GO'B v CMEC [2010] UKUT 6 (AAC)

UKUT-AAC
GO'B v CMEC
[2010] UKUT 6 (AAC) · 2010-01-14
[1]This appeal by the non-resident parent is allowed and the decision of the Exeter appeal tribunal sitting on 8 October 2008 set aside to the extent that the case is remitted to a First‑tier Tribunal to reconsider and redetermine the variation of the child maintenance calculation effective from 25 January 2007 it is just and equitable to impose in all the circumstances having regard in particular to the matters identified below . For this purpose I direct that the First‑tier Tribunal to which the case is remitted to carry out this exercise is to be composed of the same members as have already dealt with the case on 8 October 2008, unless for any reason it is impracticable to reconvene them; in which case it will be for the regional tribunal judge to give any necessary procedural directions to enable the case to be reconsidered and redetermined effectively.[2]This is an appeal on limited grounds by the non‑resident parent of three teenage children against the decision of the tribunal (Mrs K R Miller, chairman, and Mr R D Wheare, financial expert member) to direct a variation on three specified grounds of his calculated maintenance liability due to the children’s mother from 25 January 2007.[3]The tribunal’s decision, set out in the formal decision notice dated 8 October 2008 at pages 207 to 208, also dealt with two other matters that are not now in dispute. First it directed that the income received by the non‑resident parent by way of PAYE earnings from his own wholly controlled company was to be recalculated as £97.59 per week net of tax and national insurance; and secondly that the overall maintenance calculation was in any case to be decreased by reason of the shared care arrangements for the children in the prescribed period, by the equivalent of 6 / 21 of the full amount. (The tribunal recorded that this proportionate reduction reflected the written evidence of the children themselves, and the way it was arrived at was no longer in dispute between the parents once the criteria and the relevant period had been explained and understood.) Neither of those findings is challenged in this appeal.[4]The remainder of the tribunal’s decision concerned the variations it thought fit to direct in the calculation so as to increase the liability of the non‑resident parent, a well-to- do financial consultant, to reflect the fact that he was channelling the earnings from his professional activities through his one‑man company; and was both drawing the bulk of his income from it in forms which otherwise escaped the child support calculation, and equally or more important, was making cash retentions of a very substantial proportion of those earnings in the company in such a way as to increase his wealth but keep his distributable income low.[5]After a very thorough examination of the evidence the tribunal thus concluded that it would be just and equitable to make variations to bring additional sums into the calculation in three respects:(a) a variation under Schedule 4B Child Support Act 1991 and regulation 19(1A) Child Support (Variations) Regulations 2000 , SI 2001 No 156 (income not taken into account) for money drawn by the non‑resident parent in the form of annual dividends of £25,200.00 in the relevant period, net of basic rate tax: that is extra net income of £484.62 per week;(b) a further variation under regulation 19(1A) in respect of additional income paid by the non‑resident parent to himself out of the company in the form of rent, at the rate according to his own evidence of £1,143.00 per month gross, but with a deduction for what the tribunal was satisfied were the mortgage costs and other expenses shown by the evidence to be borne by the claimant himself on the property, resulting in a further £124.00 per week to be added to his income for the calculation, less whatever income tax he was liable for on that money;(c) a variation under regulation 19(4) (diversion of income) for a further annual amount of £31,994.00 which the tribunal was satisfied he was unreasonably diverting from his own reckonable income out of the actual yearly earnings from his activities, by retaining it undistributed in the company as a surplus over and above what the tribunal considered a reasonable level of retention, even being ‘prudent, and if anything, overcautious’; and, as they expressly found as a fact, with a view to reducing the computation of his income for child support purposes.[6]The tribunal members considered the combined effect of these variations and determined that it was just and equitable to impose them, as having the effect of bringing a more realistic proportion of the non‑resident parent’s true earnings into the calculation. They calculated that the consequent liability would be £164.00 per week or thereabouts and concluded:
“We were quite satisfied that it was just and equitable for the non‑resident parent to pay at least that amount, given our very cautious approach to the retention required by the company, and that payment of a significantly higher figure was well within his means.”
See the very detailed, clearly expressed and comprehensive statement of reasons for their decision issued to the parties on 20 November 2008 at pages 210 to 219 inclusive.[7]Against that decision the non‑resident parent appeals with the leave of the First–tier Tribunal chairman on the four specific grounds identified in paragraph 8 of the direction I gave at an earlier stage of these proceedings on 30 July 2009 (pages 258-264). In that direction, which has not been disputed or questioned by any party, I determined that the scope of the appeal was limited to those four issues, and refused the non-resident parent’s application that it should be widened by any supplemental grant of leave.[8]Following that direction, I have the benefit of an amended notice of appeal and detailed written arguments on those four issues, from the non‑resident parent’s solicitor Mr David Burrows dated 8 September 2009 at pages 267-272; from Mr C M Ellis on behalf of the Child Maintenance and Enforcement Commission, dated 24 September 2009 at pages 273 to 279; from the children’s mother (and second respondent), dated 4 October 2009 at pages 315 to 316; and from Mr Burrows in reply dated 4 November 2009 at pages 317 to 321.[9]No party has made any application for an oral hearing of the appeal and I am satisfied that it can be properly determined on the written submissions now before me.[10]The first question is whether the tribunal’s determination to include the rental income of £124.00 per week less tax in the child support calculation by way of variation under regulation 19(1A) was in accordance with the regulations.[11]I am not persuaded there was any arguable error of law in the way the tribunal dealt with the amounts of income the non‑resident parent was thus causing to be paid to himself by way of rent. It is true that as his solicitor points out in paragraph 4 of the amended notice of appeal and submissions at page 268 there is a mistaken reference in paragraph 34 of the tribunal’s reasons to the “MASC Regulations” (instead of to “MCSC”, or the Child Support Maintenance Calculation and Special Cases Regulations 2000 SI 2001 No. 155) but the express references they made to the correct regulations just above leave no possible room for doubt that this was just a trivial typographical slip and the tribunal members were in fact considering the correct regulations.[12]As they correctly directed themselves, regulation 19(1A) of the Child Support (Variations) Regulations already cited specifies it as a case for possible variation under paragraph 4(1) of Schedule 4B to the Child Support Act 1991 where – “(a) the non‑resident parent has the ability to control the amount of income he receives from a company or business, including earnings from employment or self‑employment; and (b) the Secretary of State is satisfied that the non‑resident parent is receiving income from that company or business which would not otherwise fall to be taken into account under the Maintenance Calculations and Special Cases Regulations.” Again there can be no room for possible doubt that the tribunal members were correct in directing themselves that this was such a case: there was no room for dispute on the non‑resident parent’s own evidence that he was conducting his professional earning activities through such a company or business under his own sole control; and that he was receiving substantial amounts of income from it by way of rent which is not a form of income automatically brought into the standard calculation under the 2001 MCSC Regulations.[13]I entirely agree with the submission of Mr Ellis on behalf of the Commission that as regulation 19(5)(c) expressly provides for the whole of the income referred to in paragraph (b) of regulation 19(1A) to be brought into account in such a case, there could be no ground for criticism of the tribunal for doing so on the basis of the best information available to them as to what the rate of that income was at the material time.[14]I further agree that as a matter of principle they acted entirely properly, in determining the variation they considered it just and equitable to direct on this ground, in making the non‑resident parent an allowance against his own gross rental income figure for the mortgage interest and other costs shown in his own tax return as deductible expenses in calculating the net rental income he was receiving. As both the tribunal and Mr Ellis’ submission point out, the non-resident parent’s own figures were not entirely consistent or easy to follow, and in those circumstances the tribunal’s approach based on his own figures for the six months down to 5 April 2007 as shown in his tax return on pages 122 to 123 (the property having only been acquired part way through the year) was in my view an entirely fair and reasonable one. The tribunal’s figure of £124 per week for the net profit rental before tax was in fact the same as that declared in the tax return itself, calculated over that six months period (£3,221: equal to £537 per month or £124 per week). The tribunal members expressly directed that any income tax payable on the net profit rental should be deducted from it, so there is no ground for criticism on that score. Nor can there be any in their not having taken at face value the non‑resident parent’s uncorroborated assertion at page 173 that the monthly rent he received was “just less than the mortgage repayments”, in view of the more specific evidence in his own tax return as to what the deductible income expenses actually were.[15]I therefore reject the first ground of appeal. However the course I am taking of remitting the case for redetermination on one ground under the next head will in practice allow the non‑resident parent a final opportunity to clarify his own figures on the rent, and to draw the tribunal’s attention, if he is able, to anything showing clearly and specifically that some additional allowance should be made to him in assessing the true level of profit income rental that should be taken into account in the overall variation.[16]I turn now to the second and third grounds of appeal which can conveniently be taken together. They are that the tribunal was not entitled as a matter of law to “impose its own assumptions and business preferences” in the way it treated the non‑resident parent’s decisions to retain cash reserves in his company, and was not justified on the evidence in not accepting the “need for a contingency fund for acquisitions” as justifying an even higher level of retention of accumulated earnings in the company than already allowed for in the variations it directed under regulation 19(4).[17]That provision makes it a case for a variation under paragraph 4(1) of Schedule 4B to the 1991 Act where – “(a) the non‑resident parent has the ability to control the amount of income he receives, including earnings from employment or self‑employment, whether or not the whole of that income is derived from the company or business from which his earnings are derived, and (b) the Secretary of State is satisfied that the non‑resident parent has unreasonably reduced the amount of his income which would otherwise fall to be taken into account under the Maintenance Calculations and Special Cases Regulations or paragraph (1A) by diverting it to other persons or for purposes other than the provision of such income for himself.”[18]It is beyond dispute that the non‑resident parent had complete control over the income he channelled into or drew from his company and the form in which he received it, whether as earnings or otherwise, and it is further established, and not disputed on behalf of the appellant, that the deliberate retention of profit within the limited company when it could be distributed as income so as to be taken into account for maintenance calculation purposes amounts to a “diversion” bringing the case within the potential ambit of paragraph (b): see CCS 3006/07.[19]I reject as misconceived the submissions on behalf of the non‑resident parent (see page 268) that:
“The Tribunal was not entitled, as a matter of law, to impose its own assumptions and business preferences upon the appellant in the way in which he ran his business. For example he was entitled to choose to hold money in his company to enable it later to provide him with a pension. This is a business decision which he is entitled to make and which the Tribunal was not entitled to go behind … The Tribunal was not entitled, as a matter of law, to dismiss as only a theoretical possibility … the question of whether or not the appellant might need to retain cash as a contingency fund for the acquisition of another business or businesses …”
. So to hold as a mattter of law would give a non‑resident parent complete carte blanche to prefer the increase of his own wealth and business interests to the immediate needs of his own children, and would enable an unscrupulous parent to stultify the purpose of the child support legislation.[20]There is of course a balance to be struck in this context between maintaining a viable and hopefully successful business (which is in the interests of all parties concerned: no one disputes that) and providing a reasonable income stream available for the children’s immediate maintenance needs (which do not wait, and cannot be left to catch up or come to fruition in later life, in the same way that for example pension or other capital accumulations can). Such questions are resolved by the express terms of the legislation that a non‑resident parent’s subjective choice to prefer his own accumulation of wealth and business interests to the provision of maintenance for his children may indeed be overridden in prescribed circumstances where it is just and equitable to do so. Those circumstances, under regulation 19(4), are that it is a case where the Secretary of State (or the tribunal on appeal) is satisfied his diversion of resources away from providing income that could otherwise be available to pay for child maintenance has reached the point where it has become unreasonable. Whether that point has or has not been reached in a particular case is, like other cases where the law provides for a test of reasonableness as a justiciable issue, an objective judgment of fact and degree for the Secretary of State or tribunal to make having regard to all the circumstances.[21]I agree with the well balanced and helpful submission by Mr Ellis on behalf of the CMEC that the tribunal in this case did no more than carry out the objective task thus required of them by regulation 19(4), in determining whether the non-resident parent’s level of retentions, and hence diversion of resources away from providing income so available, was reasonable or unreasonable in the context of the child support legislation it was obliged to apply. There is in my view no question of that having involved the tribunal “imposing its own assumptions and business preferences” in the subjective way suggested: it is self-evident that it did not, but rather the tribunal members asked themselves the correct question, whether making all reasonable allowances the overall effect fell outside the band of what was reasonable in all the circumstances.[22]I further completely agree with Mr Ellis that although the judgment of what is reasonable or unreasonable for the purposes of regulation 19(4) is a broad one for the good sense of the tribunal, and the legislation places no restriction on the circumstances that may be taken into account, it is a judgment to be made in the context of the child support legislation and the purpose of the variation provisions themselves. As he says:
“In my submission the question as to whether a diversion was unreasonable has to be seen in the context of the regulation (Variation reg 19) and the overall purpose of the Child Support Schemes including the terms of section 1(1) of the Child Support Act which sets out that parents are responsible for maintaining their children. In making financial decisions a parent will obviously have a number of factors to take into account but providing maintenance for his or her children must be very high up in the list of priorities. In my submission the tribunal was both entitled and required to decide as a question of fact whether the choices made by the NRP were ‘unreasonable’ given the context as I describe it above. It strikes me that the tribunal took particular care to ensure that it took into account the sort of decisions that a prudent businessman would make – for example the tribunal gave a generous margin when deciding how much the business needed to retain in order to be able to meet contingent liabilities.”
[23]Except in the one respect that the submission then goes on to identify, there is in my judgment no valid criticism of the way the tribunal members carried out their task under regulation 19(4), or the decision they reached that the overall level of retentions, and thus diversion away from provision of available income, at the time in question here fell on the unreasonable and excessive side of the line, for the reasons they clearly and comprehensively explained in their statement. As Mr Ellis points out, they reinforced their conclusion that the non‑resident parent’s level of retentions was unreasonable by finding as a fact that his diversion of income had been expressly motivated by the desire to reduce his liability to pay child support maintenance; and thereby applied a more demanding test than actually now required to constitute a case for variation under regulation 19(4), as that part of the original wording has been omitted from paragraph (b) since 6 April 2005. However that finding, which in my view was clearly open to the tribunal on the evidence to which they referred, does not of course detract in any way from their decision on the question of unreasonableness: on the contrary it strengthens it.[24]The one respect in which the tribunal’s approach can I agree be faulted is that identified in paragraphs 25 to 28 of the submission, referring to paragraphs 65 to 66 of the tribunal’s reasons where they reject as irrelevant the point made by the non-resident parent that “ he had no pension arrangements and that he saw the company as his pension scheme ”: in other words that his lack of separately funded pension arrangements made it reasonable for him to accumulate a greater level of capital wealth within the company in the hope that it would be there to be cashed-in later in life, perhaps on a disposal of the business, to provide for his own old age.[25]Instead of dealing with this as just one among various factors to be taken into account in the balancing exercise I have already described (which in my view would have been the correct approach) the tribunal excluded it from consideration as a factor altogether, for reasons the statement explained as follows:
“66. The company has no contractual obligation to provide him with a pension. The non‑resident parent’s pension or his lack of one is not a relevant factor in this calculation although the Tribunal has no doubt that it is relevant to the non‑resident parent personally. The fact is that he and the company are separate entities, a point which he emphasised repeatedly throughout the appeal, in support of his own arguments. 67. Also irrelevant to this calculation and for the same reason, is the extent to which the non‑resident parent’s inheritance tax planning affects matters. Any decision to leave money in the company to reduce a future or potential inheritance tax liability is a personal consideration and nothing to do with the sound operation of the financial affairs of the company itself.”
[26]In that one respect it seems to me the tribunal members misdirected themselves. As I have already said the determination of what is reasonable or unreasonable for the purposes of regulation 19(4) is left by the legislation to depend on all the circumstances surrounding the non‑resident parent’s ability to control the income he receives; whether (as paragraph (a) expressly says) the whole of that income is derived from or put through the company or business he controls, or not. A broad judgment has thus to be made on whether the way he has exercised that control is reasonable or unreasonable, and I do not think it can be right to impose on that any implied limitation that the only factors that can be brought into account are those depending on the obligations and needs of the business itself (still less the state of any formal contract between the non-resident parent and his own company; which seems to me of absolutely no consequence in this context, in view of his complete control over its actions or inactions).[27]To apply such a limitation would in my view limit the scope of regulation 19(4) too narrowly, and undesirably: it is a point that of course can cut both ways, as a tribunal might for example take the view that although there was everything to be said in business terms for a high level of retention to strengthen the balance sheet and fund future expansion, it was nevertheless un reasonable for a non‑resident parent to make the immediate expansion of his business the be-all and end-all of his thinking and an absolute priority over providing a reasonable level of income to pay for his children: a view they must in my judgment be entitled to take and to apply under the regulation. The weight to be attached to such factors in the balancing exercise is a matter for the judgment of the tribunal dealing with the individual case, but in my view both personal and business considerations are to be taken into account, on each side of the scale: there is no warrant in the legislation for excluding either of them automatically as a matter of principle.[28]Accordingly in my judgment the tribunal’s decision has to be set aside on that one ground and the case remitted to them to reconsider whether the non‑resident parent’s point about his pension provision makes any difference to their overall conclusion on the variations it is just and equitable to direct.[29]The final ground of appeal consisted of the suggestion that the tribunal had misdirected itself in making three factual errors on different individual aspects of the evidence. Having considered each of them and Mr Ellis’ comments on them I am not persuaded that even if these did involve any mistake on the tribunal’s part (which I do not think is certain), any was of any materiality to the actual decision. In particular I confirm that the tribunal’s approach to the calculation of the additional distributable earnings for the year in question, which it directed to be converted into a weekly equivalent amount net of tax, was in my view unaffected and was justifiable in law.[30]The appeal is therefore allowed to the extent indicated and the matter referred to the tribunal for final redetermination accordingly. P L Howell Judge of the Upper Tribunal 14 January 2010

Cited in 2 later judgments