Smith (FC) (Appellant) v. Secretary of State for Work and Pensions and another (Respondents)

For child support purposes, a self-employed earner’s “total taxable profits from self-employment ... as submitted to the Inland Revenue” are the trading profits before capital allowances are deducted. The phrase in Schedule 1 paragraph 2A(2) to the Child Support (Maintenance Assessments and Special Cases) Regulations 1992 was ambiguous.

Its meaning had to reflect the legislative purpose, history and consequences. The 1999 amendments simplified administration; they did not introduce a major substantive reduction in assessable earnings. A tax-return box could assist administration but could not determine the meaning of regulations, particularly where forms could change. Deducting capital allowances would also create an anomalous disparity with the default calculation under paragraph 3. The possibility of a discretionary departure direction did not cure that anomaly or justify the contrary construction.

The appellant was the parent with care of three children. Their father, a self-employed car-hire trader, claimed substantial capital allowances. His trading profit before those allowances was £169,520, but the figure entered as total taxable profits in his tax return was £20,892. The Child Support Agency used the latter figure when assessing maintenance.

The appeal tribunal adopted the tax-return figure and refused a departure direction. The Child Support Commissioner allowed the appellant’s appeal, holding that capital allowances were not deductible. The Court of Appeal unanimously reversed that decision in [2004] EWCA Civ 1318, reported at [2005] 1 FLR 606.

The central issue was whether “total taxable profits from self-employment ... as submitted to the Inland Revenue” in Schedule 1 paragraph 2A(2) to the Child Support (Maintenance Assessments and Special Cases) Regulations 1992 meant trading profit before or after capital allowances.

1. By a majority of three to two, the appeal was allowed. The decision of the Child Support Commissioner was restored. Lord Walker of Gestingthorpe delivered the principal majority speech. Baroness Hale of Richmond agreed with his reasons, and Lord Carswell reached the same conclusion. Lord Nicholls of Birkenhead and Lord Rodger of Earlsferry dissented.

2. Per Lord Walker, Baroness Hale and Lord Carswell: the expression “total taxable profits from self-employment ... as submitted to the Inland Revenue” in Schedule 1 paragraph 2A(2) to the Child Support (Maintenance Assessments and Special Cases) Regulations 1992 was ambiguous. It could refer either to trading profit after allowable revenue expenses but before capital allowances, or to the lower amount remaining after capital allowances. Its meaning therefore had to be determined from the statutory context, legislative history, mischief and practical consequences.

3. The 1999 amendments were presented as an administrative measure intended to simplify and accelerate assessments by using information from tax returns. They were not presented as a substantive alteration of the principles governing self-employed earnings. Before the amendment, paragraph 3 excluded capital expenditure, depreciation and related deductions. Paragraph 3 remained applicable as a default. Construing paragraph 2A as permitting capital allowances would therefore produce a large, inexplicable and potentially unjust disparity between the two methods.

4. The wording of a box on an Inland Revenue form was not decisive. The forms were produced administratively, could be redesigned and did not prescribe the meaning of the regulations. Parliament could not be taken to have made child support liability depend mechanistically on the layout or captioning of a tax form. “Total taxable profits” therefore meant trading profits before the deduction of capital allowances.

5. The possibility of a departure direction under the Child Support Departure Direction and Consequential Amendments Regulations 1996 carried no weight in construing paragraph 2A. Such relief depended on the relationship between assessed income and the non-resident parent’s lifestyle. Lifestyle bore no necessary relationship to capital allowances, so a departure direction could not reliably cure the anomaly.

6. Lord Nicholls and Lord Rodger, dissenting: paragraph 2A deliberately adopted the description used for the tax-return figure after capital allowances and losses. Paragraph 2B reinforced that reading because the alternative tax calculation notice also stated income after those deductions. Although the result could be unfair, the dissenters considered that the language could not properly bear the majority’s construction.

7. The majority did not decide whether article 8 of the European Convention imposed a positive obligation to provide an effective alternative child-support system. Lord Walker and Baroness Hale regarded that argument as having considerable force, but it was unnecessary to resolve it.

1. House of Lords: By a majority of three to two, allowed the appeal from [2004] EWCA Civ 1318 and restored the Child Support Commissioner’s decision.

2. Court of Appeal: Ward and Wall LJJ and Sir Martin Nourse unanimously allowed the non-resident parent’s appeal in [2004] EWCA Civ 1318, reported at [2005] 1 FLR 606. It remitted the assessment and departure-direction issues to the appeal tribunal.

3. Child Support Commissioner: Allowed the parent with care’s appeal. He held that capital allowances were not deductible when calculating self-employed earnings for child support.

4. Child Support Appeal Tribunal: Used the taxable profit after capital allowances when determining earnings and declined to make a departure direction.