EM v London Borough of Waltham Forest [2009] UKUT 245 (AAC)

UKUT-AAC

EM v London Borough of Waltham Forest

[2009] UKUT 245 (AAC) · 2009-11-26

EM v London Borough of Waltham Forest

[2009] UKUT 245 (AAC)

(26 November 2009) DECISION OF THE UPPER TRIBUNAL (ADMINISTRATIVE APPEALS CHAMBER) The DECISION of the Upper Tribunal is to allow the appeal by the appellant. The decision of the London Fox Court appeal tribunal dated 17 March 2008 under file reference 160/07/04118 involves an error on a point of law. The decision of the appeal tribunal is therefore set aside. I re-make the decision of the tribunal as follows: The appellant’s appeals against the decisions of the respondent council in relation to housing benefit and council tax benefit dated 8 June 2007 are allowed, in large part at least. The gross payments of £3,817.96 and £2,125.46 made on 19 September 2003 were payments of capital and not payments of income. They accordingly fall for assessment under Chapter VI of Part VI of the Housing Benefit (General) Regulations 1987, and not under any of Chapters II-V. They cannot be attributed backwards to cover the period from August 2000 under regulation 68 of the same Regulations. The matter is remitted to the respondent council for recalculations of the alleged overpayment of housing benefit and excess payment of council tax benefit. That recalculation should not include the gross payments of £3,817.96 and £2,125.46. The gross payment of £691.80 made on 15 August 2003 can be included in the recalculation but only if the respondent council can demonstrate that it was a payment of income and not capital. This decision does not affect any overpayment of housing benefit or excess payment of council tax benefit arising from any failure by the claimant to report any increase in ongoing weekly earnings after August 2003. This decision is given under section 12(2)(b)(ii) of the Tribunals, Courts and Enforcement Act 2007. REASONS FOR DECISION The decision in summary

[1]The appellant’s appeal to the Upper Tribunal (formerly the Social Security Commissioner) succeeds. The decision of the London Fox Court appeal tribunal dated 17 March 2008 under file reference 160/07/04118 involves an error on a point of law. In the circumstances I can re-make the decision, being the decision which the tribunal should have made and as set out above. As a result the local authority will need to make new decisions, revising the calculations involved. These will presumably result in a much reduced total overpayment figure, and will give rise to a new right of appeal. The issues in this appeal

[2]The central issue in this appeal is whether the London Fox Court appeal tribunal erred in law in confirming the local authority’s decision that the appellant was liable for an overpayment of housing benefit (HB) in the sum of £3,459.29, and an excess payment of council tax benefit (CTB) of £1,066.12, for the period from 7 August 2000 to 27 June 2004. This decision refers only to those provisions governing housing benefit, but the effect of the relevant law is the same for both benefits.

[3]The local authority’s case was that the overpayment of HB and excess payment of CTB were caused by two factors. The first was the fact that in August and September 2003 the claimant received three substantial lump sum payments from his employer which, so the local authority argued, represented arrears of pay going back to August 2000 and which accordingly had to be attributed over that entire period. The second was the fact that the claimant’s normal weekly earnings increased in August 2003, but he did not at the same time inform the appropriate office of this change. The position is complicated by the fact that the claimant is an employee of the same local authority (the London Borough of Waltham Forest) which has administered his HB and CTB claim. The oral hearing of this appeal before the Upper Tribunal

[4]I held an oral hearing of this appeal at Harp House on 21 October 2009. The claimant attended the hearing and was represented by Mr David Forsdick and Ms Jacqueline Lean of Counsel through the good offices of the Free Representation Unit. The local authority was represented by Mr Paul Stagg of Counsel. I am grateful to all three counsel for their very helpful submissions, both oral and written, which have assisted greatly in narrowing the issues to be resolved in this complex case. The background to the appeal

[5]The claimant started work with the London Borough of Waltham Forest (“Waltham Forest”) as a part-time driver on 17 March 1997. On 5 March 1997 he countersigned a standard form contract of employment. This contract stated that, in addition to a driver’s normal pay and allowances, “You will also receive bonus payments calculated in accordance with the scheme operated by the authority for your work group.”

[6]On 17 March 1997, the day he actually started work, the claimant signed a new contract of employment. This appears to have been identical in all respects to the one signed on 5 March with one exception. The clause relating to bonus payments had been removed. Presumably someone in the council had spotted that the claimant had originally been issued with the ‘wrong’ contract, which applied to full-time drivers only. The new standard form part-time contract, with no provision for bonus payments, therefore superseded the earlier version.

[7]Also in 1997, but at a national level, a “single status agreement” was reached between local authorities and trade unions designed to phase out employment practices which discriminated against part-time (and predominantly female) workers. It seems that the national agreement required councils to have local deals in place by April 2007. According to papers before the tribunal, by February 2008 there had still not been a local settlement on the full implementation of the single status agreement in Waltham Forest.

[8]Meanwhile, the claimant had agreed a contractual variation from 1 June 2002, increasing his hours of work from 15 to 25 a week. This variation letter made it clear that “all other terms and conditions of your employment remain unchanged”. In other words, he had no contractual entitlement to bonus payments, unlike his full-time colleagues. This was despite the fact that the Part-time Workers (Prevention of Less Favourable Treatment) Regulations 2000 (SI 2000/1551; “the PTWR 2000” or “the 2000 Regulations”) had been brought into force by then. These Regulations were made under section 19 of the Employment Relations Act 1999, which required the Secretary of State to make regulations for the purpose of securing that people in part-time employment were treated no less favourably than people in full-time employment. The PTWR 2000 were also intended to comply with the United Kingdom's obligations under Council Directive 97/81/EC, which required member states to implement the Framework Agreement on Part-Time Work.

[9]Meanwhile, the claimant had been in receipt of HB and CTB from Waltham Forest for the period from 22 June 1998 until 27 June 2004. On 27 July 2003 the claimant filled in a HB and CTB review form. He declared his gross weekly income to be £200.11. This was an accurate statement at that time and there is no suggestion that he had received any lump sum payments (or weekly bonus payments) by this date.

[10]Meanwhile Waltham Forest, as with many other local authorities, had for some years been faced with a campaign for equal pay and an end to discriminatory practices in the employment of part-time workers, based on the single status agreement and on the PTWR 2000, brought by trade unions on behalf of part-time workers such as the claimant (who, as it happens, was not himself a member of any trade union). Indeed one of the claimant’s workmates, another part-time driver in the same borough, had written to the local authority as long ago as July 2002, complaining that “this law [the PTWR 2000] has been on the statute books since 1st August 2000 yet the part-time drivers at Passenger Services are still not being paid the bonus that is being paid to full-time workers”.

[11]Neither the appeal tribunal nor the Upper Tribunal had full documentary evidence as to how this matter was resolved in Waltham Forest, apparently because of difficulties in locating the relevant paperwork at the council. I refer to this further below. However, the evidence that was before the tribunal undoubtedly established the following matters.

[12]On 6 September 2003 an internal council memorandum gave a stark instruction to the payroll department. In full, the memorandum stated:

“Re: Part Time Drivers Bonus It has been decided to pay part-time Passenger Services drivers the same 31% bonus as full timers. Can you please start paying this A.S.A.P. We are advised that legally we should have been doing this since August 2000 and have not done so. Therefore can you please do the required calculations to find out how much each driver is entitled to in back pay and notify me prior to payment.”

[13]Council officers then duly calculated what would have been the bonus payments based on contractual hours and additional hours worked from August 2000 through to August 2003 and produced a bonus arrears schedule for the various drivers showing the amounts due.

[14]In July 2003 the claimant’s usual weekly gross wage had been £200.11. In August 2003 his gross weekly wage increased as a result of overtime and additional payments. In particular, for the week ending 10 August 2003 his gross wage was £988.82, which included a lump sum of £691.80 described as “R Bonus Passenger Serv”. Despite the best efforts of counsel at the hearing it was not possible to ascertain the basis for and nature of this payment. The original submission to the appeal tribunal suggested it had been paid solely in respect of the 2003/04 tax year, but I leave that matter to be investigated further as the case is being remitted to the local authority in any event. I make no findings either way on the status of the £691.80.

[15]Much more significantly, the payslip for the week ending 14 September 2003 notified the claimant that his gross pay was £6,218.22 and his net pay £4,614.97. The gross pay figure included lump sums of £3,817.96 (“Other Pay Arr S”) and £2,125.46 (“Other Pay Arr NS”). According to the bonus arrears schedule, this reflected the bonuses which would have been paid on contractual and additional hours respectively over the period since August 2000 had the claimant been full-time. It appears that at the time the claimant did not report either the receipt of those lump sum payments or the ongoing bonus payments to that part of the local authority that handled housing benefit claims.

[16]In October 2004 Waltham Forest ran a computer data matching exercise. This revealed that according to the council’s payroll data the claimant had been paid nearly £12,000 gross in the year to date (about £390 a week), while the HB and CTB system still had his gross weekly income recorded as just under £200 a week, based on his July 2003 review form.

[17]Waltham Forest then carried out further inquiries and issued decisions revising the claimant’s entitlement to both HB and CTB back to 7 August 2000. After a further recalculation, the council decided that the HB overpayment was £3,459.29 and the CTB excess payment was £1,066.12. The claimant appealed. At this point it is convenient to note that the question of the claimant’s entitlement to housing benefit fell to be decided according to the Housing Benefit (General) Regulations 1987 (SI 1987/1973, “the 1987 Regulations”), which applied at the material time. However, the question of any liability for any overpayment fell to be determined according to the Housing Benefit Regulations 2006 (SI 2006/213; “the 2006 regulations”), which applied at the date of the decision. The substance of the relevant provisions was identical at all times. The appeal before the London Fox Court appeal tribunal

[18]The first hearing of the appeal on 3 December 2007 was adjourned by the appeal tribunal (District Chairman Lane), who directed the local authority to produce the source document under which the council had agreed to make the extra payments to the part-time drivers. She noted the argument had been made on behalf of the claimant that the payments were capital payments under a compromise agreement rather than income.

[19]Following that adjournment, the local authority produced a further detailed submission. However, they reported that they had “found very little contemporaneous documentary evidence that might shed more light on the precise nature of the payments made to [the claimant] and several of his colleagues”. They reported that “the officers in the payroll department who handled the matter have left the Council”. I have to interpose that that appears to me to be a rather lame excuse. The council could also find “no trace” of any agreement with the trade union.

[20]The appeal tribunal, again chaired by District Chairman Lane, heard the claimant’s appeal on 17 March 2008. She found the claimant to be liable for both the recoverable overpayment of HB and the excess payment of CTB and dismissed the appeal. In summary, her three main conclusions were as follows.

[21]First, she rejected the argument that the three payments of £691.80, £3,817.96 and £2,125.46 were capital. Rather, she concluded that the payments were earnings in the sense of any remuneration or profit derived from the employment within the meaning of regulation 28(1) of the 1987 Regulations.

[22]Secondly, she ruled that the attribution of these payments was governed by regulation 68(7) of the 1987 Regulations, and that the payments were to be spread across all three years (2000-03) for which, on her findings, they had been paid in lieu.

[23]Thirdly, she rejected the various arguments that there had been an official error on the part of the local authority, either in respect of the question of entitlement to bonus payments or the August 2003 pay increase. As to the latter she concluded that the substantial, “if not overwhelming” cause of the overpayment was the claimant’s failure to report the various changes of circumstances to the council’s HB department in a timely fashion.

[24]The tribunal chairman also recorded the claimant’s evidence about the circumstances surrounding the payments, which reinforced what he had previously put in writing:

“I took it as money owed to myself as p/t drivers should be entitled to same as f/t. I was not told verbally/in correspondence to declare. I took it as a one-off. I signed a compensation document. I lost mine and they don’t seem to have any of the drivers’ documents + union won’t deal with us because non-union.”

Later in evidence the agreement was described as a “no come back” compromise.

[25]There has been no suggestion by the local authority that the claimant’s account of having signed some form of agreement is inaccurate. The council simply say that it has not been possible to locate any of the relevant paperwork. I have to say I find that extremely unsatisfactory. However, like the appeal tribunal, I accept the claimant’s evidence as credible on this point. I also take into account the fact that Waltham Forest were making these payments in the context of the wider background of the single status agreement and the risk of being faced with proceedings under the PTWR 2000. It is entirely plausible that the council’s legal advice – even if it seems unable to trace it now – was to the effect that it had better get its part-time workers to sign without prejudice agreements in full and final settlement of any outstanding claims they might have in relation to their treatment as part-time workers. In so far as it is necessary to do so, I find as a fact that the claimant signed such a settlement document. The parallel criminal proceedings

[26]For the record I note that Waltham Forest have brought criminal proceedings against the claimant under section 111(1A) of the Social Security Administration Act

[1992]The papers before the appeal tribunal included copies of three summons; one referred to an allegation that the claimant had dishonestly failed to declare a change of circumstances on or around 1 August 2003 which affected his benefit entitlement, “namely that there had been an increase in your earnings/income backdated to 7 August 2000”. The other two summons referred to allegations of having dishonestly provided false or misleading income details on two dates in July 2004.

[27]The three summons were issued in the local magistrates’ court. I understand that at least one of those matters has since been transferred to Snaresbrook Crown Court, where the matter has been held pending the resolution of this case, first before the appeal tribunal and now before the Upper Tribunal. It would obviously be inappropriate for me to comment on those criminal proceedings. For the same reason I make no comment on the council’s decision to institute disciplinary proceedings against the claimant. The issues on appeal to the Upper Tribunal

[28]The central issues on this appeal to the Upper Tribunal were as follows. First, did the payments by the employer to the claimant of the sums of £691.80, £3,817.96 and £2,125.46 represent payments of (arrears of) income or capital? Secondly, if they represented arrears of income, how and over what period were such payments to be attributed? Thirdly, if there had been a overpayment of housing benefit, had there been any official error on the part of the local authority?

[29]I should note at the outset that Mr Stagg quite properly conceded that the tribunal’s decision involved an error on a point of law. This was because the District Chairman (as she then was), despite the terms of her original adjournment notice, did not deal with the argument that the payments were capital (and, in particular, capital in the form of compensation for the local authority’s breach of the PTWR 2000). Mr Stagg argued that this was a harmless error in the overall scheme of things and that the Upper Tribunal should reach the same decision and outcome as the appeal tribunal, having dismissed Mr Forsdick’s argument based on the 2000 Regulations.

[30]I agree that the tribunal’s failure to address this point meant that the tribunal erred in law and its decision should be set aside (Tribunals, Courts and Enforcement Act 2007, section 12(2)(a)). In doing so, I make no criticism of the District Chairman – this was a complex case with over five hundred pages of evidence, and the multifarious arguments advanced by the claimant’s then representative, while doubtless well-intentioned, had a scatter gun effect. As indicated above, the Upper Tribunal has had the benefit of the rapier-like forensic skills of counsel to assist in focussing on the central legal issues.

[31]Given the time that has already elapsed and the fact that there are other related proceedings pending, it would be quite wrong to delay matters still further and send this case back to a new First-tier Tribunal with directions for rehearing (Tribunals, Courts and Enforcement Act 2007, section 12(2)(b) (i)). My decision is therefore to re-make the decision (section 12(2)(b)(ii)); in doing so I can make any decision the First-tier Tribunal could make and make such findings of fact as are appropriate (section 12(4)). My reasons and conclusions on the legal issues, and on any necessary findings of fact (in addition to paragraph 25 above), accordingly follow. Were the three payments income or capital? Introduction

[32]The character of the three payments of £691.80, £3,817.96 and £2,125.46, and in particular whether they were payments of capital or income, is crucial. If the payments were indeed income, as found by both the local authority and the appeal tribunal, and as Mr Stagg submits, the issue of the proper attribution of those earnings to a past period would be very much a live issue, as would any liability for the overpayment which would inevitably result.

[33]If, on the other hand, the payments were capital, as Mr Forsdick argues, then by definition they could not be attributed backwards as a form of income. In that event, they might, of course, affect the amount of ongoing entitlement to housing benefit but only as from the date of payment. This is because entitlement is lost only once the upper capital limit of £16,000 is exceeded. However, the amount of benefit may be reduced where the claimant holds capital in excess of the lower capital limit (£3,000 at the time in question, and £6,000 as from 1 April 2006) because of the operation of the tariff income rule. The parties’ arguments

[34]Mr Forsdick’s main argument was that the three payments were payments of capital rather than income. On his analysis, the three payments were compensation for a wrong – the employer’s failure to implement the 2000 Regulations in good time. He conceded that, at least as far as the two larger sums were concerned, they appeared to have been calculated on the basis of what the claimant’s bonus earnings would have been had he been treated in the same way as full-time drivers. However, Mr Forsdick argued, this of itself did not detract from his fundamental proposition that the payments represented just and equitable compensation for the wrong committed by the employer, rather than payments of arrears of contractual (bonus payments) income.

[35]Mr Forsdick referred to the relevant parts of the PTWR 2000. A full-time driver who was paid the contractual bonus was, in relation to the claimant, a “comparable full-time worker” within regulation 2(4). The claimant had “the right not to be treated by his employer less favourably than the employer treats a comparable full-time worker – (a) as regards the terms of his contract” (regulation 5(1)); moreover, this right arose where the treatment was solely because of the claimant’s part-time status and was not justified on objective grounds (regulation 5(2)).

[36]If that right was infringed, the worker then had a right to present a complaint to the employment tribunal (regulation 8(1)). If the tribunal found the complaint “well founded”, it had the power to take such “steps as it considers just and equitable” including the power to order certain remedies, such as the payment of “compensation” (regulation 8(7)). If compensation was to be ordered, it must be such as “the tribunal considers just and equitable in all the circumstances” (regulation 8(9)). Thus the payments in the present case were not simply income in the form of a payment of arrears of earnings; rather, they were capital payments made by way of settlement of a potential legal action.

[37]Mr Stagg, on the other hand, denied that the payments were by way of compromise of a legal dispute. He pointed out that there is no evidence that there was any legal dispute between Waltham Forest and the claimant in 2003, when the payments in question were made. Rather, he argued, these payments in 2003 represented back pay, going back to 2000, following legal advice given to the council’s personnel section following the resolution of a broader local-authority trade union dispute that the bonus pay arrangements should apply to all part-time workers, whether trade union members or not.

[38]It was, in Mr Stagg’s words, “as clear as day” that these sums were "earnings" in the sense of “any remuneration or profit derived from that employment” within regulation 28(1) of the 1985 Regulations. He pointed out that regulation 28(1) states that that wide expression “includes” (but is not limited to) a number of specified types of payments, including awards of compensation for unfair dismissal (regulation 28(1)(g)). The fact that the payments, which were clearly based on the bonus payments that would have been paid had the claimant been full-time, had been delayed did not, in his submission, change their nature as earnings. The Upper Tribunal’s conclusions

[39]There is, of course, no definition of either capital or income in the 1987 Regulations or indeed the 2006 Regulations. In CH/1561/2005, which concerned the impact of a payment of arrears of working families’ tax credit on entitlement to housing benefit, Mr Commissioner Jacobs (as he then was) explained the position with customary clarity (at paragraph 19):

“The Regulations deal with both income and capital. They provide for the calculation of both, for disregarding both, for treating income as capital and capital as income, for student income and for benefit income. What they do not do is to provide a definition of income or capital. The provisions operate at the stage after the money has been classified. They assume an initial classification without explaining how it is to be made. It is not possible to deduce the classification from the provisions of the legislation. Even the provisions that treat income as capital or vice versa assume an initial classification that is displaced.”

[40]That classification is ultimately a question of law (Lillystone v Supplementary Benefits Commission [1982] 3 F.L.R. 52). There is, inevitably, a considerable body of case law on the distinction. As Bridge J. observed in R v Supplementary Benefit Commission ex parte Singer [1973] 1 W.L.R. 713 at 717, the “essential feature of receipts by way of income is that they display an element of periodic recurrence. Income cannot include ad hoc receipts”. The term “income” in the statutory scheme “should be given its ordinary and natural meaning” (Morrell v Secretary of State for Work and Pensions

[2003] EWCA Civ 526

at paragraph 31 per Richards J., also reported as R(IS) 6/03), and presumably the same should apply to the notion of “capital”. That said, there will clearly be difficult borderline cases which may go either way (R v West London Supplementary Benefits Appeal Tribunal, ex parte Taylor

[1975] 2 All ER 790

at 794b per May J.).

[41]I must confess that at the initial stage of granting permission to appeal in this case I was inclined to the view that the payments in this case constituted income by way of earnings in the form of arrears of bonus payments. I had formed this provisional view in the light of the breadth of the expression “any remuneration of profit derived from that employment” in regulation 28(1) (now regulation 35(1)), which of course includes “any bonus or commission” (regulation 28(1)(a)). However, in the light of the approach taken in CH/1561/2005, I am satisfied that that preliminary view was mistaken. It was to start at the wrong end of the problem.

[42]The reason is that Part VI of the 1987 Regulations deals with the assessment of income and capital. Chapters II-V (regulations 21-36) provide for various types of income and their assessment, while Chapter VI (regulations 37-45) govern capital and its assessment. So, for example, regulation 28 cannot determine whether a payment is income or capital. The question of whether particular payments amount to income or capital is a logically prior question.

[43]My conclusion, in short, is that the two larger payments in question were capital rather than income in the hands of the claimant (as to the smallest of the three sums, see paragraph 14 above). I therefore agree with Mr Forsdick’s analysis that in essence those two payments were by way of a capital settlement for the resolution of the potential claim under the PTWR 2000 that the claimant had against his local authority employer. Mr Stagg set out a number of arguments to the contrary and as I am disagreeing with his analysis, I will set out my reasons for so doing in more detail.

[44]First, Mr Stagg observed that there was no actual litigation or specific dispute between Waltham Forest and the claimant at the time. That may well be true in a rather narrow legalistic sense, subject to the caveat that there was clearly a long-running dispute between the council on the one hand and the generality of its workforce of part-time drivers on the other and their union (even if the claimant was not himself a member). However, the claimant was evidently in a position where he could easily have lodged a complaint with the employment tribunal, as he had three months beginning with the date of the last act or failure to act comprising the less favourable treatment or detriment to which the complaint related in which to do so (PTWR Regulations, regulation 8(2)). So time did not start running until the date when the council moved its part-time workers on to the same terms as their full-time equivalents as regards bonus payments. I have also found that the claimant signed a compromise agreement.

[45]Second, Mr Stagg relied upon the wide terms of regulation 28(1) of the 1987 Regulations as conclusive in terms of the classification of these payments. However, this is to ignore the strictures of Mr Commissioner Jacobs in CH/1561/2005. Mr Stagg’s approach assumes that the payments are income and then relies on a provision which only applies to income to determine the logically prior issue of classification. Furthermore, the label attached to the payments by the employer cannot determine their true legal character. Indeed, the local authority’s own further submission to the tribunal very fairly, and in my view accurately, described the use of the term “back pay” in the 6 September 2003 memorandum as “probably a casual description rather than a considered legal view”.

[46]Third, Mr Stagg stressed that the payments (or at least the two larger amounts) were clearly calculated on the basis of the weekly bonus payments that the claimant would have earned had the provisions governing full-time drivers been applied throughout to part-time drivers. I agree with Mr Forsdick – they way in which the sums were calculated cannot detract from the fact that they were payments by way of settlement of a potential (and indeed highly probable) legal liability under the PTWR 2000. In other words they were capital payments for a breach of those Regulations and were not paid in respect of a clear contractual liability for a past period.

[47]In addition, the terms of regulation 8(7)-(14) of the PTWR 2000 make it plain that had the matter gone to a tribunal, there is no guarantee that the amount awarded would be based simply on the bonus payments which had been denied. That loss was clearly a relevant factor (regulation 8(9)(b) of the PTWR 2000) but the ultimate criterion was “just and equitable” compensation (regulation 8(7) and (9)). In practice the process of settlement would also have taken into account the fact that by making the payments the local authority was avoiding the costs of potentially protracted litigation in the employment tribunal (and perhaps beyond). On that basis the facts of this case can be distinguished from CIS/590/1993, relied on by the council and the tribunal, where the compensation was directly referable to a loss of earnings caused by an act of sex discrimination. In addition, the payment in that case covered just five weeks, not a breach that had endured for (as here) three years.

[48]Fourthly, I take into account the fact that the claimant had no clear-cut and absolute contractual right to the bonus payments between the date in 2000 when the PTWR came into force and 2003. The PTWR 2000 did not operate by way of implying a statutory term into his contract that he was automatically entitled to all the benefits enjoyed by full-time workers. This is in stark contrast to the position under equal pay legislation, under which the right to equal pay takes effect by way of an equality clause in the individual’s contract of employment, so giving rise to the usual contractual remedies. Instead, the PTWR 2000 gave the claimant a statutory right to complain to an employment tribunal about less favourable treatment, and the tribunal, assuming it found the complaint well founded, then had a wide range of potential remedial orders available to it. I also note that the precise scope and effect of the PTWR 2000 has been tested all the way to the House of Lords (Matthews & Ors v. Kent and Medway Towns and Fire Authority & Others

[2006] UKHL 8

) and has been disputed in connection with all manner of part-time posts, including judicial office-holders (Department for Business Enterprise & Regulatory Reform v O'Brien & Another

[2009] EWHC 164 (QB)

[49]Finally, I have not overlooked the fact that the payments appear to have been treated as income for PAYE purposes and subject to income tax accordingly. However, I do not attach much weight to that feature of the case. It is unclear from the papers before me how much, if any, thought was devoted to the matter. It may be that HMRC might take the view that the sums were earnings for the purposes of income tax. The employer might also have simply assumed that the appropriate course of action was to run them through the payroll, subject to normal PAYE procedures (in which event, they would presumably have been treated as income for the 2003/04 tax year alone, and as not affecting previous tax years).

[50]Yet it is by no means self-evident that the payments in question were properly taxable as earnings. There is, of course, a considerable body of jurisprudence in revenue law on such issues. However, a sum that is paid as damages or by way of compromise for breach of a contract of employment, or as compensation for breach of a statutory right, is not taxable as earnings from employment: see Du Cros v Ryall (1935) 19 TC 444 and more recently Wilson v Clayton

[2004] EWCA Civ 1657

. In any event, the issue for the Upper Tribunal is the true character of these payments in the light of the legislation governing housing benefit entitlement, not revenue law. If the payments were income, how were they to be attributed? Introduction

[51]If the payments (contrary to my conclusion above) constituted income and not capital, the next question is the period over which such payments should be attributed. I am stating my reasoning and conclusion on this point for two reasons, although the comments are strictly obiter (in other words, not essential for the decision on this appeal). First, the capital / income point is a finely balanced one, and I may of course found to be mistaken, should there be a further appeal in this case. Secondly, I state my findings in some detail in deference to the careful arguments advanced by both counsel about the scope of regulation 68 of the Housing Benefit (General) Regulations 1987, and in particular regulation 68(6) and (7).

[52]Regulation 68, which applied until replaced in the same terms by regulation 79(6) and (7) of the 2006 Regulations, is headed “Date on which change of circumstances is to take effect”. The general rule, as stated in regulation 68(1), is that a change of circumstances which affects housing benefit entitlement “shall take effect from the first day of the benefit week following the date on which the change of circumstances actually occurs”. This rule is subject to certain exceptions, including regulation 68(6) and (7):

“(6) Where the change of circumstances is that income, or an increase in the amount of income, other than a benefit or an increase in the amount of a benefit under the Contributions and Benefits Act, is paid in respect of a past period and there was no entitlement to income of that amount during that period, the change of circumstances shall take effect from the first day on which such income, had it been paid in that period at intervals appropriate to that income, would have fallen to be taken into account for the purposes of these Regulations. (7) Without prejudice to paragraph (6), where the change of circumstances is the payment of income, or arrears of income, in respect of a past period, the change of circumstances shall take effect from the first day on which such income, had it been timeously paid in that period at intervals appropriate to that income, would have fallen to be taken into account for the purposes of these Regulations.”

[53]These provisions are not happily phrased. The tribunal decided that it did not matter whether the payments in question fell within regulation 68(6) or 68(7), as either way they would be attributed to the period from August 2000. However, the tribunal expressed the view that regulation 68(7) was the “more apt” provision, given the “nice point” as to whether the claimant had an entitlement to “income of that amount during that period” within the terms of regulation 68(6). As indicated above, I find that in the period between 2000 and 2003 the claimant had no entitlement to such income – at best he had a “right not to be treated by his employer less favourably than the employer treats a comparable full-time worker” and an allied remedy by way of a complaint to the employment tribunal.

[54]I also note that the housing benefit scheme appears not to include any provision which is equivalent to regulation 31 of the Income Support (General) Regulations 1987 (SI 1987/1967). That regulation is headed “Date on which income is treated as paid” and makes specific provision to that end. The absence of any parallel provision in the housing benefit scheme means that reliance has to be placed on a regulation dealing more generally with the “Date on which change of circumstances is to take effect”. The parties’ arguments

[55]Mr Forsdick’s central argument was that regulation 68(6) was a catch-up provision and regulation 68(7) an anti-avoidance rule, and that both were designed to deal with the situation where there had been changes in pay reflecting the cash that the individual had in hand at a specified time, bearing in mind the context of housing benefit being a weekly benefit for people on modest incomes. In short, he contended that those provisions cannot be indeterminate, and Parliament cannot have intended that they be applied so as to remove entitlement retrospectively for a period of some three years.

[56]Mr Stagg’s reply to this analysis was simple: if Parliament had wished to impose some sort of limit to the period over which late payments of income could be attributed, it could have done so, but there was nothing in regulation 68 or in the regulations governing revisions and supersessions which suggested there was any time limit. Mr Forsdick’s approach, he argued, involved the impermissible insertion of qualifying words into the plain terms of regulation 68. The statutory history of regulation 68(6) and (7)

[57]Neither of the sub-paragraphs in question appeared in the original version of the 1987 Regulations.

[58]Regulation 68(6) was added by amending regulations in 1994 (regulation 11 (3) of the Housing Benefit and Council Tax Benefit (Miscellaneous Amendments) Regulations 1994 (SI 1994/578)). The unhelpful Explanatory Note issued at the time simply stated that the amendment made “further provision as to the date on which a change of circumstances is to take effect, where the change is in respect of a person's income”.

[59]The commentary on the current provision to the same effect (regulation 79(6) of the 2006 regulations) in Housing Benefit and Council Tax Benefit Legislation – Twenty-first Edition 2008/2009 is of more assistance. This suggests the following scenario: if the claimant should have received a pay rise at the end of May, but it is not actually received until the end of August, then under this provision the arrears are to be treated as having been received at the end of May. This type of case was also the explanation proffered by counsel for the Secretary of State in R v Middlesbrough Borough Council, ex parte Holmes (CO/2718/94, 15 February 1995) and apparently accepted by the High Court in that case.

[60]Regulation 68(7) was added a year later by regulation 2(b) of the Housing Benefit and Council Tax Benefit (Amendment) Regulations 1995 (SI 1995/511). The contemporaneous Explanatory Note was equally unhelpful. However, it seems reasonably clear that the purpose of the amendment was to reverse the effect of the decision of Brooke J. in R v Middlesbrough Borough Council, ex parte Holmes. Certainly Mr Commissioner Jacobs (as he then was) did not demur from counsel’s assertion to that effect in CH/1561/2005 (at paragraph 7). That explanation is also borne out by the commentary in Housing Benefit and Council Tax Benefit Legislation – Sixteenth Edition 2003/2004 at pages 455-456.

[61]In R v Middlesbrough Borough Council, ex parte Holmes the claimant had been paid a lump sum in 1993 representing three years’ arrears of industrial disablement benefit. The local authority treated that as a payment of income going back to 1990, producing an overpayment of housing benefit. Brooke J. held that the payment of arrears of benefit could not be taken into account as income over the past period before the change of circumstance itself had occurred, given the wording of regulation 68(1) as it then stood. The amending regulation was, so it is said, designed to restore “the original policy intention that the change of circumstance (award of arrears of a social security benefit) should take effect from the date on which such income would fall to be taken into account had that income been paid on time” (Housing Benefit and Council Tax Benefit Legislation – Sixteenth Edition 2003/2004, at page 456).

[62]In this appeal the parties did not refer to R v Middlesbrough Borough Council, ex parte Holmes in their submissions. As it provides part of the background to this case, rather than being central to my reasoning, I have not delayed matters further by inviting submissions from counsel on that authority. The Upper Tribunal’s conclusions

[63]If (contrary to my decision as explained above) these payments are income by way of past earnings, I would conclude that they are not caught by regulation 68(6). I agree with Mr Forsdick that regulation 68(6) is a catch-up provision. I did not understand Mr Stagg to be pressing the contrary view with any great vigour. In my judgment it is significant in this context that regulation 68(6) applies to changes of circumstances where “income, or an increase in the amount of income… is paid in respect of a past period”, whereas regulation 68(7) refers to a “payment of income, or arrears of income, in respect of a past period” which has not been timeously paid (emphasis added).

[64]That distinction between an “increase in” and “arrears of” income holds the key to the difference between the two sub-paragraphs. The example of the pay increase due in May but paid in August seems to me a good one. In many jobs there may be a general expectation, based on past practice rather than on any contractual rights, that a pay increase is due to take effect on a certain date each year. However, for all sorts of reasons payment of the increase (even assuming it is paid) may be delayed for several months. Regulation 68(6) covers just that situation. Such delayed pay increases, although “paid in respect of a past period” are also referable to a period during which “there was no entitlement to income of that amount”, for the very reason that pay negotiations had dragged on and contractual rights were not adjusted until they were concluded.

[65]I have real difficulty in seeing how regulation 68(6) can apply to the present circumstances, even assuming for the moment that the payments in question represent income by way of earnings. It is true (on this assumption) that the payments were in respect of a past period and that claimant had “no entitlement to income of that amount” under his contract between 2000 and 2003. However, those responsible for drafting regulation 68(6) and (7) must have used the distinction between the terms “increase in” and “arrears of” income in some meaningful sense, notwithstanding the proviso to regulation 68(7) that it is without prejudice to regulation 68(6). In particular, as explained above, regulation 68(6) and (7) were added incrementally. If the payments in the present case were earnings by way of past bonus payments, they were arrears. If they were arrears, then they fell within regulation 68(7).

[66]So, if (again, contrary to my decision as explained above) these payments are income by way of past earnings, I would conclude that they are caught by regulation 68(7) but not by regulation 68(6). On this matter I agree with Mr Stagg that there is no warrant for reading regulation 68(7) in the time-restricted way advocated by Mr Forsdick. Nor do I accept Mr Forsdick’s argument that regulation 68(7) is no more and no less than an anti-avoidance rule. That argument cannot stand with what we know of the background to the amendment. More importantly, regulation 68(7) refers in general and unqualified terms to a “payment of income, or arrears of income, in respect of a past period”. Those words are sufficiently wide to catch the payments in this case (assuming, again, that they are income).

[67]I reach that conclusion primarily as a matter of statutory interpretation, but that construction would also be consistent with the legislative history of, and policy intention behind, regulation 68(7) (see R v Middlesbrough Borough Council, ex parte Holmes above). I also note that the argument now made by Mr Forsdick was not taken by counsel in R v South Hams District Council, ex parte Ash (1999) 32 H.L.R. 405, where three years’ arrears of a war disability pension created a substantial housing benefit overpayment. There are, furthermore, two more recent decisions which also support Mr Stagg’s interpretation of regulation 68(7).

[68]First, in CH/38/2008 the claimant had been in receipt of both housing benefit and incapacity benefit. In October 2003 the claimant lost his entitlement to incapacity benefit. He informed the local authority, which reassessed and increased his entitlement to housing benefit to reflect his reduced income. In February 2005 the claimant won his appeal against the decision to withdraw his incapacity benefit and was paid arrears back to October 2003. He reported that change to the local authority, which failed to act upon the information. The local authority subsequently sought to recover an overpayment of housing benefit from October 2003 to March 2007. Mrs Deputy Commissioner Ramsay was in no doubt that regulation 79(7) (previously regulation 68(7)) applied, so that “his weekly income was to be treated as increased for each week” since October

[2003]However, the main issue in that appeal concerned the scope of official error, and in particular whether the claimant could reasonably have been expected to realise that there had been an overpayment.

[69]Secondly, I note also that in Middlesbrough Borough Council v DS

[2009] UKUT 80 (AAC)

, discussed further below, no point was taken on the attribution of payments by way of arrears of occupational pension over a period of some six years, i.e. twice the period which had been at issue in R v Middlesbrough Borough Council, ex parte Holmes. As the point was not taken, Deputy Tribunal Judge Mark heard no argument on the matter in that case. However, I have had the advantage of full submissions on the point and am satisfied that if the payment(s) in the present case amounted to income, and not capital, then there is no time restriction in regulation 68(7) as regards the period of time over which they are to be attributed. The attribution to a potentially unlimited past period is governed by the plain words of regulation 68(7). If this may cause injustice in particular cases, then the answer must lie in the discretion which local authorities have as to whether to seek recovery of overpayments. For example, the fact that a claimant has been ‘kept out of his money’ was certainly regarded by Moses J. as relevant to the local authority’s exercise of its discretion in R v South Hams District Council, ex parte Ash (1999) 32 H.L.R. 405 at 411-413. If there was an overpayment, was there an official error? Introduction

[70]If the payments in question were income and were properly attributed back to August 2000, there can be no dispute but that there was an overpayment of housing benefit. The general rule, of course, is that such overpayments are recoverable from the claimant (regulation 100(1) of the 2006 Regulations). The general social security test for recovery of overpayments, premised on the claimant’s misrepresentation of, or failure to disclose, a material fact does not apply in the housing benefit context. There is, however, a defence to what would otherwise be a recoverable overpayment of housing benefit in certain (but by no means all) cases of “official error” (regulation 100(2) and (3)). The parties’ arguments

[71]Mr Forsdick’s argument, in summary, was that the local authority’s failure to give effect to the 2000 Regulations at the right time and to treat its part-time workers no less favourably than their full-time counterparts amounted to an “official error” by the council. This failure, he argued, was the sole and the direct reason for the overpayment of housing benefit. If that official error had not occurred in 2000, the claimant’s pay would have been higher, his housing benefit entitlement would have been lower and there would accordingly have been no need for any catching-up lump sum payments in 2003 and so no overpayment. Furthermore, the claimant himself made no contribution to that official error – it was the local authority’s fault alone that they had underpaid their part-time staff. Accordingly, Mr Forsdick contended, the claimant could rely on the ‘escape route’ of regulation 100(2) of the 2006 Regulations.

[72]In addition, in terms of causation, Mr Forsdick relied on R (on the application of Sier) v Cambridge City Council Benefit Review Board

[2001] EWCA Civ 1523

, and in particular Latham L.J.’s observation (at paragraph 25) as to the “general legislative purpose” of the 1987 Regulations, which seemed to His Lordship to be clear:

“Parliament has laid down in the Regulations that a person is to be relieved of the obligation to repay an overpayment when that has been occasioned by an administrative mistake and not by any fault on the part of the recipient. That seems to me to be the basic thrust of the Regulation and one should approach the meaning of the word ‘cause’ and its application to the facts on that basis.”

[73]Mr Stagg’s argument, again in summary, was that the local authority’s failure to implement the PTWR 2000 with immediate effect was not an “official error” in this sense. Rather, the application of those statutory provisions was not straightforward and had given rise to a long-running and complex national dispute between local authority employers and trade unions. Furthermore, it was only the coincidence that the claimant’s employer was also the same local authority that administered housing benefit in that area that allowed the claimant to run this argument at all. In the course of the oral hearing this became identified as ‘the Redbridge argument’ – if the claimant had lived in Waltham Forest but had worked for the neighbouring borough of Redbridge, the claimant’s “official error” defence would never have got off the ground in the first place.

[74]As to R (on the application of Sier), Mr Stagg submitted that the case had to be seen in the context of its facts. In particular, the claimant in that case had plainly not disclosed material information to the local authority, but was seeking to rely on the omission by the social security office to send the housing benefit office a particular notification as an “official error” that had caused the overpayment. On a common sense analysis of causation, as applied by the Court of Appeal, the claimant in that case was clearly primarily responsible for the overpayment.

[75]Both counsel agreed that the starting point must be the statutory definition in regulation 100(3) (as amended):

“(3) In paragraph (2), "overpayment which arose in consequence of an official error" means an overpayment caused by a mistake made whether in the form of an act or omission by— (a) the relevant authority; (b) an officer or person acting for that authority; (c) an officer of— (i) the Department for Work and Pensions; or (ii) Revenue and Customs, acting as such; or (d) a person providing services to the Department for Work and Pensions or to the Commissioners for Her Majesty's Revenue and Customs, where the claimant, a person acting on his behalf or any other person to whom the payment is made, did not cause or materially contribute to that mistake, act or omission.”

[76]Mr Forsdick pointed out that the expression “relevant authority” in regulation 100(3)(a) was itself defined by regulation 2 as “an authority administering housing benefit”. However, he relied on R(H) 10/08, where Mr Deputy Commissioner Whybrow QC observed as follows (at paragraph 28):

“I see no justification for construing the term ‘relevant authority’, which in its ordinary meaning is wide enough to embrace any part of the authority, in a way which confines it to one department within the authority. In particular, the statutory definition of ‘relevant authority’ does not justify such a restriction: its purpose, in my opinion, is to limit the term to authorities administering HB, as distinct from authorities, like shire counties, who do not have these functions.”

[77]So, Mr Forsdick contended, “relevant authority” meant no more and no less than an authority which administered housing benefit; it did not mean an authority which administered housing benefit but only when it was carrying out its functions under the housing benefit scheme (rather than as, e.g., employer). In so far as it decided otherwise, Middlesbrough Borough Council v DS

[2009] UKUT 80 (AAC)

, a decision of Deputy Upper Tribunal Judge Mark, should not be followed.

[78]Mr Stagg, however, argued that the Deputy Commissioner’s observations at paragraph 28 of R(H) 10/08 had to be read in the context of the parties’ submissions in that case. In addition, they had to be seen in the light of the Deputy Commissioner’s conclusion (at paragraph 26) that “the mere fact that information given to the housing office had not been passed to the benefits service” (of the same council) was not sufficient to make a finding of “official error”. Rather, the claimant had to have “a reasonably based expectation” that the information would be passed on. It would only be in those rather special circumstances that a council employee who was not otherwise involved in housing benefit administration could be said to be “an officer or person acting for that authority” within regulation 100(3)(b).

[79]In Middlesbrough Borough Council v DS

[2009] UKUT 80 (AAC)

the claimant was paid a lump sum in 2008, representing arrears of an occupational pension going back to 2000. As a result he was found to have been overpaid housing benefit and council tax benefit from 2002. The issue was whether these overpayments were in consequence of an official error. The same council was responsible both for administering housing benefit and the pension scheme in question.

[80]Deputy Upper Tribunal Judge Mark, substituting his own decision for that of the tribunal, concluded on the facts that there was no evidence of any mistake or error on the part of the council. The deputy judge declined to remit the case for re-hearing as, in his view, the “official error” defence could not succeed in any event:

“the official error must have been in the context of the performance of the council’s duties in relation to the relevant benefit. It does not cover mistakes made as, for example, a pension provider or an employer”

(at paragraph 13).

[81]In addition, however, the deputy judge stated at the outset of paragraph 13 of his decision that “Regulation 100(3) of the Housing Benefit Regulations 2006 and regulation 83(3) of the Council Tax Benefit Regulations 2006 in fact refers to the relevant authority or a person acting for that authority ‘acting as such’.” Mr Forsdick and Mr Stagg were, as I understand it, agreed that this passage did not accurately reflect the text of regulation 100(3)(b). Rather the “acting as such” qualification applies only to officers of the DWP or HMRC, as set out in regulation 100(3)(c)). The Upper Tribunal’s conclusions

[82]I agree with the analysis by both counsel as set out in the previous paragraph. I merely note that the deputy judge may have been inadvertently misled by the note to this provision which appears in the annotated Housing Benefit and Council Tax Benefit Legislation – Twenty-first Edition 2008/2009 at page

[492]The commentary there, referring to the statutory expression “acting as such”, argues that “The official must be acting in her/his official capacity. Thus the claimant whose neighbour works for the council and gives her/him erroneous advice as to entitlement to HB cannot rely on his advice as the relevant mistake”. I would suggest that the suggested outcome in this textbook example is clearly correct, but not because of the wording “acting as such” in regulation 100(3)(c), which refers solely to DWP or HMRC officers. Rather, the conclusion follows from the wording of regulation 100(3)(b), as explained by R(H) 10/08. I should perhaps note for the record that Mr Stagg nimbly disclaimed any continuing responsibility for this error in the annotations to the legislation, as he no longer has an editorial role in the publication in question

[83]So where does this leave Middlesbrough Borough Council v DS? With respect, and notwithstanding the unfortunate conflation in the passage referred to, the actual outcome in that case must be right. Deputy Upper Tribunal Judge Mark put the point as follows, in a passage at paragraph 12 of his decision, relied upon strongly by Mr Stagg:

“However, it does not appear to me that the matter does rest there. The question arises here solely because the council happened to be responsible for the claimant’s pension through the fund, which was administered on its behalf. If any other body (other than the DWP and HMRC which are specifically included in regulation 100(3)) had been responsible for the pension, including some other local authority, any mistake on that body’s part could not have affected the claimant’s liability to repay the overpayment. To construe regulation 100(3) in this way is to produce a very odd result which would put one small class of claimants in a better position than anybody else for no very good reason.”

[84]In my judgment there is no good answer to that argument. Put another way, the ‘Redbridge argument’ deals a fatal blow to the claimant’s prospects of relying on the “official error” defence. If the claimant had been employed by the neighbouring council, he could not have relied upon regulation 100(2) and (3). If he had been employed by another public sector employer operating in the same borough as Waltham Forest (e.g. a primary health care trust), he could not have relied upon regulation 100(2) and (3). If he had been employed by a private contractor providing the services of drivers to the council in the same borough, he could not have relied upon regulation 100(2) and (3). It cannot be right that the claimant should be able to plead “official error” simply because his employer and the council dealing with his housing benefit claim happen to be the one and the same local authority.

[85]I do not think that R (on the application of Sier) provides any great support for Mr Forsdick’s arguments. In particular, I conclude that he is seeking to read too much into Latham L.J.’s observations (at paragraph 25) about the “general legislative purpose” of the 1987 Regulations. The context of those comments was very much in terms of administrative errors by staff performing social security (including housing benefit) functions and do not translate easily to the circumstances of the current case.

[86]Accordingly, if the payments at issue were (contrary to my conclusion) income, and if they were on that basis then properly attributed as earnings over the period of the housing benefit claim going back to August 2000, then the resulting overpayment would have been recoverable from the claimant under regulation 100(1). He cannot rely on the local authority’s handling of the issue of equal pay for part-time workers to mount an “official error” defence within regulation 100(2) and (3). The claimant’s regular earnings after August 2003

[87]Quite independently of the lump sum payments received in September 2003, the claimant’s regular weekly wages increased with effect from 15 August 2003 as a result of the extension of bonus payments to the part-time drivers. The tribunal found that that increase was not reported at the time and that there was no official error in that regard. The local authority’s case was that the claimant had not reported that change until the summer of 2004. I did not grant permission to appeal in relation to that aspect of the case and need say no more about it. Conclusion

[88]The claimant’s appeal to the Upper Tribunal succeeds to a large extent. I set aside the tribunal’s decision and re-make the decision of the respondent council in the terms as set out above. Signed on the original Nicholas Wikeley on 26 November 2009 Judge of the Upper Tribunal

EM v London Borough of Waltham Forest [2009] UKUT 245 (AAC)

Cited in 2 later judgments