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	Upper Tribunal (Administrative Appeals Chamber)
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[2008] UKUT 30 (AAC) (04 December 2008)

 


DECISION OF THE UPPER TRIBUNAL

ADMINISTRATIVE APPEALS CHAMBER

The claimant's appeal to the Upper Tribunal is allowed. The decision of the Leeds appeal tribunal dated 4 January 2008 involved an error on a point of law and is set aside. The decision on the appeal against the local authority's decision dated 20 September 2007, as revised on 22 October 2007, can properly be re-made by the Upper Tribunal (Tribunals, Courts and Enforcement Act 2007, section 12(2)(b)(ii)). That decision is that the appeal is allowed and that the decision awarding the claimant council tax benefit that was operative prior to 10 September 2007 falls to be superseded only so far as necessary to give effect to the change in the amount of tax credits awarded. The local authority is to carry out the necessary calculations subject to the conditions in paragraph 26 below.

REASONS FOR DECISION

1. As from 3 November 2008, appeals which were pending before a Social Security Commissioner are to be dealt with by the Administrative Appeals Chamber of the new Upper Tribunal.
2. An oral hearing of this appeal was directed by Mr Commissioner Jacobs on 8 October 2008, to consider whether the case was governed by R v West Dorset District Council, ex parte Poupard (1987) 20 HLR 295, relied on by the local authority, or by Chandler v Secretary of State for Work and Pensions [2007] EWCA Civ 1211, R(CS) 2/08. Despite the local authority's (City of Bradford Metropolitan District Council's) adjudication manager having stated in a letter dated 26 June 2008 that it would attend an oral hearing if directed to do so, on receipt of the notice of the hearing on 24 November 2008 at Doncaster County Court the local authority replied without explanation that it would not be attending. Unfortunately, I did not find out about that reply until too close to the date of the hearing to take any action about it. It is true that Mr Commissioner Jacobs did not in his direction of 8 October 2008 spell out an express direction that the local authority was to attend, but that was necessarily implied. The local authority's attitude is incompatible with the proper approach of a public authority entrusted with the administration of a national benefit scheme when difficult questions arise as to the proper interpretation of the terms of the governing legislation. The claimant's representative, who I shall call Mr E, went to the time and inconvenience of attending the hearing to make carefully prepared and helpful submissions. The local authority has therefore forfeited the opportunity to make any points in reply to those submissions or about the relevance and effect of the further Commissioners' decisions enclosed with my direction of 13 October 2008.

The issue and the relevant legislation

3. The central issue in this case is the proper treatment of regular drawings by a partner when the partnership is not making any profits. Are such drawings, used for day-to-day living expenses, income other than earnings to be taken into account in full? That was the view of the local authority and of the appeal tribunal. I have concluded, after consideration of all the arguments that it seems to me could be made on both sides, that that view is wrong in law.
4. The Council Tax Benefit Regulations 2006 ("the CTB Regulations"), in essentially identical terms to the Housing Benefit Regulations 2006, contain highly detailed provisions about the identification and calculation of amounts of income, from employment, self-employment and otherwise, that are to be taken into account. They are in regulations 25 to 42 and in Schedule 4. For present purposes I need only set out parts of regulation 28, after noting that regulation 27 provides that "earnings" in the case of employment as a self-employed earner means the gross income of the employment and regulation 20 requires reference to earnings over whatever period (not exceeding a year) as is appropriate to estimate average weekly earnings. In relation to partnerships, regulation 28(1) provides:

"(1) For the purposes of regulation 20 (average weekly earnings of self-employed earners) the earnings of a claimant to be taken into account shall be--

...

(b) in the case of a self-employed earner whose employment is carried out in partnership or is that of a share fisherman within the meaning of the Social Security (Mariners' Benefits) Regulation 1975, his share of the net profit derived from that employment, less--

(i) an amount in respect of income tax and of social security contributions payable under the [Social Security Contributions and Benefits Act 1992] calculated in accordance with regulation 29 (deduction of tax and contributions for self-employed earners); and

(ii) one-half of the amount calculated in accordance with paragraph (11) in respect of any qualifying premium."

Regulation 28(4) provides:

"(4) For the purposes of paragraph (1)(b) the net profit of the employment shall be calculated by taking into account the earnings of the employment over the assessment period less, subject to paragraphs (5) to (7), any expenses wholly and exclusively incurred in that period for the purposes of the employment."

Regulation 28(5) and (6) prohibits the deduction of a number of expenses, including any capital expenditure, depreciation of any capital assets or repayments of capital on loans (except where the loan is for the replacement of business equipment or machinery, when a deduction is to be made).

5. Regulation 30(1) provides that income of a claimant which does not consist of earnings to be taken into account is to be his gross income.

The factual background

6. The facts as found by the appeal tribunal are not disputed:

"In 2002 [Mr E] purchased a livery yard with land, buildings and living accommodation. He bought this in his name. The value at the time was approximately £325,000. He did not have experience of running a livery yard or stables or training school. [The claimant's wife] did. They set up in partnership. [The claimant and his wife] moved into the living accommodation. [The claimant's wife] ran the business herself, with staff. [Mr E] took no part in running the business. [The claimant's wife] was to take the first £5,200 per annum of earned profit. [Mr E] was to take the next tranche [£30,000] of profit, as calculated, and the balance was to be split equally. Neither [the claimant nor his wife] put any capital into the business. The business itself has run from 2 September 2002 to date and accounts have been prepared up to 30 April in each year. It was expected that the business would be in profit within 3 years. That has not proved to be the case. By the latest accounts of 30 April 2007 the business has not yet made a profit. Clearly, the situation cannot continue indefinitely. It is now hoped that the business will show a profit shortly. In the meantime, further capital expenditure has been spent and it is estimated that the capital value of the property has increased considerably.

From the outset [the claimant's wife] has taken drawings from the business. These are shown on the balance sheets as copied in the submission bundle. ... The council had considered it significant that the partnership agreement had stated that drawings could be paid provided that the drawings did not result in a partner having an overdrawn capital account. Clearly, [the claimant's wife] has an overdrawn capital account. The Appellant had argued that the terms of a partnership agreement can be varied with the consent of all partners. In any event, the Tribunal considered that this was not a relevant point. The fact of the matter is that [the claimant's wife] was taking drawings from the partnership. These drawings were charged to her capital account. In the year ended 30 April 2007 her drawings were £5,388. It was only the year to 30 April 2007 which was relevant to the Tribunal."

The local authority's decisions

7. So far as I can make out the history from the local authority computer notepad entries, there was an award of CTB of some amount in effect prior to September 2007. On 20 September 2007 the decision notified by the document dated 23 September 2007 was made. The notice referred to a change in income and the newly calculated benefit taking effect from 10 September 2007, so that the decision was apparently given under the power of supersession for relevant change of circumstances. The new calculation included £100.01 per week earned income and £239.88 other income, subject to disregards of £25.45. That led to an entitlement of £15.84 against a weekly council tax liability of £28.31.
8. The claimant appealed on the ground that his wife's earned income should have been nil. In response, the local authority revised its decision of 20 September 2007, as it is empowered to do when a decision is under appeal (although it purported to revise for official error). It was accepted that the claimant's wife should not be treated as having earnings from self-employment, but decided that her drawings should be treated as unearned income and therefore attract no disregard. I cannot see in the papers a statement of the resulting amount of CTB, but it was no doubt less than had been awarded by the decision of 20 September 2007. The appeal accordingly continued as if against that decision as revised. The local authority's reasoning, as set out in the written submission to the appeal tribunal, was that the drawings were properly to be characterised as loans and that, as they were used to defray living expenses, they should, in accordance with the principles of Commissioner's decision CH/3393/2003, be taken into account as income.

The appeal tribunal's decision

9. The appeal tribunal disallowed the appeal. It reasoned that the claimant's wife's drawings could not be regarded as earnings from self-employment because regulations 27 and 28 of the CTB Regulations confined such earnings in the case of a partnership to the person's share of net profits of the partnership. The statement of reasons continued:

"However, this did not detract from the fact that the drawings were income. There was therefore no alternative but to accept the drawings as other income or unearned income. This was the decision that the Council had reached and notified in their letter of 22 October 2007."

It was then stated that the appeal tribunal did not need to answer an argument from Mr E that an example produced an inequitable result and that it was particularly relevant that the business had not made a profit since its inception.

The appeal to the Upper Tribunal

10. The claimant now appeals against that decision with the leave of Mr Commissioner Jacobs, who referred specifically to the potential relevance of the decision in Chandler. He asked the Secretary of State for Work and Pensions whether he wished to be joined as a party. A negative answer was received. I renewed that invitation in a direction dated 13 October 2008, but the Secretary of State did not attend the oral hearing.
11. There can be no doubt that when a partnership is making profits any drawings that are taken by a partner are not to be taken into account as income at all. Otherwise there would be an unfair and inappropriate double counting. That was one of the points of decisions CCS/3156/2000 and CCS/1246/2002 that were enclosed with my direction of 13 October 2008. Regulation 28(1)(b) of the CTB Regulations, like Schedule 1 to the Child Support (Maintenance and Special Cases) Regulations 1992 that were in issue in those cases, requires the earnings of a person in self-employment as a partner to be the person's partnership share of the difference between the gross receipts of the employment and the deductions allowed by the regulations. That amount is to be taken into account as earnings whether drawings are taken or not. Any drawings cannot be regarded as earnings, as I think the local authority agrees, but in the context of the Regulations as a whole the drawings cannot be taken into account as other income. To do so would involve taking into account both the claimant's share of the profits (independent of whether any profits were withdrawn) and the actual drawings from that share of profits.
12. The question here is whether the legal position is different if the partnership is not in profit at the relevant time or if a partner draws amounts in excess of his or her share of profit, so that that partner's capital account goes into, or further into, overdraft. Mr E argued cogently that it would be desirable, not least for simplicity of application and administration, for the rule that applies where a partnership is in profit to apply to drawings in any circumstances (other than perhaps in circumstances where the partnership was found to be a sham of some kind). There is plainly much force in the position that, if partnership drawings cannot be regarded as income when the partnership is in profit, they simply cannot be regarded as income at all.
13. Mr E also submitted that there would be severe practical difficulties in identifying when a partnership was in profit for these purposes. Was that question to be answered according to standard accounting principles, so that a profit would be shown on the profit and loss account, or according to the special rules for CTB? He showed that there could easily be circumstances in which a profit was shown by one of those methods, but not the other. For instance, depreciation of capital assets is not allowed as a deduction under regulation 28 of the CTB Regulations, but is allowed under ordinary accounting principles. Thus, depreciation could lead to no profit being shown on the profit and loss account, so that the taking of drawings would lead to a deficit on the partner's capital account, while an amount for earnings from self-employment was to be taken into account under the Regulations. Conversely, it might just be possible for the allowance under regulation 28(6) of the deduction of capital repayments on loans for the replacement of business equipment or machinery, which would not be allowed under ordinary accounting principles or for taxation purposes, to exceed what could have been allowed for depreciation on the latter basis. That could result in a situation where there are no earnings to be taken into account under the CTB Regulations, but the profit and loss account shows a profit. Those practical difficulties point against trying to distinguish between circumstances in which the partnership is in profit and circumstances in which it is not. They also point against a rule in terms of whether a partner makes drawings in excess of the profits available.
14. However, there is a more compelling argument of principle. That was the argument that the appeal tribunal considered it did not need to answer. Without going into any of Mr E's detailed examples, there is a simple point. If drawings like those made here by the claimant's wife are taken into account as income other than earnings, what would happen if in the next financial year or years the partnership made a profit, but the drawings were restricted so as to decrease the overdraft on the capital account (a course that other partners might well insist on)? There would be no scope under regulation 28 to do anything other than take into account for CTB purposes the partner's share of the profits, even though a smaller amount was taken in drawings. That position would be unfair. In effect, the rule applied would be to take into account a person's share of partnership profits or actual drawings, whichever was the higher. Although it could be said that the legislation on means-tested benefits is concerned with what money a claimant has available to live on in the short term, the result would treat different categories of claimant in an inequitable way. A person whose partnership made a consistent profit and who restricted drawings to their share could end up over the years with a higher entitlement to CTB than another person who made the same total profit over those years and took the same drawings, simply because for the latter there was a fluctuation year by year from losses or minimal profit to larger profits. Such a result is to be avoided if possible and can be avoided by the simple interpretation above.
15. It is therefore not necessary to analyse in any detail how the claimant's wife's drawings might be characterised as income, whether as loans or otherwise. But I do need to consider the relevance and effect of the decisions in Poupard and in CH/3393/2003.
16. It is important first to record that Poupard was concerned with the application of the Housing Benefit Regulations 1985, where the sole provision about income was regulation 16 and the associated Schedule 2 listing amounts to be disregarded. Paragraphs (3) to (5) of regulation 16 were as follows:

"(3) In so far as a person's earnings from any gainful occupation comprise salary, wages or fees related to a fixed period, the gross amount of his salary, wages or fees shall be taken into account, and in so far as a person's earnings from any gainful occupation do not comprise salary, wages or fees related to a fixed period, the net profit derived from that occupation shall be taken into account.

(4) In so far as a person's income does not consist of earnings from a gainful occupation, its weekly amount shall be calculated or estimated on such basis as appears to the appropriate authority to be reasonable in the circumstances of the particular case.

(5) In paragraph (3), `net profit' means profit after deduction of expenses but without deduction of income tax or of contributions payable under the Social Security Act 1975."

It is also important to record that the 1985 Regulations, made under the very broad powers to make a scheme in section 28 of the Social Security And Housing Benefits Act 1982, contained no provisions making the amount of capital possessed relevant to entitlement to housing benefit or deeming capital to produce income.

17. Mr and Mrs Poupard ran a retail business in partnership. In the relevant financial year it made a net loss on sales of some £19,000. The balance sheet showed drawings to self of £5,455.45, but did not show whether those were from their combined business and personal bank current account or from the cash receipts of the business. On the question whether those drawings, used for day-to-day living expenses, were income under regulation 16, Balcombe LJ (giving the only substantive judgment in the Court of Appeal) agreed that since Mr and Mrs Poupard derived no net profit from the business they had no earnings from gainful occupation. But he held that the housing benefit review board had been entitled to decide that the drawings were income to be taken into account. The following much-quoted guidance was given:

"(1) Income is that which comes in to the applicant.

(2) It may, depending on the facts of the case, be appropriate to take into account cash withdrawals from the gross receipts of an applicant's business, or withdrawals from an applicant's bank account or other moneys received by way of loan, notwithstanding that these may not be classified as income on accountancy principles and notwithstanding that the loan may eventually be repaid out of capital.

(3) Capital which is in no way utilised cannot be deemed to constitute or create income.

(4) However, again depending on the facts of the particular case, the utilisation of capital, whether directly so as to pay for living expenses, or indirectly as security for a loan which is used to pay for living expenses, may thereby `convert' the capital so used into `income'."

18. I observe first that propositions (2) and (4) were both made dependent on the facts of particular cases and so did not purport to lay down any rigid rules. Second, there was a recognition that the approach taken involved some departure from the ordinary meaning, or at least an ordinary meaning, of "income" in not applying accountancy principles. Third, the Court of Appeal in Chandler did not find the decision in Poupard of any help in the case on the child support legislation that was before it.
19. Jacob LJ, again giving the only substantive judgment, said this at paragraph 36:

"I think there is considerable danger in jumping from one statute to another. It does not help. Each statute and its associated regulations fall to be construed as a whole. The context for construing a particular phrase or word is that statute, not some other statute. This statute [the Child Support Act 1991] is clearly drawn on the basis that there is clear distinction between capital and income. That distinction is pursued right through into the detail of the Schedule to the MASC Regulations [the Child Support (Maintenance Assessments and Special Cases) Regulations 1992]. There is no need to hold, perhaps a bit artificially, that that which is capital counts as income. There are anti-avoidance provisions which will generally cover such a case. I see no need to do so on a purposive construction of the Act."

He had also pointed out that, in relation to the general proposition that income is that which comes in, there were other equally authoritative decisions taking a different approach in their specific statutory context.

20. Of course Poupard was about housing benefits, very close in nature to CTB, but the framework of primary legislation and the terms of the regulations in the present case produces an entirely different context. The context is very close to that described in Chandler. The Social Security Contributions and Benefits Act 1992 distinguishes clearly between income and capital and contains a provision (section 136(5)) giving express power for regulations to treat income as capital and capital as income and to treat as person as possessing income or capital that he does not possess. Section 136(2) authorises regulations prescribing that capital below a certain level is to be treated as producing income of a prescribed amount. As already noted, the CTB Regulations contain extensive and detailed provisions about income and even more about capital. In particular, regulation 33 provides that there is to be no entitlement where a claimant's (including a partner's) capital exceeds £16,000 and regulation 42 provides for capital between £6,000 and £16,000 to be treated as producing income at the weekly rate of £1 per £250. There are also anti-avoidance provisions in the rules on notional capital and income.
21. The factors of the absence of any provision for taking capital into account and of any real definition of income, that no doubt stood behind the impetus in Poupard to regard the loans or the utilisation of a person's own capital for living expenses as income, are entirely absent from the current CTB. Nor is there room in that context for the adoption of a simplistic starting point like "income is that which comes in". The starting point must be the particular highly detailed statutory context. There is nothing in the statutory context here to point against the conclusion in paragraphs 12 to 14 above. If that result is thought to be wrong in policy terms, the remedy is amendment of the statutory scheme. Poupard never stood for any rigid rule that loans always have to count as income, but in my judgment the decision should no longer be considered as of any relevance to the current housing benefit and CTB schemes. It should now be consigned to a historical footnote at most.
22. The decision of Mr Commissioner Henty in CH/3393/2003 is also not of assistance in the particular factual and statutory context of the present case. The loans that were in issue in that case were lump sums from the claimant's ex-wife and credit card indebtedness. The claimant apparently used the loans for day-to-day expenses and juggled balances and repayments between different credit cards. The Commissioner held that the existence of the funding facility to be drawn on for regularly recurring expenses constituted income, as there was no obligation of immediate repayment in accordance with Leeves v Chief Adjudication Officer, R(IS) 5/99. On the assumption that that was a legally permissible approach (and the precise facts in CH/3323/2003 remained somewhat obscure), what was absent from that case was a statutory background as in the present case of a provision stating that a form of income from the same source as in question was to be taken into account in a particular way. Here, it is the existence of regulation 28(1)(b) of the CTB Regulations on the treatment of earnings from self-employment in a partnership that dictates the proper approach to the treatment of drawings by a partner. That factor was wholly absent from CH/3323/2003.
23. I have finally considered whether it could be argued that in reality the claimant's wife was in receipt of loans from Mr E. If Mr E had made loans directly to the claimant and his wife specifically to pay for day-to-day living expenses, even if they were made in lump sums at irregular intervals, the claimant would no doubt have been regarded as in receipt of a weekly income. Could the same be said when the claimant's wife was making drawings against her partner's capital account while Mr E was having to introduce more capital into the partnership to keep the business going?
24. The question is whether the appeal tribunal's decision should not be set aside, despite the faulty legal approach that I have identified, because the outcome could be supported through this alternative route. My answer is no. On the evidence that it had and without having asked Mr E any questions on that specific point, the appeal tribunal did not have the material on which it could have concluded that the claimant's wife's drawings were not what they appeared and were to be treated as loans made by Mr E. The partnership itself was plainly set up as a bona fide commercial enterprise. There was not the slightest suspicion that it was set up or operated merely as a device to enable the claimant and his wife to receive an income from Mr E that would not count for benefit purposes. With that legal structure properly in place and with there being no legal bar to the terms of the partnership being varied by the consent, express or inferred from a course of dealing, of the partners, the claimant's wife was entitled to take drawings from the capital of the partnership even though it made her capital account overdrawn. There would need to be clear evidence that that legal structure was a sham or a device to evade the benefit rules before the money received by the claimant's wife could be regarded as anything other than drawings on that basis. There was no such evidence.
25. The appeal tribunal's decision must therefore be set aside on the ground explained above. It erred in law by taking the drawings made by the claimant's wife into account as income other than earnings. As a result, I have not needed to consider Mr E's arguments at the oral hearing based on the Human Rights Act 1998.

The Upper Tribunal's decision on the appeal against the decision of 23 September 2007 as revised on 22 October 2007

26. Having set the appeal tribunal's decision aside under section 12(2)(a) of the Tribunals, Courts and Enforcement Act 2007, and there being no dispute about the essential facts, it is plainly appropriate for me to substitute a decision (in the inelegant terms of section 12(2)(b)(ii), "re-make" the appeal tribunal's decision) on the appeal that was before the appeal tribunal. The claimant's appeal must be allowed. The local authority's decision of 23 September 2007, as revised on 22 October 2007 should not, as explained above, have treated his wife either as having any earnings from self-employment or as having any income other than earnings. However, it appears that the decision made on 23 September 2007 was primarily in response to a relevant change of circumstances in the form of a change in the award of tax credits. I do not have the information on which to decide what the effect of that change should be. Accordingly my decision set out on page 1 deals only with the question of principle. The local authority is now to carry out the necessary calculations on that basis to complete my decision and to put in

place to proper award of CTB. If there is any dispute about the calculations that are carried out by the local authority, the case may be referred to me or to another judge of the Upper Tribunal for further decision.

(Signed on original): J Mesher

Judge of the Upper Tribunal

Date: 4 December 2008