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Child Maintenance Assessments: Self-employed non-resident parents beware!

Byron James, barrister, 14 Gray’s Inn Square, considers the issue of a child support officer’s unfettered discretion in child maintenance assessments of self-employed non-resident parents.

Byron James, barrister,  14 Gray's Inn Square

"A dog is for life, not just for Christmas" is well known.  The same logic applies to children. Whilst the older one gets the more one realises that Christmas is certainly for children, children are not just for Christmas.  They need to be maintained all year round, beyond the considerable, occasionally compensatory, festive spoiling many enjoy.

For as long as one can remember, child support has been controversial. It has been one of the clearest examples of government failing, and failing the children in society. Since it was decided in the early nineties to remove child support from the court process there have been serious issues (see Smith v Smith [2006] UKHL 35 per Lord Walker); it was at the time a decision oddly out of kilter with a Conservative agenda to reduce the role of government in people's lives. It was however the nineties and bad decisions were made throughout; I can remember wearing white jeans to a zap zone birthday party: a fashion and tactical disaster. Hindsight is a wonderful thing.

Child support is perhaps best known for its ancillary role to financial remedies proceedings, setting the context for other financial orders. It may be that there is accord over the level of child maintenance, wherein the consent exception to the court's jurisdiction is triggered; otherwise, there may be an extant or forthcoming child support assessment. A working knowledge of how the child support calculation is conducted is therefore important. Most are aware of the percentage starting points, dependant on the number of children, ranging from 15% (one child) to 25% (three or more); the deductions on the maintenance are also well known, for time spent with the non-resident parent for example, and set out in At a Glance (pages 6-8). The difficulty however falls in the amount to which one is applying a percentage; especially difficult when dealing with the self-employed1 . Many a financial remedies case has struggled with determining the income of someone self-employed; to name a few, grappling with deductions for business expenses which are actually living expenses, cash payments not officially recorded and setting off bad debts against good income. This process follows a careful process of contested disclosure and subject to professional and judicial examination. Imagine the poor government attempting the same thing through their polyonymous agency.

Gray v Sec of State for Works and Pensions [2012] EWCA 1412 deals with the question of whether a Tribunal or relevant agency are able to make their own evaluation of the actual profits earned by a parent or whether they are bound by the regulations to accept the income as stated by the information provided to them by HMRC. Essentially, can the Tribunal or agency make their own findings of fact as to the actual income of the parent?

In the present case, the agency made an assessment of a father who was a self-employed handyman and found his obligation to be £6.10 per week. In doing so they "accepted at face value his own evidence as to his income as shown on his income and expenditure accounts prepared by his accountants without carrying out an audit for submission to HMRC" (para 4, per Ward LJ). This decision was subject to an appeal and the First Tribunal deviated from the assessment "on the basis that the appellant's lifestyle was inconsistent with his declared income". Both parties appealed to the First Tier Tribunal, who found:

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

The father appealed again to the Upper Tribunal. The father was aggrieved 'deeply' by the various findings of fact made at the lower levels and was 'frustrated' that neither the Upper Tribunal nor Court of Appeal could interfere with these. He did however find one ground on which to pursue his case, both to the Upper Tribunal and to the Court of Appeal:  had the First Tier Tribunal been entitled to go behind the figures he had supplied from HMRC.

The starting point for child support is (per Ward LJ, para 8):

"Section 1 of the Child Support Act 1991 provides that each parent of a qualifying child is responsible for maintaining him.  For the purposes of the Act, an absent/non-resident parent shall be taken to have met his responsibility to maintain any qualifying child of his by making periodical payments of maintenance with respect to the child of such amounts, and at such intervals, as may be determined in accordance with provisions of the Act.  Delegated legislation is in place, both for the old cases and for the new as to how to ascertain the income of a self-employed absent/non-resident parent."

Ultimately, the issue for the Court of Appeal was how to best establish the earnings of the father; following section 2A(2) of the 1992 MASC Regulations this would involve the 'taxable profits from self-employment of that earner'. The taxable profits are, by virtue of paragraph 2A(5),  his "profits calculated in accordance with Part 2 of the Income Tax (Trading and Other Income) Act 2005." This therefore led the Secretary of State to advance the argument that "ascertainment of taxable profits requires a calculation to be made; the calculation is to proceed in accordance with Part 2 of the Income Tax Act; the calculation has to be done by whomsoever has to make the decision, that is to say by the Secretary of State or his officials in the Child Support Unit, or on appeal by the First Tier Tribunal." (para 21, per Ward LJ). An argument described as 'beguiling' and not 'perfectly simple' as advanced, his Lordship pointing out, astutely, that 'nothing to do with child support is ever simple and straightforward'.

The aspiration of the regulations is stated in the Explanatory Note as intending to "reflect the original policy intention so that self-employed earnings for income tax purposes are the same as earnings for child support earnings."  An effect achieved by ensuring that the calculation of earnings is to be made in accordance with the 2005 Tax Act, however it is not specifically stated or deemed therein that earnings for the purpose of income tax shall be the same as those for the purpose of child support.  Ward LJ considered however the effect of such a statutory construction  (para 25) which would ultimately provide a child support officer with an 'unfettered discretion' to accept or reject figures put forward in a tax return, or otherwise, including HMRC's own assessment. This unfettered discretion being provided without any guidance whatsoever as to its exercise; making their own assessment based, for example, on a parent's lifestyle.

Ward LJ identified two 'unfortunate consequences' (para 26) of allowing such discretion: firstly, the government will have two bodies assessing an individual as having different incomes and secondly it will lead to more and more applications for a proper assessment of income.  However, whilst these may be proper aspirations, is it not more important that the 'interests of the child demand the right sum of money is paid', the achievement of such somewhat modestly being stated by Ward LJ as 'no bad thing'. Surely this is the primary purpose of child support and if the system cannot cope with the raft of applications being made then it may not be the best vehicle to conduct such an exercise.

The appeal was dismissed with it being found that the "that the decision maker is entitled to rely on an evaluation of the father's actual profits from self-employment in the relevant period rather than the figures submitted to HMRC in his tax return for 2007/2008". The hitherto unfettered discretion for child support officers therefore exists: they are not bound to rely upon tax return assessments as filed or by HMRC. As Ward LJ states, "the consequence surely is that in the vast majority of cases a trader will be liable to have his accounts scrutinised and rejected whenever there is credible evidence that he has under-declared his income or over declared his expenses".

What then for the future? This has potentially very significant consequences and arguably places upon child support officers a function that they are not necessarily in a position to properly conduct; as above, the process of analysing lifestyle and income is not always straightforward for the court, and that is with a great deal more resource and time. Once it becomes more widely known that child support officers are capable of making determinations, with unfettered discretion, of self-employed parent's income based on lifestyle, as Ward LJ warns, surely many more applicants will seek to take advantage of the same. Perhaps, one wonders, this will be the pressure on the system that leads to it finally breaking down.

It is important however for practitioners dealing with child support calculations going forward to remember the facility of the above. For example, where the court has already made certain findings as to lifestyle and income, a direction to disclose the same to the waiting child support officer might be appropriate. Self-employed non-resident parents beware!

I am not going to suggest there is any reason other than professional for those self-employed members of the legal profession to make themselves au fait with the rules of quantification of child support obligation for the self-employed