Smith v Smith & Anor

The Child Support Agency has not won many plaudits for its efficiency, though to be fair, it may be improving. Certainly in the early years of its operation it came under much criticism for its delays and erroneous calculations of child support both of which can be explained by the difficulties encountered by the staff working out the complicated formulae for the assessment of child support maintenance. As is well known, the Child Support Act 1991 was introduced in order largely to remove from the court’s jurisdiction all matters relating to the assessment, enforcement and collection of child maintenance. Except in limited circumstances, the parent with care of a child had to resort to the Agency to obtain child support from the absent parent, now called the non-resident parent. Liability is calculated in accordance with an algebraic formula which I once described as “obtuse”, from which description I have not found much reason to recant. One of the symbols in this formula is the absent parent’s net income. This case concerns the difficulties in assessing those earnings where the absent parent is self-employed.

The problem in a nutshell is this. Under the regulations as originally promulgated, “earnings” means the gross receipts of the employment less certain expenses but it is expressly provided that such expenses do not include any capital expenditure or depreciation of any capital assets. After the Act was substantially amended in 1995 the new regulations, whilst preserving the old approach for exceptional cases, defined “earnings” as the total taxable profits as submitted to the Inland Revenue in accordance with their requirements and the regulations are silent as to whether or not capital expenditure and depreciation are to be deducted. It is common ground that depreciation must be deducted but battle is joined over the deduction of capital allowances. The effect can be dramatic as the facts of this case exemplify. On one view of the figures, Mr Smith’s liability for the child support of his three children would be £11.28. As Mr Mostyn Q.C. points out on the mother’s behalf, this is not £11.28 for each of the three children, but £11.28 for all of them. With characteristic vigour he submits that such an assessment “is startling to the point of absurdity”. On his construction the proper assessment would have been the maximum, then £106 per week for each child, £318 per week in total. The tragedy, nay the scandal, of this case is that the assessment must be backdated to 20^th September 2001, nearly three years ago since when 22 different assessments have been made, none of them final. There may still be no end in sight.

The main question arising on the appeal is thus whether capital allowances are included or excluded for the purpose of calculating net income. A subsidiary question arises in this way. As originally enacted there was and there remains a limited right of appeal but no appeal capable of varying an assessment correctly calculated. Reforms in 1995 allow the Secretary of State to direct a departure from an assessment in certain circumstances one of which may avail the mother in this case. Thus the subsidiary question is whether one must leave her to exercise that remedy if one cannot properly robustly construe the regulations in her favour.

The marriage of Mr and Mrs Smith broke down in December 1997. She applied to the Secretary of State (who administers the Child Support Agency) for a child maintenance assessment for their three children, boys now 17 and 13 years old and a girl of 14 who reside with her. As I understand it, she was, or certainly for the most part she was, in receipt of income support and consequently she was obliged to resort to the Child Support Agency to assess and collect maintenance for the children, the jurisdiction of the court being excluded in her case.

At the time of the original assessment with which we are concerned Mr Smith carried on business as an unincorporated sole trader. The nature of that business is to acquire fleets of motor cars on hire purchase or other credit-sale terms, then adapt them by adding dual controls in order to let them to driving schools, take them back at the end of the rental period, remove the dual controls and sell them. For accounting purposes he is entitled to claim substantial capital allowances and show a high rate of depreciation.

The original calculation made by the Secretary of State on 26^th September 2001 was based on the accounts for the year ending 31^st March 2000, the most recent available at that time. They showed that the business had a turnover of £131,887 and after deducting trade expenses a net profit of £45,479 was recorded. For tax purposes the depreciation of £35,901 had to be added back as it was not an allowable revenue expense in calculating the annual profit arising within the charge to income tax under Schedule D. The capital allowances for that year amounted to £72,000 and if that figure were also to be deducted in order to arrive at his “total taxable profits”, the child support assessment would be made on an income of £9,380 leading to the assessment of £11.28 a week for the three children. In the decision of the Commissioner made on 6^th October 2003 the Commissioner Mr P.L. Howell Q.C. described this as Basis (B). He pointed out that if the capital allowances were not to be deducted, his Basis (A), then the trading profit would rise to £81,380 with an obviously increased child support assessment.

Mrs Smith exercised the right of appeal from the Secretary of State’s decision afforded her by s.20 of the Child Support Act 1991, (“the 1991 Act”). By the time the matter was heard by the Appeal Tribunal on 8^th April 2002 the figures for the year ended March 2001 had become available and it was common ground that they were then the correct figures to use for calculating the liability from the effective date of 20^th September 2001. They showed that the turnover had increased to £284,570 which after deduction of trade expenses of £221,012 left a net profit of £61,305. For tax purposes the profit chargeable to Schedule D after adding back depreciation of £107,301 and the other minor non-allowable expenses would be increased to £169,520, Basis (A) for that year. In this year the capital allowances amounted to £148,628 so that an assessment carried out on Basis (B) would be calculated as if the taxable income was only £20,892.

The starkness of the dispute between the parties is that, as calculated by the Commissioner, the liability of this father to maintain his children would be assessed on an income of £3,260 a week on Basis (A) or less than one-eighth of that, £401 on Basis (B). As the Commissioner has observed, “It has to be one or the other”.

The Appeal Tribunal’s solution was a modified version of Basis (B) and this was in turn appealed to the Commissioner. It was agreed by all parties that the Tribunal’s modifications were erroneous and there was essentially only one point for the Commissioner to decide which he expressed in these terms:-

His decision made on 6^th October 2003 was that the figure to be used for the formula assessment was to be calculated in accordance with his Basis (A). The Commissioner refused permission to appeal, so did my Lord, Wall L.J., considering the matter on the papers but permission was reluctantly granted by Thorpe L.J. on a renewed oral hearing before him and Pill L.J.

The Child Support Act 1991 was enacted on 25^th July 1991 but came into force on 5^th April 1993. The Child Support (Maintenance Assessments and Special Cases) Regulations 1992 (SI 1992 No. 1815) (the “MASC regulations”) governed the calculation of child support maintenance and Schedule 1 provided for the calculation of the absent parent’s net income. As originally promulgated Part 1, Chapter 2 dealt with the “earnings of a self-employed earner” and paragraph 3 provided as follows, omitting parts which are immaterial to this decision:-

It will be seen that the burden on the Child Support Agency officer was quite extensive. He had to ascertain gross receipts, deduct business expenses, and then work out the income tax to be paid. What is, however, abundantly clear is that depreciation is to be excluded as is capital expenditure. Tax counsel, Mr James Henderson, who has appeared for the appellant in this court and has given us concise but considerable assistance for which I am grateful, resists all temptation to argue that capital allowances are not to be treated as falling within “capital expenditure”. For present purposes it is, therefore, common ground that capital allowances, being part and parcel of the self-employed earner’s capital expenditure, must not be deducted for the purposes of the calculation carried out under paragraph 3.

As I have already indicated, if the calculation is correctly made, there is no effective appeal by either party who might be aggrieved by the assessment. The Secretary of State has no discretion to vary it. This caused widespread hardship and deep dissatisfaction, especially from the absent parents who felt that the high levels of assessment often made life impossible. They were not the only dissatisfied customers. The parents with care of their children found the delays equally intolerable. Although in his White Paper Improving Child Support (January 1995, Cm. 2745) the Secretary of State valiantly contended that the government believed that the principles underlying the system were right and that they commanded support both from the general public and Parliament, he had to bow to the pressure to make changes. As paragraph 2 of the Introduction to that White Paper acknowledged:-

Thus it was accepted in paragraph 3 of the Introduction that:-

One of the changes which it was recognised had become essential was to give “some discretion to depart from the maintenance formula assessment”. Thus it was proposed that:-

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