Chandler v Secretary of State for Work and Pensions & Anor

This is an absent parent’s appeal from a decision of Commissioner Turnbull of 26^th February 2007 (CCS/2806/2006). The Commissioner himself gave permission to appeal, rightly taking the view that an important point is involved.

In its broadest form the question is whether regular payments to an absent parent should be treated as his/her (I shall henceforth use “he”) income for the purposes of calculation of his liability for child maintenance even where those regular payments come purely out of capital. The Commissioner held they should. The appellant absent parent, supported by the Secretary of State for Work and Pensions, submits he was wrong. The parent with care supports the Commissioner’s decision.

The parties were represented by Mr Martin Blount for the absent parent, Miss Zoe Leventhal for the Secretary of State and Mr Richard Drabble QC and Mr James Willan for the parent with care. I would like to pay a tribute to all counsel for the great precision and economy with which they each advanced their arguments.

The facts are as follows. The absent parent is the sole director and majority shareholder in a company. The company needed money. This he raised by taking out a mortgage on his house and lending it to the company. He arranged for the company to pay him back at a rate of £2,500 per month. Although he works for the company he takes no remuneration at present. A dividend was declared in one year and Mr Blount rightly accepted that that would count as income even though it was credited directly to the absent parent’s loan account.

This appeal is not concerned with whether these arrangements do or might fall within the various anti-avoidance provisions of the legislation. It is confined to the issue of whether the regular payments (“re-payments” might be a better term) fall within para. 15 of Schedule 1 of The Child Support (Maintenance Assessments and Special Cases) Regulations 1992 (SI 1992 No. 1815) (“the MASC Regulations”). The key words for this case are “any other payments or other amounts received on a periodical basis …”

The legislative basis and background to the MASC Regulations is rather lengthy. I set it out so far as relevant in an Annex to this Judgment so as make the judgment itself more digestible.

I start with the argument for the appellant and Secretary of State. In short it is this: that the Act and implementing regulations draw a clear distinction between capital (not available for maintenance) and income (available). Para. 15 is within Part III of Schedule 1 of the Regulations headed “Other Income.” It follows a whole series of other provisions clearly dealing only with income, e.g. para. 9 (periodic payment of pension), para. 11 (student income), para 13 (income derived from capital – particular reliance is placed on this) and so on. “Any other payments” in clause 15 is to be construed eiusdem generis with all the other forms of income and is limited to payments which can properly be called income in contrast to payments which are clearly just of capital.

The argument is elaborated in various ways. First by reference to the primary Act. Sched. 1, setting out how a maintenance assessment is to be calculated, works on income. Para. 2 of Sched. 1 sets out the general rule. It depends on the respective parents’ income. Para. 5 is all about the absent parent’s income – the key figure for present purposes is N – the amount of the absent parent’s net income. It is to be assessed in accordance with the regulations to be made, but its underlying characteristic is income properly so called.

It is significant also that, again in the primary legislation, Parliament has specifically considered capital as being distinct from income – see the express power to make regulations under which one is to be treated as the other (Sched. 1 Para. 9(e) and (f)).

When one comes to the delegated legislation it must follow that “income” and “capital” continue to have the same meaning as in the primary, enabling, Act and in particular that “income” is used in contradistinction to “capital”. The delegated legislation must, unless one is convinced otherwise, use words with the same meaning as the primary, enabling, legislation.

Going next to the MASC Regulations para. 7 is about the calculation of N (the net income of the absent parent). It brings in the Schedule to the Regulations for the detail. Under para. 7 you add the amount of earnings (para. 7(1)(a) – Part I of Sched. 1), benefit payments (para. 7(1)(b) – Part II of Sched. 1) , other income (para. 7(1)(c) – Part III of Sched. 1), amount of a relevant child’s income which is to be treated as that of the parent (para. 7(1)(d) – Part IV of Sched. 1) and any amount which is to be treated as the income of the absent parent under Part V of Sched. 1 (para. 7(1)(e)). So at this point what is to be added together are various sorts of income – not capital. Para. 7 goes on in subparas (2) and (3) to set out types of income to be disregarded – the detail does not matter for present purposes save to say that they are all obviously income and not capital.

By para. 8 the same rules apply to the assessment of M (income of parent with care). The scheme is looking to see what each parent’s income is.

The structure of the Schedule to the Regulations follows through and is that foreshadowed by para. 7 of the Regulations. Part 1 deals with “Earnings”, Part II with “Benefit Payments”, Part III with “Other Income”, Part IV with “Income of Child treated as Income of Parent” and Part V with “Amounts Treated as the Income of the Parent.”

Focussing now on Part III of the Schedule itself it is headed “Other income” and one expects it to be concerned with income properly so called and nothing else. Moreover in this very Part the draftsman is obviously working on a distinction between capital and income – see para. 13 about interest derived from capital particularly. The same point can be made about para. 27 (intentional deprivation of “income or capital which would otherwise be a source of income”).

So, when one comes to para. 15 and its language “any other payments or other amounts received on a periodical basis” the context must be “payments or other amounts” by way of income. Just regular payments from a capital sum are outside the intended meaning and scope of the language. A reasonable reader of para. 15 in the context of the Act and the remainder of the MASC Regulations would not take the reasonable legislator to have intended to include such payments in what, after all, is just a sweep-up clause.

The appellants and Secretary of State also urge that the court need not and should not strain to conclude that regular payments by way of reduction of capital should be counted as income out of a supposed purposive construction in favour the provision of child maintenance. For the Regulations themselves have anti-avoidance provisions under Part V. If what is really income is dressed up so as to appear not to be so, Regs. 26 (working for no payment with the principal purpose of reducing assessable income) and 27 are there for that purpose.

Further, the provisions about departure directions support this conclusion. A departure direction is another anti-avoidance mechanism. Such a direction is provided for by ss.28A-I of the Act, introduced by amendment in 1996. Under the regulations made thereunder if a parent has a life-style beyond his declared income then he can be ordered to pay more. But, and this is the important bit, not if that lifestyle is financed out of capital. So clearly the draftsman of this provision did not think that regular payments out of capital already counted for the purposes of assessment of N.

Finally the appellants and Secretary of State took us to the authority of two Commissioners. In CCS/3671/2002 Commissioner Mesher rejected a suggestion that repayment of a loan to a company by an absent parent was a profit derived from employment by the company or as holder of the office of director. He said:

In CCS/3499/2004 Commissioner Jacobs set out the Secretary of State’s submissions:

Commissioner Jacobs went on to allow for the possibility that somehow what was really income might be dressed up as repayment of a director’s loan, but that would be for the possible application of the anti-avoidance provisions or a departure direction. In the particular case he remitted the matter to be considered for such a direction.

Finally in CCS/3387/2006 Commissioner Jacobs said:

It was suggested that we should pay deference to these expressions of opinion (none were actually about para. 15) by experienced Commissioners as indicated by Lord Hoffmann in Hinchy v Secretary of State for Work and Pensions [2005] UKHL 16 [2005] 1 WLR 907.

Finally, so far as the appellant’s arguments are concerned, I should record Mr Blount’s submission about the merits. He submitted that the actual effect of the Commissioner’s decision is that the absent parent has the liability to pay mortgage interest on the re-mortgage of his house and additional child support based on the repayments of capital. So the re-mortgage monies (capital) would acquire a child support liability solely by virtue of being paid into and out of a company by the mechanism of a loan. That cannot be within the contemplation of an overall scheme which is intended to disregard capital.

I first record an argument Mr Drabble specifically eschewed: that para. 15 is an example of a regulation authorised by para. 9(f) of Schedule 1 to the Act – allowing for a regulation under which capital is to be treated as income. I think he was right to so – the exercise of such a power would call for language much more specific than that of para. 15 – as Commissioner Mesher observed in CCS/3671/2002 (see above).

Mr Drabble’s argument put shortly is in two stages. First is that the very words of para. 15 – “Any other payments or other amounts received on a periodical basis” literally apply. The absent parent did and does indeed receive payments on a periodical basis. The emphasis is on the periodical receipt, not on where the money comes from.

The next stage is to accept that the payment must in some sense be regarded as income. But, submitted Mr Drabble “income” is a word which is capable of including receipt of money in tranches from a capital fund. For this he relied particularly on three cases, Morrell v Secretary of State for Work and Pensions [2003] EWCA Civ 526, R v West Dorset DC ex parte Poupard [1988] RVR 40 and an older case, Longsdon v Minister of Pensions and NI [1956] 2 WLR 176. None were concerned with child maintenance, but all were, he submitted, concerned with closely related subject matter and were a firm indication that “income” could include regular payments from capital. If it could in those cases, it could for child maintenance too, the policy considerations being not significantly different.

It followed that although para. 15 was indeed confined to regular payments in the nature of income, regular payments out of a capital fund were in the nature of income. So there was no reason not to apply the very words as they stand to such a case.

I turn first to Morrell, which was about income support. The Secretary of State claimed for recovery of alleged overpayments. He contended that the claimant had misrepresented her income by failing to say that she had received regular sums from her mother by way of a loan which she used for paying rent and other living expenses. It was held that the payments were by way of income. Since these had not been declared she had made a misrepresentation. Richards J (as he then was), giving the lead judgment said:

Poupard was about housing benefit. The Poupards had used capital to purchase assets to be used in a business which did not make any profits. They lived by using cash receipts from the business and drawings from a single account which they used both for personal and business purposes. The question was whether those amounts were “income” for the purposes of Reg. 16 of the Housing Benefit Regulations (1985 SI No. 677). It was held by this court they were. Balcombe LJ said at p.303:

Longsdon was about national insurance contributions. The question was whether the applicant’s income exceeded the threshold requiring payment. The applicant, a farmer, had ploughed back all his profits into his business. He maintained a standard of living represented by an income well above the threshold. He did this by selling capital and bank borrowing. Havers J held that these sums constituted “income” for the purposes of the National Insurance Act 1946 and the regulations made thereunder. He said at p.182:

Given that in those cases the taking out of a loan in regular amounts (Morrell), the regular taking of living expenses from business receipts and a mixed account of business receipts and capital (Poupard) and the regular taking of borrowings and use of capital (Longsdon) were all treated as “income”, Mr Drabble submitted that the repayments here should be similarly treated. They are “that which comes in.”

As for the decisions of Commissioners Mersher and Jacobs relied upon by the appellant, Mr Drabble submitted they were largely obiter, wrong and per incuriam in that the cases he had cited here had not been cited to the Commissioners.

I would reject Mr Drabble’s contentions. I accept the contentions and arguments of the appellant and Secretary of State which I have set out above. In summary I think the Act and Regulations draw a clear demarcation between capital and income. A periodical drawdown of capital is not “income” and is not “Any other payments or other amounts received on a periodical basis” within para. 15. Para. 15 is a “sweep-up” provision for other kinds of income not specifically dealt with in other provisions and must be read in that context. If Parliament had wanted to include periodic drawdown of capital it could have so provided. The Regulations could have expressly provided that such a circumstance was to be treated as income even though it was a drawdown of capital but did not do so.

I do not accept that Mr Drabble’s authorities help here. Each was under a different statute and were in different contexts from that of this statute and its regulations. More specifically none of those cases were specifically about a man simply taking regular helpings from his own capital – taking what is in substance no more than re-payment. Morrell involved taking an income by way of building up a loan, Poupard involved taking payments from sources which included a business income and Longsdon involved an obvious attempt to convert income into capital (the ploughing back), financed by borrowings. That is the sort of thing which, under this statute, would be caught by the anti-avoidance provisions.

Besides, as Miss Leventhal pointed out, if you start looking for analogous cases under other “analogous” statutes you can find cases which go the other way. She took us to Lillystone v SBC [1982] FLR 52 by way of example. To raise money for repairs to her house, a widow living on supplementary benefits sold her house for a capital sum payable by monthly instalments. It was contended (1) that these instalments took her income above the threshold for entitlement to benefit and/or (2) her capital resources were above the relevant threshold. This court held the latter to be so. Importantly for present purposes, however, was the holding that the regular payments of the capital were not income. Lord Denning MR said:

I think there is considerable danger in jumping from one statute to another. It does not help. Each statute and its associated regulations fall to be construed as whole. The context for construing a particular phrase or word is that statute, not some other statute. This statute is clearly drawn on the basis that there is clear distinction between capital and income. That distinction is pursued right through into the detail of the Schedule to the MASC Regulation. There is no need to hold, perhaps a bit artificially, that that which is capital counts as income. There are anti-avoidance provisions which will generally cover such a case. I see no need to do so on a purposive construction of the Act.

I would add that although the MASC Regulations cannot be construed in the light of the departure direction provisions and regulations (the Regulation preceded it) it is comforting to conclude that my construction is consistent with those provisions.

There are these further reasons why I would reject Mr Drabble’s argument. On any basis para. 15 could not extend to a single re-payment of a loan. So if he were right, one would have the bizarre result that a lump sum repayment would not be caught whereas a regular repayment would. There is no rationality in that. Moreover how would one deal with intermediate situations, irregular repayments of varying amounts? The reasonable reader would not consider that a reasonable legislator had intended such odd distinctions should be drawn.

It follows that this appeal should be allowed. Commissioner Turnbull himself set aside the decision of the Southampton Appeal Tribunal. Mr Blount first suggested that we should do nothing more than allow the appeal. But that would mean that there is no determination at all. So I think we should remit the matter for a fresh determination.

For my part I think the determination should be entirely afresh. I bear in mind Mr Blount’s submission on the merits, but it is also possible (I express no view one way or the other) that the case may come within the anti-avoidance provisions. The absent parent is, after all, working for the company for no payment and has lent the money at no interest. Possibly, instead of taking loan repayments, he could instead take a salary with the consequence that the company would be worth less. It is perhaps arguable that he is in substance turning his labour into capital.

I agree.

I also agree.

the person with care, or absent parent, with respect to whom it was made, or

where the application for the current assessment was made under section 7, either of those persons or the child concerned, may apply to the Secretary of State for a direction under section 28F (a “departure direction”).

The general principles are that –

parent should be responsible for maintaining their children whenever they can afford to do so;

where a parent has more than one child, his obligation to maintain any one of them should be no less of an obligation than his obligation to maintain any other of them.

he is satisfied that the case is one which falls within one or more of the cases set out in Part I of Schedule 4B or in regulations made under that Part; and

it is his opinion that, in all the circumstances of the case, it would be just and equitable to give a departure direction.

the financial circumstances of the absent concerned;

the financial circumstances of the person with care concerned; and

the welfare of any child likely to be affected by the direction.

for factors which are to be taken into account in determining whether it would be just and equitable to give a departure direction in any case;

for factors which are not to be taken into account in determining such a question.

The Secretary of State may by regulations provide that, in such circumstances and to such extent as may be prescribed –

Income of a child shall be treated as income of a parent of his;

Where the Secretary of State is satisfied that a person has intentionally deprived himself of a source of income with a view to reducing the amount of his assessable income; his net income shall be taken to include income from that source of an amount estimated by the Secretary of State;

A person is to be treated as possessing capital or income which he does not possess;

Capital or income which a person does possess is to be disregarded;

Income is to be treated as capital;

Capital is to be treated as income.

For the purposes of paragraph 5(2) of Schedule 1 to the Act, the amount of M (net income of the parent with care) shall be calculated in the same way as N is calculated under regulation 7 but as if references to the absent parent were references to the parent with care.

a grant;

an amount in respect of grant contribution;

covenant income, except to the extent that it has been taken into account under subparagraph (b);

a student loan.

intended to meet tuition fees or examination fees;

intended to meet additional expenditure incurred by a disabled student in respect of his attendance on a course;

intended to meet additional expenditure connected with term time residential study away from the student’s educational establishment;

on account of the student maintaining a home at a place other than at which he resides during his course;

intended to meet the cost of books, and equipment (other than special equipment) or, if not so intended, an amount equal to the amount allowed under regulation 38(2)(f) of the Family Credit (General) Regulations 1987 towards such costs;

intended to meet travel expenses incurred as a result of his attendance on the course.

are excluded from the definition of “earnings” by virtue of paragraph 1(2);

are excluded from the definition of “the relevant income of a child” by virtue of paragraph 23; or

are the share of housing costs attributed by virtue of paragraph (3) of regulation 15 to any former partner of the parent of the qualifying child in respect of whom the maintenance assessment is made and are paid to that parent.

where it has been received in respect of the whole of the period of 26 weeks which ends at the end of the relevant week, by dividing such income received in that period by 26;

where it has been received in respect of part of the period of 26 weeks which ends at the end of the relevant week, by dividing such income received in that period by the number of complete weeks in respect of which such income is received and for this purpose income shall be treated as received in respect of a week if it is received in respect of any day in the week in question.

Where in respect of the period of 52 weeks which ends at the end of the relevant week a person is in receipt of interest, dividend or other income which has been produced by his capital, the amount of that income shall be calculated by dividing the aggregate of the income so received by 52.

The amounts which fall to be treated as income of the parent in calculating or estimating N and M shall include amounts to be determined in accordance with this Part.

Where [the Secretary of State] is satisfied –

That a person has performed a service either –

without receiving any remuneration in respect of it; or

for remuneration which is less than normally paid for that service;

That the service in question was for the benefit of –

another person who is not a member of the same family as the person in question; or

a body which is neither a charity nor a voluntary organisation;

that the service in question was performed for a person who, or as the case may be, a body which was able to pay remuneration at the normal rate for the service in question;

that the principal purpose of the person undertaking the service without receiving any or adequate remuneration is to reduce his assessable income for the purposes of the Act, and

that any remuneration foregone would have fallen to be taken into account as earnings;

Subject to paragraphs 28 to 30, where the Secretary of State is satisfied that otherwise than in the circumstances set out in the circumstances set out in paragraph 26, a person has intentionally deprived himself of –

any income or capital which would otherwise be a source of income;

any income or capital which it would be reasonable to expect would be secured by him,

out of capital belonging to him; or