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TB v Sec of State for Works and Pensions and SB (CSM) (Child support - variation departure directions - diversion of income) [2014] UKUT 301 (AAC)

Appeal to the Upper Tribunal Administrative Appeals Chamber from decision of first tier tribunal, imposing a variation direction on father's child support liability - whether father had been unreasonably reducing his earnings from dentist business by diverting income to payment of a director's loan account - appeal allowed in part and re-assessment directed

The father worked as a dentist and until 2007 had been self-employed. In 2007 he sold the dentistry business to I and A Ltd, a company of which he was the sole director and shareholder (though he later transferred 600 of 1000 shares to his brother and sister). The company paid the father a gross salary of £1,500 per calendar month from the start of 2007. His tax return in respect of his self employed earnings for the previous year showed net profit of £38,645. The Secretary of State's calculation of the father's child support liability consequently reduced from £152 per week to £54 per week.

The assets transferred to the company were recorded as totalling £137,284, of which £115,000 was recorded as being goodwill. Since the company had no funds from which to pay these amounts, the liability was recognised by the establishment of a directors loan account in favour of the father.

At the relevant time regulation 19(4) of the Child Support (Variation) Regulations 2000 provided (although there have been amendments since) that there could be a variation of the maintenance calculation if:

"a. the non-resident parent has the ability to control the amount of income he receives, including earnings from employment or self-employment, whether or not the whole of that income is derived from the company or business from which the earnings are derived, and

b. the Secretary of State is satisfied that the non-resident parent has unreasonably reduced the amount of his income which would otherwise fall to be taken into account under the Maintenance Calculations and Special Cases Regulations or paragraph (1A) by diverting it to other persons or for purposes other than the provision of such income to himself."

The main issue for determination was whether payments to the father had unreasonably reduced his income and diverted it into payments by the company of the Director's Loan Account.

At first instance it had been held that the £115,000 included for goodwill had been a sham and as this had constituted 87% of the Director's Loan Account, that amount of the payments to it should be taken into account as income available to the father which would otherwise have been taken into account.

On appeal to the Upper Tribunal, Judge Mesher held that had been an error. He found that the sum for goodwill had not been a sham and set out his reasons for concluding that goodwill could attach to dentistry practices (and had in this case) at paragraphs 23 to 27.

He went on, however, to consider the reasonableness of the amount of payments to the Director's Loan Account by the company. He agreed with the test of reasonableness as set out in GO'D v CMEC (CSM) [2010] UKUT 6 (AAC) in which it had been held that it is a matter of the judgment of the tribunal and legislation had placed no restrictions on the circumstances which could be taken into account. He considered in this case that the reduction in income which was brought about was to an extent unreasonable. He set out at paragraphs 37 to 39 the factors taken into account and concluded that around half of the reduction had been unreasonable. He noted, however, that it had to be taken into account that had the father not unreasonably reduced his income to this extent he would have had to pay income tax and national insurance on the increased income, following Gray v Secretary of State for Work and Pensions and James [2012] EWCA Civ 1412. The calculations of these amounts would be for the Secretary of State.

The Upper Tribunal therefore allowed the father's appeal in part and directed a variation accordingly.

Summary by Thomas Dudley, barrister, 1 Garden Court Family Law Chambers



______________


DECISION OF THE UPPER TRIBUNAL
ADMINISTRATIVE APPEALS CHAMBER

The non-resident parent's appeal to the Upper Tribunal is allowed to the extent that the decision of the Leeds First-tier Tribunal of 4 December 2012, having involved errors on points of law for the reasons given below, is set aside. It is appropriate for the Upper Tribunal to re-make the decision on the parent with care's appeal against the Secretary of State's decision of 26 September 2007, as revised on 28 January 2008, after making further findings of fact (Tribunals, Courts and Enforcement Act 2007, section 12(2)(b)(ii) and 4(b)). That decision as re-made is that the parent with care's appeal is allowed and that with effect from 28 December 2006 a variation is to be imposed under regulation 19(4) of the Child Support (Variations) Regulations 2000. The Secretary of State is directed to re-calculate the maintenance calculation with effect from 28 December 2006 on the basis that the non-resident parent's net weekly income is to include, as well as the £268.82 on which the formula calculation was based, the net sum produced by applying a deduction for income tax and national insurance contributions (paragraph 40 below) to the gross weekly amount of £450 of diverted income. If there is any disagreement by either parent with the way in which the deductions are calculated or with how the effect of the new amount of net weekly income on the maintenance calculation is worked out, the case is to be returned to the Upper Tribunal for further decision

See paragraphs 43 and 48 below for the period covered by this re-made decision and for the possible effect on decisions made after 26 September 2007.


REASONS FOR DECISION
1. In the language of the relevant child support legislation the appellant is the non-resident parent of two qualifying children. From now on I shall call him the father and I shall call the second respondent, in the language of the legislation the parent with care, the mother.

2. Since this is the third time that this case has reached the level of the Upper Tribunal, I directed an oral hearing despite my preliminary view that there was a clear error of law in the decision of the tribunal of 4 December 2012, in the hope that I would be able to substitute a final decision on the mother's appeal in the event that the decision of the tribunal of 4 December 2012 was set aside. I made it clear in my direction for the hearing that it would be the last opportunity to come forward with evidence and arguments and that adverse inferences might be drawn from a failure to attend and to give evidence on any issue.

3. The hearing was listed for 19 June 2014 as a date on which counsel who was expected to represent the father was available. The father attended the hearing without any representative, although accompanied by his present partner. He explained that there had been some problem with counsel's availability, but that he was prepared to go ahead unrepresented. In the event he was obviously well on top of all the factual and legal issues involved, although without expertise on legal technicalities. The mother attended without representation. The Secretary of State was represented by Mr Stephen Cooper, solicitor, instructed by DWP Legal Services. I am grateful to all present for their contributions to the hearing.

The background
4. I went into a lot of the background in my previous decisions, as a Child Support Commissioner on 16 June 2009 on file number CCS/249/2009 and as a judge of the Upper Tribunal on 17 May 2012 on file number CCS/2484/2010. I am not going to repeat all that here or set out all the procedural history. Since I make fresh detailed findings of fact below I only sketch in the general background here by way of introduction, limited in the main to the circumstances as they were down to 26 September 2007. I also note some issues that were formerly considered relevant which have now fallen away.

5. The tribunal of 4 December 2012 was concerned with the mother's appeal against the Secretary of State's decision dated 26 September 2007, which calculated the father's liability with effect from 19 July 2007 at £54 per week. His previous liability (calculated on the basis of his earnings as a self-employed earner) with effect from 20 April 2006 was £152 per week. The decision was made on the father's application (first received on 28 December 2006) for a supersession on the ground of a change of circumstances, saying that as from 1 January 2007 he would cease to be self-employed in his profession as a dentist and would take up part-time employment with a salary of £12,000 per year. His first two monthly pay-slips showed payments of £1,500 gross, £1,164.89 net. The father had also appealed against the same decision, following which it was revised on 28 January 2008 so as to make the liability at £54 per week effective from 28 December 2006. As that revision was not in the mother's favour, her appeal did not lapse and continued against the decision as revised. Her appeal had properly been treated as including applications for variations of the ordinary calculation rules by way of revision on the grounds of possession of assets, income not taken into account, diversion of income and lifestyle inconsistent with declared income. On 17 February 2008 the Secretary of State determined that there should not be a revision to give effect to any variation. It is now a matter of agreement that any variation would properly take effect from 28 December 2006 and that the technical arguments about that discussed in my decision in CCS/2484/2010 need not be revisited.

6. The father's tax return for the year ending 5 April 2007 showed a net profit from his self-employment for tax purposes of £38,645 for the year to 31 December 2006. As explained in the accountants' letter of 22 September 2008, the company (which I shall call I and A Ltd) to which the practice (which I shall call M Dental Practice) was transferred was formed in July 2006. Initially the father owned all 1,000 issued £1 shares. On 1 December 2006 he, for no consideration, transferred 400 shares to his brother Naveed and 200 shares to his sister Robina. The father was the sole director until 23 August 2007, when Robina was appointed. On 1 January 2007 the practice was transferred to I and A Ltd. The assets transferred were the following: prepaid expenses the benefit of which would be enjoyed after 31 December 2006 (£7,540.59), equipment, fixtures and fittings (£14,244.00), stock (£500.00) and goodwill (£115,000.00), in total £137,284.59. The company had no money to pay for those assets, so that its liability was recognised by the establishment of a director's loan account in favour of the father with an initial balance of £136,284.59. The schedule of transactions on the director's loan account attached to the accountants' letter of 22 September 2008 with the accounts of I and A Ltd for the period ending 31 December 2007 showed payments of £43,267.39, so that the balance had reduced to £94,017.00 by 31 December 2007. Payments down to 26 September 2007 totalled £34,992.

7. The first decision on appeal, by the appeal tribunal sitting on 3 September 2008, was to impose variations on the grounds that the father had diverted income of £36,622 gross under regulation 19(4) of the Child Support (Variations) Regulations 2000 and that he had control of assets of £247,985 (regulation 18) and to direct that there was to be a recalculation of the child support maintenance calculation on the basis that the father had additional gross weekly income of £1,500 as well as his salary. I set that decision aside on the father's appeal in CCS/249/2009 because the tribunal had failed to deal with many of the conditions for the application of regulations 18 and 19(4) or make necessary findings of fact, and had erred in treating the incorporation of the father's business as in itself constituting the diversion of income. The case was remitted for a rehearing.

8. The result of that rehearing, in the decision of the First-tier Tribunal of 8 July 2010, was again to allow the mother's appeal, but to impose a variation only on the ground of assets, in the form of the £136,284.59 balance in the director's loan account and the balances in some bank accounts, leading to a direction that the father's net weekly income be increased by £216.15 and an estimated liability of £97 instead of £54. I set that decision aside on the father's appeal in CCS/2484/2010, after an oral hearing, because the balance in the father's director's loan account could not properly be taken as the value of the chose in action throughout the period down to 26 September 2007 and the tribunal failed to deal properly with the question of whether the asset was being retained for a reasonable purpose. There was a further remission for rehearing of the mother's appeal.

9. It has become apparent in the course of those earlier proceedings that there was no case to be made on the ground of assets stemming from the father's ownership of any property. The only such asset that he owned at the relevant time was the premises where the dental practice was located, with a flat above. At that time the outstanding mortgage either wiped out the market value of those premises or left only a low level of equity, so that the ownership of the asset could contribute nothing of significance towards the threshold of £65,000 as the total value of assets for a variation to be imposed. I come back briefly below to the rent of £12,000 per year paid to the father by I and A Ltd from 1 January 2007. The major issues that remain in dispute are those of potential diversion of income arising from the transfer of the practice to I and A Ltd and the level of salary taken by the father, of the potential application of regulation 18 of the Variations Regulations to the chose in action constituted by the father's director's loan account and of the potential interaction between variations on those two grounds.

10. At the relevant time regulation 19(4) provided (there have been amendments since):

"(4) A case shall constitute a case for the purposes of paragraph 4(1) of Schedule 1 to the [Child Support Act 1991] where—

(a) the non-resident parent has the ability to control the amount of income he receives, including earnings from employment or self-employment, whether or not the whole of that income is derived from the company or business from which the earnings are derived, and

(b) the Secretary of State is satisfied that the non-resident parent has unreasonably reduced the amount of his income which would otherwise fall to be taken into account under the Maintenance Calculations and Special Cases Regulations or paragraph (1A) by diverting it to other persons or for purposes other than the provision of such income to himself."

Regulation 19(5)(b) provided that where a variation was agreed on that ground:

"the additional income taken into account under regulation 25 shall be the whole of the amount by which the Secretary of State is satisfied the non-resident parent has unreasonably reduced his income;"

Regulation 25 provided that effect was to be given to variations including those under regulation 19(4) in the maintenance calculation by increasing the net weekly income of the non-resident parent that would otherwise be taken into account by the weekly amount of the additional income (subject to the rules on capping: not relevant in the present case).

11. The meaning of an "asset", to be taken into account for the purposes of regulation 18 where a non-resident parent has a beneficial interest or the ability to control it includes under paragraph (2):

"(d) a chose in action which has not been enforced when the Secretary of State is satisfied that such enforcement would be reasonable"

Paragraph (3) provides that paragraph (2) is not to apply:

"(a) where the total value of the assets referred to in that paragraph does not exceed £65,000 after deduction of—

(i) the amount owing under any mortgage or charge on those assets;

(ii) the value of any asset in respect of which income has been taken into account under regulation 19(1A);

(b) in relation to any asset which the Secretary of State is satisfied is being retained by the non-resident parent to be used for a purpose which the Secretary of State considers reasonable in all the circumstances of the case;

[(c) – (f) omitted as not relevant]."

The decision of the First-tier Tribunal of 4 December 2012
12. It was the rehearing directed in CCS/2484/2010 that was carried out by the tribunal of 4 December 2012, along with a number of other appeals relating to the same parents. The mother attended. The father did not attend. A clerk rang the M Dental Practice and was told that the father was with a patient and would not be attending. The tribunal decided that it was in the interests of justice, taking into account in particular how long the appeal had been outstanding and the father's failure to attend previous hearings, to proceed to make a decision and not to adjourn. It again allowed the mother's appeal, directing that the father's liability with effect from 28 December 2006 should be recalculated with the inclusion of an additional income of £751.59 per week net. The direction was made under regulation 19(4). There was no discussion in the statement of reasons of the assets ground under regulation 18.

13. The tribunal's statement of reasons included the following, after noting the circumstances of the creation of the director's loan account:

"12)  This is a common procedure where a sole trader or partnership incorporates its business and it is generally an entirely proper reflection of the true state of affairs. We take notice of the fact that it is rarely challenged by HMRC.
 
13)  In the present case, we have no difficulty in accepting the genuineness of the transfer and the valuation of its tangible assets. We accept this as legitimate.
 
14)  Problems arise, however, over the major item, namely goodwill. Historically, the analysis and evaluation of goodwill is approached by one of two routes. The end result is usually the same whichever route is taken. By the first, goodwill is understood as the likelihood of past customers continuing to resort to the enterprise. By the second, goodwill is understood as the difference in value between a business valued as a going concern and the value of its tangible assets.

 
16)  The difference in this case is that the only business of the company was the provision of [the father's] professional services. Without [the father's] services the company would be worthless except for the small value of its tangible assets.
 
17)  Although [the father] is clearly a sophisticated litigant and, at least until May 2012 energetically and professionally represented, he has at no time suggested that he was under any obligation in law to continue to supply his services to the company.
 
18)  We find as a fact that [the father] was under no such obligation. This means that at any time, it was open to him to withdraw his services from the company and set up in competition, in an extreme case even from premises next door.
 
19)  In these circumstances, goodwill can have no value. Patients are more likely to be loyal to [the father] than a newly formed company. We find without hesitation that the company had no value over and above that of its tangible assets.
 
20)  The point is so obvious that we are driven to conclude that the purported transfer of goodwill and the value allotted to it [were] part of a sham. In other words, the state of affairs recorded in the books of the company in relation to goodwill bore no relation to reality and was part of a deliberate attempt to conceal the true state of affairs. It matters not whether this was an attempt to defeat HMRC or defeat the CSA. It also matters not (as we accept) that there was apparently no investigation or challenge to the transaction by HMRC.
 
21)  It follows that the purported payments to [the father] of the Director's Loan Account, to the extent that they relate to 'goodwill', were also a sham.
 
22)  In truth, the arrangement represented a diversion of income […] by [the father] to the company, namely his earnings from professional work. It was on our findings an unreasonable diversion because the basis on which [the father] extracted the profit from his services (at least as regards the purported repayments of such of the Director's Loan Account as represented the value of 'goodwill') was false.
 
23)  We are satisfied that the case constitutes a case for the purposes of a variation. We find that [the father] has the ability to control the amount of income that he receives, we have taken into account his net weekly income and are satisfied that [the father] has unreasonably reduced the amount of his income, which would otherwise fall to be taken into account, by diverting it to the company for the purposes other than the provision of income for himself."

14. The tribunal then made a calculation on the basis that 83.76% of the initial balance in the director's loan account was made up of the amount for goodwill, so that that percentage of the payments made from the account down to 26 September 2007 should be taken into account, working out to £751.59 per week (at the oral hearing I suggested that there was an arithmetical error in this calculation, but closer inspection shows that there was not). Purporting to follow the decision of the Upper Tribunal in WM v CMEC (CSM) [2011] UKUT 226 (AAC), the tribunal decided that it would be wrong to deduct any amounts for notional income tax and national insurance contributions. The rough calculation by the Secretary of State's representative was that the result would be a liability of £204 per week. The tribunal concluded that it would be just and equitable to award a variation producing that result.

The appeal to the Upper Tribunal
15. The father was given permission to appeal by Upper Tribunal Judge Bano on 13 September 2013 on the ground that it was arguable that the evidence did not support the finding that there was no goodwill of any value in the business. He noted:

"The non-resident parent did not in fact set up in business next door (and if he had sold the business to an outsider he would inevitably have been required to enter into an agreement not to compete with the new owners). Some goodwill may have attached to the business because of patients who went there for reasons of convenience rather than from a desire to be treated by the non-resident parent. If the tribunal were wrong in holding that the goodwill in the business had no value, it is arguable that their finding that the transfer of the goodwill was a 'sham' transaction was also wrong."

16. In the submission dated 4 November 2013 the representative of the Secretary of State supported the father's appeal in a rather convoluted way. It was pointed out that in Gray v Secretary of State for Work and Pensions and James [2012] EWCA Civ 1412, [2013] AACR 5 the Court of Appeal had decided that where in working out the ordinary maintenance assessment for a self-employed person it was found that a parent had greater profits than had been accepted by HMRC for income tax purposes, the income tax and national insurance contributions that would have attached to the higher level of profits had to be deducted. It was submitted that the Upper Tribunal should substitute a decision finding that there had been a diversion of income within regulation 19(4) of the Variations Regulations without the need for any finding that there had been a sham transaction. Both parents replied. No-one requested an oral hearing.

17. It was at that stage of the process that the appeal was referred back to me for determination. I then came to the following preliminary and provisional view as expressed in the direction of 25 March 2014:

 "3. … The tribunal [of 4 December 2012] based its decision on its conclusions that in the particular circumstances (including what was known about the details of the father's employment relationship with the new company) the goodwill purportedly transferred by him to the new company had no value to the company (possibly no market value at all) so that that part of the transaction and the creation of the director's loan account was a sham. Therefore, it was held, the making of those transactions constituted a diversion of income at a stage when the father had control of the matter, coupled with an unreasonable reduction in the amount of salary taken, so that the conditions of regulation 19(4) of the Child Support (Variations) Regulations 2000 were met. Leaving aside for the moment whether that reasoning holds water and whether different facts might have been found on the basis of different evidence about current accepted practice on transfers by self-employed dentists to employment by newly created companies, the essential problem is that there had been no mention anywhere in the case of a potential argument along the lines accepted by the tribunal before its appearance in the statement of reasons issued on 13 February 2013. Although the father had to some extent forfeited his right to put forward evidence by declining to attend the hearing on 4 December 2012, that can only operate on issues that had already been raised and on which he could reasonably have been expected to realise that evidence was relevant. And the warning in the directions notice signed on 14 August 2012 about the drawing of adverse inferences from any failure to comply with the directions did not extend to a failure to attend the hearing, because no direction to that effect had been given. Accordingly, my current view is that the father was deprived of a fair opportunity to meet the case against him by not having been given the opportunity to consider and respond to the entirely new points raised for the first time in the tribunal's statement of reasons, contrary to the principles of natural justice and to the right to a fair trial.

4. My preliminary and provisional view is that that not only in itself requires the setting aside of the decision of the tribunal of 4 December 2012, but so undermines the factual basis on which it made the decision that the Upper Tribunal could not properly substitute its own decision on the basis of the facts already found, as suggested in the Secretary of State's submission dated 4 November 2013."

18. I therefore directed an oral hearing, having indicated that, on the assumption that the decision of the tribunal of 4 December 2012 was set aside, there should not be a remission to the First-tier Tribunal for a fourth attempt to avoid errors of law, but that the substituted decision on the mother's appeal against the decision of 26 September 2007, as revised on 28 January 2008, should be given by the Upper Tribunal, after a final opportunity for the parties to give evidence and make submissions. Because regrettably a judge of the Administrative Appeals Chamber is not allowed to sit with a financially qualified member, as I would have welcomed, I directed that in advance of the hearing the Secretary of State was to make a full written submission and to provide expert evidence from a suitably qualified person on the issue of whether goodwill exists in a dental practice run by a sole trader on a self-employed basis in the context of transfers to limited companies and on other financial and accounting issues arising. That was done and I shall come back below to the evidence provided.

19. The submission dated 23 May 2014 on behalf of the Secretary of State maintained the view that the tribunal of 4 December 2012 had erred in law, on the basis that the new evidence confirmed that it had been wrong to conclude that the goodwill transaction was a sham. At the hearing, no-one argued that the tribunal's decision should not be set aside. I prefer to put the ground of error of law in terms of breach of the principles of natural justice and of the right to a fair trial, as briefly explained in paragraph 17 above. That in itself requires the setting aside of the decision without having to enter into any discussions about whether the tribunal's conclusion was so irrational that it had not been entitled to adopt it all as a matter of judgment.

20. Accordingly, the father's appeal to the Upper Tribunal is allowed to the extent that the decision of the tribunal of 4 December 2012 is set aside as involving an error on a point of law. Then I have no doubt that it is appropriate not to remit the case to a new First-tier Tribunal for rehearing.

The Upper Tribunal's re-made decision on the mother's appeal against the decision of 26 September 2007, as revised on 28 January 2008
Findings of fact
21. I have the benefit not only of the evidence recorded as part of the earlier decisions at First-tier level, but also of the father's direct evidence and answers to questions on 19 June 2014 and of the new evidence on financial and accounting matters produced by the Secretary of State. I restrict my findings of fact, in addition to those already set out as background above, to what is necessary for the making of the substituted decision in this case.

22. The maintenance calculation that was in effect prior to 28 December 2006, imposing a weekly liability of £152 with effect from 20 April 2006, was apparently based on the father's earnings from self-employment in the accounting year to 31 December 2005. That would have indicated that net weekly income of £760 per week had been taken into account. His 2006/2007 tax return showed net business profits for tax purposes in the year to 31 December 2006, after removing disallowable deductions such as depreciation but taking account of capital allowances for plant and cars, of £38,645 on turnover of £156,126. That was brought down to £31,667 by an overlap profit of £6,978 being brought forward, which I do not consider should affect a judgment about amounts available in reality for the maintenance of the qualifying children. The tax calculation on the return showed total income tax and Class 4 national insurance contribution liability of £12,346.47, which, if correct, would indicate net earnings that would have been taken into account for child support purposes of just under £564 per week.

23. The tax return also declared receipt of £115,000 for the disposal of goodwill on the "sale of goodwill on incorporation of dental practice [I and A Ltd] controlled by [the father]" for the purposes of calculating capital gains tax liability. The summary of the balance sheet is also of interest. This showed assets as at 31 December 2006 valued as follows: plant, machinery and motor vehicles (£28,588); other fixed assets (£18,560); stock and work in progress (£500); debtors/prepayments/other current assets (£7,802); bank and building society assets (£4,235); cash in hand (£1). Liabilities were recorded as: trade creditors/accruals (£14,183) and loans and overdrawn bank accounts (£12,518). The balance of the capital account was shown as increasing over the year from £8,493 to £32,985. The increase was made up of net profit of £33,596 and capital introduced of £7,163, less drawings of £16,267.

24. The father told me, and I accept, that after the regulations governing dental practices changed in 2006 he approached his accountants about the possibility of incorporation, particularly because of the well-known tax advantages, who agreed that it would be a good idea. They discussed how to handle the sale and to value the assets that would be transferred. They also discussed how to fix the salary that the father would receive initially and agreed to stick roughly to the amount of drawings that he was taking in the year to 31 December 2006, considering that the salary could be increased later if profits were available or dividends could be declared. In his evidence on 19 June 2014 the father stressed the prudence of setting a long-term commitment like a salary at a low level at the start of an enterprise. He accepted that in 2006, when he was subject to a child support liability on the basis of his self-employed earnings, that he knew that his liability would vary with the amount of earnings, although in his final submissions he sought to distinguish his current familiarity with child support law from his more limited understanding in 2006. At that point, when the company had only just been formed, the father was the sole shareholder. As mentioned above, it was not until 1 December 2006 that the father transferred 200 of his 1,000 shares to his sister Robina and 400 to his brother Naveed. It appears from the findings made by the First-tier Tribunal of 8 July 2010 that (apparently as at September 2007) Robina was aged 22 and recently graduated and Naveed was aged 37 and a car salesman. The father told me, and I have no reason to doubt, that he transferred the shares for nothing because his siblings had helped him out in the past and this was a way of repaying them for that help, although the company had not yet been able to declare any dividends. It has never been suggested that either Robina or Naveed played any active part in the running of the business, at least until Robina became a director in August 2007, although there is no evidence her doing anything as a result. In the past it has mistakenly been said that Naveed was company secretary. In fact, that was Nadeem.

25. The transfer of the business took place on 1 January 2007. Comparison of the amounts agreed to be paid by the company for assets, as set out in paragraph 6 above, with the valuations shown on the 2006/2007 tax return shows that roughly half of the recorded value of plant, machinery and motor vehicles was transferred. It is possible that any car or cars that had formed part of those assets was retained by the father. On the assumption that the tax return valuation for other fixed assets had not included anything for goodwill, no other fixed assets were transferred. The bank balances were not transferred.

26. The evidence produced by the Secretary of State and attached to the submission of 23 May 2014 was from Mr T Bedaton, an agent of the Child Maintenance Group within the Department for Work and Pensions and a Regional Manager of the Financial Investigations Unit. He was formerly an Inspector of Taxes within HMRC. The evidence was set out as an unsigned appendix, which was not entirely satisfactory, but it has not been challenged before me and I accept it (subject to slight qualifications below) as cogent and rational. Mr Bedaton stated that it was not really accepted in the accounting profession that the valuation of goodwill in circumstances like those of the present case should be minimal because the provision of the father's services was what generated income for the practice. He continued:

"In reality goodwill for a dentist is in essence not just the professional services he provides as a dentist. It is made up of a proportion of the value of the current customer base of the practice. This means that if the dentist has NHS customers the value of the goodwill could equate up to the entire annual fees obtained from the NHS as this is what the practice has built up over time. The goodwill valuations are usually decided by the accountant who may be a specialist advisor in such businesses. HMRC have accepted this practice over the years but can always question how the valuation was calculated if they choose to. As the turnover was in excess of the amount of the valuation in this case I would suggest this would not be questioned.

The Tribunal's position on the valuation of personal goodwill could be viewed as acceptable if [the father] was a medical consultant who does not have a practice offering general services mainly to NHS patients but who generates income from referrals to him personally. An example of this would be a private consultant such as a plastic surgeon who is generating income from their expert skills and through referrals made purely to them. This is not the same as that of a dentist. If the dentist chose to leave the practice the NHS patients who create the majority of the turnover of the practice would still probably remain present as long as the business continued with a new dentist taking his place so the value of the company would not be adversely affected.

In recent years HMRC have usually accepted valuations on goodwill for dentists choosing to incorporate. This is commonplace and not a sham but is a valuable tax saving and sound business decision for dentists. With entrepreneurs' relief, it is now common to sell goodwill to the new company at full market value and accept the 10% personal capital gains tax liability."

Mr Bedaton went on to summarise the various benefits that could accrue to a self-employed dentist from incorporation, then to mention a further issue that I deal with separately below.

27. Mr Bedaton put some emphasis on a practice having mainly NHS patients. The mother has at earlier hearings given evidence that the father's practice did mainly private work, but had some NHS patients. There is no decisive evidence about the proportion or whether before and after the incorporation there were any NHS patients. But I do not think that that matters. Even if there were no NHS patients, in my judgment there would still have been a real element of goodwill that had a market value and could be crystallised on the transfer of the business from the father to the company. That is partly for the reason suggested by Judge Bano, that if the father had ceased to offer his services, patients would still have come back to the practice for reasons of convenience. But it is more than a matter of convenience. Although the father was at the relevant dates the only dentist working at the practice, there were other employees, such as a receptionist and a dental nurse and possibly (I do not know for sure at the relevant dates) a dental hygienist. Their skills as well as the convenience, comfort and attractiveness of the premises would contribute to goodwill. More fundamentally, dental practices have their own patient lists in a way that a private medical consultant of the kind mentioned by Mr Bedaton, treating patients on the basis of referrals, does not. That makes a fundamental difference to the existence, nature and value of goodwill.

28. The father's evidence to me was that he did not change the number of hours he worked in January 2007. He had already cut down the number of days worked to four before the transfer of the business. That is consistent with his reply on a questionnaire signed on 9 February 2008 that he worked on average 3½ days a week for about 25 hours. It is also in line with the mother's evidence, and the appearance from the evidence as a whole, that the practice continued after the transfer to offer the same level of service to patients and the same opening hours, with the father continuing as the only dentist. At least one earlier tribunal has rejected evidence that the father worked only for 12 hours a week and I consider that that must be right. I think that so far as patients were concerned they would have noticed no difference in January 2007, apart perhaps from a change in the name to be used for making payments.

29. As found above, the first two monthly payments of salary on 5 January 2007 and 5 February 2007 were for £1,500 gross, £1164.69 net of tax and national insurance contributions. I am satisfied that payment at that rate continued at least until 26 September 2007, even though the company accounts for the period to 31 December 2007 showed directors' emoluments of only £16,500. I think that something or other must have led to only eleven monthly payments being recorded in the period covered by the accounts. The schedule of repayments from the director's loan account shows the first repayment of £2,000 being made on 10 January 2007, followed by 16 January 2007 (£550), 17 January 2007 (£350), 22 January 2007 (£4,000), 1 February 2007 (£1,500), 7 February 2007 (£1,000), 13 February 2007 (£1,000), 18 February 2007 (£900) and 22 February 2007 (£2,000). I shall not set out the rest of the repayments during the year, but repeat that, as noted above, repayments of £43,267.39 were made by 31 December 2007. Payments down to 26 September 2007 totalled £34,992. The father told me that he could not remember exactly what any of the repayments were spent on. He thought that they were used for general living expenses, as well as to pay off debts and to meet tax bills and legal fees from divorce proceedings. As part of the application for permission to appeal against the decision of the appeal tribunal of 3 September 2008 the father's then solicitors submitted a brief statement of his personal income from salary and expenses for 2007 and 2008 (page 371), which showed a substantial weekly shortfall in 2007 (£268 income against £429 expenses). It was part of the solicitors' argument in relation to the potential variation ground of lifestyle inconsistent with declared income that that shortfall was funded by capital drawings from the director's loan account. I accept, since there is nothing to the contrary, that the amounts drawn were used up in one of those various ways shortly after the date of drawing.

30. There remained on that evidence what the representative of the Secretary of State in the submission of 23 May 2014 called "the mystery" of where the money came from for the company to make repayments of more than £43,000 to the father from his director's loan account in 2007. That had to some extent been flagged up in paragraphs 21 and 22 of my decision in CCS/2484/2010, where it was recorded that the same point had been made by the mother. Mr Bedaton in his evidence suggested that to establish the nature of the drawings would require an analysis of the entire year's transactions and suggested that the father's and the company's accountants be asked to explain and substantiate how the funds were withdrawn. The father asked the accountants to produce such an explanation, which they did in the document dated 6 June 2014 with a calculation attached.

31. The document included the following:

"At the start of the year the company had no cash. At the end of the year it had a cash balance of £3,335.

The main source of money is the annual profit generated from trading.

It is important to understand that flows of profit and flows of cash are not the same thing. They often track each other closely but there are differences between the two.

In arriving at the annual profit there are deducted certain expenses which are accounting adjustments rather than cash transactions. The main examples of such adjustments are depreciation of equipment, amortisation of goodwill and losses arising on the disposal of equipment. Having used profit as our starting point we must take these adjustments out in order to arrive at the true cash position. Profit plus depreciation plus amortisation gives us a closer approximation to the amount of cash generated by trading."

In relation to figures in the balance sheet, what the accountants said included this:

"If stock is lower at the end of the year than at the beginning this tells us that money which was previously tied up in stock is now released. This is a source of money.
 
The same analysis applies to debtors.

If creditors are higher at the end of the year than at the beginning this tells us that more money has been preserved in the business by not paying creditors. This is a source of money."

32. Figures were put to those propositions in the calculation attached. Sources of funds were described as follows (I have omitted categories with nil entries):

"Sources of funds

 

Profit before tax and dividends

21,402

Amortisation of goodwill deducted from profit but not a cash outgoing       

5,750

Depreciation of equipment deducted from profit but not a cash outgoing  

  2,298

Loss on disposal of equipment deducted from profits but not a cash outgoing     

     401

Reduction in debtors (money freed up from customers paying debts)      

  4,815

Increase in creditors (money freed up by taking extra credit from suppliers)

16,016

Total sources of funds

50,682

"Applications of funds

 

Purchase of equipment    

  1,482

Increase in stock (extra money tied up in buying of stock)      

  3,597

Repayment of [father's] loan account                            

42,268

Total application of funds

47,347"

 

That resulted in the increase in cash balance of £3,335 over the year. Most of those figures can easily be verified by reference to the accounts at pages 291 to 308. The one figure which troubled me was that of £16,016 for increase in creditors, which on the first page of the calculation was labelled "trade creditors". In fact, as the father was able to point out, that figure covered the amounts shown in the balance sheet (and notes) for "creditors: amounts falling due within one year" after taking out the balance remaining on 31 December 2007 in the director's loan account. The amounts (page 303) were trade creditors (£2,725), corporation tax (£4,997), social security and other taxes (£6,390), other creditors (£3,700) and accruals and deferred income (£3,201).

33. Mr Cooper was able to report at the hearing on 19 June 2014 that Mr Bedaton, having seen the accountants' explanation of the source of cash funds, was satisfied that that explanation had removed the mystery and that he saw nothing suspicious in relation to the company's accounts, for instance in any suggestion that other income must have been concealed.

Discussion: Variations Regulations, regulation 19(4): diversion of income
34. Regulation 19(4) as in force at the relevant time is set out in paragraph 10 above. There are two parts to it which must both apply for a case to fall within paragraph 4(1) of Schedule 4B to the Child Support Act 1991 to allow a variation to be imposed if it is just and equitable to do so (section 28F(1)). Under paragraph (4)(a) the parent must have the ability to control the amount of income he receives from a business or company. It was established by the decision of the Upper Tribunal in RC v CMEC (CSM), reported as part of [2011] AACR 38, that in regulation 19(1A) (which contains the same condition) this does not require sole control, but effective control, with the focus on the realities and practicalities of the particular case. That approach must apply equally to regulation 19(4). At the hearing on 19 June 2014 the father accepted that in relation to I and A Ltd he had the ability to control the amount of income he received. That would in any case have been the inevitable conclusion. The focus must be on the date or dates at which any potential diversion of income occurred. When the crucial initial discussions with the accountants were going on, at which the decision was made to restrict the father's salary initially to about the amount of drawings that he was taking in 2006, the father was the sole shareholder and director. In my judgment nothing in reality changed when he gave away the shares to Robina and Naveed. The father was still the controlling and directing force, both before and after the transfer of the business, as the major fee-earner. In so far as there were continuing diversions of income after 1 January 2007 in the form of omissions to increase the amount paid to the father in salary, even if the other shareholders had been consulted (or Robina as a director from 23 August 2007) it is hard to see what possible interest they would have had in paying the father more than he asked for. In essence, once the father had decided on the initial restriction of his salary to £1,500 per month gross, his ability to control that amount was undiminished because the company would only consider increasing his salary if he asked for that to be done.

35. Paragraph (4)(b) of regulation 19 requires that the parent has unreasonably reduced the amount of his income that would otherwise be taken into account under the Child Support (Maintenance Calculations and Special Cases) Regulations 2000 or under paragraph (1A) by diverting it to other persons or for purposes other than the provision of such income to the parent. It is no longer any part of the conditions for the application of regulation 19(4) that the parent's motive or purpose should be to reduce the amount of his child support liability. Once it is found that there has been a diversion away of income that would otherwise have counted in the ordinary calculation of net weekly income, the test is whether the reduction in such income was unreasonable.

36. On the test of reasonableness, I agree with and adopt the approach taken by Upper Tribunal Judge Howell QC in GO'B v CMEC (CSM) [2010] UKUT 6 (AAC), where he said in paragraph 22:

"I further completely agree with Mr Ellis [the representative of CMEC] that although the judgment of what is reasonable or unreasonable for the purposes of regulation 19(4) is a broad one for the good sense of the tribunal, and the legislation places no restriction on the circumstances that may be taken into account, it is a judgment to be made in the context of the child support legislation and the purpose of the variation provisions themselves. As he says:

'In my submission the question as to whether a diversion was unreasonable has to be seen in the context of the regulation (Variation reg 19) and the overall purpose of the Child Support Schemes including the terms of section 1(1) of the Child Support Act which sets out that parents are responsible for maintaining their children.

In making financial decisions a parent will obviously have a number of factors to take into account but providing maintenance for his or her children must be very high up on the list of priorities.

In my submission the tribunal was both entitled and required to decide as a question of fact whether the choices made by the NRP were 'unreasonable' given the context as I describe it above.
[…].'"

37. Judge Howell rejected the somewhat extreme argument for the father in GO'B that the tribunal in effect had to accept the way he ran his business and found that the tribunal had in general carried out its objective task of striking a balance between maintaining a viable and successful business (in the interests of all parties) and providing a reasonable income stream available for the children's immediate maintenance needs. The tribunal had erred only by refusing to consider at all the father's interests in building his business to support him in old age (as he had no pension arrangements), instead of taking that into account as one of many relevant factors.

38. Since the decision in GO'B had not been referred to before the hearing on 19 June 2014 I gave the parties a very short time after the hearing in which to comment on its relevance if they wished. The Secretary of State did not reply and the mother replied that she had no comments. The father replied with substantial comments and additional evidence. In so far as the decision in GO'B, was concerned, the only issue on which a submission was invited, he stressed that Judge Howell had made it clear that both personal and business circumstances need to be considered. That has already been taken into account in the discussion below. The further submissions and evidence, being uninvited, I exclude from formal consideration. I have of course had to read them in order to do that. I can say that I consider that in the main they constitute only attempts to reinforce arguments already made and taken into account in my decision and that, so far as new matters are raised (e.g. about what the drawings from the director's loan account were used for) they would not affect the conclusions already reached below. Nevertheless, I am instructing that the replies be added to the papers and issued to all parties at the same time as this decision is issued.

39. I have no doubt that the father did reduce the amount of the income that otherwise would have counted in the ordinary maintenance calculation and thereby diverted it to another purpose, that is keeping that income within the assets of I and A Ltd in circumstances in which there was the possibility of making capital drawings that would not themselves count as income. I do not find the reduction and diversion merely in the creation of the new company and the transfer of the dental practice, even though in a sense one of the major benefits of such a process as identified by Mr Bedaton was a reduction in income tax and national insurance contribution liability which would depend on a reduction in the earnings subject to such liabilities. But the mere process of incorporation on its own would not inevitably lead to a reduction in income. That assumption was one of the errors that required the setting aside of the very first tribunal decision in this case (see CCS/249/2009). Rather, the reduction and the diversion lies in the decision to set the father's initial salary from the company at £1,500 gross per month and the failure subsequently to increase that amount, in the particular context that it was clear that the company would not have any cash available to pay the father for the tangible assets transferred and for the transfer of goodwill, so that a debt would have to be owed, to be acknowledged in the director's loan account. The salary could have been set at a higher level and, if so, less cash would have been available for repayments in the form of capital from the father's director's loan account, as is shown by the accountants' document of 6 June 2014. That is a reduction and diversion of income.

40. I have also concluded that the reduction in income that would otherwise have counted in the ordinary maintenance calculation was to an extent unreasonable, having taken account of all relevant circumstances as explained in the decision in GO'B.

41. I have no doubt that considering only the father's own personal, professional and business interests the reduction in income was reasonable. But I do not accept the father's submission at the hearing on 19 June 2014 that in effect his was the only choice open to him according to the standards of good business administration. He submitted that it would have been wrong to set his salary at a level that might have been in danger of putting the company into loss rather than profit in its first year, that such a position could not be sustained on a long-term basis by the deferring of expenditure etc and that if the accounts showed a loss that would adversely affect the ability of the company to obtain loans or possibly credit. I do not consider that it would be at all unusual for a company starting up on a new financial basis to show a loss on the profit and loss account in early years or that that would indicate that the company was not viable or would not be understood by potential lenders. Nor do I accept his submission about the constraints of prudence in setting definite salary commitments at the start of an enterprise. This was not a case of an entirely new business starting up and the prospects of success being uncertain and, if there, likely to be long-term rather than short-term. This was the case of an existing thriving and profitable business, as recognised by the valuation and transfer of the goodwill, being put within a new ownership and financial structure but without a change in the central role of the father in the success of the practice. In those circumstances, the father and his accountants would have been able to make a fairly confident prediction of the turnover of the practice even in its first year in the ownership of I and A Ltd and of its real profitability and the cash flow that would be available. And the arguments about prudence are in my view also undermined by the fact that the father was confident enough to take £13,300 out of the company in the form of drawings on the director's loan account in the first two months of 2007. If those amounts and the continuing payments through 2007 could legitimately be found during the year from the sources identified in the accountants' calculation of 6 June 2014, sums could legitimately have been found to pay him a salary closer to one in keeping with his professional expertise and experience. Instead the choice was made to pay a salary at a low level that would allow the father to benefit from the crystallisation of the goodwill inherent in the practice by drawing down on his director's loan account and also to leave some profit in the company. That was a reasonable choice considering only the father's own personal, professional and business interests, but it was nonetheless a choice and many other choices could have been made consistent with the standards of good business administration.

42. Against those factors must, in accordance with the approach in law adopted in paragraphs 33 and 34 above, be set the immediate maintenance needs of the qualifying children who the father was under a statutory obligation to support. An objective judgment must be made of whether in that context the reduction of income identified above was unreasonable. That does not depend on the motives of the father at the time in relation to his child support liabilities (although I come back to that below under "just and equitable"). However, it is relevant to consider the difference between the amount of the maintenance calculation in force prior to 28 December 2006 (£152 per week, although it might have reduced slightly after that date on the basis of the father's earnings from self-employment in the year to 31 December 2006) and the amount of the calculation from that date onwards on the basis of his salary from I and A Ltd (£54 per week). I conclude that the full extent of the reduction in income leading to that result was unreasonable. But under regulation 19(5)(b) there is not an all or nothing conclusion on the additional income to be taken into account. There must be a judgment as to how much of the reduction was unreasonable. It is very much an issue of judgment dependent on the particular circumstances of the present case. My conclusion is that balancing out the competing considerations as required, and to reflect the legitimate business logic behind the incorporation of the practice, the reduction was unreasonable in so far as represented by around half of the weekly rate at which drawings were made by the father from his director's loan account in the period down to 26 September 2007. As was calculated by the tribunal of 4 December 2012, the total drawings in that period were £34,992, equating to a weekly rate (after some rounding) of £897.31.  I take the figure of £450 gross per week as representing the unreasonable reduction. I note that that figure, translated to an annual rate, would still be less than the post-tax profits shown in the company's accounts for the period to 31 December 2007 if one takes out the accounting adjustments of depreciation of equipment and amortisation of goodwill as described in the accountants' calculation of 6 June 2014.

43. However, if the father had taken that weekly amount in salary instead of unreasonably diverting it to other purposes it would have been subject to income tax and national insurance contributions. As submitted on behalf of the Secretary of State and as I understand to follow from the decision of the Court of Appeal in Gray and from the approach recently put forward by Upper Tribunal Judge Rowland in DA v Secretary of State for Work and Pensions (CSM) [2014] UKUT 142 (AAC), deductions of those amounts have to be made before making an addition to the father's net weekly income in the maintenance calculation effective from 28 December 2006. I see no reason why the principles applied in those cases to the ordinary maintenance calculation should not also apply when additional income on which income tax and national insurance contributions were not in fact paid come into the calculation by way of a variation of the ordinary rules. I leave the Secretary of State to make those calculations.

44. Before imposing a variation in those terms it must be concluded that it is just and equitable to do so. I do not have any precise calculation of the effect that the variation would have on the maintenance calculation. However, if it is assumed that about 30% would be deducted for income tax and national insurance contributions combined, that would leave £315 per week and 20% of that (for two children) would be £63 to be added to the existing calculation of £54 per week. I have no doubt that a result in that general range would be just and equitable. The total is significantly less than that in operation prior to 28 December 2006 and is one that I am satisfied the father could have met from the resources available to him. I am satisfied that he had more than £315 per week available to him in addition to his salary, from which imposing a child support liability at the rate of 20% is quite fair. I also take into account that at the time when the choices were made about reduction of income, the father (as he was already under a child support liability) knew in general that the consequence of his choices would be a substantial reduction in his liability on the ordinary calculations, even if he was not at that time as familiar with the details of the scheme as he is now. There has been no suggestion that imposing such a variation would be likely to lead to the father ceasing paid employment (Variations Regulations, regulation 21(1)(a)(i)).

45. Accordingly, a variation is to be made under regulation 19(4) of the Variations Regulations in the terms set out at the beginning of this decision.

46. That variation is to be applied to the maintenance calculation effective from 28 December 2006. By virtue of section 20(7)(b) of the Child Support Act 1991 I have not been able to take into account any circumstances obtaining only after 26 September 2007. The variation will have a continuing application beyond that date so long as the maintenance calculation effective from 28 December 2006 continues to be in effect. That maintenance calculation will no doubt have ceased to be in effect from some date, to be replaced on supersession for relevant change of circumstances by a new maintenance calculation, probably with a series of further maintenance calculations following. I have no information about that process or about the circumstances of the parents beyond 26 September 2007. Since the effect of a variation is incorporated into the decision on the ordinary maintenance calculation, it would seem that if there was here a supersession for relevant change of circumstances with effect from a date after 26 September 2007, say, for instance, a change in the amount of the father's salary from I and A Ltd, that supersession could take effect by changing that element of the maintenance calculation while leaving intact the effect of the variation within the previous decision. However, that would not absolve the Secretary of State from the obligation to consider how the change of circumstances mentioned, and any other changes of circumstances brought to his attention, would impact on all aspects of the existing maintenance calculation, including the variation. It also appears that the Secretary of State is given power by regulation 3A(5A) of the Social Security and Child Support (Decisions and Appeals) Regulations 1999 to revise any of such a subsequent series of decisions if they would have been decided differently if at the time the Secretary of State had been aware of the present decision. In my judgment the reference in regulation 3A(5A)(b) to a decision of the First-tier Tribunal must include a reference to a decision of the Upper Tribunal re-making a First-tier Tribunal decision under section 12(2)(b)(ii) of the Tribunals, Courts and Enforcement Act 2007. A new right of appeal would then arise against each decision as so revised. However it would in my view be good practice, and the more so the further away the relevant dates are from the circumstances as at September 2007, for the Secretary of State to inform both parents in advance of how he was proposing to revise the series of decisions to take account of the present decision and to invite them to make representations before actually carrying out any revisions.

Discussion: Variations Regulations, regulation 19(1A): income outside the MCSC Regulations received
47. I should mention this ground of variation briefly because I and A Ltd paid the father £12,000 per year in rent for the premises at which M Dental Practice operated. Both parts of regulation 19(1A) would therefore appear to be satisfied, in that the father had effective control of the amount of income of that kind received from the company and rental income does not count towards net weekly income for the purposes of the MCSC Regulations. However, on the father's tax return for 2006/2007, where the receipt of £3,000 was properly declared on the land and property pages, expenses of £3,045 were also claimed, no doubt attributable to mortgage interest (as shown in the bank statement at page 280). In those circumstances it seems to me that the father cannot be said to be receiving income in a way that could properly found the imposing of a variation under regulation 19(1A).

Discussion: Variations Regulations, regulation 20: life-style inconsistent with declared income
48. I should also mention this ground of variation briefly because of what was said by Upper Tribunal Judge Turnbull in WM v CMEC (CSM) [2011] UKUT 226 (AAC). There, in a case where the tribunal considering an ordinary maintenance calculation for a self-employed earner decided that a parent was receiving higher earnings than had been taken into account for income tax purposes by HMRC, he decided that notional income tax and national insurance contributions were to be deducted from the additional amount of earnings taken into account in the maintenance calculation. But he suggested that that deduction could be added back by a variation under regulation 20 on the basis that the parent would have enjoyed the benefit of the additional earnings free of income tax and national insurance contributions to support his lifestyle, subject to the just and equitable test. In Gray, another case of a self-employed earner, the Court of Appeal took the same view as Judge Turnbull on the ordinary maintenance calculation, but without mentioning his solution of adding back the deduction through regulation 20. Since in the decision under appeal to the Court of Appeal (CCS/392/2011, also reported as part of [2013] AACR 5) I had relied in the alternative on that solution for not interfering with a tribunal's decision applying no deduction for notional income tax and national insurance contributions and the Court of Appeal simply remitted the case to the Secretary of State to calculate the deduction, there is an argument that the regulation 20 solution was rejected by necessary implication. Even if that is not so, it appears that the application of regulation 20 would be excluded in a regulation 19(4) case by the provision in regulation 20(3)(b) against a variation where the lifestyle is paid for from income that falls to be considered under regulation 19(4) (see also the similar exclusion under regulation 20(3)(c) where the lifestyle is paid for from assets as defined for the purposes of regulation 18).

Discussion: Variations Regulations, regulation 18: assets
49. As explained above, the only remaining live issue under this heading is the potential asset in the form of the father's interest in his director's loan account. That potentially counts as an asset under regulation 18(2)(d) as a chose in action, i.e. a right that can only be enforced by a legal action. But to count, the chose in action must not have been enforced when such enforcement would be reasonable. What does "enforced" mean here? Mr Cooper for the Secretary of State suggested that, given the conceptual nature of a chose in action, it must mean enforced by taking court proceedings or, perhaps, even more narrowly, taking action to enforce a court judgment. That cannot possibly be right. It would deprive regulation 18(2)(d) of almost all its practical application. Although the great majority of choses in action will not have been enforced in that way, it would not be reasonable to enforce them by taking legal proceedings. Legal proceedings would only be a last resort and the benefit of the rights would be obtained without the need for such proceedings. In my view (although for the reasons given below I do not need to decide definitively) enforcement must take its meaning from the context of the type of chose in action in question in each particular case. Where the chose in action is a debt of the kind represented by the father's director's loan account in the present case, which he was apparently free to draw on at will just as he would have been able to do on a personal bank account, my view is that "enforced" must mean something more like "realised". I would take support for such an approach from the decision in CS v CMEC and MS (CSM) [2010] UKUT 182 (AAC); [2011] AACR 2. That was a case arising in Scotland, where it was confirmed that the phrase "chose in action" was not known in the law of Scotland, but where Upper Tribunal Judge May QC agreed with the approach in an earlier decision to insurance policies that the relevant question was whether it was reasonable to enforce the policies by cashing them in to receive their surrender value. On the facts there, the parent in question did not have the right to cash in the policies, so that enforcement was not possible, let alone reasonable. In the present case, whatever was the balance in the director's loan account at any particular date would on that approach represent the value of the chose in action that had not been enforced, i.e. realised. The amounts drawn out would as soon as drawn be assets as money in cash or on deposit (regulation 18(2)(a)), but since the evidence suggests that the amounts would have fairly quickly been spent on living expenses or repaying debts or meeting other liabilities, I do not consider that those amounts would need to be brought into the calculation.

50. On the assumption that the variation ground was not excluded because taking legal proceedings was not reasonable, the question then would be whether enforcement, i.e. further realisation, of some or all of the chose in action would be reasonable. The same factors are relevant in asking whether under regulation 18(3)(b) the asset was being retained for a reasonable purpose. On this aspect of the case I accept the father's submissions to a large extent. In my judgment, as at 1 January 2007 it was reasonable for the father not to seek to realise the entirety of the chose in action, by requiring repayment of the whole of his director's loan account. That was also a retention for a reasonable purpose. It is a relevant factor that the viability of I and A and its continued operation as a source of employment for the father would have been put at risk if it had been required to come up with £136,000 at the outset. It did not have the resources to do so. Of course, the company could have borrowed the money from another source, but there might be doubt whether anyone would be prepared to lend without much security (as the premises were already mortgaged) and, if they were, the company would have the burden of paying interest as well as repayments of capital. However, again it is not an all or nothing question, as shown in the context of assets and choses in action by decisions CSCS/1/2005 and DGH v SSWP (CSM) [2013] UKUT (AAC), both attached to the Secretary of State's submission of 23 May 2014. The father felt able to start drawing quite substantial amounts from his director's loan account early in January 2007 (partly as a result of his choice to take an artificially low salary) and his accountants have explained how the cash was actually available for the withdrawals throughout the year. It was therefore, even at the beginning of January 2007, not reasonable for the father to be retaining some proportion of the chose in action. It could not be said at that point that it was reasonable to realise the whole of the year's drawings. That would depend on the cash flow during the year. So at each date through the period from 1 January 2007 to 26 September 2007, as the balance in the account reduced, it would have been reasonable for the father to have realised some additional amount that could realistically be regarded as available in the next few months. But I do not need to make findings about what amount was caught by that conclusion throughout the period. Even if the full amount of the year's drawings of some £43,000 was regarded as caught throughout the period, that is far below the threshold of £65,000 in regulation 18(3)(a), so that a variation could not be imposed. The same result would follow even with the addition of money in cash or on deposit resulting from the drawings and from the father's receipts of the monthly rent of £1,000 and of his salary. Most of those amounts appear to have been spent or disposed of relatively soon after receipt, so that on any realistic footing the balance of the money in cash or on deposit at any one time could not get near bridging the gap to £65,000. Nor would the value of the father's shares in I and A Ltd, which would count under regulation 18(2)(c), allow the gap to be bridged, even if they were not regarded as being retained for a reasonable purpose.

51. Thus no variation falls to be imposed under regulation 18 of the Variations Regulations. I do not then have to grapple with the question of whether, if the conditions for variations under regulations 19(4) and 18 were both met, there would be some degree of double counting in the income to be added in to the maintenance calculation as a result, so that some adjustment would be required in accordance with the just and equitable test.

Conclusion
52. Accordingly, the conclusion in re-making the mother's appeal against the decision of 26 September 2007, as revised on 28 January 2008, is to allow the appeal to the extent only of imposing a variation with effect from 28 December 2006 as set out in the decision as the beginning of this document. I have no power to direct the Secretary of State how to determine the effect of the Upper Tribunal's re-made decision on decisions relating to maintenance calculations taking effect from dates subsequent to 26 September 2007, but I remind him of the legislative provisions mentioned and the points made in paragraph 43 above.

(Signed on original): J Mesher
 Judge of the Upper Tribunal

Date:                   27 June 2014