username

password

1 Garden CourtDNA LegalHind CourtHarcourt Chambersimage of 4 Paper Buildings logoCoram ChambersGarden CourtCafcass advertsite by Zehuti

Home > Judgments > 2015 archive

CP v Secretary of State for Work and Pensions (CSM) (Child support - calculation of income) [2015] UKUT 391 (AAC)

Successful appeal to Upper Tribunal in CMEC case where the court found that the First-Tier Tribunal had failed in its duty to enquire into the Mother’s allegations.

This was a successful appeal by a Mother to the Upper Tribunal of the Administrative Appeals chambers challenging decisions of the Child Maintenance Enforcement Commission ('the Agency') and the First-Tier Tribunal. The Upper Tribunal found that the lower First-Tier Tribunal erred in concluding the case against the Mother at the preliminary hearing without directing that the Father file evidence to answer the Mother's allegations; there had been a duty to enquire that had not been met. The case was remitted to be re-heard.

The Mother and Father were parents of a 15-year old gild. In April 2012 the Father communicated a change of circumstances to the Agency, having converted from self-employed sole trader status an incorporated business. This saw him declare an income of £7,000 p.a. instead of £23,000 p.a. The Agency assessed the Father as liable to pay maintenance of £12 per week. The Mother challenged this, but the Agency did not realise or acknowledge her challenge. The Judge commented, "Such agency misunderstandings are not uncommon". In September 2012 the Mother applied for the assessment to be revised, arguing for a variation on the grounds that the Father's lifestyle was inconsistent with the declared income (he having purchased a property for, she calculated, around £290,000 and spent another £200,000 refurbishing it), and that there had been diversion and income not taken into account. Some limited information was sought by the Agency from the Father, who argued that the funds for the property had been provided by his new wife. The Judge recorded, "The agency seems to have accepted that the father's new partner contributed substantially to their lifestyle and dismissed the variation application on that basis.  There is little information to show how (or whether) they assessed the lifestyle costs or as to how they investigated the diversion ground". The Agency began the revision process, but the decision maker then discontinued it and refused to revise the assessment. The Mother challenged that too. Two further decisions were then taken revising but rejecting the Mother's application and making minor amendment to the assessment on technical rounds. The Mother appealed those decisions.

The legal effect of the Mother's challenges was a single direct appeal of the revision decision, with the First-Tier Tribunal being under a duty to consider the variation heads she advanced also (inconsistent lifestyle and diversion). The Mother wrote to the Tribunal asking for further disclosure of the Father's financial circumstances. There was no record of any determination of that. Instead, the parties were sent a letter by HMCTS which invited them to attend before a District Tribunal Judge in October 2013. It said, "The hearing will be an opportunity to see if agreement can be reached between the parties.  If it cannot, the tribunal will make a decision on the appeal, but not necessarily at the first hearing.  The tribunal may identify the matters in dispute, and direct the parties to produce further evidence." The First-Tier Tribunal Judge decided the case finally at that hearing, dismissing the Mother's appeal. The Mother had attended without her solicitor, anticipating a preliminary directions at hearing at which the production of further evidence would be ordered. She was able to phone her solicitor to attend but, the Judge found, he was – quite reasonably – unprepared for a final hearing. The Upper Tribunal granted the Mother permission to appeal.

On appeal, the Mother argued that she had been disadvantaged by the way in which he final hearing was conducted. She added that disclosure of the Father's bank statements had not been properly dealt with and that the First-Tier Tribunal had not properly examined the documents (unaudited accounts) that the Father had brought to the hearing. The Father argued that the First-Tier Tribunal Judge had acted within his powers of case management, consistent with the procedural rules. The Secretary of State argued that the case should be remitted because the First-Tier Tribunal had failed to use its inquisitorial power to investigate the variation grounds appropriately. He argued that the court had placed a burden of proof on the Mother to establish a prima facie case before it would direct further evidence, which was not appropriate; instead, the Mother had needed only to get to a point where a question arises, upon which it was incumbent on a tribunal with inquisitorial powers to go into matters further.  The funding of the house purchase should have been the subject of further directions, and the issue of diversion of funds within the incorporated company should have been investigated given it was potentially a "classic case of diversion".

The Upper Tribunal expressed surprise that the lower Tribunal had concluded the case in the manner that it did. It suggested that the letter inviting parties to the initial hearing was misleading and required amendment. The Upper Tribunal's view was that generally at an initial hearing in a child support case it will be necessary for directions to be made as to the production of relevant documents.  Importantly, it was proportionate for the court to do so considering (a) the gravity of the issue of child maintenance, and (b) the Agency's typically lackadaisical approach:

"it must be recalled that this matter concerns the maintenance of children.  It is not disproportionate for a judge at an initial hearing to direct further reasonable disclosure bearing in mind the importance of the issue at stake and the stance of the agency which is one of reluctance to call for and analyse evidence which might reasonably be available to refute or substantiate assertions made by a party.  The lack of pro-activity in the obtaining of evidence by the agency entrusted to make assessments of child maintenance based upon the correct calculations has regrettably been a feature in child support cases over many years and the [lower Tribunal] has throughout had to take that stance into account in relation to decisions as to its investigative role."

The lower Tribunal was therefore wrong not to direct the production of documentation that would have allowed further investigation of the matter, and the Mother's appeal was allowed. The court did not need to deal with the conduct of the hearing itself. But the Upper Tribunal did comment that, "It seems to me likely that the judge's decision to proceed was based on the fundamental legal misunderstanding that it was for the mother to prove certain matters to a particular standard prior to the [lower Tribunal] making any enquiry of the father.  That is not the position as a matter of law." There was a duty to enquire that had not been met. Finally, it had been a procedural error not to have an expert accountant on the lower Tribunal's panel in considering the Father's unaudited company accounts.

Summary by Marlene Cayoun, barrister, 1 Garden Court Family Law Chambers

_________________

IN THE UPPER TRIBUNAL
Appeal No.  CCS/2524/2014
ADMINISTRATIVE APPEALS CHAMBER

Before: Upper Tribunal Judge Gray


The decision of the Upper Tribunal is to allow the appeal.  The decision of the Wolverhampton Tribunal made on 17 October 2013 under number SC 053/13/01268 was in error of law and I set it aside under section 12 (2) (a) and remit it for rehearing under section 12 (2)(b)(i) Tribunals Courts and Enforcement Act 2007.

REASONS FOR DECISION
1. In this child support case the appellant and the second respondent are the parents of Sophie born on 26/11/1999 and now 15. 

2. Sophie lives with her mother the appellant.  Her mother is the Parent with Care and her father, the Second Respondent in these proceedings, is the Non Resident Parent in the terms of the applicable legislation. I will refer to Sophie's parents as the mother and the father.   The Secretary of State for Work and Pensions is the Respondent, the functions of CMEC (formerly the CSA) having been transferred to the DWP under a transfer of functions order effective from 1/8/12.  I will refer to the body that has from time to time been administering child support maintenance as the agency.

3. Child support maintenance for Sophie is based on the 2003 statutory scheme.  The issues in the original appeal were the mother's allegation that the father was understating his declared income and her application for a variation from the formula assessment on the grounds of lifestyle inconsistent with declared income, diversion of income or income not taken into account. 
 
The procedural background
4. This is largely taken from the submission of the Secretary of State to the First-Tier Tribunal (FTT) although the sequence of events set out at pages 5 and 6 contains some errors which the chronology below seeks to clarify.

5.  It is not clear from that submission when the initial maintenance decisions were made, but page 62 shows that on 13 April 2012 agency contact, probably with the father, was made about what was said to be a change of circumstances.  That chimes with evidence that the father incorporated his business at about that time having previously been a self-employed sole trader.  In any event a decision was made on 31/8/12 that he was liable to pay £12 per week in respect of Sophie from 26/4/12.  This was a rather lower amount than was previously assessed. The context suggests this was likely to be a supersession for a change of circumstances, that change probably relating to the incorporation of the fathers sole trading business.

6. That decision is said by the agency not to have been appealed by the mother, but it is clear from what later transpired that she had appealed it. Such agency misunderstandings are not uncommon.  It is evident that the mother disagreed with the decision from the note following that on 30/8/12 (this may be an error as to the date, or the previous date may be in error).  She disputed the assessment on the basis that the father was manipulating his income. On 12/9/12, she applied for that maintenance calculation to be revised asking for a variation on the grounds of his lifestyle being inconsistent with the declared income, diversion and income not taken into account; that is to say under regulations 20 and 19  of the Child Support (Variations) Regulations 2000 ( the variation regulations).   

7. As the application was made within one month of the decision any fresh assessment would commence from the effective date of that decision, the variation application being treated as an application to revise the existing award. This is the effect of a combination of section 28G and section 16 Child Support Act 1991 and regulation 3A (1) (a) (ii) Social Security and Child-Support Decisions and Appeals Regulations 1999.

8. The variation procedure followed the application, but partway through that process on 27/9/12 the decision maker refused to revise the decision dated 31/8/12, and on 10/10/12 the mother challenged that decision too. 

9. There is no direct right of appeal under section 20 Child Support Act 1991 against a refusal to revise, an appeal against such a decision taking effect in relation to the original decision as revised (R(CS)5/09)  and the fresh decision simply extending the period during which an appeal can be made against that to one month beyond the date of the refusal to revise: section 16 (5) Child Support Act 1991. The mother therefore continued to have a valid appeal against the supersession decision itself.

10. On 26/11/12 the variation application was considered, and it passed what is known as the preliminary sift, that is to say the process under variation regulation 6, so the father was asked for his comments under regulation 9.

11. On 11/12/12 a decision was made rejecting the variation application.  On the following day, however, 12/12/12, a somewhat technical revision of the decision of 31/8/12 was made to take into account an incorrect effective date, the £12 per week being then said to be effective from 28/06/12 ( as opposed to the 26/4/12 stated previously.)  The mother appealed that decision.

The decision under appeal to the FTT
12. The legal effect of the combination of the mother's various challenges was no more than a single direct appeal against the supersession decision of 31/8/12 as revised, an appeal tribunal additionally having the duty to consider the variation heads that she had put forward within a month of the decision under appeal.

The issues before the FTT
13. The father's net income was of central importance in considering whether the formula assessment was correct.  His tax returns for 2010/11 showed a gross annual income of some £23,000, but the following year he was only declaring £7,200 p.a. (£600 per month). As set out above it seems likely that he reported his having incorporated his business in mid 2012 as a change of circumstance to the agency.  Whether or not this constituted an actual change of circumstances or whether there was in fact a material change to his income required consideration.

14. The mother's primary allegation was that the father was earning £600 per week not £600 per month.  It is unclear where she got that figure from, but it is not very far off the average annual wage for a male employee so such a bare allegation is not outside the realms of probability given the father's likely position in the newly incorporated company with the attendant possibility of money being taken out of the company in ways other than the payment of earned income. 

15. The lifestyle ground is put forward by the mother on the basis that in March 2012 the father and his new partner bought a property for some £290,000, and spent or were spending a further £200,000 improving it. She provided details of the property next door which she said was on a par with that property and was for sale for £515,000.

16. The father said that he bought the property with equity from 2 houses plus a mortgage. He queried the conversion costs put forward by the mother and the parity with the neighbouring property. He said that his wife was the primary earner and had a substantial income which funded their lifestyle, which was not lavish; he said that he had not changed his car in 7 years nor taken a family holiday for 2 years.   

17. The agency seems to have accepted that the father's new partner contributed substantially to their lifestyle and dismissed the variation application on that basis.  There is little information to show how (or whether) they assessed the lifestyle costs or as to how they investigated the diversion ground.

18. The mother's appeal went forward to the FTT.  Early in those proceedings she wrote to the FTT asking for further disclosure of the father's financial circumstances, but there is no record of a determination that would suggest the matter was put before a judge as an interlocutory application.

What happened at the FTT hearing?
19. The matter came before a District Tribunal Judge on 17/10/2013.   The HMCTS letter informing the parties of that hearing, which is on the FTT file, said the following

"The hearing will be an opportunity to see if agreement can be reached between the parties.  If it cannot, the tribunal will make a decision on the appeal, but not necessarily at the first hearing.  The tribunal may identify the matters in dispute, and direct the parties to produce further evidence."

20. The judge decided the case finally at that hearing, dismissing the mothers appeal.  He later provided a statement of reasons at her request. 

The appeal to the Upper Tribunal
21. The mother applied for permission to appeal, initially to the FTT and following the refusal of that application to me.  Having sought observations from the other parties I granted permission to appeal on 3 November 2014 on the basis that the mother's complaints as to procedural irregularities, which the FTT judgement and the record of proceedings to some extent supported, should be explored.

22. I held an oral hearing in London on 11 March 2015.  The mother attended and represented herself, but there was a letter from the solicitor representing her below in relation to the proceedings before the FTT.  The father also attended, represented by Mr Thomas, counsel.  His instructing solicitors had also responded to my request for their recollection of the FTT hearing. The Secretary of State was represented by Mr Cooper, solicitor.  I thank them all for their assistance to me, and I hope that I fairly summarise their respective positions, which were put forward in writing prior to the hearing and orally at it, below.

The position of the parties before the Upper Tribunal
The mother

23. The mother argued that she was disadvantaged at the FTT hearing because the notification letter intimated that it was an initial hearing and due to that her solicitor was not expecting to attend, although he was in fact able to come in response to her telephoning him from the hearing centre.   She later put forward further matters in connection with the hearing which are best encapsulated in the written submission of Mr Thomas, counsel for the father, who has, in the best traditions of the Bar when acting against a litigant in person, set out her case.  That does not in any way disadvantage the father, but it does help me.  

24. Those further matters, put shortly, were that her application for disclosure of the father's bank statements was not properly dealt with, that the judge should have looked at the documents the father brought to the hearing, that the father had written a letter about her in prejudicial terms, which coloured the judges view of her and that all in all she had not had a fair hearing.

The father

25. The father's position regarding the substance of the mother's appeal was that his lifestyle was funded by his partner's earnings. The father argued that he had been forthcoming, the business bank accounts were subsumed in the final company accounts and that the company's income was not his income.

26. Mr Thomas countered the mother's points as to the procedural matters at the FTT hearing. In relation to the implication that the judge took an inappropriate approach to an inquisitorial hearing by using the burden of proof to dismiss the variation applications he argued that whether the proceedings are inquisitorial or adversarial in nature there has to be a starting point; the judge's use of the term "a prima facie case" was in the context of the mother having to have some substance to her allegations.  To require that was not to fix her with the burden of proof, but merely to set out her case.  It was not for a tribunal to entertain all and any allegation regardless of merit, because that would offend the overriding objective in the procedural rules.  He argued that there was no error of law in the way the judge dealt with the mother's allegations as to the father's income and lifestyle; there was, Mr Thomas said, ample evidence to support his conclusions.

27. In relation to a point which I had raised at the permission stage, the weight the judge attached to the unaudited company accounts, he argued that evidential weight is a matter for the tribunal, and given that it is a discretionary issue it was solely a matter for the judge in the absence of unreasonableness or irrationality of approach.  The reference by the judge in his reasoned judgement to the "audited accounts" he argued was a red herring.  The accountants were qualified and respectable, and it is to be expected, he said, that they had the father's bank accounts and reconciled the entries in the business books with what they saw there.  He said that unless it was argued that the accounts were falsified, the point was otiose.

28. As to the funding issues relating to property purchase and lifestyle, the father had sufficiently explained these matters to the satisfaction of the judge, who was entitled to come to the view that he did.

29. The judge's management of the case overall was consistent with the procedural rules, and in particular the case management powers and the overriding objective. No procedural error was made.

The Secretary of State

30. Mr Cooper saw no material procedural error in relation to the conduct the hearing itself, at which he reminded me all parties were represented.  He argued, however, that the case should be remitted because the FTT failed to use its inquisitorial power to investigate the variation grounds appropriately.  He disagreed with the father's approach, saying that the mother needed only to get to a point where a question arises, upon which it was incumbent on a tribunal with inquisitorial powers to go into matters further.  The funding of the house purchase should have been the subject of further directions; he observed that there was a great deal of useful information in mortgage documents regarding earnings, in particular as to whether different figures were being put forward for different purposes. 

31. As to the diversion ground he argued that the incorporation process, given the apparently reduced earnings and mention of a fund to build up the business or for the acquisition of business premises could amount to diversion within regulation 19.  He pointed out that within a small company what is paid out by way of dividend or wages, and what is retained may be under the control of the father.  He described the situation where somebody set their earnings at a low level as a classic case of diversion given that the retention would allow a capital sum to be created and taken after the child had grown up.  There was certainly enough, he argued, to justify the conclusion that the tribunal was remiss in not pursuing matters further.  He submitted that the appeal should be allowed and the case remitted for rehearing.

The issues before me
Should the appeal have been concluded at that hearing?
32. The first issue in relation to whether or not the FTT's decision was in error of law is whether it was appropriate to deal finally with the matter at the hearing at all.

33. The letter from the mother's solicitor indicates that his firm was of the understanding that the initial hearing was a directions hearing, and they had not intended to be present.  They thought that it would consider the mother's application to obtain disclosure of documents from the father. I have said before that this did not seem to have been adjudicated upon.  Whilst the solicitor did manage to get to the hearing after being contacted by the mother from the tribunal venue it seems to me improbable in all the circumstances that he was properly prepared for a final hearing, despite the record of proceedings showing that he made a number of points on her behalf; he seems to have been surprised at the matter being finally dealt with. I share that surprise.  My experience, based upon sitting on child support tribunals at the first tier, is that an initial hearing is for directions only unless matters are agreed or it is obvious that no further documents are required and the issues can be dealt with on the day without prejudice to the parties.  

The pre-hearing invitation letter
34. The way in which the hearing was represented to the parties in the letter informing them of it was sufficiently misleading that there was room for justice to be compromised by a party relying on that letter and not being sufficiently prepared for a final hearing. I accept the mother's solicitors comments that he understood that the mother's application for directions in relation to the father producing certain documents was likely to be the focus of the hearing and given the circumstances of this case and that letter he was justified in that view. It is understandable for a party to wish to save costs by minimising the incidence of representation. The expectations that the invitation letter provokes may well be an issue which senior FTT judiciary together with their administrative arm need to address.  It is of course the right of an independent judge to deal with a case as they think most appropriate and absolutely critical for them not to be limited in their approach by their administration, but it is as well for a judge to know what has been said to a party prior to the hearing because they may need to take any expectations so raised into account as a natural justice matter in relation to procedural decisions that they take.  That is quite a different issue to the judge being constrained in his independence; there can be no question of the tail wagging the dog, but where issues of natural justice are considered, as they must be when one party is apparently taken by surprise by the hearing being a final hearing, the circumstances leading to that position must be looked at in the round, however they have arisen. 

35. In the event the letter is not critical to my decision because there are additional factors.

The need for further information
36. Generally at an initial hearing in a child support case it will be necessary for directions to be made as to the production of relevant documents.  There may be unusual cases in which there is no real factual dispute, a technical matter as to calculation or a legal issue as to whether certain expenses are allowable out of income perhaps, where the decision can be made at that hearing, but where there is a dispute as to the level of income extraneous evidence will frequently be required, and where the income is derived from a company that is not at arms length from the parties consideration of the finances and structure of the company and its accounts is almost always essential.

37.  As to proportionality, this aspect of the Tribunal Procedural Rules having been prayed in aid by the father, it must be recalled that this matter concerns the maintenance of children.  It is not disproportionate for a judge at an initial hearing to direct further reasonable disclosure bearing in mind the importance of the issue at stake and the stance of the agency which is one of reluctance to call for and analyse evidence which might reasonably be available to refute or substantiate assertions made by a party.  The lack of pro-activity in the obtaining of evidence by the agency entrusted to make assessments of child maintenance based upon the correct calculations has regrettably been a feature in child support cases over many years and the FTT has throughout had to take that stance into account in relation to decisions as to its investigative role.

38. In this case the father's assertions that his lifestyle was being supported by his partner were accepted on minimal evidence without apparent investigation into what the cost of that lifestyle might be; the terms of variation regulation 20 clearly envisage the costing of the lifestyle prior to a decision being made as to whether under regulation 20 (2) (b) the income to be taken into account for the purposes of the maintenance calculation is substantially lower than the level of income required to support the overall lifestyle.  If it is substantially lower then there may be a case for a variation, subject to the consideration of the lifestyle being funded by matters excluded under regulation 20 (3), relevant here under 20 (3) (d) the independent income of a partner. 

39. There is little if anything in the agency submission that would suggest that such a costing was done prior to the decision to reject the lifestyle of variation application.

The FTT hearing itself
40. A number of things have been said about the way in which the hearing was conducted.  Since I am of the view that the judicial decision to proceed rather than to direct further documents or consider the documents that the father had brought cannot be sustained I do not need to deal with what arose at the hearing itself. 

41. As to there being any notion, however, of the rejection of the mother's judicial complaint in some way binding me in respect of such considerations I would explain that, because of the importance of judicial independence to which I avert above, judicial decisions are not subject to the complaints process.  A judicial complaint must be rejected where it relates to judicial decision making, and that includes case management decisions and the conduct of a case generally.  Only where a complaint relates to the personal conduct of a judge will it be considered; the appropriate challenge to a judicial decision, whether procedural or substantive, is by way of statutory appeal. 

42. It seems to me likely that the judge's decision to proceed was based on the fundamental legal misunderstanding that it was for the mother to prove certain matters to a particular standard prior to the FTT making any enquiry of the father.  That is not the position as a matter of law.

The approach of the judge

43. The statement of reasons shows that the judge decided the matter as he did based upon the business accounts together with certain other information from the accountants; he appears to have simply discounted the mother's allegations to the effect that there was undeclared cash in the business.  

44. The judge seems to have conflated the issue of the accuracy of the accounts as produced with the accuracy of the information upon which they were produced, and assumed that to impugn the accounts was to impugn the professionalism of the accountants; such an assumption may have been unfair to the mother.

45. It is not unknown for a small business to have money outside the accounts, and irrespective of the professionalism of the accountant who prepares them business accounts can only be as good as the information that the accountant is given.  Audited accounts are not required as a matter of law, but they are likely to be more reliable than accounts which are compiled only from information provided, rather than on an inspection of the sources of the information.  These accounts state (at page 88 of the bundle) "in accordance with your instructions we have compiled these unaudited accounts from the accounting records and information and explanations supplied to us". That is an important qualification.  I deal below with the need for an expert panel in relation to the weight that might be accorded to such accounts in particular circumstances, such as this where there was an allegation of money having been received other than that accounted for.

46. The clear issue raised by the mother was whether the accounts truly represented the father's access to income.  This bore upon the issue of whether there was a change of circumstance justifying a supersession at all, and if there was a change, upon the diversion and lifestyle allegations.  Probing that issue by considering further documentation as to the father's finances could have been productive in resolving the issue, the documentation tending to support either the materially reduced income put forward by the father, or the mother's allegation of their being cash available to him outside his declared income. What was important bearing in mind the essential challenge to the decision reducing the maintenance upon the father's apparent reduction in earnings by two thirds, was an explanation as to that reduction.  That is because the very first question for the FTT in relation to this appeal which involved both the formula calculation and the variation application was to decide whether the father had established a true change of circumstance to permit the supersession decision of 31/8/12; this may not have been appreciated by the judge as the statement of reasons refers only to the mother's "variation appeal".   Given the mother's evidence that they had been in receipt of cash from the father's self-employed work that was not declared whilst they were living together, the business accounts were not necessarily the final story.

The status of the accounts
47. As set out above the business accounts are stated to be unaudited. This is not a problem of itself; there is no requirement that the accounts are audited, but it contrasts with what was said in the judgement and the fact that the accounts were described as audited accounts may well have had a bearing upon the weight that the judge gave to them; indeed at paragraph 5 the judge appeared to place significant reliance on that point.  The misapprehension of the status of the accounts is a mistake of fact by the tribunal judge which in view of the importance of the issue becomes an error of law.

48. The solicitor acting for the father, in a somewhat combative letter written in the course of the proceedings before the Upper Tribunal takes issue with that proposition, putting forward the dichotomous position that the accounts are either wholly accurate or they have been fabricated, and that my observation to the effect that unaudited accounts may carry less weight is in effect saying that the accountants are charlatans.  This is an oversimplification of a point which is of some subtlety, and it is in matters such as this that the expertise of a financial member on the FTT, whose qualification is as a Chartered Accountant, is invaluable; in this instance their knowledge of the practice of accountants will inform the FTT what documents will have been looked at where accounts are audited and conversely.  

49. It is and indeed was imperative that an accountant sit in a case such as this where the key issue in the appeal was the diminution in declared income following incorporation of a business that on its face had not altered its activity or otherwise change, and the examination of company accounts in that context. 

The duty to enquire
50. Where there is a duty to enquire the FTT must look for the true financial position of (in this instance) the father, which, in a lifestyle case may involve considering the company background and looking to see whether the income he received from the company might have been understated.   In a diversion case, and the mother had also made an allegation of diversion of income under  regulation 19 of the variation regulations, the FTT must look at that position, the regulation positively demanding consideration of whether the non-resident parent has the ability to control the amount of income he receives from a company or business under regulation 19 (1A) (a); the purpose of the regulation (and its precursor in the departure provisions under the original child support scheme)  was to counter the possibility of additional income being available to a non-resident parent because of their position of authority and control, and such allegations are made in child support cases not infrequently.  In Denison-v-Stevenson and another reported as R (CS) 2/01 the Court of Appeal considered a case that involved the lifestyle ground under the departures scheme.  Simon Brown LJ giving the judgement of the Court at [20] dealt with the "suggestion that the tribunal here was not entitled to pierce the corporate veil" emphasising that it was entitled to "have regard to the true situation underlying the corporate façade".

51. To consider that situation is not, however, to automatically attribute the profits of a company to its owner as counsel for the father fears.   The extent of any diversion must be quantified.  Matters as diverse as taking a benefit in kind, for example a company car, instead of cash (R (CS) 6/05 [34]) and leaving funds in a particular company (CCS 3006/2007 [26]) may amount to diversion within the regulation.

Was there a duty to enquire here?
52. Mr Thomas says not and of course I accept that a tribunal need not enquire into a wild allegation made on apparently baseless assumptions. Whether what is put forward is sufficient to provoke an enquiry is a matter of common sense for a tribunal considering the overall context, which may include the understanding that one party apparently has of the lifestyle of the other, together with the income declared, and the potential for additional undeclared income given the family history and the nature and structure of any business.   That is a decision which would be subject to scrutiny only where a failure to investigate was unreasonable or based upon a false premise. 

53. I do not accept the contention on behalf of the father that the use by the judge in this case of the term "a prima facie case" meant merely that something substantive had to be shown; if I am wrong and it did then the judge's failure to accept that those allegations which had been made had sufficient substance to warrant further investigation was irrational. To a lawyer the use of the term pima facie has significance, and given the decision of the judge to take the matter no further, not even to look at the documents brought to the hearing by the father, it seems to me overwhelmingly probable that the use of that expression denotes his having set a particular bar for the mother to get over prior to him feeling the need to consider making further enquiry, and that is to misunderstand the inquisitorial function of the tribunal.

54. Where there is a credible allegation, and an allegation which is founded upon there being a previously higher declared income followed by a sole trader incorporating and then declaring a significantly decreased income is probably credible, the spending pattern of the non-resident parent on credit cards or out of bank accounts whether personal or company is likely to require consideration by an investigative tribunal.

55. The statutory question is whether the father's lifestyle might substantially exceed the income declared.  Here there was no dispute that the father, together with his new partner, was purchasing and renovating a property at a time when he had notified the agency of a drop in his income of some two thirds, and the undisputed fact of the purchase of a sofa which represented almost half of the father's annual salary which must raise a lifestyle question. His partner's income was respectable but not so high as to be a complete answer to the source of funding allegations, particularly where easily available documents might provide a determinative answer.

56. The father asks why it is for him to substantiate the cost of his lifestyle as opposed to the mother having to substantiate her allegations.  The answer to that question is straightforward. He is able to justify his lifestyle costs on the basis of documents that he holds or can acquire. We could all provide details of the money that we spend if required to do so. The mother cannot explain or justify the father's lifestyle because she does not have access to the evidence; he has, and where her allegations have a credible base he must produce that evidence.  As I explained in  CCS1352/2013 at [21] and [22] 

21. The FTT were looking again at the supersession decision of the agency, and standing in the shoes of the Secretary of State. It had been for the father to convince the Secretary of State that his circumstances had changed. It remained for him to convince the FTT.

22. Having made that point, I do not advocate strict use of burdens or other evidential constructs within child support proceedings; the tribunal is inquisitorial, the purpose of the hearing being to come to a conclusion that is correct in law, and based upon the best evidence.  It is not so much a question of he who asserts must prove, but he who is most likely to be in possession of the relevant evidence must prove. The dicta of Baroness Hale in Kerr-v- Department of Social Development [2004] UKHL 23 as to this and the collaborative nature of the tribunal process applies clearly to such a case.  In this case in fact on either premise the father was the person who needed to establish various matters. The issue was his income, and he was in a position to give information about it, which the mother was not.

Child support appeals 
57. Whilst they may often be based upon diametrically opposed points of view, child support appeals are not truly adversarial proceedings.  The issue at stake is the assessment of child maintenance payments under a strict legislative regime and the State has an interest in a proper outcome.  The aim, as with social security payments (the legislation in respect of which underpins the architecture of the child support scheme) is that the correct amount under the law should be payable; no more, no less.  This is a direct echo of the principle in the case of Kerr, quoted above, where to facilitate that result the process was likened to a co-operative journey taken by the state and the claimant.  Whilst there is a third party in this arena that does not, in my view, diminish the application of the Kerr principle.  There may well be legitimate disagreement over various issues in child support cases, as there often is between the Secretary of State and a claimant in the adjudication of benefit claims under social security law, and the parties must of course argue their respective positions, but the concept of a burden of proof is rarely appropriate.  As Baroness Hale said at [62-63] of Kerr, explaining the co-operative process in the context of relevant information to determine the outcome of a claim being in the possession of the DWP, "… where the information is available to the department rather than to the claimant, then the department must take the necessary steps to enable it to be traced. [63] If that sensible approach is taken it will rarely be necessary to resort concepts taken from adversarial litigation such as the burden of proof. The first question will be whether each partner in the process has played their part. If there is still ignorance about a relevant matter then generally speaking it should be determined against the one who was not done all that they reasonably could to discover it." 

58. Bearing in mind the ultimate goal (the proper assessment of child maintenance based upon correct information as to income) and the inquisitorial nature of the proceedings it is logical and correct that the person who has the means of showing the reality of a situation should do so; if they do not then inferences may be drawn either from a refusal to produce documents or to answer questions, in appropriate circumstances.   

A brief return to the FTT hearing
59. The final comment by the presenting officer in the Record of Proceedings that they had nothing to add having not seen the accounts is concerning. I assume that the reference is to the company accounts, but a similar principle would apply to a complaint by a representative that they were inhibited in their submissions because they had not seen the bank accounts supplied on the day.  Not to deal with this matter seems to me to be a procedural error of itself and tends to support points made to the Upper Tribunal in correspondence from the father's solicitor as to the poorly prepared state of the tribunal bundle and the overall lack of readiness for hearing.  These points tend to the view that the appeal was very much in its preliminary stages, and should not have been finally disposed of. I do not know when the company accounts were provided, or whether the presenting officer's not having seen them was a failure of HMCTS administration, the agency itself or the late delivery of the accounts but the Secretary of State is a party to the proceedings albeit not a contentious party, and it is often the wise counsel of a non-contentious party having examined documents which is of particular value in what may be an otherwise emotionally charged dispute.  

60.  At this juncture it is appropriate for me to deal with aspects specific to the enquiry in relation to this appeal.

The further investigation
Diversion and control questions for the next tribunal
61. RC-v-CMEC [2011] AACR 38 was a case in which the Upper Tribunal (Carnwath LJ (Senior President of Tribunals) as he then was, and Upper Tribunal Judge Jacobs) decided a number of issues one of which (a single procedural matter concerning the approach of the Upper Tribunal on Judicial Review and not affecting the substantive issues in before the Upper Tribunal) was considered by the Supreme Court in R (Cart) v the Upper Tribunal (Administrative Appeals Chamber).  The analysis of the judge at first instance, in a passage approved by the Upper Tribunal, spoke as to "the manipulation carried out as between salary and dividend which implies control. It is clear that he controls income and the manner of payment; that is the way small private companies work. They are typically controlled by shareholding directors whose work in the business is fundamental to profitability. [The non-resident parent] is such a director. The regulation does not require sole control or legal control: it requires effective control. He has that."

62. The concept of the "manipulation" between salary and dividend could also apply to a decision apportioning financial resources between salary and retention within the business.   The submission made by Mr Cooper on behalf of the Secretary of State was that there may be circumstances in which such apportionment could amount to diversion within regulation 19, and I agree with that.  The task of a tribunal in analysing such circumstances is not to put itself in the position of making ex post facto business decisions for the company, but it must look at the reasons for the retention of profit; if it is for business expansion the FTT must balance the non-resident parent's understandable wish to develop the business with the responsibility under section 1 of the Child Support Act 1991 to maintain qualifying children and it is for the FTT to decide on the facts of the case whether a non-resident parent's approach to the tension created between those two principles amounts to diversion within regulation 19. GO'B-v- CMEC [ 2010] UKUT 6 (AAC) [19-22]  is authority for the proposition that the decision of the non-resident parent as to how to organise the business finances does not bind the tribunal; it must look at what is reasonable in the context of the child support legislation and the purpose of the variation scheme.

Lifestyle
63. The company bank accounts are relevant because of the possibility of the company funding the father's lifestyle other than through payment of salary or dividend.  That possibility will depend upon the structure of the company, its profitability and the extent of the control exercised by the father.  These matters are critical in relation to the allegation of diversion (regulation 19) but are also pertinent as to lifestyle, because the father admits that his lifestyle is higher than his salary would allow, arguing that his wife's income funds it.  The possibility as to funding from the only other rational source, the company for which he works and over which he would at first blush appear to have control having previously been a sole trader doing similar work must be considered.

64. The father needs to explain how his property was purchased, the equity which was put in from him and from his partner, the mortgage taken out and the figures upon which the lender based that sum.  If further sums have been spent in renovating the property they will also need to be established.  The father says that he spent £60,000 on the barn conversion, half of that being a gift from his father, and half from within the mortgage. The source of that funding could be provided.

65. It will be for the FTT to find facts as to the source of the funding for the father's lifestyle. If it is indeed from the income of his partner or, in the case of the purchase of property from capital, then that funding is ignored. 

66. The father had not been trading as a limited company 12 months or more up to the date of consideration. Presumably those accounts will now be available. They may assist in informing the tribunal as to the circumstances obtaining at the date they must consider.

Costs
67. Mr Thomas applied at the end of the hearing for the father's costs to be paid by the mother in the event of the father winning the appeal.  In the light of my decision the application is academic, however I made a preliminary ruling which was issued to the parties shortly after that hearing to the effect that I had no jurisdiction to make such an award, and I will briefly explain why.

68. The costs application was made under the Tribunal Procedure (Upper Tribunal) Rules 2008 rule 10 (4).  The argument ran that although rule 10 (3) set out circumstances in which costs or expenses may be awarded, that was not an exclusive list, because paragraph (4) was a freestanding power in the  Upper Tribunal to award costs either upon application or on its own initiative.

69. The argument ignores rule 10 (1), the relevant parts of which read

(1)The Upper Tribunal may not make an order in respect of costs (or, in Scotland, expenses) in proceedings transferred or referred by or on appeal from another tribunal except --…

(b) to the extent and in the circumstances that the other tribunal had the power to make an order in respect of costs (or, in Scotland, expenses)

71. The relevant rule in the First Tier Tribunal of the Social Entitlement Chamber from which the appeal came is rule 10 of the Tribunal Procedure (First-Tier Tribunal) (SEC) Rules 2008 which reads simply

10 the Tribunal may not make any order in respect of costs (or, in Scotland, expenses). 

72. Given that there was no basis in law for the potential costs claim it is to say the least unfortunate that the solicitors acting for the father sent the mother a costs letter in the strident terms that they did. That letter understandably concerned her considerably, hence her correspondence which I treated as an application for a preliminary ruling.
 
Other issues for the fresh Tribunal
73. It will be necessary to know what income the father was declaring before the decisions under appeal, and whether or not his income changed simply because he incorporated. The FTT may need to enquire as to why the father incorporated and, if his income was higher beforehand, why it diminished.  The Secretary of State should supply details of the income disclosed previously. 

74. There seems to be an issue as to whether the father incorporated his sole trading enterprise on 26/4/2012 or 4/7/2012, so it may be that the FTT will need to consider 2 periods, one of self-employment and one of employment within the new company.

75. The essential question is whether the incorporation was in fact a change of circumstances which justified the supersession.  

76. Looking at the profit and loss account for year ended 5/4/12, which of course includes the previous year which the father says was a particularly good year for him, I see that the turnover differs only by some £8000, yet the net profit differs by about £15,000. The standing expenses are similar, the difference being a threefold increase in the advertising budget and of purchases which almost doubled in the second of the two trading years. There are also significant drawings in that second trading year of over £11,000.  Whether or not that is consistent with the lower level of business activity may be something upon which an appropriately constituted FTT could bring their experience to bear;

77. At the oral hearing (page 126) the father said that his company was set up to minimise tax. This was in answer to a question as to his earnings in 1999 being £5-£600 per week. The implication of that may be that he is being paid at about the national insurance rate in order to minimise taxation, but takes further money out of the company other than as earnings; that is a matter off act fort he tribunal.  Such conduct is lawful; but the result may not represent his income from the company for child support purposes.  Legal tax avoidance and income for child support maintenance purposes are not two sides of the same coin. Reduction of income may be legitimate and effective within the taxation legislation but in the context of the child support scheme the results of that reduction may not be replicated.  (CCS 2623 2005

78. The father says that he spent £60,000 on the conversion, half of that being a gift from his father, and half from within the mortgage. The source of that funding could be provided. The father's bank account statements which appear in the bundle of documents that I have between pages 194 and 229 are so heavily redacted as to be almost worthless for litigation purposes; a bank account should not be redacted other than for the account number to be struck through unless the case involves confidentiality as to the whereabouts of a party, in which case further editing (by the FTT) may be required.  That is not the case here.

79. It should be noted that the mother's appeal was against a refusal to revise.  That decision was made on 12/12/12, however an appeal against a refusal to revise acts as an appeal against the original decision for the purposes of section 27 (2) Child Support Act 1991, the date of decision rule.  The date in this case beyond which matters not then obtaining can be considered is 31/8/12.   Evidence which sheds light on the position as it was likely to have been at that time may be considered, however, whether it has come into existence before or since that date.

In conclusion
80. I will give brief directions for the rehearing by the FTT and I must warn the mother that success here is no indication of success there.

DIRECTIONS
1. This case shall be placed before a District Tribunal Judge for listing directions, in particular as to the production of any documents which are thought may be of assistance to the tribunal.  What I say below is subject to any amendment by the DTJ.

2. Should the parties have any requests as to specific documents being produced, they should put those in writing to the Administrative Support Centre at Birmingham within 14 days of the issue to them of this decision and their applications will be put before a judge.

3. Given the criticisms of the papers available to the parties at the previous FTT hearing, which appears in the letter from the father solicitors received by the Upper Tribunal on 4/12/14, which is currently unnumbered in my bundle but which will be part of the bundle sent by the Upper Tribunal to the FTT, the parties should notify the FTT within 14 days of issue as above, should there be any concern as to the pagination and whether all relevant documentation appears.  Should the document bundle be a matter of concern the DTJ might consider directing a trial bundle being prepared by the agency, given the protracted nature of these proceedings and cost the parties and the initial inadequate investigation by the agency to which I have referred.

4. The re-hearing will be an oral hearing by a fresh panel which should include a financial member.  Both parents must attend the hearing to give evidence. The parties should be aware that failure to provide documents that have been directed, or failure to attend the hearing and answer questions, may result in the tribunal drawing inferences adverse to the party failing to produce, attend or answer.

5. The Secretary of State must provide a Presenting Officer.
                                                            
Upper Tribunal Judge Gray
Signed on the original on 3 July 2015