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Gray v Sec of State for Works & Pensions [2012] EWCA Civ 1412

Appeal concerning the proper method of assessment/calculation of child support to be paid by a self-employed person under Child Support Act 1991.

The Mother made an application to the Child Support Agency (CSA) for child support in 2002. The CSA made a revised maintenance assessment in 2008, accepting the self-employed Father's own evidence as to his income as shown on his accounts, prepared by accountants for submission to the HMRC. The Mother appealed that decision on grounds, among others, that the Father had misstated his weekly income.  The Commission for Child Maintenance and Enforcement then made a departure direction, increasing the amount payable on the basis that the Father's lifestyle was inconsistent with his declared income. The parents both appealed that direction, the Mother on the basis it was insufficient, the Father on the basis that it should not have been made at all. The First-Tier Tribunal (FTT) made their own finding as to the Father's true income, finding that he had failed to declare his full income. The FTT found that it was accordingly not necessary to deal with the appeals on the basis of the departure direction. The Father appealed. The Upper tribunal (Administrative Appeals Chamber) held that the decision maker was entitled to rely upon his own evaluation of the Father's actual profits from his self-employment during the relevant period, rather than accepting the figures supplied by him. The Father was granted permission to appeal.

The Court of Appeal reviewed the law including the amendments to the CSA and case law in relation to CSA calculations. Although the Child Support Act and Regulations have been subject to amendments, the old provisions apply in cases brought before the amendments, such as this.  It was found that although the Regulations and Explanatory Note's aspirations reflect the original policy intention that self-employed earnings for income tax purpose are the same as earnings for child support earnings, the regulations do not explicitly state that a father's earnings for income tax purposes shall be treated as his earnings for child support purposes. The Court found that the decision maker is entitled to rely on an evaluation of the Father's actual profits from self-employment rather than the figures submitted to the HMRC.

Appeal dismissed.

An appeal out of time was allowed on whether, in the event that the Child Support Officer increases the profit above the level accepted by HMRC, he has a duty to deduct the income tax and national insurance contributions (NICs)  that would be payable on that higher level of profit, rather than simply deduct the tax actually paid. The Court found that there was such a duty.

Appeal allowed and remitted for recalculation only so as to allow for a deduction of the income tax and NICs on the surplus between the earnings found by the FTT and the earnings accepted by the HMRC.

Summary by Laura McMullan, barrister, Coram Chambers


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Neutral Citation Number: [2012] EWCA Civ 1412
Case No: C3/2012/0080

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL (ADMINISTRATIVE APPEALS CHAMBER)
HHJ MESHER
CCS/392/2011

Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 05/11/2012

Before :
LORD JUSTICE WARD
LORD JUSTICE LLOYD

and
LADY JUSTICE RAFFERTY
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Between:
Trevor Gray Appellant
 - and - 
(1) Secretary of State for Work and Pensions
(2) Ms Lisa James
  Respondents

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(Transcript of the Handed Down Judgment of
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The Appellant, Mr Gray, appeared in person
Mr T. Buley (instructed by Child Maintenance Litigation and Advice Team) for the 1st Respondent
The 2nd respondent, Ms L. James, appeared in person

Hearing dates: 25th October 2012
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Judgment
Lord Justice Ward:
1. This appeal concerns the proper method of assessment or calculation of child support for the purposes of the Child Support Act 1991.  The issue, as defined by Black L.J. when granting permission to appeal, is whether, in a case where the Commission for Child Maintenance and Enforcement (the "CMEC"), or, as applicable, a Tribunal, have been provided with details of the figures submitted by a parent to Her Majesty's Revenue and Customs ("HMRC") relating to his profits from self-employment in the relevant period, the CMEC or Tribunal are entitled to rely upon their own evaluation of his "actual" profits for the purpose of calculating his earnings from self-employment, or, to put it another way, whether the decision maker is bound by the applicable legislation, namely, paragraphs 2A of Schedule 1 of the Child Support (Maintenance Assessments and Special Cases) Regulations 1992 ("the 1992 MASC Regulations") to accept that the liable parent's gross income is as stated in the information provided by him to HMRC, or whether the decision maker is entitled to go behind those notices and make his own findings of fact as to the parent's actual income.  In the decision of the Upper Tribunal (Administrative Appeals Chamber) dated 13 September 2011 Judge Mesher held that the decision maker was entitled to rely on his own evaluation of the father's actual profits from his self-employment in the relevant period. 

The relevant factual background
2. The appellant is the father of two qualifying children aged 16 and 13 living with their mother, the second respondent to the appeal.  He has remarried and has a young child of that marriage.  He is the father of two other children to whom he is obliged to pay maintenance under orders of the court.

3. The second respondent, as the mother with care of the children, applied to the Child Support Agency for Child Support in 2002.  Since then the Act and the Regulations made under it have been amended, more than once, but the old provisions survive in respect of the cases brought before the amendments.  Under the old system, the father was known as "the absent parent".  Under the new system he is called "the non-resident parent".  Under the old system "a maintenance assessment" of the appropriate amount of child support would be made in accordance with a convoluted formula.  The "new" system is designed to simplify matters by making "a maintenance calculation" in a way more readily understandable and by reference to figures more readily understandable.  Until November 2008 the body charged with the responsibility for decision making in child support cases was the Child Support Agency ("the CSA"), an executive agency under the purview of the Secretary of State (originally for Social Security, and subsequently for Work and Pensions).  Its responsibilities were then assumed by the CMEC, an independent statutory body established pursuant to the Child Maintenance and Other Payments Act 2008.  But nothing remains constant for child support purposes and the poor Commission was abolished on 1st August 2012 and its functions once again taken over by the Secretary of State for Work and Pensions. 

4. I can pick up the material history of this particular case as at 11th September 2008.  The CSA made a revised maintenance assessment effective from 9th May 2008 that the appellant was liable to pay child support in the sum of £6.10 a week.  He was at the time a self-employed handyman and the assessment was based on applying the child maintenance formula to his declared net weekly income of £151.37.  In doing so the CSA accepted at face value his own evidence as to his income as shown on his income and expenditure accounts prepared by his accountants without carrying out an audit for submission to HMRC.  The accountants also made their personal tax computation.   The CSA did not have and did not call for any tax calculation notice issued by the HMRC.

5. The mother then appealed that decision to the First-Tier Tribunal on grounds, among others, that the appellant had mis-stated his weekly income.  The CMEC then made a departure direction increasing the amount payable on the basis that the appellant's lifestyle was inconsistent with his declared income.  Both mother and father appealed that direction, mother on the basis that it was insufficient and the father on the basis that it should not have been made at all. 

6. All three appeals came before the FTT at an oral hearing on 7th July 2010.  The Tribunal held that the father had indeed failed to declare his full income and the Tribunal judges made their own finding as to his true income.  It was accordingly not necessary to deal with the appeals on the basis of the departure direction.  The crucial passage in their decision was:

"27.  The Tribunal's conclusion was therefore that the income recorded in the accounts and tax calculation was not reflective of Mr Gray's actual income.  The likely level of his net income was on the balance of probabilities about £18,300 calculated after making deductions for the income tax and National Insurance contributions he had actually paid on the level of income disclosed in his accounts.  This was consistent with the level of his personal expenditure.  It took into account understated income derived substantially from labour charges and a modest amount of profit on the re-sale of materials.  As no income tax and National Insurance was ever paid on the additional sum found by the Tribunal to have been earned but not accounted for, it was not appropriate to make any deductions for these elements."

7. The appellant appealed to the Upper Tribunal.  He is deeply aggrieved by the findings of the FTT that his accounts understate his earnings and he finds it difficult to understand that appeals lie on questions of law only and that neither the Upper Tribunal nor this court can interfere with the findings as to his true income made by the FTT.  Judge Mesher gave permission to appeal on a limited ground which is essentially the same as the one before us and he held that the FTT had been entitled to go behind the figures supplied by the appellant and thus to make its own findings of fact.   As this may be a matter of some importance for the proper assessment or calculation of child support, Black L.J. allowed this second appeal to the Court of Appeal on the limited ground she identified.

The relevant law
8. Section 1 of the Child Support Act 1991 provides that each parent of a qualifying child is responsible for maintaining him.  For the purposes of the Act, an absent/non-resident parent shall be taken to have met his responsibility to maintain any qualifying child of his by making periodical payments of maintenance with respect to the child of such amounts, and at such intervals, as may be determined in accordance with provisions of the Act.  Delegated legislation is in place, both for the old cases and for the new as to how to ascertain the income of a self-employed absent/non-resident parent.  Under the old scheme which governs this case the relevant legislation for determining the income of a self-employed earner, such as the appellant, is contained in Schedule 1 to the 1992 MASC Regulations.  For new cases the governing regulations are the Child Support (Maintenance Calculations and Special Cases) Regulations 2000 ("2000 MCSC Regulations"). 

9. The 1992 MASC Regulations provide as follows so far as material to this appeal:

"2A- (1) Subject to paragraphs 2C, 4 and 5A, "earnings" in the case of employment as a self-employed earner shall have the meaning given by the following provisions of this paragraph.

(2) "Earnings" means the taxable profits from self-employment of that earner, less the following amounts–

(a) any income tax relating to the taxable profits from the self-employment determined in accordance with sub-paragraph (3);

(b) any National Insurance Contributions relating to the taxable profits from the self-employment determined in accordance with sub-paragraph (4);

(c) one half of any premium paid in respect of a retirement annuity contract or a personal pension scheme or, where that scheme is intended partly to provide a capital sum to discharge a mortgage or charge secured upon the self-employed earner's home, 37.5 per centum of the contributions payable.

(3)  For the purposes of sub-paragraph (2)(a) the income tax to be deducted from the  taxable profits shall be determined in accordance with the following provisions–

(a) subject to head (d), an amount of earnings [calculated as if it were equivalent to any personal allowance which would be] applicable to the earner by virtue of the provisions of Chapter 1 of Part VII of the Income and Corporation Taxes Act 1988 (personal reliefs) shall be disregarded;

(b) subject to head (c), an amount equivalent to income tax shall be calculated in relation to the earnings remaining following the application of head (a) (the "remaining earnings");

(c) the tax rate applicable at the effective date shall be applied to all the remaining earnings, where necessary increasing or reducing the amount payable to take account of the fact that the earnings relate to a period greater or less than one year;

(d) the amount to be disregarded by virtue of head (a) shall be calculated by reference to the yearly rate applicable at the effective date, that amount being reduced or increased in the same proportion to that which the period represented by the taxable profits bears to the period of one year.

(4) For the purposes of sub-paragraph (2)(b) above, the amount to be deducted in respect of National Insurance Contributions shall be the total of–

(a) the amount of Class 2 contributions (if any) payable under section 11(1) or, as the case may be, (3), of the Contributions and Benefits Act; and

(b) the amount of Class 4 contributions (if any) payable under section 15(2) of that Act,

at the rates applicable at the effective date.

(5) For the purposes of this paragraph, "taxable profits" means profits calculated in accordance with Part 2 of the Income Tax (Trading and Other Income) Act 2005.

(6) A self-employed earner who is a person with care or an absent parent shall provide to the Secretary of State on demand a copy of—

(a) any tax calculation notice issued to him by Her Majesty's Revenue and Customs; and

(b) any revised notice issued to him by Her Majesty's Revenue and Customs.



2C- Where the Secretary of State accepts that it is not reasonably practicable for a self-employed earner to provide any of the information specified in paragraph 2A(6), "earnings" in relation to that earner shall be calculated in accordance with paragraph 3."

10. I need not set out paragraph 3 in full, but in summary it provides that where paragraph 2C applies then earnings mean the gross receipts of the employment.  Paragraph 3(3) provides for deductions from the gross receipts of any expenses reasonably incurred and wholly and exclusively defrayed for the purposes of the business, any value added tax, income tax, National Insurance and one half of any retirement annuity payment or personal pension scheme premium.  Business expenses are further defined in sub-paragraph (4) sub-paragraph (5) providing how income tax is to be determined and sub-paragraph (6) how National Insurance is to be calculated.  The point to note is that the net income figure thus derived is not necessarily the same as the net figure which would be reached under paragraph 2A. 

11. The above provisions came into force on 1st August 2007.  They replace provisions which had been in force since 16th March 2005.  Under these repealed provisions paragraph 2A defined earnings to mean "the total taxable profits from self-employment of that earner as submitted to the Inland Revenue" (my emphasis) less, as is still provided, income tax, National Insurance and retirement annuity or personal pension payments.  Paragraph 2B of this version has been repealed and nothing comparable has taken its place.  2B used to provide:

"(1)  Where–

(a) a self-employed earner cannot provide the Secretary of State with the total taxable profit figure from self-employment for the period concerned as submitted to the Inland Revenue, but can provide a copy of his tax calculation notice; or

(b) the Secretary of State becomes aware that the total taxable profit figure from the self-employment submitted by the self-employed earner has been revised by the Inland Revenue,

the earnings of that earner shall be calculated by reference to the income from employment as a self-employed earner as set out in the tax calculation notice issued in relation to his case, and if a revision of the figures included in that notice has occurred, by reference to the revised notice.

(2)  In this paragraph and elsewhere in this Schedule–

"submitted to" means submitted to the Inland Revenue in accordance with their requirements by or on behalf of the self-employed earner; and

a "tax calculation notice" means a document issued by the Inland containing information as to the income of a self-employed earner;

a "revision of the figures" means the revision of the figures relating to the total taxable profit of a self-employed earner following an enquiry under section 9A of the Taxes Management Act 1970 or otherwise by the Inland Revenue."

Paragraph 2C is then provided (as now) for cases where the Secretary of State accepts that it is not reasonably practicable for the self-employed earner to provide information relating to his total taxable profits in the form submitted to, or (and this alternative provision has been revoked), where paragraph 2B applies, as issued or revised by the Inland Revenue.  In either of those events earnings have the meaning given by paragraph 3.  The current paragraph 3 is substantially the same as the replaced paragraph 3. 

12. For cases proceeding under the new system the applicable Regulations are, as I have said, the 2000 MCSC Regulations.  Paragraph 7 deals with the net weekly income of the non-resident parent as a self-employed earner and provides that the net weekly income shall be his gross earnings less the deductions to which sub-paragraph (3) applies.  Gross earnings are defined in paragraph 1A to be "his taxable profits calculated in accordance with Part 2 of the Income Tax (Trading and Other Income) Act 2005".  This is, therefore, to the same effect as paragraph 2A(2) read with paragraph 2A(5) of the 1992 MASC Regulations.  Paragraph 7(2) replicates paragraph 2A(6): the non-resident parent must provide the Secretary of State on demand with a copy of any tax calculation notice or revised notice issued to him by the Inland Revenue.  But paragraph 7(8) is unique to the new system.  This provides:

"(8) Any request by the Secretary of State in accordance with sub-paragraph (2) for the provision of information shall set out the possible consequences of failure to provide such information, including details of the offences provided for in section 14A of the Act for failing to provide, or providing false, information."

Paragraph 8(1) is an equivalent of paragraph 2C but it is lamentably sloppily drafted.  It provides:

"(1) Where—

(a) …

(b) the Secretary of State accepts that it is not reasonably practicable for the self-employed earner to provide information relating to his gross earnings from self-employment in the forms submitted to, or as issued or revised by, the Inland Revenue;

net income means in the case of employment as a self-employed earner his earnings calculated by reference to the gross receipts … less the deductions provided for in sub-paragraph (2)."  (My emphasis is added.)

This is sloppy drafting because part of the whole purpose of the amendments was to repeal a method of calculation by reference to total taxable profits as submitted to the HMRC.  The calculation under paragraph 8 is broadly similar to the calculation under paragraph 3 of the 1992 MASC Regulations. 

13. These 2000 MCSC Regulations were also amended to take effect from 1st August 2007.  The old Regulations repealed by this amendment were, as I have indicated, along similar lines to the 1992 Regulations which looked for total taxable profits as submitted to the Inland Revenue.  The circumstances for calculating gross receipts less deductions under paragraph 8 do, however, undergo an interesting change.  In addition to the Secretary of State accepting that it is not reasonably practicable for the earner to provide information relating to gross earnings in the form submitted to or as issued or as revised by the Inland Revenue, there was a third circumstance for the use of the paragraph 8 method of calculation and that is where, under 8(1)(c), "in the opinion of the Secretary of State, information as to the gross earnings of the self-employed earner which has satisfied the criteria set out in paragraph 7 does not accurately reflect the normal weekly earnings of the self-employed earner."  In that case there is an express power for the Secretary of State to use the paragraph 8 calculation. If that provision had been carried forward into the amendments brought into effect on 1 August 2007 and applied to old scheme cases, the answer to this appeal would have been obvious.  But that was not done. 

14. The Child Support Act has not been without its critics and Schedule 1 itself has had a chequered history, as the speech of Lord Walker of Gestingthorpe in Smith v Smith [2006] UKHL 35 [2006] 1 WLR 2024 has shown.  By virtue of s. 11 of the Child Support Act 1991 the amount of child support maintenance to be fixed by any maintenance assessment/calculation must be determined in accordance with the provisions of Part 1 of Schedule 1 to the Act.  That has changed shape over time.  The original algebraic formulation required quantification of the absent parent's net income ("N" in the original formula).  When the Child Support (Maintenance Assessment and Special Cases) Regulations 1992 were originally made, the earnings of a self-employed person were to be calculated in accordance with paragraph 3.  That paragraph provided that certain expenses were to be deducted from gross receipts while other expenses, including any capital expenditure, were not to be deducted.  In practice the calculation of earnings in terms of paragraph 3 proved to be far from straightforward and the complications were one of the causes of the delays for which the whole child support scheme became notorious.  This led in 1994 to the House of Commons Select Committee on Social Security reporting on the Operation of the Child Support Act and making proposals for change.  The Government in reply accepted that "The assessment of the self-employed can be administratively complex and agrees to consider ways in which the process should be simplified."  These changes were effected by the Child Support Act 1995 and by the Child Support (Miscellaneous Amendments) Regulations 1999.  Among these changes was the introduction of a new paragraph 2A which was in place from 16th March 2005 until it was repealed at the end of July 2007 as I have already set out.  One would think that by defining earnings with reference to the total taxable profits "as submitted to the Inland Revenue", the purpose to be achieved was to use the information submitted, usually the trading accounts of the self-employed person, as the basis for the calculation without more ado.  Indeed paragraph 2B seems to have been peremptory in its terms that the earnings had to be calculated by reference to the income from employment as set out in any tax calculation notice issued by the Inland Revenue.  Again it seems that that information had to be taken as gospel.  It follows that the paragraph 2A method was to be used where a tax calculation notice was available and accordingly the paragraph 3 process would be limited to those cases where it was not reasonably practicable for the husband to provide information in the form submitted to or issued or revised by the Inland Revenue.  Unlike new scheme cases, there was no way out of using the actual figures for tax purposes in cases where these were thought not accurately to reflect the earner's normal weekly earnings.  As Baroness Hale of Richmond observed in Smith at [70]:

"The intention was to make it much easier for the child support officer to discover what those earnings were, and indeed for the parent whose earnings were being assessed to provide the information required: the tax return would be sufficient for both purposes.  If the taxpayer did not supply it, the officer could now obtain it from the Inland Revenue direct."

Lord Walker had drily remarked at [45]:

"It is curious that these changes (which rely heavily on documents and information actually available to the AP [absent parent]) were introduced at about the same time as the CSA was (by the Welfare Reform and Pensions Act 1999) granted much wider statutory powers to seek information direct from the Inland Revenue."

15. The criticisms of the regulations voiced in Smith led to the reforms taking effect on 1 August 2007 and the promulgation of the current 1992 MASC and the 2000 MCSC Regulations.  The Explanatory Memorandum to the draft 2007 Regulations explained the policy background to the changes as follows:

"The House of Lords ruled in July 2006 that the existing legislation regarding earnings from self-employment should be interpreted in a way which differs from that originally intended.  They held that 'total taxable profits' should be taken to mean the taxable business profits without recognition of capital allowances.

The amendment will ensure that the regulations reflect the original policy intention so that self-employment earnings for income tax purposes are the same as earnings for child support earnings i.e. taking capital allowances into account.  Tax calculation notices will also be used as the initial source of information when assessing earnings from self-employment.

[The amendments] provide ….a new definition of taxable profits on which the maintenance assessment of a self-employed earner will be based, bringing it into line with the definition for income tax purposes.  A self-employed earner's taxable profits will be calculated for child support purposes as they would be for tax purposes – meaning that capital allowances will be deducted from, and balancing charges applied to, gross profits in line with tax legislation.  The figure will in general be derived from information supplied by Her Majesty's Revenue and Customs.  Where tax information is not available, taxable profits are calculated on a different basis as set out in the amended Regulations." 

I have highlighted the aspiration that earnings for income tax purposes should be the same as earnings for child support as demonstrating the purpose that is sought to be achieved by this continuing round of simplification. 

16. Challenging the accuracy of trading accounts is obviously not a simple process designed to speed up the assessment of parents' liability for child support.  It would all be much easier if the decision-maker was obliged to accept HMRC's assessments.  Whether he is so bound is the issue which is the subject of this appeal. 

17. It is not the first time it has arisen.  In KB v CMEC (CCS 1382/2010) [2010] UKUT 434 (AAC) the Upper Tribunal was dealing with a case to which the new scheme rules applied, observing that paragraphs 7 and 8 make alternative provision; either one or the other applies.  Paragraph 7 is the default position; it applies unless one of the conditions in paragraph 8(1) is satisfied.  The Upper Tribunal Judge, Edward Jacobs, held:

"16.  The first issue for the tribunal to decide was whether paragraph 7 or paragraph 8 applied.  This depended in turn on the period over which the non-resident parent's income was to be assessed.  If the relevant year was 2006-2007, the tribunal had to use paragraph 7 as it had the tax calculation notice for that year.  If the relevant year was 2007-2008, the tribunal had to use paragraph 8, as it was not reasonably practicable for the non-resident parent to produce a tax calculation notice for that year.  ...

19.  If paragraph 8 applies, the decision-maker and the tribunal must make their own findings on both receipts and expenditure. What is the position if paragraph 7 applies?

20.  If paragraph 7 applies, gross earnings are the non-resident parent's taxable profits.  These must be calculated in accordance with Part 2 of the Income Tax (Trading and Other Income) Act 2005.  I accept Mr Ellis' submission that 'in accordance with' does not mean that all the provisions of Part 2 of that Act have to be applied.  It does not mean that the tribunal (or decision-maker) has to accept the figures used by Her Majesty's Revenue and Customs, whether for receipts or expenditure.  Paragraph 7 could have so provided, but it does not.  If the parent with care can prove that the non-resident parent had receipts in excess of those taken into account in the tax calculation, the tribunal can and must apply the provisions of Part 2 to that amount.  The same applies if the parent with care can prove that the expenditure accepted in the tax calculation is excessive.  This is a realistic interpretation, as it is well known that most self-employed accounts that show low earnings are not subject to detailed scrutiny by Her Majesty's Revenue and Customs.

21.  Paragraph 8(1)(c) used to provide that paragraph 8 could be used if the figures used for paragraph 7 did not accurately reflect the non-resident parent's normal weekly earnings.  That provision has been repealed.  I accept Mr Ellis' argument that the repeal has not affected the power for decision-makers and tribunals to substitute figures for those used in a tax calculation.

22.  This does not mean that those figures are irrelevant.  Paragraph 7(2) imposes a duty on a non-resident parent to provide copies of any original or revised tax calculation notice.  The function of this provision is to provide evidence of how Part 2 of the 2005 Act has been applied.  That may be the only evidence available, especially at the stage when the matter is before a decision-maker.  Even if there is other evidence, it may still be preferable.  This will depend on the content of the evidence and on the degree of scrutiny involved in the tax calculation.  But none of this means that the tribunal must accept the information supplied to or used by Her Majesty's Revenue and Customs."

18. The issue was considered for a second time by the Upper Tribunal in DB v CMEC [2011] UKUT 202 (AAC).  This was another case where the FTT subjected the self-employed trader's accounts to scrutiny and the issue on the appeal to the Upper Tribunal was whether the Tribunal judge had erred in assuming she had the power to substitute her own analysis of the non-resident parent's receipts and expenses as a self-employed trader for the figures in the tax return on which the Commission had based its decision under appeal. 

19. The written submissions submitted by the Commission originally contended that in the light of previous decisions by the Child Support Commissioners the Tribunal judge had been entitled to carry out her own evaluation of the true level of receipts and expenses and was not bound to regard the figures he had entered on his tax return as conclusive and so there was no error of law in the point raised.  But the Commission then changed tack.  As the Upper Tribunal Judge P.L. Howell QC recorded:

"23.  … It was now contended that the concession made in the earlier case and the judge's express decision to that effect had both been wrong.  Consequently if, as here, there was in existence a tax return or tax calculation containing a non-resident parent's self-employed earnings figures for the relevant period, both the Commission itself and a tribunal on appeal were bound to take those figures as the ones to be used for that parent's "net weekly income" in the child support calculation, and had no option to do otherwise.  That was so even if they took the view on the evidence that there had in fact been substantial under-declarations and the figures in the tax return should not have been accepted by HMRC at face value.  The remedy in such circumstances would be a variation of the child support calculation, for example on lifestyle grounds; or possibly a reference to HMRC to scrutinise and adjust the tax calculation, in which case there could be a consequential revision or supersession of the child support liability to reflect that.  Otherwise, submitted Mr James, there would be the oddity of having two different arms of the Government producing and using different answers for the calculation of what are supposed to be the same earnings over the same period and this could not be intended."

Judge Howell concluded:

"30.  Despite the manful attempts made by Mr James to sustain the altered position now taken by the Commission on the meaning of paragraph 7 of Schedule 1 to those regulations, it must in my judgment follow from the fact that the 2005 Act is the charging legislation defining what amounts are legally liable to be taxed, not a set of administrative provisions referring to figures shown in returns or calculation documents, that the Commission's present interpretation is plainly wrong and that in KB v CMEC plainly right.  As Judge Jacobs said in paragraph 20 of his decision in that case, the requirement of paragraph 7 that the non-resident parent's taxable profits for the purpose of determining his net weekly income must be those calculated in accordance with Part 2 of the 2005 Act does not mean the tribunal (or decision maker) has to accept whatever figures for receipts or expenditure may have been used or accepted by HMRC. 


31.  I entirely agree with that [paragraphs 20 to 22 of Judge Jacob's decision].  The fact that the previous form of paragraph 7, criticised by the House of Lords and now abandoned, did attempt to make the child support liability depend on the actual figures shown in a non-resident parent's tax return or tax calculation notice, but has now been replaced by a simple referential incorporation of the charging provisions, does nothing but underline that, for child support as well as for income tax, what is required to be included is the true and full amount of those profits defined as taxable by law; not any lesser amount a person may happen to get away with as a result of that law being evaded, avoided or imperfectly administered."

20. In the decision under appeal in our case, Judge Mesher was well aware of the previous decisions of the Upper Tribunal and with limited argument addressed to him on the question he gave "relatively brief reasons" for his conclusion which was:

"7.  I should follow the principles laid down in KB and DB unless satisfied that those appeals were wrongly decided.  That is a conclusion that would not lightly be reached, especially in view of the fact the DB was decided after an oral hearing at which the case for KB having been wrongly decided was fully argued by the legal representative of CMEC, but rejected.  In the event, I find the reasoning of Upper Tribunal Judges Jacobs and Howell cogent and convincing and endorse the conclusions of law that they reached."

Discussion
21. The problem in this case is how to establish the husband's "earnings" which s.2A(2) tells us are the "taxable profits from self-employment of that earner".  That is the problem and the answer is that his taxable profits are, by virtue of paragraph 2A(5), his "profits calculated in accordance with Part 2 of the Income Tax (Trading and Other Income) Act 2005."  So Mr Tim Buley, now representing the Secretary of State, submits that the answer is perfectly simple.  The ascertainment of taxable profits requires a calculation to be made; the calculation is to proceed in accordance with Part 2 of the Income Tax Act; the calculation has to be done by whomsoever has to make the decision, that is to say by the Secretary of State or his officials in the Child Support Unit, or on appeal by the First Tier Tribunal.  Nothing in the language constitutes a deeming provision nor does it require blind adherence to any calculation which the HMRC may have done.  That is the natural and ordinary meaning of the words.  It is as simple as that.

22. It is a beguiling submission.  But Mr Buley ought to know better.  Nothing to do with child support is ever simple and straightforward.  Trying to interpret the statutory language so as to give effect to its intended meaning is not made easier by the CMEC's volte-face on express instructions in DB that that these words do not mean what it is now contended they do mean.  The draftsman of the regulations has been in this little pickle before as Smith and the Explanatory Note to the amendments confirm.  The task of interpretation is to derive the true meaning from the context in which the words appear, from their place in the paragraph and in the Regulations as a whole, always having some regard to "the archaeology of [the] phrase appearing in [the] statutory provision" (as Lord Carswell stated it in Smith at [89]) and thus with some eye to the mischief which the legislation was intended to cure.  Bearing all those matters in mind the answer is by no means as simple as it might seem. 

23. One must pay some attention to the purpose which the legislation is intended to serve.  One cannot escape the conclusion that the intention since 1995 has been to simplify the maintenance calculation process so as to eliminate delays and get the right amount of money as soon as possible into the hands of the children whose interests the Act has to serve.  The Act was supposed to remove the antagonism so frequently generated by a separation of the parents.  The sad experience of this Act is that algebra may be a source of happiness for mathematicians but it is not much of a panacea for angry parents.  The hopes of 1991 and 2005 may not have been fully realized.

24. I accept that the aspiration of the Regulations is, as the Explanatory Note explained, to "reflect the original policy intention so that self-employed earnings for income tax purposes are the same as earnings for child support earnings."  That is achieved by ensuring that the calculation of earnings is to be "in accordance with" the Tax Act of 2005.  But the Regulations do not go so far as to state that a father's earnings for income tax purposes shall be treated as his earnings for child support purposes.  There is no such deeming provision.  The production of a tax calculation notice is not even a mandatory requirement; the parent with care must produce one if demanded by the Secretary of State and its importance if demanded is emphasised by paragraph 7(8) of the MCSC 2000 Regulations by warning the parent of the possible consequences of failure to provide the information including the imposition of criminal penalties.  Even if it is provided, it serves not to bind the Child Support Officer but merely to ease his calculation: the tax calculation notice tells him what he needs to know. 

25. The task of statutory construction requires the court to have some regard for the consequence of the construction which is advocated.  The consequence here is that, without any statutory guidance as to how or when to exercise this unfettered discretion, the Child Support Officer is totally at liberty to accept or to reject the figures put forward in the tax return, any support accounts or computations from the accountants, even the HMRC's own assessment.  He can then make his own determination of the parent's income and expenditure.  He does not even have to do so under paragraph 3 of the 1992 MASC Regulations or paragraph 8 of the 2000 MCSC Regulations as the case may be. 

26. Where does that leave paragraphs 3 and 8?  Mr Buley struggles to answer that.  He is driven to submit that the situations where it is not reasonably practicable for the self-employed earner to provide his tax calculation notice are cases where the person has not been in business long enough to have accounts to submit to the HMRC.  The consequence surely is that in the vast majority of cases a trader will be liable to have his accounts scrutinised and rejected whenever there is credible evidence that he has under-declared his income or over declared his expenses.  Now that may be no bad thing.  The interests of the children demand that the right sum of money is paid for their maintenance.  But it has two unfortunate consequences.

(1) Two arms of Government may reach different answers for tax purposes as for child support purposes.  That cannot be a good thing. 

(2)  The spectre arises of more and more of these enquiries being undertaken which gave rise to the fear of the evils that beset the original working of the Act resurrecting themselves causing unacceptable complications and delay and so the reforms of 1995 will have been in vain. 

So I see much force in the arguments addressed to Judge Howell QC that the remedy for the child support authorities, if unhappy with the tax liability notice, is to seek a variation on lifestyle grounds or refer the matter back to HMRC seeking their scrutiny and if necessary adjustment of the tax return.  The two arms of Government should speak with one voice. 

27. Impressed as I was by the simple answer put forward by Mr Buley, I became increasingly concerned by the very helpful submissions put forward in the skeleton arguments of Miss Rachel Spicer, counsel for the appellant.  Most unfortunately, but understandably, Mr Gray cannot put his solicitors and counsel in funds and they have had to withdraw.  We have therefore been deprived of Miss Spicer's no doubt valuable and instructive oral argument. 

28. I have, however, taken on board all the points she made and did my best to give Mr Buley a bad time in dealing with them.  He responded with admirable fortitude and good humour and by the end of our tussle had persuaded me that he was right.  The language is plain and simple.  The words have an ordinary and natural meaning and the contrary position that the decision maker is bound to accept the information placed before or even the information supplied by the HMRC is far from conclusive.  I must, therefore, give effect to the ordinary meaning of the words and conclude that the answer to the question posed in this appeal is that the decision maker is entitled to rely on an evaluation of the father's actual profits from self-employment in the relevant period rather than the figures submitted to HMRC in his tax return for 2007/2008.  Like Judge Mesher I find the reasoning of Upper Tribunal Judges Jacob and Howell cogent and convincing and so I too endorse the conclusions of law that they have reached.  In the result the appeal as it was originally presented to us must be dismissed.

29. That is not an end to it.  In the course of his judgment Judge Mesher adverted to another matter which, in this instance, is dividing the judges of the Upper Tribunal.  The problem arises in this way.  Where the child support decision maker arrives at his own conclusion about the level of the father's taxable profits, he is nonetheless obliged to deduct "any income tax relating to the taxable profits from the self-employment determined in accordance with sub-paragraph (3)" as well as "any National Insurance contributions relating to the taxable profits from the self-employment determined in accordance with sub-paragraph (4)" as paragraph 2A(2) and paragraph 7(3) require.  If the parent's taxable profits have been assessed by the HMRC and his income tax relating to those profits also determined by the HMRC, then what figure for tax must be deducted – the notional tax due on the child support figure for earnings or the actual tax paid or payable on the HMRC's assessment of those profits? 

30. Judge Mesher posed the question and inclined to answer it by following Judge Howell in DB by allowing the deduction of actual income tax rather than notional income tax.  Judge Turnbull took the opposite view in WM v CMEC [2011] UKUT 226 (AAC).  In his skeleton argument Mr Buley questioned the correctness of Judge Mesher's approach.  There was originally no application for permission to appeal that part of the decision and Black LJ had in any event limited this appeal to the ground I have already identified.  Nonetheless we were invited to express our views about it.  The second respondent was present in court but not represented; nor was the father.  The mother's position, with which one could have sympathy, was that she would accept a reduction in the monies paid to her if only she could be assured that she would receive something soon and that she would not have to endure another round of battle.  The father, whose battle is still against the adverse findings of fact made by the FTT, eventually realized he should not turn away a gift horse.  So in the end we gave permission to appeal out of time on this point and I would allow the appeal to that extent.  If the Child Support Officer is going to increase the profit above the level accepted by the HMRC then his responsibility is to deduct the income tax (and NIC) which would be payable on that level of profit.  That is why I highlighted the definite article, "the", in paragraph 2A(2) to show that the deduction of tax must be related to the taxable profits which have been established to be the actual earnings of the parent.  To borrow Mr Buley's phrase, it is as simple as that.  Consequently I would allow the appeal and remit the case to the Secretary of State for a recalculation of the child support assessment but only so as to allow for a deduction of the income tax and national insurance on the notional surplus between the earnings found by the First Tier Tribunal and the earnings accepted by the HMRC.  For the sake of the children I would ask that this be done just as soon as possible, please. 

Lord Justice Lloyd:
31. I agree.

Lady Justice Rafferty:
32. I also agree.