Smith (FC) v Secretary of State for Work and Pensions & Anor

The House had to construe the phrase "total taxable profits ... as submitted to the Inland Revenue" in paragraph 2A(2) of Part 1, Chapter 2 of Schedule 1 to the Child Support (Maintenance Assessments and Special Cases) Regulations 1992 (as amended in 1999). The key question was whether that phrase required the use of a self-employed earner's trading profit before capital allowances (the figure used under paragraph 3) or the taxable profit after capital allowances as shown on a tax return (the figure appearing in box 3.92 of the self-assessment form).

The majority concluded that the 1999 amendment was intended as an administrative simplification and not a substantive change that would permit capital allowances (or similar tax adjustments) to reduce child support earnings. Read in context with the unchanged paragraph 3 and paragraph 2B, the fair and coherent construction was that "total taxable profits" should be understood so as not to give effect to capital allowances and other tax-specific deductions which would produce anomalous and potentially unfair results.

The appellant, Mrs Helen Smith (parent with care), challenged the computation of her children's non-resident parent's earnings for child support. The respondent non-resident parent, Mr Robert Smith, carried on a car-hire business as a sole trader and claimed substantial capital allowances in his self-assessment, producing a small taxable profit for income tax purposes despite substantially larger accounting profits. Mrs Smith sought an assessment of child support based on the parent's earnings undiminished by capital allowances and applied for a departure direction.

Procedural history:

• Initial CSA maintenance assessment (September 2001) produced a very low weekly maintenance figure based on taxable profits as submitted to the Inland Revenue.
• Appeal tribunal made a fresh determination; Child Support Commissioner allowed Mrs Smith's appeal, holding capital allowances should not be deductible when calculating earnings for child support.
• Court of Appeal reversed (reported at [2005] 1 FLR 606), holding that paragraph 2A(2) pointed to the taxable figure as submitted (the box labelled "Total taxable profits from this business").
• House of Lords granted permission to appeal and heard argument.

Issues before the House:

• What is the proper construction of "total taxable profits from self-employment ... as submitted to the Inland Revenue" in paragraph 2A(2) of Schedule 1 to the 1992 Regulations?
• Whether capital allowances (and comparable tax adjustments) are properly deductible in computing earnings for child support purposes under paragraph 2A.
• Subsidiary issues included coherence with paragraph 3 (the pre-existing method), the consequence of paragraph 2B and whether article 8 ECHR impacted the construction.

Court's reasoning and outcome:

• The majority analysed context, legislative purpose and consequences. The 1999 amendments were designed to simplify administration by permitting use of tax-return figures, not to effect a substantive change permitting capital-allowance-driven reductions in child support liability.
• Paragraph 3 (the earlier rule) continued to operate as the default and expressly excluded capital expenditure and similar items; reading paragraph 2A to permit capital allowances would create an anomalous and unfair discrepancy between methods.
• Although the tax form contained a box labelled "Total taxable profits from this business" (box 3.92) representing profit after capital allowances, the majority regarded reliance on the form layout as insufficient to displace the contextual and purposive-led construction that capital allowances were not intended to reduce child support earnings under paragraph 2A.
• Article 8 arguments were considered but not decisive; the appeal was disposed of on conventional statutory construction.

Relief sought: a declaration/assessment that the earner's profits for child support should be calculated without allowing capital allowances (and restoration of the Child Support Commissioner’s decision), and consideration of a departure direction. The House allowed the appeal and restored the Commissioner’s decision, ruling that capital allowances should not be deducted under paragraph 2A when calculating earnings for child support.

Appeal allowed. The House held that paragraph 2A(2) should be construed so as not to permit the deduction of capital allowances (or comparable tax-specific deductions) when calculating a self-employed non-resident parent's earnings for child support; the 1999 amendment was an administrative measure and must be read in context with the continuing paragraph 3 and paragraph 2B to avoid anomalous and unfair results.

Appeal from the Court of Appeal ([2004] EWCA Civ 1318; reported [2005] 1 FLR 606). Prior proceedings included a Child Support Appeal Tribunal determination, a decision of the Child Support Commissioner (allowing the appellant's appeal), and a remittal direction from the Court of Appeal before the appeal to the House of Lords.