Arathoon v Secretary of State for Work & Pensions

J U D G M E N T

1. LORD JUSTICE BUXTON: I will ask Mr Justice Rimer to give the first judgment.

2. MR JUSTICE RIMER: This appeal by the Secretary of State for Work and Pensions is against the decision dated 5th July 2004 of a Social Security Commissioner, Mr Charles Turnbull, dismissing the Secretary of State's appeal against a decision of the Chester Appeal Tribunal made on 30th November 2003. The claimant in the proceedings, and the respondent to this appeal, is Mrs Denise Arathoon. The appeal raises a question of some general importance, turning on the interpretation of paragraph 7 of Schedule 3 to the Income Support (General) Regulations 1987 ("the Regulations").

3. The facts can be stated shortly. Mr and Mrs Arathoon own a house in Cheshire which they bought with the help of a mortgage loan of about £45,000 made by Mortgage Express. They bought in 1990, when interest rates were substantially higher than they are now. Mortgage Express's then standard rate of interest was 15.95%. Mr and Mrs Arathoon's mortgage was, however, a so-called "stabiliser" mortgage, which entitled them to pay a lower fixed rate of interest of 10.25%. The difference between that lower fixed rate and the higher standard rate from time to time was added to the loan capital outstanding and itself earned interest. Were the standard rate to fall below the fixed rate, the like difference would be deducted from that capital.

4. Mrs Arathoon has since 1992 qualified for income support under section 124(1) of the Social Security Contributions and Benefits Act 1992. Section 124(4) describes the amount of an individual's entitlement to such support as the "applicable amount" and, under regulation 17 of the Regulations, that amount consists of the aggregate of amounts falling under such of various identified heads as are applicable to that individual. Mrs Arathoon was in particular entitled under regulation 17(1)(e) to an amount in respect of "housing costs, defined as follows:

"any amounts determined in accordance with Schedule 3 (housing costs) which may be applicable to him in respect of mortgage interest payments or such other housing costs as are prescribed in that Schedule."

5. Prior to 2nd October 1995 that entitled her to support in the way of housing costs in respect of the entirety of her mortgage interest liabilities, being costs calculated by reference to the full fixed contractual rate of 10.25% that she was actually paying. The problem raised by the appeal results from the fact that on 2nd October 1995 a new Schedule 3 to the Regulations was introduced by the Social Security (Income Support and Claims and Payments) Amendment Regulations 1995. The purpose of that amendment was plainly to impose limits on the amount of housing costs that were in future to be met by income support. In general terms, paragraph 1(1) provided that the "housing costs" applicable to a claimant were those costs falling within paragraph 1(1)(a) which also qualified under paragraphs 15 to 17. Paragraphs 15 and 16 brought in costs in respect of loans to acquire or improve a home, and paragraph 17 brought in a miscellany of other costs including, for example, ground rent.

6. Paragraph 1 importantly also drew a distinction between "existing housing costs", which in general terms referred to housing costs arising under an agreement entered into before 2nd October 1995, and "new housing costs", being those arising under an agreement entered into after 1st October 1995. Mrs Arathoon's entitlement was, of course, to "existing housing costs" and the limits of her entitlement to such costs were described in paragraph 6. The effect of that in her case was, as regards loan interest, to limit the housing costs payable in respect of interest on her Mortgage Express loan to a maximum calculated in accordance with paragraph 10 by applying a new "standard rate" of interest to the eligible loan capital. When the new Schedule was introduced, that standard rate, fixed under paragraph 12, was 8.39%, although it has since been periodically varied in line with the movement of interest rates generally and is now 6.33%. Paragraph 6 also provided for "existing housing costs" to include certain payments qualifying under paragraph 17(1)(a) to (c), namely rent, service charges and rent charges, but there is no evidence that the costs applicable for Mrs Arathoon's benefit included such sums.

7. The effect of limiting Mrs Arathoon's housing costs to an amount calculated at that initial standard rate would be to cause immediate hardship to her and to others in a like position. This is because, under the Regulations applicable down to 1st October 1995, she had been entitled to housing costs calculated by reference to the full contractual rate of interest she was liable to pay, namely 10.25%. If she was now only to be entitled to housing costs calculated at the initial standard rate of 8.39%, she would be left with an immediate shortfall on the amount required to meet her interest liabilities; and if that standard rate were then to fall, she would be faced with an even larger shortfall.

8. Schedule 3 recognised its own potential to cause an immediate hardship of the type just identified and paragraph 7, headed "Transitional Protection", contained transitional provisions which were plainly directed at moderating the financial impact of the new scheme on borrowers such as Mrs Arathoon. In general terms, they provided for such borrowers also to receive by way of housing costs an "add back", being an amount bridging the gap between their actual interest liabilities and the housing costs provided by reference to the initial, and lower, standard rate of interest. They also provided for the add back to be subsequently reduced. Any such reduction would be permanent, and if and when the reduction was to nil that would end all entitlement to add back.

9. Turning to the relevant provisions which raise the question with which we are concerned, paragraph 7 provides, so far as material, as follows:

"(1) Where the amount applicable to a claimant by way of housing costs under regulation 17(1)(e) or regulation 18(1)(f) (as the case may be) in the benefit week which includes 1st October 1995 ('the first benefit week') is greater than the amount which, in accordance with paragraphs 6 and 10, is applicable in his case in the next succeeding benefit week ('the second benefit week'), the claimant shall be entitled to have his existing housing costs increased by an amount (referred to in this paragraph as 'add back') determined in accordance with the following provisions of this paragraph.

(2) Where the amount to be met by way of housing costs in the first benefit week is greater than the amount to be met in the second benefit week, then the amount of the add back shall be a sum representing the difference between those amounts.

(3) Where the amount of existing housing costs, disregarding the add back, which is applicable to the claimant increases after the second benefit week, the amount of the add back shall be decreased by an amount equal to that increase, and the amount of the add back shall thereafter be the decreased amount.

(4) Any increase in the amount of the existing housing costs, disregarding the add back, shall reduce the amount of the add back in the manner specified in sub-paragraph (3), and where the amount of the add back is reduced to nil, the amount of the existing housing costs shall thereafter not include any amount by way of add back."

By way of brief explanatory addition, the "first benefit week" was the last week in which the old rules for calculation of housing costs were in effect. The "second benefit week" was the first week in which the new rules for calculation of such costs took effect. Paragraphs 6 and 10 contain, as I have said, rules for the calculation of the amount applicable in respect of existing housing costs under the new regime by reference to the standard rate. Under paragraph 7(2) any applicable add back is an amount equal to the difference between the amount of housing costs applicable to the claimant in the first benefit week and the lower amount applicable in the second benefit week. In the present case, the claimant became entitled to an add back of £16.39 per week. The amount of any add back cannot subsequently be increased. It will continue to be paid in its initial amount, or in any subsequently reduced amount, until such time, if ever, as it is reduced to nil. The questions raised by the appeal are as to the circumstances in which it will be reduced.

10. The main question so raised can be illustrated by considering the following simple sequence of hypothetical events. Assume that at all material times the claimant has a fixed mortgage interest liability of 10% and that in the first benefit week she receives housing costs of £100 enabling her to meet that liability in full. Assume next that the initial standard rate under Schedule 3 is 8% and that at quarterly intervals thereafter it is first increased to 9%, then reduced to 8%, then further reduced to 7%, and then increased to 8%. On that scenario, disregarding the add back, the housing costs applicable to the claimant in the second benefit week will be £80, leaving her with a shortfall of £20 in meeting her interest payment of £100. Under paragraphs 7(1) and 7(2) she is, however, also entitled to a £20 add back, enabling her to meet that payment in full. The effect of the subsequent increase of the standard rate to 9% is that, disregarding the add back, the housing costs will be £90. If she were then to receive both the £90 and the £20 add back she would be unjustly enriched by £10, and there is no dispute that the effect of paragraph 7(3) is permanently to reduce the add back to £10. When the standard rate is then reduced to 8%, the applicable housing costs, disregarding the add back, will be £80, but she will also receive the reduced £10 add back. She will, therefore, suffer a shortfall of £10 and there is nothing in the transitional provisions to compensate her for that. Likewise, when the standard rate drops yet further to 7%, she will, disregarding the add back, only be entitled to £70 by way of housing costs. She will still receive the £10 add back, but her shortfall will now be £20.

11. The main issue is as to what happens at the last stage in my example, when the standard rate is increased from 7% to 8%. Disregarding the add back, the applicable housing costs will be £80. If the £10 add back is also payable, the claimant will receive a total of £90 which will leave her suffering a £10 shortfall. The Secretary of State's case is, however, that no add back will be payable at all. That is because, disregarding the add back, a change of the standard rate from 7% to 8% results in an increase in the housing costs payable, with the consequence that the provisions of paragraphs 7(3) and (4) require a corresponding reduction of the add back, which in my example would reduce it to nil.

12. In the present case the standard rate was in fact steadily reduced from its initial rate of 8.39%, so that by 22nd December 1996 it stood at 6.89%. But on 20th April 1997 it increased to 7.2% and thereafter it increased in stages to 8.65% on 27th December 1998. The last increase in fact took it over the initial standard rate of 8.39%. The Secretary of State's case is that each such increase represented an increase in housing costs resulting in a corresponding reduction of the add back, with the final increase to 8.65% having the effect of reducing it permanently to nil.

13. The claimant's case is that that is wrong. Reverting to my example, while she of course accepts that the change of standard rate from 7% to 8% resulted in an increase in housing costs as compared with those payable when the standard rate was 7%, she says that that is not the increase to which paragraphs 7(3) and (4) are referring. They are referring, she says, exclusively to an increase in housing costs as compared with the housing costs payable in the second benefit week, disregarding any add back. Since an increase in the standard rate from 7% to 8% did not effect any such increase, it is irrelevant. If so, on the facts of the present case the claimant would still have been entitled to an add back of about £10 by March 2002, the last date for which any calculations were in evidence. This reflects a recognition by her that the consequence of increases in the standard rate has effected some erosion of the add back, but that it has only been so eroded by increases of the standard rate over the initial standard rate of 8.39%, being increases causing the applicable housing costs to increase over those applicable in the second benefit week. The increase to 8.65% in December 1998 is the first example of that.

14. The question, therefore, is whether on the true interpretation of paragraphs 7(3) and (4) any "increase" in the amount of the existing housing costs means an increase as compared with the amount applicable in (a) the second benefit week, or (b) the immediately preceding week. The Commissioner's decision, upholding that of the Appeal Tribunal, was in the sense of alternative (a). He held that upward movements of the standard rate to a level still below the initial standard rate had no reducing effect.

15. The Commissioner reached that conclusion for the following reasons. First, he regarded the words of paragraph 7(3) as pointing more naturally to that interpretation. Secondly, whilst there was an obvious reason why an increase of housing costs above the amount payable in the second benefit week should require a reduction in the add back (namely to ensure that the claimant was not put in a better position than he would have been before the introduction of the new Schedule 3), it was less obvious why any future increase in housing costs above the level payable in the immediately preceding week, but still to a level below that payable in the second benefit week, should reduce the add back. The rationale for a reduction in the latter circumstance would appear, as the Commissioner held in paragraph 18, simply to be one under which the objective was to reduce the add back whenever it could be done:

"... consistently with the erosion not causing the level of housing benefit payable to fall as compared with the previous week. Looked at in terms of interest rates, it becomes a means of clawing back the add back whenever an opportunity to do so results from an interest rate rise, rather than a simple means of ensuring that a claimant is not protected to a greater extent than he should be. The latter result would obviously have been thought desirable, but it seems to me much less clear that the former would have been."

16. The Commissioner also considered a further question arising in the following hypothetical example, namely a fixed mortgage interest liability of 10%, or £100 per week, an initial standard rate of 8% in the second benefit week, an increase of the standard rate to 9%, followed by its reduction to 8%, followed by a further increase to 9%. There is no doubt that the first standard rate increase reduced the add back from £20 to £10. But did the second increase reduce it by the remaining £10? No like double increase actually arose in the present case, and this particular question only came to be considered as part of the opposing arguments on the main question to which I have already referred.

17. The Commissioner's view was that if the double increase did cause a second reduction, that tended to support the correctness of the Secretary of State's argument on the main question. He held, however (although only after, as he put it, considerable hesitation) that the repeat increase did not result in a second reduction, saying in paragraph 21:

"It seems to me that it is implicit that the total amount of the reduction in the add back cannot be more than the amount by which the housing costs exceed or have exceeded their second benefit week level - in other words that any given amount of increase above the second week level can only be counted once for the purpose of determining 'the amount equal to that increase'. I recognise that that view is very arguably open to the objection that it does appear to be intended by para. 7(3) that any increase which qualifies as an increase within the opening words is to result in a decrease in the add back. That impression is strongly confirmed by para. 7(4), stating that 'any increase in the amount of the existing housing costs ... shall reduce the amount of the add back.' At the end of the day, however, it does not seem to me that the wording of paras. 7(3) and (4), taken as a whole, compel the result that every increase which falls within the opening words of para. 7(3) (i.e. even an increase which duplicates a previous increase) must result in a reduction of the add back. Whilst para. 7(4), looked at on it own, does most strongly indicate that result, the purpose of para. 7(4) was in my view merely to make clear that once the add back has been entirely eroded it cannot be reinstated."

18. On this appeal Mr Ward, for the Secretary of State, submitted that the Commissioner's decision on both questions was wrong. He submitted that paragraphs 7(3) and (4) show that any increase in the amount applicable in respect of existing housing costs reduces the add back, whether or not that increase takes such amount above the applicable amount in the second benefit week. Thus, not only will the increase in the standard rate from 7% to 8% in my first example reduce the add back, so will the second increase from 8% to 9% in my second example. He emphasised that the protection provided by the add back was plainly not intended to be permanent, and nor was it directed at ensuring that in no circumstances could a claimant under the new regime become worse off than under the previous regime. He emphasised that it was no part of the apparent policy of paragraph 7 simply to ensure that the claimant is not better off than he was under the old regime. If it were, he said the Regulations might simply have provided for any sum eroded from the add back by a rise in the standard rate to be restored in the event of a subsequent fall in that rate. He said the plain inference was that the scheme of the transitional provisions was directed merely at easing the transition from the old regime to the new.

19. Mr Ward submitted that his basic submission was supported by the plain meaning of paragraph 7(3). He said that an increase in the standard rate from 7% to 8% in my first example was plainly a case in which "the amount of existing housing costs, disregarding the add back, which is applicable to the claimant increases after the second benefit week." He said there is no express requirement that the increase must be an increase over the amount applicable in the second benefit week. He criticised the Commissioner's conclusion to the contrary effect, namely "that the obvious comparison is with the housing costs in the second week", and said that this is to read in words which are not there. He said that the word "increases" in paragraph 7(3) is not qualified, and that any increase will do. He said that this interpretation is underlined by paragraph 7(4), in particular by the first of the two opening words "Any increase ...". He laid great emphasis on those words, submitting that they illustrated that the statutory intention was that any and every increase was to be capable of eroding the add back, and that they undermined any suggestion that the relevant increase was merely an increase by comparison with the amount of housing costs applicable in the second benefit week.

20. As for the Commissioner's conclusion that a repeat of a previous increase will not effect a further reduction, Mr Ward said this was also wrong, again placing reliance on the opening words of paragraph 7(4). He agreed with the Commissioner that paragraph 7(4) makes clear that once the add back is wholly eroded it cannot be reinstated, but said that the Commissioner had failed to pay sufficient regard to the opening words. He said that even if the Commissioner was right on the main question, there was no justification on the statutory language for his answer to this further question, which involved reading in a good deal of language which is simply not to be found in paragraph 7.

21. Finally, Mr Ward also sought to draw support for his argument from a Department of Social Security memorandum submitted to the Social Security Advisory Committee in 1995, which led in due course to the introduction of the new Schedule 3. Mr Ward relied on paragraph 42, which proposed in part that:

"MIPS [i.e. the add back] will be reduced by:

• any increase in the standard rate;"

22. For the respondent, Mr Stagg submitted that the Commissioner was correct in his decision on the main question essentially for the reasons he gave. He said the memorandum to which I have just referred was neutral as to the comparison by reference to which increases are to be measured. He recognised that the Commissioner's decision on the second question did involve reading certain words into paragraph 7, but he said these words were anyway implicit in it, and that the Commissioner's construction was a legitimate one that properly reflected the apparent legislative purpose of the housing costs scheme. Mr Stagg submitted that even if the Commissioner was wrong in his answer to the second question, that did not mean that he was also wrong in answer to the first question.

23. Coming now to my conclusions, I deal first with the question of whether an increase in the standard rate from 7% to 8% in my first example results in a reduction of the add back, that being strictly the only question raised by the appeal. Despite the clarity and force of Mr Ward's argument that it does, I was not persuaded by it. I respectfully agree with the Commissioner's decision that it does not. Mr Ward criticised the Commissioner's observation that the use of the verb "increases" in paragraph 7(3) prompts the question "increases as compared with what?" and for answering it in the way he did. In my judgment the Commissioner was right to regard paragraph 7(3) as posing that question, since, like the Commissioner, I cannot see how something can be identified as an "increase" except by comparison with something else. Mr Ward's argument itself necessarily poses exactly the same question, although he answers it by saying that the correct comparison is with the applicable amount of housing costs in the immediately preceding benefit week.

24. The question, therefore, is which answer is right. In my judgment, the Commissioner was right to hold that the more natural interpretation of the language of paragraph 7(3) points to the conclusion that the comparison is with the applicable housing costs in the second benefit week. The language in terms refers to the circumstance in which the amount of existing houses costs "increases after the second benefit week", and I prefer the view that that choice of words is referring to an increase in comparison with the housing costs payable during that week. That also appears to me to be a more rational interpretation to attribute to paragraph 7 as a whole. As the Commissioner observed, there is a solid reason to treat an increase in those housing costs as effecting a corresponding reduction in the add back, since otherwise the claimant is likely to be unjustly enriched. But there is no readily understandable policy reason why a subsequent increase in the standard rate to a level still below the initial standard rate should be regarded as having been intended to have the like effect. In the case of a borrower such as Mrs Arathoon, a fall in the initial standard rate will produce an immediate financial hardship for which her add back (or however much of it is still left) will provide no compensation. Nor was it intended to. It was intended only to provide a fixed, albeit reducible, element of compensation, measured by reference to the immediate financial shortfall represented by the difference between the level of housing costs applicable in the first and second benefit weeks. Since it was not intended to provide any compensation for any increased financial hardship resulting from a fall in the standard rate of interest, I fail to see why any subsequent alleviation of that latter hardship resulting from a rise in the standard rate should be regarded as being intended to reduce the particular and limited benefit that the add back was intended to achieve. In the circumstances I am now considering, that original hardship is not just continuing: it has become greater.

25. In my judgment, therefore, there is no sound basis for extracting from the statutory language the interpretation for which Mr Ward contends. In particular, I do not regard the language of paragraph 7(4), upon which Mr Ward placed particular reliance, as providing support for it. The purpose of the opening words "Any increase ..." is, I consider, simply to make clear that which paragraph 7(3) does not, namely that a reduction in the add back in the event of a relevant increase is not simply a one-off future event, but that every relevant increase will have the effect of reducing the add back. The draftsman might well have opened paragraph 7(4) with the words "Every increase ...". It is easy to see why he did not, since that choice of words might perhaps be construed as having something of a promissory element about it. Had he favoured a little cautious pedantry, he might have said "Every (if any) increase ...", but he instead simply used the words "Any increase ...". That language does not in my judgment serve to widen the concept of the type of increase referred to in paragraph 7(3). The type of "increase" referred to in paragraph 7(4) must, I consider, be an increase of the like kind as is referred to in paragraph 7(3).

26. Finally, I do not regard paragraph 42 of the memorandum as providing support for Mr Ward's argument. Even assuming, upon which I specifically express no view, that the memorandum is admissible as an aid to construction of paragraph 7, I do not regard the sentence upon which Mr Ward particularly relied as providing any assistance. It again poses, but does not answer, the same question, namely "increases as compared with what?" I agree with Mr Stagg that its language is neutral as regards the particular question that this court now has to decide.

27. I turn to the second question raised by the argument, namely whether a duplicate increase in housing costs as compared with those applicable in the second benefit week results in a second reduction of the add back. This question does not strictly arise for decision on this appeal but since the Commissioner expressed his views upon it and we have heard argument upon it, I will briefly express my own view on it.

28. On this point I am in respectful disagreement with the Commissioner. If the initial standard rate rises, falls to the initial standard rate and then rises again, there is no doubt that the first rise reduces the add back. I would regard the second rise as just as much a relevant increase as the first, and I cannot see why a like further reduction in the add back should not follow. I can sympathise with the Commissioner's view that this may seem unfair or anomalous, but it appears to me to flow inexorably from what I regard as the correct construction of paragraph 7, and I can identify no basis on which that construction entitles the claimant to have the duplicate increase left out of account. If the result is anomalous, that is probably because it was not foreseen by the draftsman of paragraph 7 as an event very likely to happen.

29. We were referred to the decision of this court in Chief Adjudication Officer v Dommett, 12th March 1992, CIS/100/1989. It raised a question under the Income Support (Transitional) Regulations 1987, which bore some similarly to that with which the Commissioner was concerned in the present case, although it turned on rather different facts and slightly different statutory language. The decision was sufficiently close to home to cause Mr Ward to submit that it was relevantly distinguishable, although in the event, rightly in my view, Mr Stagg did not seek to submit that the Dommett decision provides the answer to the present appeal. I agree with Mr Stagg and will say no about the Dommett decision.

30. Perhaps more to the point, we were also referred, as was the Commissioner, to the decision of Mr Commissioner Mesher in case number CIS/16769/1996, one also involving paragraph 7 of Schedule 3, in the course of which Mr Commissioner Mesher uttered an obiter sentence which accorded with the view of the Commissioner in the present case on the main question before him. For the reasons given, I also agree with that view.

31. I would dismiss the appeal.

32. LORD JUSTICE SEDLEY: I agree.

33. LORD JUSTICE BUXTON: I also agree.

ORDER: Appeal dismissed with costs; the parties to seek to agree what those costs should be; in the event of any disagreement, the matter to be referred back on paper to Buxton LJ before going to a costs judge.

(Order not part of approved judgment)