[2023] UKUT 175 (AAC)

There are two principal reasons why the First-tier Tribunal’s suggested conclusion was different from any of the conclusions previously reached by the Secretary of State.

The first reason that the First-tier Tribunal reached a different conclusion was that it relied on historic income, rather than current income. This the point to which Judge Robinson drew attention and which the Secretary of State has adopted. As the Secretary of State submits, there is nothing specific to show that the First-tier Tribunal addressed that question and had it in mind when suggesting to the father that he should accept that a figure that related to historic income should be used in place of a figure that related to current income.

On the other hand, I consider that, if historic income was £81,725, the First-tier Tribunal could, and should, have considered that the use of historic income was more appropriate than the use of current income. Regulation 34(2)(a) required historic income to be used unless current income was at least 25% less than that figure, i.e., no more than £61,293.75. The First-tier Tribunal’s reference to the father’s “pessimistic” projection of dividend income, suggests that it may have had in mind that the parents were agreed that his actual income in 2017/18 was £61,500.

Applying only regulations 37 and 38, current income could take account only of “taxable earnings”, which in this case, it is not disputed, amounted to only £11,500. Most of the income derived from the company was, however, taken as dividends, which are not taxable earnings, because they are received by virtue of being a shareholder rather than an employee or office holder and they are taxed under Chapter 3 of Part 4 of the Income Tax (Trading and Other Income) Act 2005. However, they can be included in current income by virtue of regulation 69 of the 2012 Regulations, paragraphs (1) to (3) and (5) of which provide –

“69.—(1) A case is a case for a variation for the purposes of paragraph 4(1) of Schedule 4B to the 1991 Act where the non-resident parent has unearned income equal to or exceeding £2,500 per annum.

(2)

For the purposes of this regulation unearned income is income of a kind that is chargeable to tax under—

(a)

Part 3 of ITTOIA (property income);

(b)

Part 4 of ITTOIA (savings and investment income); or

(c)

Part 5 of ITTOIA (miscellaneous income).

(3)

Subject to paragraphs (5) and (6), the amount of the non-resident parent's unearned income is to be determined by reference to information provided by HMRC at the request of the Secretary of State in relation to the latest available tax year and, where that information does not identify any income of a kind referred to in paragraph (2), the amount of the non-resident parent's unearned income is to be treated as nil.

(4)

….

(5)

Where—

(a)

the latest available tax year is not the most recent tax year; or

(b)

the information provided by HMRC in relation to the latest available tax year does not include any information from a self-assessment return; or

(c)

the Secretary of State is unable, for whatever reason, to request or obtain the information from HMRC,

the Secretary of State may, if satisfied that there is sufficient evidence to do so, determine the amount of the non-resident parent's unearned income by reference to the most recent tax year; and any such determination must, as far as possible, be based on the information that would be required to be provided in a self-assessment return.”

In her first revision, the Secretary of State simply accepted the father’s projections. However, such an approach appears not to be permitted by either of paragraphs (3) or (5) of regulation 69. In her second revision, the Secretary of State took the £5,000 dividend received in 2016/17 as the appropriate figure. However, both of paragraphs (3) and (5) talk of determining unearned income “by reference to” information relating to the past year. It seems to me that, in this case, where the company had only been operating for a short period, the dividend should have been attributed just to that period if regulation 69 was being applied and an annual or weekly figure should have been determined accordingly. Thus, if the dividend were attributed just to the two months in respect of which the father received earned income, the annual figure would be £30,000.

On the other hand, even that figure is considerably lower than the £50,000 dividend actually declared, retrospectively, in respect of 2017/18. Although HMRC may not have been told of that declaration until 31 January 2019 (see page 62 of the bundle), it had actually been made on 28 August 2018 (page 121), which was before the Secretary of State’s revision, although that is not relevant to an application for a variation under regulation 69.

However, an alternative ground for a variation is to be found in regulation 71 of the 2012 Regulations, to which the Secretary of State referred in her submission to the First-tier Tribunal, and which provides –

The father undoubtedly had the ability to control the extent to which he received earnings, dividends or any other drawings from the company. However, the Secretary of State, in her submission to the First-tier Tribunal (page 3), considered that the father had not “reduced” his income. I disagree. To the extent that the father chose either to retain money in the company or to take payments in the form of dividends rather than earnings, he undoubtedly reduced the amount of his income that, unless a variation were made, would fall to be taken into account as current income in a child support maintenance assessment. The real question is whether he did so “unreasonably”.

In AS v Secretary of State for Work and Pensions (CSM) [2018] UKUT 315 (AAC), I considered the meaning of that word in the predecessor of regulation 71, which was regulation 19(4) of the Child Support (Variations) Regulations 2000 (SI 2001/156), and said –

“18.

The question of what is reasonable for the purposes of regulation 19(4) must be considered in the context of the purpose of the provision and, indeed, the purpose of the whole child support regime. It is expected that parents will support their children and regulation 19(4), like much of the rest of the 2000 Regulations, is obviously intended to prevent non-resident parents from avoiding that liability. An action that might be quite reasonable in the absence of any potential liability to support children may, for the purposes of regulation 19(4), be unreasonable if it has the effect of reducing a parent’s ability to pay child support maintenance. Whether a diversion was unreasonable will depend on a number of factors and is likely to be a matter of judgment. In particular, it is necessary to consider the extent to which the action that amounted to a diversion of income was purely voluntary or was forced upon the parent by circumstances and the extent to which the reasons for carrying out the action reflected what can fairly be regarded as a diminution in his ability to pay child support maintenance.

19.

… I do not consider that gaining a tax advantage can ever contribute to the reasonableness of the diversion for the purposes of regulation 19(4). It would be absurd if a non-resident parent were to be allowed to enrich himself and members of his household at the expense of other children whom he is under an obligation to support, save to the extent that such enrichment is merely the consequence of action taken for some other good reason.”

Absent any potential liability to pay child support maintenance, it may well have been perfectly sensible for the father to pay himself a small salary and draw other income in the form of a dividend, declared retrospectively because he was able to live off his redundancy payment in the meantime. However, doing so must be regarded as unreasonable for the purposes of regulation 71 and I consider that a variation under regulation 71, rather than under regulation 69, should have been made in this case.

It may well be that at the time the Secretary of State made her first revision decision, it would have been quite appropriate, if the Secretary of State had had in mind a variation under regulation 71, to rely on the father’s projections. There may have been no evidential basis for not doing so. However, when the Secretary of State was further revising the decision on 1 June 2019, I can see no reason why she could not have had regard to the real figure of £50,000 if she had had a variation under regulation 71 in mind. Unlike in regulation 69, there is no requirement in regulation 71 that the relevant information should have been provided to HMRC before the Secretary of State made her original decision and, since the declaration of a dividend had retrospective effect, it declared what the position was as at the time of the Secretary of State’s original decision. (In any event, where a decision is based on a prognosis or projection, it is well established that, on an appeal, the First-tier Tribunal is not prohibited by section 20(7) of the 1991 Act from having regard to what actually happened when considering what had been likely to happen at the date of the Secretary of State’s decision under appeal (R(DLA) 3/01). The same must be true in relation to regulation 14(2) of the 2012 where revisions are concerned.)

In these circumstances, I am satisfied that, for the purposes of calculating the father’s current income from 9 September 2017, there should have been a variation under regulation 71 amounting to £50,000. Added to the £11,500 taxable pay, that would have produced a total current income of £61,500. However, that is more than 75% of the £81,725 historic income that the parents both accepted that the father had in 2016/17. Accordingly, if 2016/17 was the right year, the First-tier Tribunal’s decision to rely on historic income was justifiable in the light of the parties’ concessions, even if it failed to provide the justification in either its order or its statement of reasons. (I observe, however, that if the true, or HMRC, figure had been £83,475 or more – as I suggest above it might have been – the current income would have been less than 25% of that figure and so current income, rather than historic income, would have been relevant.)

On the other hand, the other reason that the First-tier Tribunal’s approach was different from the Secretary of State’s is that it based the father’s historic income on his earnings in 2016/17, rather than on his earnings in 2015/16. It may have thought that that was fairer, because 2016/17 was the more recent year, but that approach was not in accordance with regulation 35 and 36, which required historic income to be based on an HMRC figure. The Secretary of State’s request for an HMRC figure had led to the figure for 2015/16 being provided. This raises the question whether the Secretary of State should have obtained, and used, an HMRC figure for 2016/17 before making her decision on 1 June 2019.

Presumably, the Secretary of State used the HMRC figure for 2015/16 in her original decision because no HMRC figure was yet available for 2016/17, which would not be surprising in September or October 2017, well before the deadline for submitting a tax return for 2016/17. There are circumstances in which the Secretary of State may apply for a second HMRC figure, but these are confined to cases where there is evidence that HMRC did not supply the correct figure based on evidence that it had at the time of the Secretary of State’s first request (SB v Secretary of State for Work and Pensions (CSM) [2016] UKUT 84 (AAC), AR v Secretary of State for Work and Pensions (CSM) [2017] UKUT 69 (AAC); [2017] AACR 23 and BK v Secretary of State for Work and Pensions (CSM) [2022] UKUT 283 (AAC)). It is not appropriate for the Secretary of State to request a new HMRC figure merely because information in respect of a more recent tax year has been provided since the original request. That would undermine the statutory procedure and prolong decision-making. Any later HMRC figure will only be relevant on the next annual review.

Accordingly, the Secretary of State was right to consider 2015/16 as the relevant year for determining historic income. It is not disputed that the HMRC figure for that year was £66,319.62. That was the figure for the father’s income that she used initially. She only revised that decision in the light of her calculation of current income. Had she calculated current income at £61,500, as I have done, she would not have revised her original decision.