House of Lords
|Session 2005 - 06|
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Smith (FC) (Appellant) v. Secretary of State for Work and Pensions and another (Respondents)
LORD NICHOLLS OF BIRKENHEAD
1. On this appeal your Lordships' House is concerned with the interpretation of a singularly unhappy piece of drafting. Your Lordships are called upon to interpret the phrase 'total taxable profits ... as submitted to the Inland Revenue' in paragraph 2A of Part 1, Chapter 2 of Schedule 1 to the Child Support (Maintenance Assessments and Special Cases) Regulations 1992 (SI 1992/1815) as amended by the Child Support (Miscellaneous Amendments) Regulations 1999 (SI 1999/977). This phrase is used for determining the earnings of a self-employed non-resident parent for the purpose of calculating the amount of child support maintenance payable by him. The legislation and facts are set out fully in the speech of my noble and learned friend Lord Walker of Gestingthorpe.
2. For the reasons given by my noble and learned friend Lord Rodger of Earlsferry I am satisfied this phrase was intended to refer to the amount inserted by a taxpayer in his tax return in the box captioned 'Total taxable profits from this business'. The newly-introduced paragraph 2A was intended to simplify the maintenance calculation process and this was the somewhat unusual means chosen for that purpose. But that is not the end of the matter. I am also satisfied that the consequence of using this amount for the purpose of a maintenance calculation was not fully appreciated. Had the consequence been appreciated, this amending regulation would not have been presented to Parliament and the world in the way it was.
3. In short, the unappreciated consequence was that using this figure from a non-resident parent's tax return can yield a significantly different result from a calculation made in accordance with the existing paragraph 3 of the 1992 regulations. Using the 'total taxable profits' figure from the tax return means using an amount of profits arrived at after deducting capital allowances and losses brought forward. By way of contrast, under the existing paragraph 3 expenses deductible from gross receipts did not include capital allowances or losses carried forward. The present case is an extreme example of the difference there can be between these two calculations.
4. The first of these two methods of calculation can produce a most unfair result to the parent with care and the children in question. Hence, it is said with force, the newly-introduced paragraph 2A cannot have been intended to have this effect. Paragraph 2A should not be so construed.
5. So what is to be done? It goes without saying that the House will seek to interpret statutory language so as to give effect to its intended meaning. The intended meaning of language is to be derived from its context. Here the context suggests that the end result produced by the 'total taxable profits' formula in paragraph 2A was not intended to bring about a radical departure from the end result produced by the existing paragraph 3.
6. But there are difficulties in interpreting the new paragraph 2A in a way which would produce much the same result as the existing paragraph 3. There are two particular difficulties. First, paragraph 2A clearly was intended to refer to figures readily derivable from the non-resident parent's tax return. If the amount appearing in the box captioned 'Total taxable profits from this business' is discarded it is far from obvious what amount is to be substituted. To achieve the same result as paragraph 3 it would be necessary to use an amount which does not, as such, appear anywhere on the tax return. It would be necessary to take the amount of net profits shown on the tax return, add back the disallowable expenses, but ignore the deductions made on the form in respect of matters such as capital allowances and losses carried forward. It is far from clear that paragraph 2A can reasonably be read as requiring any such calculation. It is, to say the least, highly questionable whether the phrase would be so understood by anyone in the context of a form which on its face applies that very phrase ('total taxable profits') to a different amount.
7. The difficulty in reading paragraph 2A in this way is compounded by the terms of paragraph 2B. In two circumstances the earnings of a self-employed earner are calculated by reference to paragraph 2B, not paragraph 2A. One circumstance is where a self-employed earner is unable to provide a total taxable profits figure for the relevant period as submitted to the Inland Revenue but he can provide a copy of his tax calculation notice. The other circumstance is where the total taxable profits figure submitted by the self-employed earner has been revised by the Inland Revenue. Paragraph 2B provides that in either of these events the earner's earnings shall be calculated by reference to his income from employment as a self-employed earner 'as set out in the tax calculation notice issued in relation to his case'.
8. Herein lies the further difficulty. The amount shown in the tax calculation notice as 'income from employment as a self-employed earner' is a net amount after deduction of capital allowances and allowable losses. Thus this alternative method of identifying a self-employed earner's earnings assumes that capital allowances and allowable losses are deductible under the paragraph 2A mode of calculation. Paragraph 2B assumes this because paragraphs 2A and 2B cannot have been intended to operate differently. Thus paragraph 2A cannot be read as identifying an amount arrived at before deducting capital allowances and allowable losses without producing an unacceptable and inescapable discord between paragraphs 2A and 2B. With reluctance and regret I would dismiss this appeal.
LORD RODGER OF EARLSFERRY
9. The issue in this appeal concerns the interpretation of paragraph 2A(2) of Schedule 1 to the Child Support (Maintenance Assessments and Special Cases) Regulations 1992 which deals with the calculation of the earnings of a self-employed person for the purpose of assessing his liability to pay child support. In the speech which he is to deliver, my noble and learned friend, Lord Walker of Gestingthorpe, sets out the terms of this paragraph and of all the other relevant provisions I need not repeat them.
10. When the regulations were originally made in 1992, for the purpose of child support the earnings of a self-employed person were to be calculated in accordance with para 3. That paragraph provided that certain expenses were to be deducted from the self-employed person's gross receipts, while other expenses were not to be deducted. In terms of para 3(4)(b)(ii) among the expenses which were not to be deducted was any capital expenditure. In other words, for calculating the non-resident parent's earnings, no deduction was to be made for capital expenditure. Similarly, for example, in terms of para 3(4)(b)(v) and (vii) no loss incurred before the beginning of the current earnings period and no loss incurred in any other self-employment was to be deducted.
11. In practice the calculation of earnings in terms of para 3 proved to be far from straightforward and the complications were one of the causes of the delays for which the whole child support scheme became notorious. So in 1999 the Secretary of State for Social Security amended the Schedule and introduced a number of changes which were designed to simplify the system. One simplification was to allow more use to be made of the figures in non-resident parents' tax returns. Para 2A was designed to introduce that change.
12. Para 2A gives a new definition of "earnings", which applies subject to the provisions of paras 2B, 2C and 5A of the Schedule. In terms of para 2A(2) "earnings" means "the total taxable profits from self-employment of that earner as submitted to the Inland Revenue" less certain amounts which the sub-paragraph goes on to specify.
13. It is common ground that the expression in para 2A(2) which has to be interpreted is not just "the total taxable profits" but "the total taxable profits from self-employment of that earner as submitted to the Inland Revenue". The form of the expression ("as submitted to the Inland Revenue") points to the total taxable profits which, as a matter of historic fact, the non-resident parent submitted to the Inland Revenue. Given the purpose of para 2A, it is therefore no surprise to find that in the tax return which is submitted by self-employed earners, such as Mr Smith, there is a box (3.92) in which a figure is to be inserted and opposite which are the words "Total taxable profits from this business". The phrase is not a technical term in the tax statutes. It is found only at this one point in the form of tax return for self-employed persons drafted by the Inland Revenue. Which makes it all the more striking that it should have been adopted by the official who drafted para 2A(2). This must have been done deliberately. I am therefore satisfied that, in terms of regulation 2A, the starting point for calculating the non-resident parent's earnings is the figure for total taxable profits which he submitted to the Inland Revenue in box 3.92 of his tax return. QED, as Ward LJ so rightly said.
14. This straightforward approach assumes that anyone drafting regulations which were designed to simplify the system by allowing the non-resident parent to use a figure in his tax return might actually have looked at a sample tax return for self-employed people. It also assumes that he or she might actually have thought that the simplest thing was to copy the words used on that form to identify the desired figure. Lord Walker is not prepared to make the assumption that the draftsman working in-house in the Department of Social Security would have had a tax form before him. Joined-up government may sometimes appear to be in short supply, but it does not seem unduly extravagant to imagine that an official in another department, drafting a regulation which was intended to refer to the non-resident parent's tax return, might actually have had the initiative to obtain a copy of such a return from the Inland Revenue, to read it and to adopt its language. The alternative is to suppose that, by the most bizarre of coincidences, without ever looking at a tax return, the Social Security official quite independently alighted upon a form of words which was exactly the same as the non-technical description used by the Inland Revenue opposite box 3.92 on their form. By a sad mischance, however, the official used the words with the intention of identifying a completely different figure - to be found, presumably, somewhere else on the tax return but described by a different form of words. I forbear to express my respectful incredulity.
15. My Lords, I venture to think that the interpretation of para 2A(2) would never have been in doubt, were it not for a major inconsistency in the regulations. For the purpose of calculating the profits on which tax is to be charged, taxpayers are not allowed to deduct capital expenditure as such. But, for very many years, they have been allowed to deduct any capital allowances to which they are entitled and which they choose to claim. Therefore the figure for total taxable profits which the non-resident parent submits in box 3.92 is reached after deducting the figure (boxes 3.22 and 3.70) for any capital allowances. It follows that, if the non-resident parent's earnings are based on the figure in box 3.92 in his tax return, they are based on a figure from which any capital allowances have been deducted. For various reasons the capital allowances to which a taxpayer is entitled may be considerably higher than the depreciation figure. Where that happens, as in this case, the resulting figure for the taxable profits of a business will be appropriate for tax purposes, but may appear inappropriate if it is used for other purposes - such as calculating earnings for the purposes of child support. Nevertheless, that is the figure mentioned in para 2A(2). By contrast, before the regulations were changed in 1999, the non-resident parent's income was always calculated according to regulation 3 - which does not permit the deduction of capital expenditure and certain other items. Regulation 3 has not been revoked. It still applies, but only in certain limited circumstances. So, as a result of the amendments in 1999, the profit figure which is the starting-point for calculating the non-resident parent's earnings is different, depending on whether para 2A or para 3 applies.
16. In case it is thought that this inconsistency between paras 2A and 3 casts doubt on the interpretation of 2A(2), it is useful to consider para 2B. This paragraph applies in two situations. The first is where the self-employed earner cannot provide the total taxable profit figure as submitted to the Inland Revenue, but can provide a copy of his tax calculation notice issued by the Inland Revenue. The other is where the Secretary of State becomes aware that the total taxable figure which the self-employed earner submitted to the Inland Revenue was revised by them. In these cases the self-employed person's earnings are to be calculated "by reference to the income from employment as a self-employed earner as set out in the tax calculation notice issued in relation to his case, and if a revision of the figures included in that notice has occurred, by reference to the revised notice." It is indisputable that the income figure in the tax calculation notice or revised notice sent out by the Inland Revenue is a figure for the earner's income after deduction of capital allowances. The notice would not serve its intended purpose otherwise, since it would not explain how the Inland Revenue had calculated the taxpayer's income tax on his taxable income. It follows that what the Secretary of State uses, if the taxpayer cannot provide "the total taxable profits figure" as envisaged in para 2A, is a figure for the taxpayer's income after deduction of capital allowances. This confirms that "the total taxable profits figure" which the taxpayer is to use under para 2A must also be the figure after deduction of capital allowances - in other words, the figure in box 3.92.
17. In my view, therefore, the inconsistency between para 2A (not to mention 2B) and para 3 does not call into question the proper interpretation of the relevant words in para 2A(2). What it does indicate, however, is that when the regulations were amended in 1999 the Secretary of State and the departmental officials did not appreciate that there was an inconsistency between the two paragraphs. The approach of the majority presupposes that, if their attention had been drawn to it in 1999, the Secretary of State for Social Security and his officials would have chosen to assimilate paras 2A and 2B to para 3. That is far from obvious. After all, para 3 was one of the sources of the delays which they were trying to cure by adopting the new approach in para 2A, based on the non-resident parent's tax return. Therefore para 2A contains what they intended should be the usual approach for the future. Of course, there may be objections to basing child support assessments on figures used for tax purposes. But, wise or not, that was the policy which the Secretary of State adopted, and was entitled to adopt, in the hope of making the system more workable and so getting money more quickly to more people. This reform did indeed involve a change of substance, but there is nothing in the short speech of the Minister of State, Baroness Hollis of Heigham, in the House of Lords to suggest that the regulations were not intended to go that far. Therefore, if the Secretary of State and his officials had been asked to choose between paras 2A and 3, it is quite conceivable that they would have amended sub-paras (4)(a) and (b) so as to bring para 3 into line with para 2A. At the very least, a court cannot say that the Secretary of State and Parliament must have intended the policy in para 3 to prevail over the policy in paras 2A and 2B.
18. It follows that I see no basis upon which the House could properly select some other figure in the non-resident parent's tax return as being "the total taxable profits" as submitted to the Inland Revenue. The problem in the present case involves the deduction of capital allowances, but similar problems could arise with other deductions, eg for losses brought forward from a previous year or for losses from another self-employed business. So, if one departed from the obvious interpretation of para 2A(2), it would be necessary to find a figure on the tax form from which none of these sums had been deducted. Suffice it to say that no uninstructed reader of a self-employed person's tax return would easily pinpoint the figure which, it would have to be supposed, the draftsman of the regulations had in mind when he so unhappily chose to write the description which so uncannily pointed to box 3.92.