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Mr N Paines QC
Incapacity benefit – reduction for occupational pension – meaning of “pension payment … payable” – whether amount of pension gross or net of income tax to be used in calculation
The claimant received incapacity benefit and an occupational pension. Section 30DD of the Social Security Contributions and Benefits Act 1992 provides that, where the amount of occupational pension “payable” to a claimant exceeds a threshold, his or her incapacity benefit is to be reduced by half the excess amount but does not specify whether the amount of pension to be taken is the amount gross or net of tax. In calculating the reduction of occupational pension in the claimant’s case, the decision-maker used the gross weekly amount of pension. The claimant’s appeal to a tribunal was unsuccessful. On appeal to the Commissioner, he argued that the amount of pension net of tax should have been used in calculating the reduction. The Secretary of State argued that on the literal construction of section 30DD the reference to “a pension payment payable” was to the gross amount.
Held, dismissing the appeal, that:
1. on a literal construction of section 30DD both meanings contended for were possible and it was therefore necessary to decide which of the two possible meanings Parliament intended (paragraph 23);
2. no assistance could be derived from considerations of “symmetry” between the tax treatment of the pension and that of the incapacity benefit, since the tax treatment was different for the different rates of incapacity benefit (paragraphs 23 to 25);
3. an examination of the legislative context of Section 30DD was equally unhelpful, since there was no uniform practice of taking payments of pension or other income as either gross or net (paragraphs 37 and 38);
4. the most reliable guide to the meaning of Section 30DD was R(U) 8/83, of which Parliament must be taken to have been aware when it enacted section 30DD. Although that case dealt with different wording, referring to pension payments which “are made”, that difference of wording could not affect the amount of money that is in issue (paragraphs 39 to 41);
5. therefore, following R(U) 8/83, the decision-maker was correct in using the gross amount of pension in calculating the abatement of the claimant’s incapacity benefit (paragraph 42).
DECISION OF THE SOCIAL SECURITY COMMISSIONER
1. I have concluded, with some regret, that the claimant’s claim cannot succeed. The decision-maker was right in law to use the amount of the claimant’s occupational pension gross of tax in calculating the abatement of his incapacity benefit. I must therefore dismiss the appeal.
2. I am setting out my reasons at some length. This is for a number of reasons. First, the claimant, who struck me as an intelligent and articulate man, was not legally represented in the appeal. It was therefore my duty to explore the issue fully on his behalf and to give a full account of why I have concluded against him. Secondly, the issue is highly technical. Thirdly, I have had the benefit of thorough submissions from Mr Heath of the Department’s Solicitor’s Office, and it is right that I should cover the ground that – largely at my invitation in a direction issued earlier in the course of the appeal – he covered in submissions.
3. The claimant, who was born in 1945 claimed incapacity benefit in April 2003. There is no dispute that he is entitled to incapacity benefit; the issue is the amount of benefit to which he is entitled. He receives an occupational pension from his work with his former employer; as from 1 April 2003 the gross amount of his occupational pension entitlement was £9,624.00 per annum. On 7 May 2003 a decision-maker decided that the claimant was entitled to incapacity benefit at the reduced weekly rate of £4.36 per week. This was on the basis that his incapacity benefit fell to be abated by his occupational pension pursuant to section 30DD of the Social Security Contributions and Benefits Act 1992, which I refer to below.
4. On 6 June 2003 the claimant appealed against the decision. He argued that it was unfair to abate his incapacity benefit leaving him with only £4.36 per week, that he had been taken off incapacity benefit previously in order to make him subject to section 30DD (which only applies to periods of incapacity starting on or after 6 April 2001) and that disabled people were being victimised in order to make up for the Department’s losses resulting from benefit fraud.
5. On 18 August the decision was reconsidered but not changed. The decision-maker found that the claimant’s occupational pension of £9,624.00 per year equated to £185.08 per week; section 30DD provided for incapacity benefit to be reduced by an amount equal to 50% of that part of the claimant’s pension that exceeded £85 per week; the claimant’s pension exceeded £85 per week by £100.08 per week; 50% of that was £50.04. Accordingly, £50.04 had to be deducted from the claimant’s incapacity benefit of £54.40 per week, leaving £4.36 per week.
6. Section 30DD provides, so far as material:
“(1) Where –
(a) a person is entitled to incapacity benefit in respect of any period of a week or part of a week,
(b) a pension payment is payable to him in respect of that period …
(c) the amount of that payment (or, as the case may be, the amount which in accordance with regulations is to be taken as payable to him by way of pension payments in respect of that period) exceeds the threshold,
the amount of that benefit shall be reduced by an amount equal to 50 per cent of that excess.
(2) In subsection (1) above ‘the threshold’ means –
(a) if the period in question is a week, £85 …
(4) Regulations may provide –
(a) for sums of any specified description to be disregarded for the purposes of this section …
(5) In this section, ‘pension payment’ means –
(a) a periodical payment made in relation to a person … in connection with the coming to an end of an employment of his, under an occupational pension scheme …”
7. Pursuant to section 30DD(4), regulation 21 of the Social Security (Incapacity Benefit) Regulations 1994 provides for the disregarding, for the purposes of section 30DD, of survivor’s benefits under pension schemes and of shortfalls in pension payments from insufficiently funded schemes.
8. In further submissions to the appeal tribunal dated 8 and 10 September 2003 the claimant also complained of the Department’s delays in dealing with his correspondence, and provided further material on benefit fraud and problems within the Department and the civil service. He also argued (page 46 of the papers) that the decision-maker was wrong to regard him as having occupational pension of £185.08 per week, pointing out that after deduction of tax his occupational pension was equivalent to £164.62 per week; this exceeded the £85 threshold by £79.62, so that only £39.81 should be deducted from his incapacity benefit, leaving £14.59 per week.
9. The appeal was heard by a chairman sitting alone on 17 September 2003. He held that the decision-maker had correctly applied section 30DD. In the statement of reasons the chairman noted that the claimant’s arguments were hard to summarise; however, he found as a fact that the claimant received occupational pension amounting to £185.80 per week and held that the decision-maker had correctly applied the law. The statement of reasons did not deal expressly with the claimant’s argument that the amount of his occupational pension net of tax should have been used in the calculation.
10. By letter of 3 December 2003 the claimant sought to appeal to the Commissioner, stating that his primary dispute was with the use of the gross rather than the net amount of his occupational pension. The chairman refused leave to appeal. On 20 January 2004 a Commissioner directed the Secretary of State to make a submission on the claimant’s application for leave, and drew attention to the decision in R(U) 8/83. The Secretary of State’s submission was that R(U) 8/83 (which I discuss below) was relevant and that leave to appeal should be refused. In response, the claimant argued that R(U) 8/83 dealt with unemployment benefit and not incapacity benefit; he also argued that most provisions of social security law regarding income suggested that net income was used and that, as section 30DD was silent on the point, it should be taken that the intention was to use net values. In a further submission, the claimant also pointed out that lower rate short-term incapacity benefit was not taxable; this meant that during the period when the claimant was receiving lower rate short-term incapacity benefit, the reduction of the benefit pursuant to section 30DD deprived him of a tax advantage.
11. On 29 June 2004 I gave leave to appeal, on the grounds that it was arguable that the phrase “pension payment … payable to him” meant the amount that was actually payable to the claimant, namely the amount net of tax; though a comparison with the terms of section 30E tended to support the Secretary of State’s construction of section 30DD, various other social security provision dealing with income – including for the purposes of incapacity benefit – used amounts net of tax and it was arguable that Parliament did not intend the treatment of income under sections 30DD and 30E to be different from that. I also observed the relevant social security and tax legislation had changed since R(U) 8/83 was decided. I directed the Secretary of State to make a written submission dealing with these points.
12. The Secretary of State’s submission was very brief, really saying only that the other social security provisions to which I had referred deliberately referred to net amounts, while section 30DD deliberately omitted any reference to net amounts, and that the provisions dealt with in R(U) 8/83 were equivalent. The claimant made a submission in response, pointing out among other things that the omission of a reference to net amounts in section 30DD was not necessarily deliberate.
13. On 21 September 2004 a Commissioner directed an oral hearing of the appeal and I conducted the hearing on 2 November 2004. The claimant appeared in person and the Secretary of State was represented by Mr Jeremy Heath of the Solicitor’s Office. Mr Heath produced a detailed skeleton argument, dealing among other things with the points raised in the direction of 29 June. The claimant commented that it was unsatisfactory that a submission in this level of detail was only produced on the day of the hearing, rather than in response to my direction, and I have to say that I agree. This is no criticism of Mr Heath, who had only recently been instructed.
14. The claimant handed me a written submission. In it, he pointed out that since R(U) 8/83 was decided, the social security legislation and regulations had changed; net income was used elsewhere in the benefit system, and in particular in connection with incapacity benefit paid for dependants. This showed that it was the norm to take net income for social security purposes; section 30DD itself was silent on the point, but this did not necessarily show a deliberate intention to provide for gross amounts to be taken; it could be an error or oversight or could be because Parliament thought it unnecessary to provide expressly that net amounts should be used.
15. Mr Heath accepted that section 30DD did not specify whether the amounts of occupational pension to be taken into account were gross or net of income tax or National Insurance contributions, or whether any other expenses could be deducted. He also accepted that nothing in the Social Security Contributions and Benefits Act 1992 or the Incapacity Benefit Regulations assisted directly with the issue. He submitted, however, that section 30E provided expressly as to what was to be deducted from the gross amount of a councillor’s allowance, and that if Parliament had intended anything to be deducted from the gross amount of a pension payment, it would have said so.
16. As regards the Social Security Benefit (Computation of Earnings) Regulations 1996 (SI 1996/2745), Mr Heath pointed out correctly that they did not directly govern section 30DD; he accepted that, under those Regulations, earnings included pension payments for certain purposes, and that the Regulations provided for earnings to be computed net of expenses, tax, National Insurance contributions and one half of certain pension contributions; but he submitted that section 30DD could not be construed as implicitly providing for the deduction of any of these sums, in the absence of the elaborate wording found in those Regulations. He made the same points in relation to the Income Support (General) Regulations 1987 (SI 1987/1967), emphasising that all of these Regulations showed that netting down was only applicable where it was expressly provided for; it had not been in section 30DD.
17. Mr Heath also accepted that earnings both included pensions and were calculated net of tax and (where applicable) National Insurance contributions for the purposes of sections 80 (since repealed) and 86A of the Contributions and Benefits Act; these sections provide for increases of inter alia incapacity benefit in respect of a claimant’s dependants, but subject to the level of the claimant’s or his partner’s earnings. But he again submitted that this showed that, in order for net amounts to be taken, this had to be expressly provided for.
18. Mr Heath relied on R(U) 8/83, pointing out that its subject-matter – the abatement of unemployment benefit on account of payments of occupational pension – was similar to that of section 30DD. He pointed out that the principle of abatement of unemployment benefit had been carried through into the Contributions and Benefits Act and from there into contribution-based jobseeker’s allowance. Abatement of incapacity benefit on account of occupational pension had not existed until section 30DD was inserted into the Contributions and Benefits Act in 1999; Hansard did not record any discussion of whether occupational pension payments were to be taken gross or net of tax for that purpose, but the literal meaning of the phrase “a pension payment is payable” clearly referred to the gross amount.
19. In reply to Mr Heath, the claimant said that the Department was struggling to support its interpretation of section 30DD. It could not be said that the literal meaning was clear, as Mr Heath suggested; on the contrary, the intention was for the net amount to be taken.
20. The issue I have to decide is what Parliament meant by the words it used in subsections 30DD(1)(b) and (c). The reference in subsection 1(c) to “the amount of that payment” is clearly a reference back to the words “a pension payment is payable to him” in subsection 1(b); accordingly the issue is what Parliament meant by the concept of “the amount of the pension payment that is payable to” the claimant – specifically, whether it means the amount that is actually payable bearing in mind the payer’s obligation to deduct tax or whether the obligation to deduct tax is to be ignored.
21. Like Mr Heath, I find no help in the definition of “pension payment” in subsection 30DD(5); that provides for the source from which a payment must come for it to be caught by the section, but offers no help on the issue that arises in this case.
22. Mr Heath’s starting point was that on the literal construction of section 30DD the reference to “a pension payment payable” was to the gross amount. That was the foundation for his argument that, to displace that construction, clear words (possibly similar to those of the Computation of Earnings Regulations) providing for netting off would be required. On the other hand, it can equally be argued that a literal construction of the words favours the claimant. “Payable” here means “that which there is an obligation to pay”; subsection 1(b) says “payable to him” – meaning the claimant; it could be argued that, because of the payer’s obligation to deduct tax, the only sum which the payer is obliged to pay to the claimant is the net sum. It therefore seems to me that the section is ambiguous. I have to decide which of those two possible meanings Parliament intended. In doing so I have had regard principally to the following considerations.
“Symmetry” between the tax treatment of the pension and the incapacity benefit
23. Section 30DD produces an abatement of 50 pence of a claimant’s incapacity benefit for every £1 of pension payment over the threshold of £85. On the face of it, one would expect Parliament to have intended there to be symmetry between the amount of pension payment taken into consideration and the amount of incapacity benefit abated. If incapacity benefit were not taxable, there would be a foundation for an argument that Parliament could not have intended the words used in section 30DD to produce the result that £1 of gross pension – worth only 78 pence after basic rate tax – should lead to the loss of 50 pence of non-taxable incapacity benefit.
24. Incapacity benefit is, however, payable at three different rates: broadly speaking, at the lower rate of short term incapacity benefit for the 196 days of a period of incapacity, then at the higher rate of short term incapacity benefit and, after 364 days of incapacity, at the long-term rate (sections 30A(1) and (5) and 30B(2)). Short-term incapacity benefit paid at the lower rate is not taxable, but both short-term incapacity benefit paid at the higher rate and long-term incapacity benefit are taxable: sections 660 to 664 and 676 of the Income Tax (Earnings and Pensions) Act 2003. As regards benefit paid at those rates, considerations of symmetry militate in favour of the Secretary of State’s construction of the section, while as regards lower rate short-term incapacity benefit they militate in favour of the claimant’s construction. Given that arguments based on “symmetry” lead in different directions depending on which rate of incapacity benefit one is considering, I am unable to derive any assistance from that consideration.
25. It is fair to point out, as the claimant did, that the abatement of non-taxable short-term incapacity benefit on account of the receipt of taxable pension deprives him and other claimants of a tax advantage. That is so, however, whether the abatement formula operates by reference to gross or net amounts of pension.
The legislative context
26. The sections of the Contributions and Benefits Act dealing with incapacity benefit, apart from section 30DD, were introduced into the Act by the Social Security (Incapacity for Work) Act 1994. One of the sections introduced – section 30E – provides for the reduction of incapacity benefit on account of receipt of councillor’s allowance. At the same time, the 1994 Act amended sections 80 and 89 of the Social Security Contributions and Benefits Act 1992, dealing with increases of benefit on account of dependants, and inserted section 86A into that part of the Act.
27. Section 30E was the subject of a decision of Mr Commissioner Williams in R(IB) 3/01. The section provides, so far as material, that:
“(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 respect of 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.”
28. In R(IB) 3/01 the issue was whether the amount to be set off against incapacity benefit was the amount of councillor’s allowance gross of the tax and national insurance contributions that were deducted by the council, or the net amount after tax and national insurance. The claimant there argued that the tax and national insurance were “expenses” within the meaning of subsection (3) and were therefore to be deducted. The Commissioner disagreed. Though the argument focused on the scope of the reference to “expenses”, it is implicit in the Commissioner’s decision that the reference earlier in subsection (3) to “the aggregate amount of the councillor’s allowance or allowances to which he is entitled” was a reference to an amount gross of tax and national insurance contributions, notwithstanding that the councillor was not entitled to receive that part of the allowance which the payer was obliged to deduct and pay to the Inland Revenue.
29. Section 80 of the Social Security Contributions and Benefits Act 1992 (since repealed but still in force at the time section 30DD was inserted into the legislation) provided that the rate of certain benefits should be increased where a beneficiary had dependent children. The 1994 Act amended section 80 to include a reference to higher rate short-term incapacity benefit and long-term incapacity benefit. Subsections 80(3) and (4) provided that the increase should not be payable where the claimant’s spouse or partner had earnings above a certain level. Also, section 86A provides for the rates of short and long-term incapacity benefit to be increased where a beneficiary has adult dependants. The section goes on to say that regulations may prevent the increase being payable where the person in respect of whom the increase is claimed has earnings above a certain level. Section 89 then provided that references to earnings in sections 80 and 86A include payments of occupational pension.
30. The Computation of Earnings Regulations apply to the computation of earnings – including occupational pension payments – for the purposes of these provisions. The Regulations provide expressly for earnings to be computed after income tax and national insurance contributions.
31. As regards means-tested benefits, similar provisions for taking net income exist for income support and income-based jobseeker’s allowance (JSA).
32. As regards contribution-based JSA, section 4(1) of the Jobseekers Act 1995 provides for the amount of benefit to be calculated after making “prescribed deductions in respect of earnings and pension payments”. The prescribed deduction for earnings is governed by regulation 80 of the Jobseeker’s Allowance Regulations 1996 (SI 1996/207), which cross-refers to detailed rules in Part VIII of the Regulations; those rules include provision for the subtraction of tax.
33. The prescribed deduction for pension payments is governed by regulation 81, which provides for deduction of the amount by which the pension payment or payments exceed £50 per benefit week. That regulation is silent as to whether the “pension payment” is to be taken gross or net of tax. However, these provisions are, as Mr Heath pointed out, the successors to section 5 of the Social Security (No. 2) Act 1980, which was considered in R(U) 8/83.
34. Section 5 of the 1980 Act provided so far as material:
“(1) If payments by way of occupational pension which in the aggregate exceed the maximum sum are made for any week to a person who has attained the age of 60, the rate of any unemployment benefit … shall be reduced by 10 pence for each 10 pence of the excess …
(3) ‘payments by way of occupational pension’ means, in relation to a person, periodical payments which … fall to be made to him …”
35. The issue in R(U) 8/83 was whether the pension payments were to be taken net or gross of tax. The Commissioner rejected the claimant’s argument that the reference to the payments that are “made” was to the net amount after deduction of tax. The Commissioner held (original emphasis) that:
“When the payer makes a payment and deducts tax when doing so, the payment made to the claimant, in terms of section 5(1), is of the sum from which income tax is deducted, not of the net amount received by him. Such tax is deducted on behalf of the claimant, whose income has been augmented by the gross amount paid.”
36. When provisions in the same terms as section 5 of the 1980 Act were incorporated into sections 30 and 122 of the Contributions and Benefits Act, the decision in R(U) 8/83 was taken as governing the construction of those provisions: see CU/27/1992. In my judgment it also governs the construction of regulation 81 of the JSA Regulations. Accordingly, pension (unlike earnings) is taken gross for the purposes of abatement of contribution-based JSA.
37. The legislative background against which Parliament in 1999 inserted section 30DD into the Contributions and Benefits Act was thus a mixed one. For the purposes of mean-tested benefits, income was normally taken net of tax. Where income was relevant to entitlement to a contributory benefit, its treatment was not consistent: as regards the abatement of contribution-based JSA on account of earnings or pension income, earnings were explicitly computed net of tax, while pension income was computed gross of tax. As regards the abatement of, or removal of entitlement to, incapacity benefit itself, there was again a lack of consistency: as regards the loss of entitlement to increases for dependants, earnings (including pension income) were computed net of tax. As regards the abatement of councillor’s allowance, section 30E provided for the amount gross of tax to be deducted.
38. If there were a uniform practice of taking payments of pension or other income as either gross or net, it would be possible to infer that Parliament intended section 30DD to follow that uniform practice. But there is not.
Applicability of the reasoning in R(U) 8/83
39. I have concluded that the most reliable guide to the meaning of section 30DD is to be found in the decision in R(U) 8/83, of which Parliament must be taken to have been aware when it enacted section 30DD. The claimant has accurately pointed out that R(U) 8/83 is an old decision. That does not in itself undermine its authoritativeness; to the extent that the statutory wording in section 30DD is different, it is necessary to consider whether the difference in wording leads to a different interpretation.
40. As I have already indicated, the Commissioner decided in that case that the reference in section 5 of the 1980 Act to pension payments which “are made” is a reference to the gross amount of the payments, before tax. The wording of section 30DD is different, referring to a pension payment which “is payable”. I have to consider whether, in referring to the amount of a pension payment that is “payable”, Parliament intended to refer to the net amount instead of the gross amount.
41. I cannot see how the difference in wording could have that effect. There is of course a difference between the meaning of the words “paid” and “payable” – “paid” refers to actual payment, while “payable” means due to be paid: the focus is on the existence of an obligation to pay, rather than the fact of payment (that is why regulation 21 of the Incapacity Benefit Regulations provides for the disregarding of sums which an insolvent pension scheme is liable but unable to pay). There could be a number of reasons why Parliament preferred the word “payable” to the word “paid” – including a desire to prevent a claimant avoiding the abatement by having his pension paid to a third party. But I cannot see how referring to a liability to make a payment rather than the fact of a payment could affect the amount of money that is in issue.
42. For these reasons I conclude that the decision-maker was correct in the way in which he calculated the abatement of the claimant’s incapacity benefit. I have reached this conclusion with a certain amount of regret. I can well see how the claimant reached the view that the amount that was “payable” to him was the amount that the pension fund were obliged to pay to him, rather than to the Inland Revenue. It is perhaps regrettable that Parliament did not make what I have found to be its intention clearer. The differences between the treatment of income in different parts of the social security legislation are also, to say the least, untidy. But I am unable to conclude that in section 30DD Parliament has departed from the “gross of tax” treatment that was laid down in R(U) 8/83.