Smith v Secretary of State for Work and Pensions
| Jurisdiction | England & Wales |
| Judgment Date | 2005 |
| Date | 2005 |
| Court | Court of Appeal (Civil Division) |
Child support – Social security – Absent parent – Calculation of liability of absent parent – Absent parent self-employed – Meaning of ‘earnings’ – Whether capital allowances should be deducted in calculation of earnings – Child Support (Maintenance Assessment and Special Cases) Regulations 1992, SI 1992/1815, Sch 1, Chapter 2, paras 2A, 2B.
In 1997, the mother and father separated. They had three children, of whom the mother was the ‘parent with care’. At the material time the father carried on business as an individual sole trader in the car-hire business. The profits of his trade were taxed under Sch D, Case 1 and he was able to claim substantial allowances under the Capital Allowances Act 1990. In the period from 1 April 2000 to 31 March 2001 he made a taxable profit (before capital allowances) of £169,520, reduced by capital allowances of £148,628 to the sum of £20,892, on which he was charged to tax. The mother applied for a maintenance assessment under the Child Support Act 1991. She appealed against the assessment, and by the time the tribunal heard the appeal the father’s tax return for 2000–2001 was available. The tribunal made a new determination based on the figure of £20,892 for the father’s taxable income. The mother appealed to a child support commissioner, who defined the issue of law he had to decide as whether, in calculating a self-employed trader’s earnings for child support purposes, he was entitled to any deduction for capital depreciation or capital allowances. He resolved the issue in the mother’s favour. The Court of Appeal allowed the father’s appeal against that decision. The court held that the definition of ‘earnings’ in para 2A(2) of Sch 1 to the Child Support (Maintenance Assessments and Special Cases) Regulations 1992, SI 1992/1815, which was inserted into Sch 1 by reg 6 of the Child Support (Miscellaneous Amendments) Regulations 1999, SI 1999/977, namely ‘the total taxable profits from self-employment of that earner as submitted to the Inland Revenue’ read with reg 6(2B)(2), meant that one had to look to the earner’s tax return to see if it assisted in ascertaining ‘total taxable profits’, and
that the answer was in box 3.92 of the tax return, ie ‘total taxable profits from this business’. The mother appealed.
Held – (Lord Nicholls of Birkenhead and Lord Rodger of Earlsferry dissenting). In calculating a self-employed trader’s earnings for child support purposes, he was not entitled to any deduction for capital allowances. Before the introduction of para 2A into Sch 1 there would have been no question of deducting capital allowances. The changes to Sch 1 made in 1999 were described as making administrative improvements, not changes of substance. The interpretation contended for by the Secretary of State and the father would be a significant change of substance. It was over-literal, and not in line with the modern approach to statutory construction, to attach so much weight to the coincidence of the use of the words ‘total taxable profits’, which amounted to a composite expression of uncertain meaning, in reg 6(2A)(2) and in the tax return. The economic reality was that capital allowances had enabled S to build up a profitable and expanding business while paying very little income tax. He had had the benefit of that, and his children (and the mother in her struggles to maintain the children) had had the burden of it. There was no fairness in that. Accordingly, the appeal would be allowed
Decision of the Court of Appeal reversed.
Cases referred to in opinions and judgmentsColtness Iron Co v Black (Surveyor of Taxes) (1881) 6 App Cas 315, HL.
Cooke v Secretary of State for Social Security[2001] EWCA Civ 734, [2002] 3 All ER 279.
Elliss (Inspector of Taxes) v BP Oil Northern Ireland Refinery Ltd [1987] STC 52, CA.
Huxley v Child Support Comr[2000] 1 FCR 448, CA.
Marckx v Belgium (1979) 2 EHRR 330, ECt HR.
R (on the application of Kehoe) v Secretary of State for Work and Pensions[2005] UKHL 48, [2005] 2 FCR 683, [2005] 4 All ER 905, [2006] 1 AC 42, [2005] 3 WLR 252, [2005] 2 FLR 1249; affg[2004] EWCA Civ 225, [2004] 1 FCR 511, [2004] QB 1378, [2004] 2 WLR 1481, [2004] 1 FLR 1132.
Secretary of State for Work and Pensions v M[2006] UKHL 11, [2006] 1 FCR 497, [2006] 2 WLR 637.
AppealThe father, Mr Smith, appealed against the decision of Commissioner Howell QC, dated 6 October 2003, whereby he decided an issue of law in favour of the mother, Helen Smith. The Secretary of State for Work and Pensions supported the father’s appeal. The facts are set out in the judgment of Ward LJ.
David Burrows, solicitor advocate of David Burrows and James Henderson (instructed by David Burrows) for the father.
Nicholas Mostyn QC and Giles Goodfellow QC (acting pro bono and instructed by Family Law Partnership also acting pro bono) for the mother.
Nathalie Lieven (instructed by the Office of the Solicitor, Dept of Work and Pensions) for the Secretary of State.
WARD LJ.INTRODUCTION[1] The Child Support Agency has not won many plaudits for its efficiency, though to be fair, it may be improving. Certainly in the early years of its operation it came under much criticism for its delays and erroneous calculations of child support both of which can be explained by the difficulties encountered by the staff working out the complicated formulae for the assessment of child support maintenance. As is well known, the Child Support Act 1991 was introduced in order largely to remove from the court’s jurisdiction all matters relating to the assessment, enforcement and collection of child maintenance. Except in limited circumstances, the parent with care of a child had to resort to the Agency to obtain child support from the absent parent, now called the non-resident parent. Liability is calculated in accordance with an algebraic formula which I once described as ‘obtuse’, from which description I have not found much reason to recant. One of the symbols in this formula is the absent parent’s net income. This case concerns the difficulties in assessing those earnings where the absent parent is self-employed.
[2] The problem in a nutshell is this. Under the regulations as originally promulgated, ‘earnings’ means the gross receipts of the employment less certain expenses but it is expressly provided that such expenses do not include any capital expenditure or depreciation of any capital assets. After the Act was substantially amended in 1995 the new regulations, whilst preserving the old approach for exceptional cases, defined ‘earnings’ as the total taxable profits as submitted to the Inland Revenue in accordance with their requirements and the regulations are silent as to whether or not capital expenditure and depreciation are to be deducted. It is common ground that depreciation must be deducted but battle is joined over the deduction of capital allowances. The effect can be dramatic as the facts of this case exemplify. On one view of the figures, Mr Smith’s liability for the child support of his three children would be £11.28. As Mr Mostyn QC points out on the mother’s behalf, this is not £11.28 for each of the three children, but £11.28 for all of them. With characteristic vigour he submits that such an assessment ‘is startling to the point of absurdity’. On his construction the proper assessment would have been the maximum, then £106 per week for each child, £318 per week in total. The tragedy, nay the scandal, of this case is that the assessment must be backdated to 20 September 2001, nearly three years ago since when 22 different assessments have been made, none of them final. There may still be no end in sight.
THE ISSUES[3] The main question arising on the appeal is thus whether capital allowances are included or excluded for the purpose of calculating net income. A subsidiary question arises in this way. As originally enacted there was and there remains a limited right of appeal but no appeal capable of varying an assessment correctly calculated. Reforms in 1995 allow the Secretary of State to direct a departure from an assessment in certain circumstances one of which may avail the mother in this case. Thus the subsidiary question is whether one must leave her to exercise that remedy if one cannot properly robustly construe the regulations in her favour.
THE FACTS IN A LITTLE MORE DETAIL[4] The marriage of Mr and Mrs Smith broke down in December 1997. She applied to the Secretary of State (who administers the Child Support Agency) for a child maintenance assessment for their three children, boys now 17 and 13 years old and a girl of 14 who reside with her. As I understand it, she was, or certainly for the most part she was, in receipt of income support and consequently she was obliged to resort to the Child Support Agency to assess and collect maintenance for the children, the jurisdiction of the court being excluded in her case.
[5] At the time of the original assessment with which we are concerned Mr Smith carried on business as an unincorporated sole trader. The nature of that business is to acquire fleets of motor cars on hire purchase or other credit-sale terms, then adapt them by adding dual controls in order to let them to driving schools, take them back at the end of the rental period, remove the dual controls and sell them. For accounting purposes he is entitled to claim substantial capital allowances and show a high rate of depreciation.
[6] The original calculation made by the Secretary of State on 26 September 2001 was based on the accounts for the year ending 31 March 2000, the most recent available at that time. They showed that the business had a turnover of £131,887 and after deducting trade expenses a net profit of £45,479 was recorded. For tax purposes the depreciation of £35,901 had to be added back as it was not an allowable revenue expense in calculating the annual profit arising within the charge to income tax under Sch D. The capital allowances for that year amounted to £72,000...
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