PP v Secretary of State for Work and Pensions and SP  UKUT 286 (AAC)
This was a case of Joanna Newton from our South West and Wales team in which she and her barrister, Jody Atkinson, successfully appealed a decision of the First-tier Tribunal. The case was remitted for rehearing, the tribunal accepting the arguments that the First-tier tribunal had erred in its approach to the application of a variation on the basis of the father’s diversion of income; and that it had interpreted regulation 69(3) incorrectly by failing to determine the father’s unearned income solely and conclusively by reference to information provided by HMRC, and instead going behind the HMRC figure.
The father had several business interests, the most significant being a haulage company employing about 10 HGV drivers. The parents had 4 children, aged between 16 and 26. The CMS decided in January 2016 that the father should pay £18.01 a week for his 2 youngest children, based on his salaried income of £7,800. The mother applied for a variation based on regulation 69 (unearned income) of the 2012 Regulations . The CMS applied a variation on the basis that the father’s income was his gross PAYE income of £7,800 together with the figure for unearned income supplied by HMRC of £30,000 (which was a dividend) but the mother did not accept that assessment and appealed to the First-tier Tribunal.
The matter came before the First-tier Tribunal in September 2019, the parties did not attend and were unrepresented. It allowed the appeal and issued a Decision Notice which first ruled that the father’s unearned income was £34,191 (the undisputed dividend of £30,000 plus rental income of £4,191, a figure taken from the father’s self-assessment tax return (SATR)). Second, the Tribunal decided that it was just and equitable to make a regulation 71 variation on the basis of diversion of income. The Tribunal concluded that the father had diverted the sum of £134,073 in the 2014/15 tax year, holding that he could reasonably have paid himself a dividend of £164,073 rather than just the undisputed figure of £30,000. The decision was issued on 21 October 2019 and neither party asked the Tribunal for a full Statement of Reasons (the father, at this stage, being unrepresented). The CMS implemented the First-tier Tribunal’s decision which resulted in them demanding immediate payment of arrears of £55,208.69 from the father. After some to-ing and fro-ing, the father eventually instructed Joanna and the case came before the Upper Tribunal on 5 Grounds of Appeal, 2 of which (Grounds B and C) were supported by the Secretary of State.
Ground B was that the First-tier Tribunal erred in its approach to the application of a variation on the basis of the father’s diversion of income. In its December 2018 pre-hearing directions, the Tribunal raised the issue of diversion in the following terms:
“First, there is the question of diversion. In short, the company’s accounts indicate that the company made a post-tax profit of £145,000 in the year to 31 March 2015 but that [the father] had only paid himself a dividend of £30,000. The question, then, is whether income that [the father] might reasonably have taken from the company (and that which might, in part, have been used to support J and A) was unreasonably diverted (i.e. retained within the company). It may be that much of that profit was used to fund the purchase of new lorries/trailers etc.
The tribunal will need to consider whether, given his responsibilities for J and A, it was reasonable for [the father] to invest in the business to the extent he did.”
A variation can be made where the non-resident parent has unreasonably reduced the amount of income which would otherwise be taken into account as gross weekly income or as unearned income by diverting it for other purposes. (Regulation 71 of 2012 Regs). A variation should only be made where, in all the circumstances, it would be just and equitable to do so (s 28(F) of the Child Support Act 1991).
On behalf of the father, Jody Atkinson argued that the First-tier Tribunal’s conclusion on diversion of income was one that no reasonable tribunal could have come to, taking into account in particular the need to give proper consideration to the just and equitable requirement in section 28F of the Child Support Act 1991. It was not in dispute that the haulage firm’s profits in the year ending 31 March 2015 were £145,260 and that an even larger sum (just over £200,000) was spent during that year on new trucks for the business. However, this was not the usual level of any surplus, as for the following financial year profits were a much more modest £21,523. The First-tier Tribunal’s conclusion was that the father had unreasonably diverted income by failing to draw down an additional dividend of £134,073, in addition to the £30,000 dividend that had been declared (which was the same figure as in the year ending March 2014). In effect, the Tribunal had decided that it fell outside the band of reasonable decisions for the company to pay the father anything less than £164,073. In doing so, it had failed to give any weight to the possibility of there being good business reasons for purchasing the trucks and other plant. This argument was supported by the Secretary of State. The Upper Tribunal agreed with the argument that the Tribunal’s conclusion was one that no reasonable tribunal, properly directing itself, could have reached.
Ground C was that there was a plain error of law on the face of the Decision Notice, in that the First tier Tribunal was not entitled, irrespective of any factual findings it might make, to go behind the HMRC figure for the father’s unearned income. This ground of appeal was supported by the Secretary of State.
The screen-print of the HMRC data supplied to the CMS stated that the total amount of the father’s unearned income was £30,000. The father’s SATR for 2014/15 confirmed a payment of a dividend of £30,000. Additionally, the property pages of the SATR included details in respect of two properties. First, the income from a furnished caravan holiday let was £7,573 but with allowable expenses of £9,251, resulting in a loss for the year on that venture (after making provision for capital allowances of £27,063) of £28,741. Second, another rental property had a taxable profit of £4,191 (£6,900 in rent minus £2,709 in loan interest). The First-tier Tribunal decided that the father’s unearned income was £34,191, and not just the dividend payment of £30,000. In its summary reasons it explained that the father had no taxable income from the caravan furnished holiday let. However, it noted he had a profit of £4,191 declared on his SATR from the other rental property. The Tribunal stated that this taxable income could not be set off against the loss from the caravan holiday let (citing section 127ZA of the Income Tax Act 2007). The Tribunal added that “it was not clear why the figure from HMRC had not included the property income of £4,191.00”, so concluding that the father’s total unearned income for 2014/15 was not £30,000 but rather £34,191.
This ground of appeal turned on the proper interpretation of regulation 69(3) which reads as follows:
“the amount of the non-resident parent’s unearned income is to be determined by reference to information provided by HMRC at the request of the Secretary of State in relation to the latest available tax year and, where that information does not identify any income of a kind referred to in paragraph (2), the amount of the non-resident parent’s unearned income is to be treated as nil.”
In effect, the First-tier Tribunal read the key phrase “is to be determined by reference to information provided by HMRC” as meaning “is to be informed by reference to information provided by HMRC”, rather than as being conclusively decided by such information.
Whilst the Upper Tribunal indicated that the wording was ambiguous, when read in a purposive manner and seen in context of the relevant provision as a whole, the words should be taken to say that the information provided by HMRC was conclusive and thus First Tribunal erred in law in assessing the father’s unearned income at £34,191 rather than £30,000.
The father’s appeal was allowed, and the decision of the First-tier Tribunal set aside. The case was remitted for rehearing.