MG v CMEC (CSM) [2010] UKUT 83 (AAC)

UKUT-AAC
MG v CMEC (CSM)
[2010] UKUT 83 (AAC) · 2010-03-19
[1]In the language of the relevant child support legislation the appellant is the non-resident parent of the qualifying children. From now on I shall call him the father and I shall call the second respondent, in the language of the legislation the parent with care, the mother.[2]This decision raises once again the problem of the proper interpretation of the very unhelpfully drafted amendment with effect from 29 April 2002 to regulation 18(3)(d) of the Child Support (Variations) Regulations 2000. The problem has already been addressed, with somewhat differing answers, by Judge Wikeley in GD v Secretary of State for Work and Pensions [2008] UKUT 27 (AAC) and by Judge Turnbull in CD v Secretary of State for Work in Pensions [2009] UKUT 48 (AAC) . It is necessary to resolve those differences. However, none of the potential outcomes is at all satisfactory and there is an urgent need for consideration to be given to further amendment to the both the Variations Regulations and to the Child Support (Maintenance Calculations and Special Cases) Regulations 2000 (the MCSC Regulations) to make clear whatever it is that Secretary of State thinks is the right answer. I cannot pretend that the present decision will necessarily be accepted as the last judicial word on the issue. Parents ought to be able to find out exactly where they stand on these important matters.[3]The immediate legislative context is that regulation 18 of the Variations Regulations requires, subject to the "just and equitable" test in section 28F(1)(b) of the Child Support Act 1991, the making of a variation of the rules on maintenance calculations when, leaving aside some conditions that are not in dispute in the present case, a non-resident parent has an asset or assets whose total value after deduction of the amount owing on any mortgage or charge on the asset is £65,000 or over. Any variation is to assume the value of the assets to produce a weekly income at a rate that is currently 8% per annum. The definition of asset includes legal estates or beneficial interests in land and rights in or over land (regulation 18(2)(b)). Regulation 18(3)(b) and (d) provide, with the 2002 amendment being shown in square brackets, that the rule does not apply:
"(b) in relation to any asset which the Secretary of State is satisfied is being retained by the non-resident parent to be used for a purpose which the Secretary of State considers reasonable in all the circumstances of the case; (d) [except where the asset is of a type specified in paragraph (2)(b) and produces income which does not form part of the net weekly income of the non-resident parent as calculated or estimated under Part III of the Schedule to the Maintenance Calculations and Special Cases Regulations], to any asset used in the course of a trade or business;"
The factual background[4]The appeal tribunal was concerned with the mother's appeal against the Secretary of State's decision dated 14 December 2006 refusing her application for a variation of the rules governing the maintenance calculation, which application it found had been made on 12 March 2004, before the Secretary of State, through what was then still the Child Support Agency, had made a decision on her application dated 22 January 2004 for a maintenance calculation. The maintenance calculation made on 13 May 2004 was for a liability of nil with effect from 22 January 2004. On 16 October 2006 an application was made by the mother's solicitors, Family Law in Partnership ("FLiP"), for a variation on the grounds of assets, income not taken into account, diversion of income and lifestyle inconsistent with declared income. The Secretary of State gave notice of that application to the father, who made no representations at that stage, but the decision of 4 December 2006 still went against the mother. On her appeal, the Secretary of State submitted that, since the mother's letter of 12 March 2004 had raised the issues of the father's assets and an ability to arrange matters so as to minimise but support an expensive lifestyle, the effective date of any variation made should be 22 January 2004.[5]The nil liability was calculated on the basis that the father had no net weekly income. His profit and loss accounts for his property management business for year ending 31 March 2002 showed a loss of £59,097.28 (with a loss also in year ending 31 March 2001, although with some confusion as between what was recorded by way of comparison in the 2002 accounts and what was recorded in the 2001 accounts prepared by a different firm). On the other hand, the accounts showed an increase in the value of fixed assets (mainly made up of land and buildings) from £616,289.29 on 31 March 2001 to £734,444.05 on 31 March 2002, with an increase in the amount owed on mortgage from £490,648.48 to £811,225.47. FLiP's application of 16 October 2006 contained a detailed analysis of the properties owned by the father and their value, with supporting evidence. There was also after the mother's appeal was lodged a good deal of argument about the basis of the Secretary of State's decision and further documentation put forward.[6]A first hearing by the appeal tribunal on 29 August 2007 produced detailed directions for the father to produce more up-to-date accounts, schedules of properties owned by himself and by a company of which he was a director and shareholder and of charges secured on the properties, personal self-assessment tax returns for years from 2003 to 2007, plus other things. I do not need to go through everything that was produced and the arguments made, but can in general go straight to the findings of fact made by the appeal tribunal on 13 March 2008. I merely note here the schedule (page 517) produced by the father valuing the properties used in his business as at 1 September 2005 of £2,262,500, with mortgage liabilities of £1,688,025 (net, £574,716). His valuation as at 1 June 2005 had been £1,830,000, with mortgage liabilities of £1,025,282 (net, £804,718). In between those dates, a new property had been acquired, but there had also been re-mortgages of many properties.[7]Both parents attended the hearing on 13 March 2008 (or possibly 6 March 2008, the documents are not clear), when the appeal tribunal consisted of a legally qualified panel member and a financially qualified panel member. The mother was represented by Ms Rachel Spicer of counsel, instructed by FLiP. The father was not represented by was accompanied by a family member. The a representative of the CSA also attended.[8]The appeal tribunal made the following findings of fact about the father's business in its five-page decision notice signed on 31 March 2008:
"(a) [The father] held a portfolio of properties in both this jurisdiction and abroad. At least in relation to the English properties which were in London he controlled the properties through [C Ltd] and his personal beneficial ownership of the long leases of the various properties. Generally he held the freehold of the properties through a Limited Company called [C], in respect of which company he had a controlling interest. The Tribunal heard no evidence that [the father's] interest in [C] was of any significant value and certainly not significant enough to have any relevance in respect of the application for a Variation. In the absence of any evidence to the contrary the Tribunal disregarded [C Ltd]. (b) [The father] held the beneficial interest of the long leases of the properties in London, in addition he acquired an interest in properties in Scotland and Slovakia. The properties are set out in the Schedule below. (c) The Tribunal found, because there was no evidence to the contrary, that [the father] controlled the entire beneficial interest in the properties or part of the property as set out in the Schedule. The properties in London and the properties in Scotland, discounting [the father's] home, were let out to tenants. [The father] on his own account ran a business as a self-employed person of acquiring and renting out properties. (d) The Tribunal found that [the father] obtained no income from his self-employment. His tax returns declared no taxable profit and the financial information provided by [the father] indicated no profit. He did however enjoy a reasonable standard of living, managing to partly refurbish a property in Scotland, acquiring new properties in London and abroad together with paying substantial school fees for his children and supporting himself. He did this relying upon the increase in property prices and drawing upon an increasing equity in his portfolio of properties, whilst at the same time maintaining equity in the properties in excess of one million pounds. Contrary to his evidence the Tribunal found that he was not significantly diminishing his equity in his property portfolio, or at least his capital wealth. Whilst [the father] re-mortgaged his property portfolio in September 2005 and this diminished his equity at the same time it increased his cash assets. The value of his assets as at 22/01/2004 were £2.1 [million]."
On the question of valuation, the appeal tribunal rejected those put forward on behalf of the mother, preferring the professional valuation made at the time of the September 2005 re-mortgaging. Then it worked backwards by reference to an index of property price increases to establish the value as at January 2004. It was satisfied that throughout the period before it that the net value of the property assets used in the business was £1.1 million, including cash retained after the re-mortgage for the purpose of buying new properties. The appeal tribunal's decisions[9]On 13 March 2008 the appeal tribunal decided that, subject to submissions on the just and equitable test to be made at a further hearing after the CSA had calculated the effect on the father's weekly liability of what was proposed, it would make a variation under regulation 18 on the basis that the father had assets of £800,000 within that regulation. It said this about whether any assets were being retained for a reasonable purpose:
"(a) The Tribunal took into account a parent's legal responsibility to support his or her children and the way in which s/he organises his financial affairs should not enable him or her to defeat that statutory and entirely reasonable aim. (b) There is clear evidence that the properties had not generated profits immediately before or during the period from 2004 to 2006. If they were to be used to generate an income their realisation would give rise to a [capital gains tax] liability in the region of [£300,000]. The Tribunal found that this sum was retained for a purpose that was reasonable.

(b) "

[10]In his last written submission before the March 2008 hearing the father had stressed that all the property assets were used in his business. In her last written submission Ms Spicer for the mother had submitted that the Secretary of State's decision had been wrong in so far as it relied on regulation 18(3)(d), because if the assets were used in the course of his business they produced an income that had not been taken into account under Part III (self-employed earners) of the Schedule to the MCSC Regulations. However, the March 2008 decision notice did not mention regulation 18(3)(d) at all. It simply concluded that assets to the value of £800,000 fell within regulation 18.[11]The CSA's calculation was that the variation proposed would have the effect of treating the father as having weekly income of £1,230.77, resulting in a weekly child support maintenance liability of £246. In an initial response the father asked whether the 8% statutory formula was meant to represent a return after taxation. He also noted that one his properties, I think attached to his home, was let as a holiday cottage, so that that income was not classed by the Inland Revenue as income from land or property, but as a trading business, and raised an issue of shared care for one of the qualifying children. He then obtained representation from Durham Legal Services UK Ltd, who put in a written submission either at the further hearing on 15 July 2008 or a day in advance. The first part of the submission was that the value of the properties should be excluded from the effect of regulation 18 by reason of regulation 18(3)(d). The second was that one property in particular had been purchased in 1981 for the sole purpose of providing a pension in later years, so that the net value of £200,000 should be excluded under regulation 18(3)(b). After some other points, it was submitted that it would not be just and equitable to make the variation proposed by the appeal tribunal, because it would result in the cessation of the father's employment, particularly because of the effect of the requirements that would be imposed under the CSA's policies to pay off the arrears of some £52,000 that would be created by making that variation effective from 22 January 2004.[12]Mr Michael Smith of Durham Legal Services elaborated on that submission at the hearing. The point seems to have come down to that the properties did not produce an income, merely capital appreciation, so that they could not be taken out of the normal treatment of business assets in regulation 18. On "just and equitable", Mr Smith stressed that if the CSA adopted its normal policy of requiring arrears to be paid off within 24 months, the burden of paying off £52,000 in such a period, plus ongoing payments of around £1,000 per month could drive the father into bankruptcy. He submitted that it was relevant that the maximum weekly liability under the 2003 scheme was set at £400. Ms Spicer and the CSA presenting officer made submissions to the contrary.[13]The tribunal's decision on 15 July 2008 was to make the variation with effect from 22 January 2004 based on the father having assets of £800,000 within regulation 18, resulting in a child support liability of £246 per week. It found it just and equitable to make such an order. The statement of reasons signed on 14 December 2008 added very little. It stated that it should be read with the three decision notices and referred to the detailed findings of fact made on 13 March 2008 and the adjournment for consideration of "just and equitable". It recorded Mr Smith's submission on 15 July 2008 that there was no power in the circumstances to make a variation under regulation 18 and continued:
"The Tribunal were satisfied that it did have power to make such a Variation. The Tribunal was further satisfied that it was just and equitable to make such a variation."
The appeal to the Upper Tribunal[14]The father now appeals against that decision with the permission of the chairman of the tribunal of 15 July 2008. Mr Smith had relied in particular in his application on the decision of Judge Wikeley in GD v SSWP , where he held that the net profits of a business renting out 11 properties were earnings for self-employment, by reference to the definitions in the MCSC Regulations and in turn the Social Security Contributions and Benefits Act 1992, so that the properties were assets of the business and excluded from counting under regulation 18 of the Variations Regulations.[15]The representative of the Child Maintenance and Enforcement Commission (CMEC) did not support the father's appeal in the submission dated 21 April 2009. GD v SSWP was distinguished on the ground that there the business made a profit and the income from self-employment had been taken into account in the ordinary maintenance calculation under the MCSC Regulations. Paragraphs 18 and 19 were as follows:
"18. However, it is submitted that the exception to the application of regulation 18(3)(d) of the Variation Regulations 2000 means that any assets, as defined in regulation 18(2)(b), will only be disregarded as an asset used in the course of trade or business for the purposes of regulation 18(3)(d) where the income arising from those assets has already been taken into account as part of the non resident parent's liability in respect of the net weekly maintenance calculation 19. In this case the properties did produce rental income but that income fell not to be included in the calculation of the net weekly income of the non resident parent and as such it is my submission that the assets could not be excluded by regulation 18(3)(d) and the tribunal were therefore entitled to grant a variation and no error of law is revealed."
[16]Ms Spicer's submission dated 29 May 2009 for the mother supported that result, with more detailed exploration of the issues and reliance on Judge Turnbull's decision, signed on 9 March 2009, in CD v SSWP . The submission was in brief that Judge Turnbull's view that income from letting property, even as a business, is not to be taken into account as income from self-employment was preferable to that of Judge Wikeley. However, it was further submitted that Judge Turnbull went wrong in holding that the exclusion of property assets from the category of business assets in regulation 18(3)(d) only operated where the let properties produce a net income, so that he should not have concluded that the let properties in that case were business assets (and to be disregarded) because the mortgage interest and other expenses exceeded the rental income. Ms Spicer submitted that either "produces income" for these purposes should include capital gains or should mean the generation of gross receipts of a type that could not form part of net weekly income within the Part of the Schedule to the MCSC Regulations to do with self-employment.[17]Although the parties initially would have preferred a decision on the papers, to minimise expense and delay, I directed an oral hearing. That was both because of the difficulty of the issues just mentioned, including differences of opinion in recent decisions, and because of further questions whether the tribunal had given adequate reasons for its conclusion that only £300,000 of the father's assets were retained for a reasonable purpose under regulation 18(3)(b) and for its conclusion on "just and equitable".[18]The hearing took place on 22 February 2010, after further written submissions had been made. The father attended, represented by Mr Smith. The mother attended, represented by Ms Spicer. CMEC was represented by Mr Leo Scoon of the Office of the Solicitor to the Department for Work and Pensions. I am grateful to all the representatives for their submissions, including the written submission dated 14 December 2009 by Mr Christopher Ellis on behalf of CMEC, although I am afraid that they did not make the task of finding a proper interpretation of the legislation any easier. I shall refer to those submissions as necessary when explaining my conclusions on the issues identified below.

(a) Rental income and self-employed earnings

[19]The starting point has to be the provisions of Part III of the Schedule to the MCSC Regulations as they stood in December 2006. The overall structure is that a non-resident parent's net weekly income means the aggregate of the net weekly income specified in the Schedule. Then Part II covers the income of employed earners, Part III covers the income of self-employed earners, Part IV covers tax credits, Part V covers other income and Part VI covers benefits, pensions and allowances. The main difference from the equivalent provisions in the previous child support scheme lies in the limits of Part V on other income. The other Parts have their limits in the particular source of income, as well as in detailed conditions, but Part V no longer contains any general round-up category. By virtue of paragraph 15 it applies only to periodical payments of pension or other benefits under an occupational or personal pension scheme or retirement annuity contract or similar retirement scheme. Thus, if receipts of rental income or of a property business are to come into the calculation of net weekly income in the Schedule, the only place where they could do so is Part II.[20]The primary provision is paragraph 7(1):
"(1) Subject to sub-paragraph (6) the net weekly income of the non-resident parent as a self-employed earner shall be his gross earnings calculated by reference to one of the following, as the Secretary of State may decide, less the deductions to which sub-paragraph (3) applies-- (a) the total taxable profits from self-employment of the earner as submitted to the Inland Revenue in accordance with their requirements by or on behalf of that earner; or (b) the income from self-employment as a self-employed earner as set out on the tax calculation notice or, as the case may be, the revised notice."
We are not concerned here with the deductions, which are for income tax, national insurance contributions and pension contributions.[21]Paragraph 8 substitutes the following meaning when either the conditions of paragraph 7(6) (evidence in relation to period ending no earlier than 24 months before the relevant week) are not satisfied, it is not practicable for the parent to provide information in the form required by paragraph 7(1) or the information in the required form does not accurately reflect the normal weekly earnings of the self-employed earner:
"net income means in the case of employment as a self-employed earner his earnings calculated by reference to the gross receipts in respect of employment which are of a type which would be taken into account under paragraph 7(1) less the deductions provided for in sub-paragraph (2)."
[22]I agree with Judge Wikeley in GD v SSWP that the incorporation into the MCSC Regulations of the social security definition of self-employed earner in section 2(1)(b) of the Social Security Contributions and Benefits Act 1992 means that a parent who is engaged in a business of letting and/or managing property means that that parent is a self-employed earner for the purposes of Part III of the Schedule to the MCSC Regulations. The definition covers a "person who is gainfully employed in Great Britain otherwise than in employed earner's employment" and "employment" and "employed" include "any trade, business, profession, office or vocation". It seems to me inescapable in the present case that the father was gainfully employed in a business otherwise than in employed earner's employment.[23]However, that does not in itself require the conclusion that whatever are the total taxable profits of that business must go into the calculation of net weekly income by virtue of paragraph 7(1) of the Schedule to the MCSC Regulations. I agree with Judge Turnbull in CD v SSWP that it is necessary to look with great care at the way in the gross earnings to be taken into the calculation are identified. In particular, it must be asked what the requirements of the Inland Revenue were as to the submission of information. Judge Turnbull pointed out in paragraph 22 of his decision that:
"even if a person is carrying on, as a self-employed person, a business of letting property, income from such a business is not generally taxed as income from self-employment, but rather as income from property. With limited exceptions, the property pages of the self-assessment tax return, and not the self-employment pages, are completed in respect of income derived from letting land, whether the letting is in pursuance of a business or not. ... So far at any rate as the primary method of calculation under para 7 of Schedule 1 to the [MCSC Regulations] [is] concerned (ie by reference either to the return submitted to HMRC, or to the tax calculation notice), income from letting property will therefore not be included in the maintenance calculation under the formula."
The judge returned to the point in paragraph 43, where after saying that income from letting property was generally taxed under Schedule A, he noted that:
"The Guidance Notes issued by HMRC in respect of the UK property pages [of the self-assessment tax return] advise that the property pages should in general be completed in respect of `rental income and other receipts from UK land and property' and that the self-employment pages should be used in certain specific cases, for example hotels and guest houses, and `letting furnished accommodation in your home that amounts to a trade'."
[24]Judge Turnbull also dealt with the potential argument that the terms of paragraph 8(1) of the Schedule to the MCSC Regulations (and in particular I think head (c)) might require the adoption of the position taken by Judge Wikeley, that all earnings from self-employment of a parent who is within the terms of those regulations a self-employed earner have to be brought into the calculation of net weekly income. He pointed out that the operation of paragraph 8(1) is expressly limited to bringing in gross receipts "of a type which would be taken into account under paragraph 7". Thus the scope of paragraph 7 cannot be widened through the operation of paragraph 8(1).[25]I agree with Judge Turnbull's analysis on those points, subject to one small qualification, which if anything adds support to his conclusion. The system of schedules was completely abolished for income tax purposes with effect from 6 April 2005, having been abandoned for profits previously chargeable under Schedule E (salaries, annuities and pensions) from April 2003. That is one of the overall effects of the rewriting of the tax legislation in Income Tax (Trading and Other Income) Act 2005 (ITTOIA). So the reference to Schedule A in GD v SSWP was somewhat out of date. In the present case, the father's net weekly income had to be calculated for some dates prior to 6 April 2005. Prior to 6 April 2005, Cases I and II of Schedule D referred to tax in respect of any trade or any profession or vocation not contained in any other Schedule (Income and Corporation Taxes Act 1988, section 18). Schedule A referred to the annual profits arising from a business for the exploitation, as a source of rents or other receipts of any estate, interest or rights over land in the United Kingdom. Thus, the concept of self-employment or of a self-employed earner did not as such feature in the income tax legislation as setting up a dividing line between Schedules. It seems to me then that what is required by the Inland Revenue to be submitted to them as total taxable profits from self-employment can only be identified by what their (now Her Majesty's Revenue & Customs (HMRC)) administrative requirements in the structure of the self-assessment tax return and the accompanying Guidance Notes.[26]However, nothing in substance changed in this respect on 6 April 2005. Income tax in respect of income other than employment pensions and social security income is charged under the various Parts of ITTOIA. Part 2 covers trading income, ie essentially the profits of a trade, business or profession. Part 3 covers property income, including the profits of a UK property business or an overseas property business. And by section 4(1) in Part II:
"(1) Any receipt or other credit item, so far as it falls within-- (a) Chapter 2 of this Part (receipts of trade, profession or vocation), and (b) Chapter 3 of Part 3 so far as it relates to a UK property business, is dealt with under Part 3."
It therefore does not affect the validity for the future of the analysis in GD v SSWP that that decision referred to the now abandoned schedular structure.[27]The submission for CMEC, supported in this respect on behalf of the father, was against this conclusion and against Judge Turnbull's view. Mr Ellis put it this way in his submission of 14 December 2009:
"3. Prior to [Judge] Turnbull's decision it was tolerably clear that where the Non-Resident Parent (NRP) owned properties that produced rental income, the Decision-maker or tribunal had to make a finding of fact as to whether the letting was solely by way of a trade or business or whether he held the property solely as an investment. 4. If the property was part of a business then any income from rent would be regarded as the gross receipts of self-employment and would be taken into account in the formula assessment accordingly. If on the other hand the finding was that the rental income derived only from an investment then the position under the new scheme is that that income is not part of the NRP's net weekly income as defined in the Schedule to the [MCSC Regulations]."
Mr Ellis then referred rightly to a principle that it does not follow that just because HMRC treat income from land or property separately as subject to taxation under Schedule A (or now under Part 3 of ITTOIA) it must be concluded for child support purposes that that income is not derived from self-employment, and continued:
"10. What all this boils down to is that the Child Support regime simply does not have a separate concept of a Schedule A business or Schedule A income. In order to establish whether income falls to be taken into account under the MCSC Schedule the decision-maker has to make a judgment as to whether income is derived from employment as a self-employed earner or not."
At the hearing, Mr Scoon adopted that submission.[28]I have effectively adopted Mr Ellis's approach to this extent. I agree that it is necessary to distinguish between a parent who is in a business that generates rental income or other income from property and a parent who just happens to own some properties that generate income. Only the former are self-employed earners in that respect under the social security definition, but they must then be treated as such and Part III of the Schedule to the MCSC Regulations applies to them, as explained by Judge Wikeley in CD v SSWP . But the argument does not then bite on exactly what is covered by heads (a) and (b) of paragraph 7 and by paragraph 8. In my judgment, the references to profits from self-employment in heads (a) and (b) must in their context be taken to refer only to what HMRC administratively required to be reported to them on the self-employment pages of the tax return, which includes only very particular categories involving the letting of property (see the Guidance Notes quoted in paragraph 23 above).[29]I am not at all sure that there had been a "tolerably clear" understanding of the effect of the legislation in the way asserted by Mr Ellis before Judge Turnbull's decision muddied the waters. It is true that in CD v SSWP the decision-maker had apparently without hesitation included the profits from rental property in the father's net weekly income in the ordinary maintenance calculation. However, in the present case (although the point was not crucial, because there were no profits) the CSA officers apparently accepted from the father's book-keeper's evidence that he was not classed as self-employed because his income was from land and property and that any profit could not be taken into account in the ordinary maintenance calculation. In addition, as Ms Spicer submitted strongly and as I explore more fully below, it is hard to see what the point was of the amendment to regulation 18(3)(d) of the Variations Regulations with effect from 29 April 2002 if rental income, both business and non-business, was not excluded from Part III of the Schedule to the MCSC Regulations. I think it more likely that, although it was appreciated that rental income as such did not find a place within any other Part of that Schedule, there was either a failure to think about where such income derived from a business fell or uncertainty as to the result. That would be consistent with Judge Wikeley's extra-judicial, and very generally expressed, opinions about rental income on page 335 of Child Support, Law and Policy (Hart Publishing, 2006), referred to by Ms Spicer. However, whatever the previous understanding was, that cannot be decisive on the question of the proper interpretation of the actual words of the legislation.[30]There is one further development, not raised in any submissions, that is at least consistent with the conclusions I have reached above. That is the amendment of paragraphs 7 and 8 of the Schedule to the MCSC Regulations with effect from 1 August 2007, well before the Upper Tribunal decisions discussed above. A new paragraph 7(1A) provides:
"(1A) In this paragraph and paragraph 8 a person's `gross earnings' are his taxable profits calculated in accordance with Part 2 of the Income Tax (Trading and Other Income) Act 2005."
That reference to Part 2 of ITTOIA plainly and unequivocally excludes profits taxed under Part 3 (property income), which by virtue of section 4(1) takes priority over Part 2. The substituted paragraph (1) now requires a parent to produce, if asked, a tax calculation notice and no longer makes any reference to self-employment.[31]The Explanatory Note to the amending regulations (the Child Support (Miscellaneous Amendments) Regulations 2007 (SI 2007 No 1979)) gives no indication that the amendment was thought to make any change in the practical treatment of rental income. The main explanation was in relation to the amendments to the Child Support (Maintenance Assessments and Special Cases) Regulations 1992, relevant to the pre-2003 scheme, and the amendment was said to be to bring the calculation of taxable profits into line with the tax position, "meaning that capital allowances will be deducted from, and balancing charges applied to, gross profits in line with tax legislation". That was obviously a response to the decision of the House of Lords in Smith v Secretary of State for Work and Pensions [2006] UKHL 35 , [2006] 1 WLR 2024 , R(CS) 6/06. The Note then simply said that similar amendments were made to the MCSC Regulations for new scheme cases. I do not know of any other material indicating an intention to make a material change in the treatment of rental income in new scheme cases. If the submissions for CMEC and the father in the present case were right, there would have been a clear and material change.

(d) of the Variations Regulations

[32]The conclusions above about the MCSC Regulations form the essential basis for the proper interpretation of regulation 18(3)(d), which then follows without undue difficulty.[33]Prior to the amendment with effect from 29 April 2002, any assets, including those consisting of interests in or rights over land, used for the purpose of a business of any kind had to left out of account for the purposes of regulation 18. The amendment accordingly made a significant difference. Any profit derived from such an asset could never in my judgment have formed part of the parent's net weekly income as calculated under Part III of the Schedule to the MCSC Regulations, except in the specific cases to be included in the self-employment pages of the tax return (such as running hotels or guest houses). The asset therefore, contrary to the conclusion of Judge Wikeley in paragraph 41 of GD v SSWP , has to be taken into account under regulation 18 if the other conditions of the new exception are met, unless excluded by some other provision of regulation 18(3), such as sub-paragraph (a) on the aggregate net value of qualifying assets or (b) on assets retained for a reasonable purpose.[34]The submission for CMEC and for the father was that the intention of the amendment was merely to reinforce and clarify the existing position, that only assets used in a business were taken out of account by regulation 18(3)(d), not assets held merely as investments or in a way which did not amount to the carrying on of a business. Mr Ellis and Mr Scoon both accepted that on the basis put forward for CMEC the amendment made no difference to the legal outcome, but submitted that it still had a point in providing clarification. But, if so, as Ms Spicer submitted for the mother, why did the Explanatory Notes to the Child Support (Miscellaneous Amendments) Regulations 2002 (SI 2002 No 1204) say that the new provision was that land or property held as a business or trade asset was excluded from the definition of asset "in certain circumstances"? And why was an allegedly merely clarifying amendment put in such an obscure form? I need not go too deeply into all that, because the answer lies in the assumption, that I have found to have been soundly based, that the income from such assets, even when used for business or trade purposes, could not in law go into the calculation of net weekly income under Part III or any other Part of the Schedule to the MCSC Regulations. (c) "Produces income which does not form part of the net weekly income"[35]I come at last to the most difficult issue of law in this case, how regulation 18(3)(d) applies in a situation where the business in which the property assets are used does not make a profit.[36]The initial written submissions for CMEC and for the mother are summarised in paragraphs 15 and 16 above. However, in his submission of 14 December 2009 Mr Ellis resiled from CMEC's initial position and said this:
"20. I have checked with those responsible for policy in this regard and their view is that this provision was not intended to mean that the property assets of a letting business which makes no profit should be subject to an assets variation under regulation 18. 21. On the face of it, it is repugnant to have a situation where a NRP can hold a portfolio of assets with a net value of perhaps a million pounds or more and yet where these assets are excluded from the operation of reg 18. However it is my submission that it was not Parliament's intention to bring within the terms of reg 18 the assets of a property/letting business solely on account of the fact that it produces no profit. 22. I submit that where reg 18 refers to income `which does not form part of the net weekly income ... etc', it means income which it is determined is not [self-employed] earnings and in this respect I resile from the position taken on this point in the submission made by [CMEC] in April which starts at page 718. 23. It is with some reluctance that I make this submission because it does seem anomalous that a parent can escape the effect of reg 18 even where a large property portfolio is not producing any kind of income return. 24. However the same thing might be said of any business with fixed assets of high value which is not making a profit and I am anxious not to argue for the unintended creation of a new anti abuse rule."
[37]With all due respect to Mr Ellis, that somewhat vacillating approach expresses the dilemma of statutory construction rather well, but does not provide any compelling argument, especially not in what policy people now think they would have meant to do in 2002. I regret that at the oral hearing I failed to pin down Mr Scoon to an absolutely concluded view. He made the point that it would be odd for a difference between a business that made an annual profit of £10 and a business that made an annual loss of £10 or perhaps exactly broke even to be crucial in determining whether the underlying property assets of the business could come into account for a variation under regulation 18 or not. That must be a relevant factor given the scope for ensuring, for instance by keeping the level of mortgage interest repayments at a high level, that a revenue loss is made year after year. That factor would tend to point against a rule drawing the line suggested by Mr Ellis. However, Mr Scoon did not depart from his instructions, which were to endorse the submissions made by Mr Ellis.[38]That position would also be supported by paragraphs 23 and 24 of

Judge Turnbull's decision in CD v SSWP :

"23. However, the Tribunal was in my judgment wrong to say that the let properties were `producing income' within the meaning of reg 18(3)(d), given that the mortgage interest and other expenses exceeded the rent. [Counsel for the parent with care] contended that the properties could be regarded as producing income because they were producing rent. However, in my judgment there is no unfairness in treating a let property as within reg 18(3)(d) if it is not producing a net income. If it is not producing a net income the non-resident parent gains no advantage from the fact that income from the property is not included in the main formula assessment. 24. In my judgment, therefore, so long as the mortgage interest and other expenses of the let properties exceeded the rental income the let properties were not within the exception to reg 18(3)(d), and were therefore business assets which could not be the subject of a variation under reg 18."
[39]As noted above, Ms Spicer's submission for the mother was that Judge Turnbull was wrong in that respect. She submitted that the practical reality was that the father was able to take money out of his business through drawings of capital at a rate of about £130,000 per year (referring to a breakdown on page 563), whether against loans or otherwise. The property assets should therefore be regarded as producing an income. Alternatively, the exception from regulation 18(3)(d) should be interpreted as meaning that the asset produces income of a type that would fall outside Part III of the Schedule to the MCSC Regulations. For his part, Mr Smith for the father accepted at the hearing that the properties produced an income in the form of rent and that it was irrelevant that overall no profit was made. As he said by comparison with a zero rate of VAT, an income of nil was still an income. That, however, was in the context of his more general support of the CMEC submission that income from the business should count, if anywhere, under Part III of the MCSC Regulations, so that the property assets, if they produced income, were not taken out of regulation 18(3)(d) and were to be disregarded as business assets.[40]On this point, I prefer the second limb of Ms Spicer's submissions for the mother. It seems to me that the key is that in principle sub-paragraphs (b) to (d) of regulation 18(3), through the reference to "any asset", must be applied to each separate asset individually. It is the total value of assets referred to in regulation 18(2), thus excluding assets disregarded by virtue of the other parts of regulation 18(3), that is to be tested against the £65,000 limit in sub-paragraph (a). There will no doubt be scope for legitimate differences of approach to when a parcel of rights is to be regarded as one asset, as discussed in Commissioner's decision CCS/8/2000. What was in issue there was some farm land and a farm house, either of which it appears could have been sold off separately. Mr Commissioner Jacobs was plainly right to hold that the appeal tribunal there had been entitled to treat the items individually or collectively, depending on the particular circumstances. But that does not in any way undermine the basic principle. In the case of a holding of a portfolio of let properties as part of a business, it must be asked of each property (without needing here to determine whether a house or block in which several flats were let is one asset or several) whether it is used in the course of a trade or business and whether the exception applies. The test in the exception is not whether the business in which the asset is used produces income, or even less "an income". The test is in terms of whether the asset produces income. It seems to me that it will often be impossible to know whether the expenses related to each particular asset exceed the rental income, at least not without more detailed investigation than is required for income tax purposes or is sensible to expect in the child support context. Mortgage interest will be easy to identify, but normal accounting procedures would not require more general expenses of the business to be apportioned among different properties. Therefore, in my judgment the test can only be whether the property asset produces gross income receipts, regardless of the overall profitability or otherwise of the business.[41]But how then can one ask whether such income forms part of the parent's net weekly income as calculated under Part III of the MCSC Regulations? The difficulty is much lessened by my conclusion as to the treatment of ordinary rental income under Part III. Since that conclusion is that any profit from a property business that is not required for income tax purposes to be reported on the self-employment pages of the self-assessment tax return cannot go into the calculation under Part III, the income produced by each property asset can never form part of the parent's net weekly income. Therefore, the exception to regulation 18(3)(d) applies. That comes to much the same thing as asking whether the income is of a type that can go into the calculation under Part III. Indeed, it seems to me that the relevant part of regulation 18(3)(d) can legitimately be read as if it said "except where the asset is of a type specified in paragraph (2)(b) which does not produce income that forms part of the net weekly income of the non-resident parent" as calculated under Part III.[42]I do not think that that produces an unfair result. Judge Turnbull said in paragraph 23 of CD v SSWP that he saw no unfairness in treating a let property not producing a net income as within the business assets disregard because in those circumstances the parent gained no advantage from the fact that income from property was excluded from the main maintenance calculation. But, turning that round, I see an unfairness or at least an arbitrariness in drawing a line between an overall business that makes a tiny profit and one that makes a tiny loss. Apart from finding it unrealistic to make judgments of profitability about individual properties within a portfolio, that difference may result from the chance of how expenses fall into different years, from different accounting practices or from an intention to run the business (perfectly within legal boundaries) so as to make a loss. And the parent could be gaining an advantage from the fact that the main maintenance calculation is based solely on the non-resident parent's income, not capital. I do not see an unfairness in excluding let properties from the business asset disregard in such circumstances. There is still the potential application of regulation 18(3)(b) to be considered, but most important there is the overarching protection of the just and equitable test. Under that test, arguments as to fairness can be taken into account in the context of the particular circumstances of each. (d) Did the tribunal err in law in relation to regulation 18(3)(d)?[43]Accordingly, the tribunal did not err in law in not disregarding the let properties in the father's portfolio and listed in the schedule to the decision notice signed on 31 March 2008 as business assets under regulation 18(3)(d) of the Variations Regulations. The properties produced income that could not go into the calculation of net weekly income under Part III of the Schedule to the MCSC Regulations and so did not fall within regulation 18(3)(d).[44]There was though an unresolved problem to do with the cash that the tribunal found that the father retained after the re-mortgage of September 2005 for the purchase of additional properties (paragraph 6 of the decision notice signed on 31 March 2008). That was the basis of its finding that throughout the relevant period (which ran from 22 January 2004 down to 4 December 2006 as the date of the decision under appeal) the father's assets had a net value of £1.1 million. However, the tribunal's own schedule showed the net value of the properties in the portfolio, after the new mortgage liabilities, as at 1 September 2005 as £574,475. The rest of the £1.1 million taken into account by the tribunal must therefore have been made up of cash. The difficulty is that that cash was an asset used in the course of the father's business, as specifically found by the tribunal. The exception in regulation 18(3)(d) could not apply because the cash was not an asset of the type specified in paragraph (2)(b). Accordingly, the cash assets used in the business from 1 September 2005 down to 4 December 2006, taking account of the new properties purchased, should have been taken out of the scope of an assets variations. In my judgment, that is something that arose so clearly from the facts found by the tribunal that it needed to deal with it regardless of whether the point was taken by any party or not. The giving of a variation that took account of cash business assets for some of the period under consideration was a material error of law.[45]As it was, Mr Smith for the father, who did not become involved until after the decision issued on 31 March 2008, specifically submitted to the tribunal sitting on 15 July 2008 that regulation 18(3)(d) prevented the making of an assets variation. Detailed argument was noted in the record of proceedings. However, the statement of reasons said nothing at all about regulation 18(3)(d) as such, merely saying that the tribunal was satisfied that it had power to make the variation. I do not think that on 15 July 2008 the tribunal could have prevented the father from raising arguments about the conclusions expressed in the decision notice signed on 31 March 2008, which had rightly been put in terms of proposals to be subject to a final decision. Having allowed Mr Smith to make his submissions, the tribunal was bound to give reasons for rejecting them. Its failure to do so was also a material error of law. (e) Did the tribunal err in law in relation to regulation 18(3)(b)?[46]Mr Smith raised one particular point in relation to regulation 18(3)(b) at the hearing on 15 July 2008, that the father had purchased one property, a basement flat at 45 G Road, in 1981 for the sole purpose of providing him with a pension in later years. He submitted that that asset was therefore being retained for a reasonable purpose and to be taken out of account for an assets variation. As at 1 September 2005 the flat was valued in the tribunal's schedule at £187,500 without any mortgage charged on the property, with a projected valuation as at December 2006 of £209,760. The father said that he had raised that point at the March 2008 hearing, although that was not mentioned in the record of proceedings or in the decision notice signed on 31 March 2008. I do not need to find whether that was so or not, because the point was plainly raised at the hearing on 15 July 2008, as Ms Spicer accepted. The specific submission having been made then on a material point, the tribunal was bound to deal with it. If accepted, the taking of up to £200,000 out of the amount on which the statutory 8% was charged would obviously have made a considerable difference. The tribunal failed to deal with the point in the statement of reasons issued after the 15 July 2008 hearing. That was a material error of law.[47]In those circumstances, I need only briefly mention what seems to me to have been a further inadequacy of reasons in relation to regulation 18(3)(b) in the decision notice signed on 31 March 2008. The property business was what the father lived on. If he sold up all the properties to invest the proceeds in some way that would produce income, as the tribunal seems to have been contemplating, it seems to me that it ought not just to have taken into consideration what his capital gains tax liability would be (£300,000), in addition to the factor of his responsibility to support his children (see paragraph 9 above). It could plainly be argued that if that was to be the source of the father's income, with no capital business assets to appreciate, he should be allowed something for the living expenses of himself and his current family. More widely, it could be argued that the retention of the property assets, or at least some of them, was for a reasonable purpose in financing his current lifestyle and providing some future financial security. I say nothing about how those factors ought to have been weighed up against the factors that the tribunal did mention, but it seems to me that its reasons were inadequate in not giving some indication that such a weighing process had been carried out. (f) Did the tribunal err in law in relation to the "just and equitable" test?[48]The tribunal may not have thought much of the arguments raised by Mr Smith about the effect of having to pay off arrears of £52,000 when on its calculations there were several individual properties in his portfolio that had equity approaching or exceeding that amount. Even so, and leaving aside that the father had earlier raised a general point about the realism of the statutory rate of assumed interest at 8% and that the overall fairness of what was proposed was challenged, the tribunal simply failed to do any more in the statement of reasons following the hearing of 15 July 2008 than state its conclusion that it was just and equitable to make the variation. There was no attempt to give any further explanation or to identify any particular factors that had been influential. Despite Ms Spicer's best efforts to show that the conclusion on just and equitable, especially so far as the effect of having to repay the arrears was concerned, was one that the tribunal was entitled to reach in the exercise of its judgment, the complete absence of an explanation cannot be ignored. That is particularly as it has now been authoritatively decided that the just and equitable issue is not all or nothing but can result in an acceptance of part of the variation that would otherwise be required by the regulations ( RC v CMEC [2009] UKUT 62 (AAC) , the Senior President, Carnwath LJ, and Judge Jacobs). There was a material error of law.[49]There is one related factor that I wish to mention. One of the father's arguments about the general unfairness of the tribunal's decision was that he had had no warning that an application for a variation was being considered until he was given notice after FLiP's application in October 2006. That was because of the CSA's failure to recognise that the mother had in substance made an application before the initial maintenance calculation was carried out, which meant that the effective date was 22 January 2004. Although by mid-2008 arrears over more than four years could have amounted to £52,000, that may have been an over-estimate. The tribunal was restricted by section 20(7)(b) of the Child Support Act 1991 to considering the circumstances as at 4 December 2006 and not beyond. If the father could show a relevant change of circumstances after that date (eg in the disposal of any assets or a change in their net value) that could ground a supersession of the tribunal's decision.[50]But there is nevertheless a point that may sometimes be relevant when the net value of assets is being looked at over a long past period under regulation 18 of the Variations Regulations. It is one consequence of the concentration in the new child support scheme on income rather than capital that there seems to be no sanction for a non-resident parent's giving away or otherwise reducing the value of assets that might otherwise have led to the making of a variation under regulation 18. Thus, if in circumstances similar to those of the present case a non-resident parent could show that, if at some point in the period in question he had known that an assets variation was under consideration, he would have taken some action to reduce the net value of his property assets (for instance, by transferring some property completely out of his control or by mortgaging the properties to the hilt, leaving him with cash that would have to be disregarded under regulation 18(3)(d)), that could be a relevant factor. However, that is not a line of argument that is calculated to carry great sympathy when the relevant considerations are justice and equity and the welfare of the children in question is to the fore. In my view, a non-resident parent would have to show a very clear case that he would, consistently with the normal running of the business, have done something different in the past if a variation had been on the cards before it could get off the ground as a factor to be considered under the just and equitable test. Conclusion on the appeal to the Upper Tribunal[51]For the reasons given above, the decision of the appeal tribunal given on 15 July 2008 is set aside as involving errors on points of law. Both Mr Smith for the father and Ms Spicer for the mother urged me to substitute as much of a decision as I could. However, there are too many issues of fact and judgment still contested, which interact across the whole of the case, to make that a possibility, in addition to the general point that under section 12 of the Tribunals, Courts and Enforcement Act 2007 a case either has to be referred to a new tribunal or the decision has to be re-made. The mother's appeal against the decision of 4 December 2006 is remitted to a First-tier Tribunal for reconsideration in accordance with the following directions. Neither member of the appeal tribunal is to be a member of the new tribunal, which should again be made up of a legally qualified panel member and a financially qualified panel member. There must be a complete rehearing of the appeal on the evidence produced and submissions made to the new tribunal. The district tribunal judge who, as is routine, considers the arrangements for the rehearing, will wish to consider whether to direct CMEC or any other parties to make any fresh written submissions in advance of the rehearing.[52]The new tribunal is to apply the interpretation of regulation 18(3)(d) of the Variations Regulations set out above, in particular in the conclusions as to law in paragraphs 33, 40, 41, 43 and 44, building on the conclusions as to what could count as income from self-employment under Part III of the MCSC Regulations in paragraph 28. The tribunal must also approach afresh the potential application of the disregard of assets under regulation 18(3)(b), taking into account the points made in paragraphs 46 and 47 and making the necessary findings of fact. If it concludes that the conditions are met under regulation 18 for the making of a variation on the ground of assets, it must consider the just and equitable test, recording the necessary findings of fact and explanation in any statement of reasons. Especially if it were to be decided that no variation was to be made under regulation 18, or only a variation of a limited amount, the tribunal would have to go on and consider the other potential grounds of variation raised by the mother's application, including lifestyle inconsistent with declared income. The evaluation of all the evidence will be entirely a matter for the judgment of the members of the new tribunal. The decision on the facts in this case is still open. Signed on the original: J Mesher Judge of the Upper Tribunal Date: 19 March 2010

Cited in 1 later judgment