Gray v Secretary of State for Work and Pensions & Anor

Under paragraph 2A of Schedule 1 to the Child Support (Maintenance Assessments and Special Cases) Regulations 1992, a self-employed earner’s child-support earnings are taxable profits calculated under Part 2 of the Income Tax (Trading and Other Income) Act 2005. A tax return or HMRC tax calculation notice is evidence, not a deeming provision, and does not bind the decision-maker. The decision-maker may determine the parent’s actual profits. If higher profits are found, income tax and National Insurance deductions must be calculated by reference to those profits, including the surplus over the figures accepted by HMRC.

The appellant was a self-employed father liable for child support under the old statutory scheme. The First-tier Tribunal found that his accounts understated his income and made its own finding of his taxable profits. The Upper Tribunal, in its decision in CCS/392/2011 dated 13 September 2011, held that the decision-maker was entitled to go behind the figures supplied to HMRC. The appeal concerned whether the old scheme required the Secretary of State or tribunal to accept HMRC figures, and, following permission granted out of time, whether tax and National Insurance deductions should reflect the lower figures accepted by HMRC or the higher profits actually found.

Disposition. The appeal was dismissed on the original question but allowed in part on the deduction issue. The case was remitted to the Secretary of State for recalculation.

1. Actual profits. Paragraph 2A of Schedule 1 to the Child Support (Maintenance Assessments and Special Cases) Regulations 1992 defines earnings by reference to taxable profits. Paragraph 2A(5) incorporates the calculation required by Part 2 of the Income Tax (Trading and Other Income) Act 2005. It does not provide that figures in a tax return or HMRC tax calculation notice are conclusive. The decision-maker may evaluate the parent’s actual profits for the relevant period. The notice assists the calculation but does not bind the Child Support Officer or tribunal. Ward LJ endorsed the reasoning in KB v CMEC [2010] UKUT 434 (AAC) and DB v CMEC [2011] UKUT 202 (AAC).
2. Statutory construction. The provisions had to be construed in their statutory context, having regard to the Regulations as a whole, their legislative history, the mischief addressed and the practical consequences of competing constructions. The legislative aim was simplification and prompt calculation, but that aim did not justify treating HMRC figures as legally binding where the statutory language contained no deeming provision.
3. Tax and National Insurance. Where the decision-maker finds profits higher than those accepted by HMRC, the deductions required by paragraph 2A(2) must be calculated by reference to the profits actually established. The relevant tax and National Insurance are those payable on that level of profit, including the surplus, rather than tax assessed on the lower HMRC figure. The appeal was therefore allowed to that extent and remitted for recalculation. Lloyd LJ and Rafferty LJ agreed.

1. Court of Appeal (Civil Division). In [2012] EWCA Civ 1412, the court dismissed the challenge to the use of actual profits, but allowed the appeal on the calculation of income tax and National Insurance deductions and remitted the case to the Secretary of State.
2. Upper Tribunal (Administrative Appeals Chamber). In CCS/392/2011, HHJ Mesher held that the decision-maker was entitled to evaluate the parent’s actual self-employed profits rather than accept the figures supplied to HMRC.
3. First-tier Tribunal. The tribunal found that the appellant’s accounts understated his income and made its own finding of his likely net income.