore whether he has shown any change of circumstances. If he does establish a change, then the question is what is his earned income and whether the costs of the lifestyle insofar as funded by income are consistent with that and his partner’s income.  The directions are given to help him establish his case by reference to the documents”.

The direction also stated clearly that:

“The Tribunal requires full and frank disclosure of the facts… It is up to you to provide the evidence that you rely on… Evidence to support your account will be expected at the hearing.

After the hearing, once the decision has been given, it will be too late to give more evidence.”

11. The second direction was issued two months later on 8 October 2009, after the non-resident parent had produced bundles of bank and credit card statements but not an income and expenditure statement, and expressly directed him again to complete an attached income and expenditure statement in respect of 2008, explaining key changes separately.  It again repeated the warnings that it was up to  him to provide the evidence that he relied on, evidence to support his account would be expected at the hearing, and after the hearing, once the decision had been given, it would be too late to give more evidence: pages 213 to 214.

12. At the full hearing on 3 December 2009 the tribunal again heard oral evidence from both parents and went at length into the evidence of the non-resident parent’s income as a self-employed trader, this time for the accounting period to 31 March 2008 as the basis for the calculation from the effective date on 18 August of that year.  Again after full consideration the tribunal found the non-resident parent’s accounts and explanations unsatisfactory, and concluded they could not be accepted.  The judge recorded, in the statement of reasons issued with her reserved decision on 29 December 2009, that at the hearing the non-resident parent had refused to give any indication of his charging rate, though his evidence at the previous hearing had been that it was £150 a day.  She found his answers to questions about the accounts, his business or his financial position to be deliberately evasive and he had declined to give any explanation either of the charging rate or of how he costed up work for quotations.  However she was satisfied that he was busy and continued not to need to advertise for work; and she concluded that for the detailed reasons she explained, there had been substantial amounts of both receipts and expenditure which had been dealt with, in effect “outside the books” in that expenses claimed for tax purposes which were not identifiable as having been funded through the bank in the statements disclosed could only have represented “expenditure funded out of undisclosed cash income.  There is no other obvious explanation and [the non-resident parent] did not provide one”.

13. She concluded therefore that the accounts presented did not give a true picture of his actual earnings, and that the evidence before her showed his true net profit, as required to be computed for tax purposes, must have amounted to at any rate £33,839 for the 63-week accounting period, representing an annual equivalent figure of £28,520.  She summed up her conclusions in the following terms:

“43.  The evidence is therefore that [the non-resident parent] had income before tax of £28,520.  Of that,  £14,719 was declared for tax and national insurance and those deductions are to be made.  £13,801 was not declared for tax and national insurance and are to be treated as net payments to him.

44. It is of course the case that he may have had other cash income.  The figure here is that demonstrated by unexplained business expenditure.  No element has been included for additional profit.  That is to err on the side of caution, very much in favour of [the non-resident parent].  This is the lowest figure the tribunal can use.”

14. Her formal decision notice at pages 220-221 therefore directed the Commission that the liability calculation from 18 August 2008 was to be based on a net weekly income worked out from those figures; and on that footing no variation was required, as “the lifestyle costs are properly reflected in the findings as to income and so there is no basis for a variation to be granted”: see page 227.

15. Against that decision the non-resident parent sought to appeal on the basis that he disputed the correctness of the tribunal’s conclusions on the facts.  In particular he said it was wrong to conclude that there had been expenditure met otherwise than through the bank account because “most cheques paid from this bank account are business related and can be proven to be so”: see his initial letter of appeal at pages 20 to 28. In his later notice of appeal to the Upper Tribunal he said that at the time of the hearing he had been put on the spot and had been unable to explain the discrepancy, but having come away and realised the factual error made he considers it unfair to be told the decision could not be altered as he is able to prove that the £13,000-odd has been spent, and not kept as income.

16. Judge Mesher who granted leave to appeal to the Upper Tribunal on 26 April 2010 made clear that he did not do so on those grounds put forward by the father, since the time for coming forward with evidence on such matters was at the hearing on 3 December 2009 itself; if it were the case that further evidence which had not been before the first-tier judge could after all be produced to show she had been factually mistaken on one or more items, then the father still had the possible remedy of a separate application to the Commission to supersede the tribunal’s decision under the special powers available to it in such circumstances; though only as regards periods in the future not the past.  The two grounds his determination giving permission to appeal nonetheless did identify as arguable issues of law were whether the tribunal judge had erred in assuming she had the power to substituted her own analysis of the non-resident parent’s receipts and expenses as a self-employed trader for the figures in the tax return on which the Commission had based its decision under appeal; and on whether it was justifiable to direct that as regards some of his income there should be no deduction for tax or national insurance contributions, when the Child Support (Maintenance Calculations and Special Cases) Regulations 2000, SI 2001 No. 155, which prescribe what is to be taken into account as “net weekly income”, appear to make such deductions mandatory.

17. The written submissions on the appeal on behalf of the Commission by Mr K O’Kane dated 24 May 2010 at pages 239-243 and 24 November 2010 at pages 256-260 helpfully identify the relevant provisions of those regulations as in force at the material time for these proceedings: in particular paragraphs 7 to 8 of Schedule 1 as altered and in force from 1 August 2007 by virtue of paragraph 5 of the Child Support (Miscellaneous Amendments) Regulations 2007 SI No. 1979.  In the first of those submissions it was contended that in the light of previous decisions by Child Support Commissioners the tribunal judge had been entitled to carry out her own evaluation of the true level of receipts and expenses of the non-resident parent’s business, and was not bound to regard the figures he had entered in his tax return as conclusive so there was no error of law as regards the first point; however the purported direction that no statutory deductions were necessary as regards a part of the income she found him to have received was contrary to the terms of the regulations and therefore in error. 

18. In the second submission however it was explained that after consultation with the Commission’s child support policy team the official position on the first question identified in the grant of leave to appeal had been reconsidered.  It was now contended on behalf of the Commission that the tribunal judge had after all been in error in substituting her own figures for the non-resident parent’s self-employed earnings for those shown in his tax return.  The intention and effect of the revised regulations was now said to be that the figures shown in a tax return or tax calculation for the relevant period were to be taken as determinative for child support purposes unless or until revised or rejected by Her Majesty’s Revenue and Customs (“HMRC”).

19. At the hearing before me, the contentions put forward by the two parents quite naturally concentrated on the factual issues which had been the father’s reasons for wanting to appeal in the first place.  Not only was this natural, but they were fully entitled to raise and address these issues, as the grant of permission was in general terms even with the judge’s comment that he would not have allowed an appeal to go forward on the father’s grounds alone.  Dealing with these issues first therefore, I have considered all the points that were made but I have concluded that the answer suggested at the time leave to appeal was given, and emphasised by the parent with care in her oral submissions to me, was the correct one: namely that the time and the opportunity for the non-resident parent to give detailed evidence and answers in response to the tribunal judge’s doubts about the business expenses going through the bank account was at the hearing on 3 December 2009 when all these matters were being explored and gone into. 

20. Particularly in the light of her conclusions about the veracity of his accounts for the (partly overlapping) previous period on the initial appeal only shortly before, he could have been under no illusion that what he was required to do in his evidence at the hearing on 3 December 2009 was to demonstrate, in his oral evidence and by reference to the documents he had been given ample opportunity to produce, the truth of the figures he was now putting forward as representing the full amount of his self-employed profits. His argument to me was that he had said he had cheques, statements and so forth which would have demonstrated that the discrepancies identified by the tribunal judge in the figures for expenses and bank payments could all be duly accounted for, but he did not have these with him at the hearing on 3 December 2009 “because he had not been asked to bring them”. 

21. In the light of what had happened on the previous appeal, and the express warnings he had been given in the tribunal’s two directions issued to him on 8 August and 8 October 2009 as to the documents he needed to produce and the evidence he needed to be ready with in preparation for the hearing on 3 December, I am unable to accept that that can give him any arguable ground for saying it was an error of law on the part of the tribunal on 3 December 2009 to proceed with the case, and reach the conclusions it did, on the basis of such evidence as was then before it.  I therefore reject the father’s contentions based on the tribunal’s treatment of the evidence and factual issues: indeed he himself had quite fairly said in an earlier letter of 28 February 2010 to the tribunal about the refusal of leave to appeal (page 233) “We are not suggesting that any error in law has been made, so do understand the refusal based on this.”  Appeals to the Upper Tribunal can only be brought on some question of law and, as already noted, the regulations do contain (limited) separate powers for the Commission to correct factual errors in a calculation if these are identified in a properly made application.

22. I turn therefore to the two points of law which the burden fell on Mr James to explain and argue at the hearing.  As he identified it, the main issue was whether the tribunal was entitled under the regulations to rely on its own assessment of the non-resident parent’s income as a self-employed earner or not: if not, the second question did not arise.  He acknowledged that the views expressed on this question within the Commission had varied in the course of this case, and that it had now been decided by another judge of the Upper Tribunal in case CCS 1382/2010 KB v CMEC [2010] UKUT 434 (AAC: Judge Jacobs 7 December 2010) that under the amended form of Schedule 1 to the 2000 Regulations in force from 1 August 2007 the tribunal or decision maker was not bound to accept whatever figures had been used by HMRC, whether for receipts or expenditure; though as was apparent from paragraph 20 of that decision the point had there been conceded by the Commission as it was in Mr O’Kane’s first submission to me. 

23. However Mr James confirmed on the basis of express instructions that the Commission’s considered position was now as set out in Mr O’Kane’s second written submission.  It was now contended that the concession made in the earlier case and the judge’s express decision to that effect had both been wrong.  Consequently if, as here, there was in existence a tax return or tax calculation containing a non-resident parent’s self-employed earnings figures for the relevant period, both the Commission itself and a tribunal on appeal were bound to take those figures as the ones to be used for that parent’s “net weekly income” in the child support calculation, and had no option to do otherwise. That was so even if they took the view on the evidence that there had in fact been substantial under-declarations and the figures in the tax return should not have been accepted by HMRC at face value.  The remedy in such circumstances would be a variation of the child support calculation, for example on lifestyle grounds; or possibly a reference to HMRC to scrutinise and adjust the tax calculation, in which case there could be a consequential revision or supersession of the child support liability to reflect that.  Otherwise, submitted Mr James, there would be the oddity of having two different arms of the Government producing and using different answers for the calculation of what are supposed to be the same earnings over the same period and this could not be intended.  Consequently the Commission urged me not to follow the decision in KB v CMEC.

24. The relevant provisions of the legislation contained in paragraphs 7 and 8 of  Schedule 1 to the Child Support (Maintenance Calculations and Special Cases) Regulations 2000, SI 2001 No 155 as in force from 1 August 2007 have been helpfully set out in paragraph 13 of that decision but for convenience I will copy them again here.

‘Net weekly income of non-resident parent as a self-employed earner

7. (1)     Subject to sub-paragraph (6) and to paragraph 8, the net weekly income of the non-resident parent as a self-employed earner shall be his gross earnings less the deductions to which sub-paragraph (3) applies.

(1A) In this paragraph and paragraph 8 a person's “gross earnings” are his taxable profits calculated in accordance with Part 2 of the Income Tax (Trading and Other Income) Act 2005.

(2)     The non-resident parent shall provide to the Secretary of State on demand a copy of-

(a)     any tax calculation notice issued to him by Her Majesty's Revenue and Customs; and

(b)     any revised tax calculation notice issued to him by Her Majesty's Revenue and Customs.

(3)     This paragraph applies to the following deductions-

(a)     any income tax relating to the gross earnings from the self-employment determined in accordance with sub-paragraph (4);

(b)     any National Insurance contributions relating to the gross earnings from the self-employment determined in accordance with sub-paragraph (5); and

(c)     any premiums paid by the non-resident parent in respect of a retirement annuity contract or a personal pension scheme or, where that scheme is intended partly to provide a capital sum to discharge a mortgage or a charge secured upon the parent's home, 75 per centum of the contributions payable.

(4)     For the purpose of sub-paragraph (3)(a), the income tax to be deducted from the gross earnings shall be determined in accordance with the following provisions-

(a)     subject to head (d), an amount of gross earnings calculated as if it were equivalent to any personal allowance which would be applicable to the earner by virtue of the provisions of Chapter I of Part VII of the Income and Corporation Taxes Act 1988 (personal relief) shall be disregarded;

(b)     subject to head (c), an amount equivalent to income tax shall be calculated in relation to the gross earnings remaining following the application of head (a) (the “remaining earnings”);

(c)     the tax rate applicable at the effective date shall be applied to all the remaining earnings, where necessary increasing or reducing the amount payable to take account of the fact that the earnings related to a period greater or less than one year; and

(d)     the amount to be disregarded by virtue of head (a) shall be calculated by reference to the yearly rate applicable at the effective date, that amount being reduced or increased in the same proportion to that which the period represented by the gross earnings bears to the period of one year.

(5)     For the purposes of sub-paragraph (3)(b), the amount to be deducted in respect of National Insurance contributions shall be the total of-

(a)     the amount of Class 2 contributions (if any) payable under section 11(1) or, as the case may be, (3) of the Contributions and Benefits Act or under section 11(1) or (3) of the Contributions and Benefits (Northern Ireland) Act; and

(b)     the amount of Class 4 contributions (if any) payable under section 15(2) of that Act, or under section 15(2) of the Contributions and Benefits (Northern Ireland) Act,

at the rates applicable at the effective date.

(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.

…

(8)     Any request by the Secretary of State in accordance with sub-paragraph (2) for the provision of information shall set out the possible consequences of failure to provide such information, including details of the offences provided for in section 14A of the Act7 for failing to provide, or providing false, information.

 

Figures calculated using gross receipts less deductions

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;

…

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).

(2)     The deductions to be taken from the gross receipts to calculate net earnings for the purposes of this paragraph are-

(a)     any expenses which are reasonably incurred and are wholly and exclusively defrayed for the purposes of the earner's business in the period by reference to which his earnings are determined under paragraph 9(2) or (3);

(b)     any value added tax paid in the period by reference to which his earnings are determined in excess of value added tax received in that period;

(c)     any amount in respect of income tax determined in accordance with sub-paragraph (4);

(d)     any amount of National Insurance contributions determined in accordance with sub-paragraph (4); and

(e)     any premium paid by the non-resident parent in respect of a retirement annuity contract or a personal pension scheme or, where that scheme is intended partly to provide a capital sum to discharge a mortgage or a charge secured upon the parent's home, 75 per centum of contributions payable.

(3)     For the purposes of sub-paragraph (2)(a)-

(a)     such expenses include-

(i)      repayment of capital on any loan used for the replacement, in the course of business, of equipment or machinery, or the repair of an existing business asset except to the extent that any sum is payable under an insurance policy for its repair;

(ii)     any income expended in the repair of an existing business asset except to the extent that any sum is payable under an insurance policy for its repair; and

(iii)    any payment of interest on a loan taken out for the purposes of the business;

(b)     such expenses do not include-

…

(ii)     any capital expenditure;

…

(vi)    any expenses incurred in providing business entertainment.

(4)     For the purposes of sub-paragraph (2)(c) and (d), the amounts in respect of income tax and National Insurance contributions to be deducted from the gross receipts shall be determined in accordance with paragraph 7(4) and (5) of this Schedule as if in paragraph 7(4) references to gross earnings were references to taxable earnings and in this sub-paragraph “taxable earnings” means the gross receipts of the earner less the deductions mentioned in sub-paragraph (2)(a) and (b).’

25. It is relevant also to note the form in which the legislation stood before 1 August 2007.  Paragraph 7 was instead entitled “Figures submitted to the Inland Revenue” and paragraph 7(1) provided as follows, with no paragraph 7(1A):

“7.  (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 sub-paragraph (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.”

There was also a paragraph 7(7) which contained definitions as follows:

“(7)  In this paragraph –

“tax calculation notice” means a document issued by the Inland Revenue containing information as to the income of the self-employed earner; and

“revised notice” means a notice issued by the Inland Revenue where there has been a tax calculation notice and there is a revision of the figures relating to the income of a self-employed earner following an enquiry under section 9A of the Taxes Management Act 1970 or otherwise by the Inland Revenue.”

And in paragraph 8 there was an additional sub-sub paragraph (1)(c), deleted by the amending regulation from 1 August 2007, which applied the calculation under that paragraph (by reference to gross receipts less deductions under paragraph 8(2)) additionally to cases where:

“8.  (1) ...(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 as set out in paragraph 7 does not accurately reflect the normal weekly earnings of the self-employed earner.”

26. That (pre-1 August 2007) form of the provisions for calculating self-employed earnings was the same as the one that had been heavily criticised in the House of Lords in Smith v Smith [2006] UKHL 35, [2006] 1 WLR 2024. There can be no doubt that the amendments introduced from 1 August the following year were intended to deal with the problems brought to light by that case.  The House was told the Secretary of State was aware the then provisions were unsatisfactory and had them under review: paragraph 21.

27. Lord Walker, who gave the leading majority judgment in Smith, also pointed out as “noteworthy” in paragraph 37 that in a yet earlier form, which had prescribed a method of calculation broadly similar to that now in paragraph 8,

“... the draftsman has not followed the technique of referential incorporation of provisions of the Income and Corporation Taxes Act 1988…in defining the concept (familiar for tax purposes) of trading profit.  Instead the draftsman has provided his own set of rules, which reproduce more or less faithfully some (but not all) of the familiar tax rules”. 

The various differences Lord Walker went on to identify, e.g. in permissible deductions from gross receipts, depreciation, start-up expenses and the treatment of losses, do not matter for the present purpose but what is notable is how closely the draftsman of the 2007 amendments seems to have adopted the idea of simply incorporating by reference the provisions already in the tax code for defining what counts as a trading profit chargeable by law to tax, formerly found in the Income and Corporation Taxes Act 1988 itself but now in Part 2 of the 2005 Act: exactly what the new paragraph 7(1A) does. 

28. The 2005 Act runs in all to over 800 sections, and is described in its long title as “An Act to restate, with minor changes, certain enactments relating to income tax on trading income, property income, savings and investment income and certain other income; and for connected purposes”.  Section 1 (“Overview of Act”) declares that it imposes charges to income tax under various heads, of which Part 2 is trading income.  In Chapter 2 of Part 2 (“Income taxed as trade profits”) sections 5 to 8 are the primary charging sections, for what used to be Schedule D income tax: section 5 providing that “Income tax is charged on the profits of a trade, profession or vocation” and section 7 defining what the charge applies to:

“7. (1) Tax is charged under this Chapter on the full amount of the profits of the tax year. 

(2) For this purpose the profits of a tax year are the profits of the basis period for the tax year.”

Succeeding provisions lay down the detailed rules for identifying the basis period, how the amounts to be brought into account as trading profits are to be calculated and what deductions are to be allowable in the computation of taxable profits. 

29. The crucial point in the present context is that this Act is entirely concerned with defining what amounts are to be brought into the charge to tax and how the taxable profits of an individual are required by law to be calculated.  Nothing in the 2005 Act is concerned with the machinery of tax returns, assessments, tax calculation documents, or the collection and enforcement of the liabilities laid down in its charging provisions. Those are all the subject of separate legislation, e.g. in the Taxes Management Act 1970, whose provisions are by contrast not incorporated by reference into Schedule 1 to the Child Support (Maintenance Calculations and Special Cases) Regulations 2000.

30. Despite the manful attempts made by Mr James to sustain the altered position now taken by the Commission on the meaning of paragraph 7 of Schedule 1 to those regulations, it must in my judgment follow from the fact that the 2005 Act is the charging legislation defining what amounts are legally liable to be taxed, not a set of administrative provisions referring to figures shown in returns or calculation documents, that the Commission’s present interpretation is plainly wrong and that in KB v CMEC plainly right.  As Judge Jacobs said in paragraph 20 of his decision in that case, the requirement of paragraph 7 that the non-resident parent’s taxable profits for the purpose of determining his net weekly income must be those calculated in accordance with Part 2 of the 2005 Act does not mean the tribunal (or decision maker) has to accept whatever figures for receipts or expenditure may have been used or accepted by HMRC. He added:

“20. ... Paragraph 7 could have so provided, but it does not.  If the parent with care can prove that the non-resident parent had receipts in excess of those taken into account in the tax calculation, the tribunal can and must apply the provisions of Part 2 to that amount.  The same applies if the parent with care can prove that the expenditure accepted in the tax calculation is excessive.  This is a realistic interpretation, as it is well known that most self-employed accounts that show low earnings are not subject to detailed scrutiny by Her Majesty’s Revenue and Customs. 

21.  Paragraph 8(1)(c) used to provide that paragraph 8 could be used if the figures used for paragraph 7 did not accurately reflect the non-resident parent’s normal weekly earnings.  That provision has been repealed.  I accept [the Commission’s] argument that the repeal has not affected the power for decision makers and tribunals to substitute figures for those used in a tax calculation.

22. This does not mean that those figures are irrelevant.  Paragraph 7(2) imposes a duty on a non-resident parent to provide copies of any original or revised tax calculation notice.  The function of this provision is to provide evidence of how Part 2 of the 2005 Act has been applied.  That may be the only evidence available, especially at the stage when the matter is before a decision-maker.  Even if there is other evidence, it may still be preferable.  This will depend on the content of the evidence and on the degree of scrutiny involved in the tax calculation.  But none of this means that the tribunal must accept the information supplied to or used by Her Majesty’s Revenue and Customs.”

31. I entirely agree with that.  The fact that the previous form of paragraph 7, criticised by the House of Lords and now abandoned, did attempt to make the child support liability depend on the actual figures shown in a non-resident parent’s tax return or tax calculation notice, but has now been replaced by a simple referential incorporation of the charging provisions, does nothing but underline that, for child support as well as for income tax, what is required to be included is the true and full amount of those profits defined as taxable by law; not any lesser amount a person may happen to get away with as a result of that law being evaded, avoided or imperfectly administered.

32. I cannot accept Mr James’ submission that the removal of paragraph 8(1)(c) by the 2007 amendments shows an intention that the tribunal was no longer to have power to determine the true profit for itself even when satisfied the tax calculation was misleading. On the contrary in my judgment the removal of paragraph 8(1)(c) is wholly consistent with the interpretation in KB v CMEC and supports it, since if paragraph 7 itself requires the true amount of taxable profit legally chargeable under Part 2 of the 2005 Act to be used in every case, there is no longer any need for the “safety valve” formerly provided by paragraph 8(1)(c) to enable the tribunal or decision maker to depart from figures in a tax return that were found to be untrue or inadequate.  (That conclusion is not affected by the continued presence of paragraph 8(1)(b) in its previous form, which is I think just an accidental anomaly as it plainly fails to align with the altered paragraph 7(2)). 

33. The more general point that two different arms of government should not be expected to be operating on two different figures for the same person’s taxable profits is answered by pointing out that there would be no discrepancy if both arms implemented the decision of the tribunal as to the true facts of the case.  It would be a much greater “oddity” if the findings of an independent judicial tribunal which had actually gone into the accounts and the evidence, and concluded that the figures previously accepted had been misleading and insufficiently scrutinised, were nonetheless to be ignored by one arm of government and actively opposed by the other.

34. In my judgment therefore the tribunal judge was correct in law to proceed on the basis that the true level of the non-resident parent’s taxable profits was within her jurisdiction to determine under paragraph 7, and for the reasons already stated above she was entitled to reach the factual conclusions she did on the evidence before her.

35. In my judgment it was also within her jurisdiction, and a proper course to take in the circumstances, to direct as she did that the additional £13,801, which she found to be the lowest possible amount of his undeclared net annual income, should be carried into the child support calculation as a net figure without any further statutory deductions for tax or national insurance contributions being applied to it. By definition of course on her findings and as matters stood before her, these were not liabilities for which any real provision was needed as they had been evaded by his non-declaration of the income.  This is I think it fair to say a situation the draftsman of paragraph 7 did not have in mind, but in my view the wording of paragraph 7(3), that deductions are to be made for “any” income tax, and “any” national insurance contributions, relating to the earnings in question, is wide enough in such circumstances to permit the direction given and avoid the absurdity of a deduction for non-existent amounts.  It should not, I think, be necessary to resort to any artificiality such as “such amount as after deduction of any amounts prescribed by regulation 7(3)(a) and (b) leaves £13,801” in order to validate what amounts to exactly the same thing.  Given the tribunal’s findings, the non-resident parent cannot claim to have suffered any injustice in not being allowed a further deduction for money he had never paid and had deliberately avoided paying; so that even if a more literal-minded (and less real) interpretation of paragraph 7 were to be required and mean that the first-tier judge’s decision had involved an error of law on this one point, I would still if necessary regard this as a proper case to exercise the discretion in section 12(2)(a) Tribunals, Courts and Enforcement Act 2007 against setting it aside on that account.

 

P L Howell

Judge of the Upper Tribunal

18 May 2011

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