Smith v Smith & Anor

Where child-support regulations require a self-employed parent’s earnings to be taken from the tax return, the relevant figure is the total taxable profit submitted to the Inland Revenue. Capital allowances deducted in arriving at that figure are not added back. Depreciation remains subject to the separate regulatory rules. The tax-return method is the primary rule, while the older calculation applies only in exceptional cases. Hardship for the parent with care may be addressed through a departure direction, including where the non-resident parent’s lifestyle is inconsistent with the income used for the assessment.

The appellant, a self-employed non-resident parent, challenged a child-support assessment for his three children. His tax return deducted capital allowances from the business profit, producing a substantially lower total taxable profit than a calculation which added back depreciation but ignored capital allowances.

The Child Support Commissioner held that capital allowances should not be deducted. The Court of Appeal considered the meaning of paragraph 2A of Schedule 1 to the Regulations and whether any resulting hardship had to be addressed through the departure-direction scheme.

1. Appeal allowed and remitted. The assessment was remitted to the Appeal Tribunal for recalculation and for any necessary enquiries concerning departure directions.
2. Ward LJ held that “total taxable profits” was not a term of art and had to be read in its legislative and tax context. Under the cited provisions of the Capital Allowances Act 1990, and now Capital Allowances Act 2001 s.247, capital allowances are treated as an expense of the trade. They therefore form part of the deduction producing the taxable profit returned to the Inland Revenue. Depreciation is treated differently.
3. The wording deliberately links child-support earnings to the figure in the tax return. Paragraph 2A is the ordinary and preferred method. Paragraph 3 is exceptional, applying where the relevant tax-return information is unavailable or does not accurately reflect normal weekly earnings.
4. The anomaly between paragraphs 2A and 3, and the possibility of sharply different assessments, did not justify adding capital allowances back into the paragraph 2A calculation. The court had to give effect to the enacted language rather than infer an intention from what the Minister had not said.
5. The resulting hardship did not make that construction impermissible. The parent with care had a possible remedy under the departure-direction provisions, particularly where the non-resident parent’s lifestyle was inconsistent with the income on which the assessment was based.
6. Wall LJ agreed with the tax-return construction and noted the restricted role of the courts under R (Kehoe) v Secretary of State for Work and Pensions [2004] EWCA 225, reinforcing Huxley v Child Support Officer [2000] 1 FLR 898. He also urged expedition on remittal. Sir Martin Nourse agreed.

• Court of Appeal (Civil Division): [2004] EWCA Civ 1318 — appeal from the Child Support Commissioner allowed and remitted to the Appeal Tribunal for assessment in accordance with the judgment and consideration of any departure direction.
• Child Support Commissioner: Decision dated 6 October 2003 — held that capital allowances were not deductible in calculating the relevant earnings figure. Permission to appeal was initially refused but was later granted on renewal.