R(IB) 3/01
Mr. D. Williams CIB/6331/1999
15.8.00
Councillor's allowance - income tax and national insurance contributions - whether deductible expenses
The claimant, a local authority councillor, was paid by his council both a basic and a responsibility allowance. The allowances were paid net of income tax and national insurance contributions. The tribunal accepted the claimant's arguments that in calculating the net amount of the allowance for the purpose of the reduction in benefit provided for by section 30E of the Social Security Contributions and Benefits Act 1992, the claimant was entitled to deduct the income tax and national insurance contributions paid by him as an expense and to average heating and lighting costs. The Secretary of State appealed on the ground that the liability to pay income tax and national insurance contributions was not an expense within the meaning of section 30E(3). The averaging of heating and lighting expenses was not disputed.
Held, allowing the appeal, that:
- neither income tax nor national insurance contributions were expenses in connection with the claimant's membership of the council and so could not be deducted in calculating the net amount of the allowances. Liability to income tax depended on an individual's overall income from all sources and did not arise only because the individual claimed incapacity benefit. Whether or not there was any unfairness in the claimant having to pay contributions at the same time as receiving a contributory benefit, rather than receiving credits, was a matter for Parliament rather than a matter that arose in applying section 30E (paras. 9 to 19);
- section 30E(3) did not require that expenses be defrayed before they were allowed nor that the amount to be defrayed be identified. Consequently the allowance of expenses based on agreed averages and estimates was not wrong in law. CS/7934/1995 was not followed (paras. 20 to 25).
The Commissioner substituted his own decision.
DECISION OF THE SOCIAL SECURITY COMMISSIONER
- I allow the appeal by the Secretary of State (in place of the original appellant, the adjudication officer).
- The appeal is against the decision of the Warrington appeal tribunal on 24 June 1999. It was brought by leave of the chairman. The decision of the tribunal was that income tax and NI contributions are to be deducted from the amount taken into account for deduction from incapacity benefit. The tribunal allowed the appeal by the claimant against the original decision of the adjudication officer.
- I set aside the decision of the tribunal, and replace it with my own decision, which is:
The claimant's appeal from the decision of the adjudication officer is dismissed, and the decision of the adjudication officer, that the incapacity benefit to which the claimant is entitled from 25.10.1998 to 31.10.1998 (inclusive) is £40.75, is confirmed.
- I held an oral hearing of this appeal at Liverpool on 7 August 2000. The Secretary of State was represented by Mr. Jeremy Johnson of the Office of the Solicitor to the Department of Social Security. The claimant (who attended the hearing) was represented by Mr. Brian White of Warrington Community Law Centre. I am grateful to both for clear and concise presentations of their arguments.
Background to the appeal
- The claimant (whom I refer to as C) was and is a member of Warrington Borough Council and is paid both a basic allowance and a responsibility allowance from the Council. C incurs travel and other expenses as a member of the Council (the amounts of which are not in dispute). The Council pays the allowances to C net of income tax and NI contributions, these being deducted under the PAYE scheme. C was at all relevant times entitled to incapacity benefit. C declared all relevant amounts to the Benefits Agency. The Agency deducts the excess of the net amount of the councillor's allowances (after deduction of expenses) over (at the relevant time) £48 a week from C's payments of incapacity benefit. C therefore receives allowances subject to deduction of tax and NI contributions, and incapacity benefit subject to deduction of the excess of the total allowances (less expenses) over the set amount.
- Two points arise in this appeal from the interpretation and application of section 30E of the Social Security Contributions and Benefits Act 1992 on these facts. The first, over which both parties are agreed, is how the expenses are to be deducted from the allowances. The second, over which they are not agreed, is whether the expenses deducted should include the income tax and NI contributions paid by C on the allowances.
- The tribunal's decision is summarised as follows on the decision notice:
"[Section] 30E refers to the "net amount" of a councillor's allowance. The normal usage of "net" means after appropriate and legal deductions from the "gross". It is only fair and reasonable that a councillor should have to bring into account the "actual" money he receives. I also accept that averaging of heating and lighting is the only practical method of apportionment despite CS/7934/1995."
The chairman also prepared a statement of facts and reasons for the tribunal's decision, but this merely set out the same matters at somewhat greater length. Both parties supported the final part of the tribunal decision. The Secretary of State appealed against the conclusion in the first part, while the claimant supported it.
- Section 30E provides:
"(1) Where the net amount of councillor's allowance to which a person is entitled in respect of any week exceeds such amount as may be prescribed, an amount equal to the excess shall be deducted from the amount of any incapacity benefit to which he is entitled in that week, and only the balance remaining (if any) shall be payable.
…
(3) In subsection (1) above, "net amount", in relation to any councillor's allowance to which a person is entitled, means the aggregate amount of the councillor's allowance or allowances to which he is entitled for the week in question, reduced by the amount of any expenses incurred by him in that week in connection with his membership of the council or councils in question."
Are tax and NI contributions deductible?
- The view of the Secretary of State is that there are four conditions to be met before something may be deducted from councillors' allowances for the purposes of section 30E:
(a) the amount must be an expense,
(b) it must be incurred by the councillor,
(c) it must be incurred in connection with membership of the council, and
(d) it must be incurred in the relevant week.
It was not in dispute that the income tax and NI contributions were incurred by C nor was the time when they were incurred in dispute. But, it was argued, neither income tax nor NI contributions could be regarded as "expenses" of council membership, nor were they incurred "in connection with" membership of the council.
- I was urged by Mr. Johnson to adopt the ordinary meaning of "expenses" in deciding that income tax could not be an expense. This was, of course, what the tribunal considered it had done, but to opposite effect. He accepted that Parliament had not defined "expenses" in the relevant Act, nor had it been defined in regulations for this purpose. But, he argued, the liability to pay income tax and NI contributions are legal liabilities and are not in the ordinary sense expenses. He drew my attention to a number of other uses of "expenses" in social security regulations, and a number of cases (both social security and otherwise) where courts had considered the meaning of "expenses" and "net amount". In particular, he referred to the decision of the Court of Appeal in Chief Adjudication Officer v. Hogg (also known as Parsons v. Hogg) [1985] 1 WLR 1100 (also reported as an appendix to R(FIS) 4/85), a family income supplement case. Other cases outside the field of social security were also cited, but I agree with Mr. Johnson that such cases are of limited assistance here. He also drew attention to the Social Security Benefit (Computation of Earnings) Regulations 1996, regulation 10 (calculation of net earnings of employed earners), the Income Support (General) Regulations 1987, regulation 36 (same title) and the Family Credit (General) Regulations 1987, regulation 20 (same title), all of which made specific provision for deduction of income tax and NI contributions separately from any deductions for expenses. He submitted that these authorities made it clear that the intention was to make separate provision for deduction of tax and contributions where that was appropriate, but that in the absence of such provisions, deduction could not have been intended under the general wording of section 30E.
- Mr. Johnson also argued that income tax was not incurred in connection with work as a councillor. Rather, it was a liability attributable to an individual on the basis of his or her total earnings for a year. Nor could any particular amount of income tax be attributed to any particular amount of earnings, notwithstanding the PAYE deductions. I pointed out that while this might be true of income tax, the same argument did not apply to NI contributions, where assessment was on weekly or monthly sums and applied separately to each activity, but he maintained the view that his argument applied to both income tax and contributions.
- Mr. White's argument did not challenge these submissions. Rather, he argued that they were irrelevant to the decision of the tribunal. The operative words in section 30E(1) were "the net amount of councillor's allowance". He argued, relying on the reasoning of the tribunal and on an opinion of Counsel that had been obtained (but which I did not see), that "net amount" meant net amount after deduction of tax and contributions. He drew support for this from Chief Adjudication Officer v. Hogg.
- Mr. White (supported by a statement by C) also argued that any other conclusion than that of the tribunal would be unfair, as it would mean that the income tax and NI contributions were being deducted from C's allowances twice over. Not only was C receiving the allowances net of the deduction of tax and NI contribution, but also those deductions were ignored in calculating the amount of excess incapacity benefit. Parliament had set a net weekly figure of allowance for councillors to keep, and should not be presumed to have intended to penalise councillors receiving more than that amount by imposing a double deduction at an effective rate of some 70% at the relevant time. Section 30E was deliberately included by Parliament to recognise the position of disabled or incapacitated councillors, and this interpretation was defeating Parliament's intention. He also noted that Mr. Johnson had produced no examples of Acts of Parliament making separate provision for expenses and income tax, all the examples being drawn from regulations.
- In reply, Mr. Johnson resisted the policy arguments. He pointed out that section 30E gave councillors an advantage given to no one else working and receiving payments while on incapacity benefit. Parliament was therefore seen to be aware of the problem and to have provided a solution. On the question of the meaning of "net amount", he pointed out that, unlike the regulations in Chief Adjudication Officer v. Hogg, section 30E provided a definition of "net amount" in subsection (3), and that this definition excludes Mr. White's approach to the section.
Is section 30E(1) fair?
- The issue of double deduction was the reason why the tribunal accepted Mr. White's approach. It did so on the basis, as the chairman put it, of both common sense and "a fair and equitable view of justice". Those factors are, however, for Parliament, not for me, save where Parliament has not made its intentions clear. In this case, the "fairness" issue raises two points. First, should C be paying contributions when he is also receiving a contributory benefit? That question has not been addressed separately in this appeal. It was, at the relevant time, a question to be determined by the Secretary of State and not by the tribunal or Commissioner. It now falls, in cases of dispute, for appeal to the tax tribunals. Regulation 9 of the Social Security (Credits) Regulations 1975 entitles a claimant to what are usually termed "incapacity credits" when in receipt of incapacity benefit. But it appears that, nonetheless, an individual receiving a contributory benefit should pay contributions at the same time, and lose the benefit of the credits, when receiving a councillor's allowance. If so, the "unfairness issue" appears to be one to be considered by those responsible for deciding if there should be a deduction of contributions, rather than a credit of contributions, rather than as a matter that arises in applying section 30E.
- The second issue is the deduction of income tax on the councillor's allowance, in effect, both from the allowance and from the incapacity benefit. The deduction of income tax from the councillor's allowance is not in question by either party in this case (and is of course a matter for the Inland Revenue). But incapacity benefit may itself be taxable: section 617(1) of the Income and Corporation Taxes Act 1988. So the issue of unfairness is somewhat more complex than Mr. White suggested. If a claimant receives a £10 excess allowance, then he loses (this year) £2.20 from it in income tax, and he loses £10 incapacity benefit. But if the incapacity benefit is itself taxable, then the net loss to the claimant after tax is not £10, but £10 less £2.20 (or £7.80). In other words, a claimant (on these figures) receives a net allowance of £7.80 after income tax, and loses a net £7.80 incapacity benefit after income tax. I understand that in some cases incapacity benefit is taxable and in other cases not. And when taxable it many not in fact be taxed because an individual's personal allowance prevents any tax being paid. But those issues depend on the overall income from all sources of the individual and on details of individual claims to incapacity benefit, and do not arise only because an individual is claiming incapacity benefit. Further, it appears that Parliament has considered the extent to which incapacity benefit is taxable, and has reached an answer that does not deal with all cases in the same way.
- Those considerations, taken together, do not seem to me to represent a level of unfairness that would compel me to seek a secondary meaning for section 30E on the ground that the primary meaning argued for by Mr. Johnson was patently absurd or unfair.
The meaning of section 30E(1)
- Turning to the words of section 30E itself, my view is that Mr. Johnson's approach is the right one. Subsection (3) states that "net amount … means … " the stated definition when used in subsection (1) (italics mine). The wording excludes other meanings, and so excludes Mr. White's approach to "net amount". Nor can I read the approach adopted by Mr. White into the definition in subsection (3). I also accept, as Mr. Johnson submitted, that "expenses … in connection with his membership of the council" does not include the statutory liability to pay income tax. As indicated above, I am more hesitant in considering NI contribution liability. If C is liable to contributions, then it can be argued that it was imposed in connection with the council duties. But contributions are not an expense of those duties.
- I conclude that the tribunal erred in law in allowing deduction of the income tax and NI contributions. As the matter is an issue of law, with no facts in dispute, it is expedient that I make the decision that the tribunal should have made on this point. My formal decision is in paragraph 3.
CS/7934/1995
- The other point is the decision of the tribunal that "averaging of heating and lighting is the only practical method of apportionment despite CS/7934/1995" (circulated as *78/96). In adopting this approach, the tribunal was endorsing the approach taken by the adjudication officer with the agreement of C and his representative. I indicated in the hearing that, although neither party was seeking to challenge the decision of the tribunal on this point, it was one I felt obliged to consider.
- The decision of the Commissioner in CS/7934/1995 was that:
"the expenses incurred in any week by the claimant for the performance of her duties as a local councillor (whether for clothes, telephone rental, telephone calls, subscriptions, travel, or whatever it might be) shall, for the purposes of calculating her entitlement to invalidity benefit, be deducted from the allowance or allowances to which she is entitled in respect of that week".
This is explained by the Commissioner in paragraph 9. Both parties had contended at the oral hearing that "unless the principle of averaging were adopted, [the section] simply could not be operated in any sensible way." That is in essence exactly the submission made to me by both parties. The Commissioner commented "I see the difficulty", but concluded:
"… I am faced with the plain words of [the section]. It specifically provides that the expenses incurred in a particular week have to be deducted from the aggregate amount of councillor's allowance or allowances to which he or she is entitled in that week. Nor does it matter that the benefit of expenses incurred in that week are enjoyed in future weeks. It would seem that Parliament deliberately decided, presumably in the interest of simplicity, that the costs incurred in each week should be offset against the allowances of that week, whatever the result might be. It is not open to me to alter the effect of the statute by adding words of my own to it."
- While I endorse the last sentence of that paragraph, I note that the actual decision of the Commissioner is not entirely consistent with that reasoning or the words of section 30E. The decision was that the expenses to be deducted against benefit for a particular week are those "incurred in any week by the claimant for the performance of her duties". Whether deliberately or not, the Commissioner replaced without explanation the words of the section with words suggesting the income tax test. The income tax test is in section 198 of the Income and Corporation Taxes Act 1988, which provides:
"If the holder of an office or employment is obliged to incur and defray out of the emoluments of the office or employment-
(a) qualifying travelling expenses, or
(b) any amount (other than qualifying travelling expenses) expended wholly, exclusively and necessarily in the performance of the duties of the office or employment,
there may be deducted from the emoluments to be assessed the amount so incurred and defrayed."
The causative test for expenses is that of "in connection with", not the stricter income tax test of "in the performance of". To that extent, the decision in CS/7394/1995 is wrong, as the "in connection with" test in section 30E should have been used.
- There are other important differences between this test and the income tax test, in addition to the point about "in the performance of". Another difference is that, to be deductible for income tax, the expenses must not only have been incurred but also defrayed. In other words, not only must the liability for the expenses have been assumed, but the bills must also have been met. There is nothing in section 30E that requires that expenses be defrayed before they are allowed or indeed that the amount to be defrayed be identified.
- The language of CS/7934/1995 suggests to me that the Commissioner and parties may have been thinking of defraying bills rather than incurring expenses. In paragraph 9, the Commissioner quotes the argument of the parties that:
"It would be absurd ... to proceed on the basis that the expense of, for example, a 100 pound dress purchased in one week should be set against the allowance or allowances for that week, when everyone knew that the dress was not going to last one week, but was to be worn over a significant period of time."
That example may be a misleading application of the section. Say, for example, a councillor buys a new dress for use in connection with council functions, and uses it for two council events and for no other purpose. She then decides that the dress is inappropriate for further use, and sells it secondhand. What is the expense she incurred in wearing the dress? It is not the cost of the dress, because she recovers the secondhand value later. The expense she incurred in wearing the dress on each occasion (if they are assumed to be equal occasions) was half the difference between what she paid for it and what she received for it. That cannot be calculated until after she has sold the dress. Suppose she did not sell the dress, but used it both for council and other purposes for some time. What then is the expense incurred? Again, that cannot be calculated by reference only to the price paid. It must also involve determining or estimating how much of the use was, is, or will be council use rather than private or other use. Similar issues appear if the tribunal's example of heating and lighting bills are considered.
- I conclude from those examples that the reference to incurring expenses rather than incurring and defraying their cost puts the focus rather differently to that of the income tax rules. The consequence is that it is wrong in principle to measure the amount incurred in a week only by reference to the amount defrayed in that week. Further, it may be impossible to determine the amount incurred in a week until some time later. That point does not appear to have been considered in CS/7934/1995, and to the extent that it fails to note the need to take a longer view to establish the amount incurred, I disagree with it. In this case, I see nothing wrong in law with the decision of the adjudication officer or of the agreed position of the parties in this case (based on agreed averages and estimates). They have not misinterpreted the section. What they have done is to apply the section in good faith to the facts in a way that seems to me to meet the intentions of Parliament. I therefore confirm that aspect of the adjudication officer's decision.
Date: 15 August 2000 (signed) Mr. D. Williams
Commissioner
