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JM [2009] UKUT 145 (AAC) (29 July 2009)
Capital
Notional Capital: deprivation

IN THE UPPER TRIBUNAL ADMINISTRATIVE APPEALS CHAMBER

Appeal Nos. CIS/1366/2008 CH/1367/2008

Before: UPPER TRIBUNAL JUDGE ROWLAND

Decision: The claimant's appeals are dismissed.

REASONS FOR DECISION

1. The claimant's wife, who is quite severely disabled, was in receipt of income support, awarded by the Secretary of State for Work and Pensions, and the claimant was in receipt of housing benefit and council tax benefit, awarded by Sunderland Borough Council, when, on 8 November 2006, £64,907.12 was paid into the claimant's wife's bank account. The money came from her late father's estate. On the same day, the claimant informed the Department for Work and Pensions that the money had been received and he also mentioned the housing benefit and council tax benefit. The Department for Work and Pensions passed the information on to the local authority. Since the money was well in excess of £16,000, which is the amount of capital that disqualifies a person from any of those benefits (see regulation 45 of the Income Support (General) Regulations 1987 (S.I. 1987/1967, as amended), regulation 43 of the Housing Benefit Regulations 2006 (S.I. 2006/213) and regulation 33 of the Council Tax Benefit Regulations 2006 (S.I. 2006/215), the awards were all superseded and brought to an end.
2. On 2 February 2007, the claimant claimed income support and, on 7 February 2007, he claimed housing benefit and council tax benefit again. In the previous three months, the claimant and his wife had spent all but £12,098.13 of their capital. The claimant says – and this has not been disputed – that he was informed by the Department for Work and Pensions in November 2006 that when their capital had reduced to below £16,000 he would qualify for income-related benefits again but that he would need to produce receipts when he reclaimed. What he was not told then was that he and his wife might be treated as still possessing capital that they no longer had if they were considered to have deprived themselves of it for the purposes of obtaining benefit.
3. However, that is the effect of regulation 51(1) of the Income Support Regulations, regulation 49(1) of the Housing Benefit Regulations and regulation 39(1) of the Council Tax Benefit Regulations. Regulation 51(1) of the Income Support Regulations provides –

"A claimant shall be treated as possessing capital of which he has deprived himself for the purpose of securing entitlement to income support or increasing the amount of that benefit except …"


The other provisions are to similar effect although each refers to the purpose of securing entitlement to that particular benefit. Quite why depriving oneself of capital for the purpose of securing entitlement to any income-related benefit should not result in a person being treated as possessing capital when entitlement to any other benefit is being considered I am not sure but nothing arises in this case because the claimant plainly expected that entitlement to income support would lead to entitlement to the other benefits. Capital that a person is treated as possessing is known as "notional capital", as opposed to "actual capital".

4. The Secretary of State, dealing with the claim for income support, initially took the view that £21,010.58 was "allowable expenditure", i.e., expenditure otherwise than for the purposes of obtaining income support, and that, as the claimant had £12,098.13 actual capital remaining in the bank, the balance of £31,798.41 (consisting of the £27,900 purchase price of a caravan and £3,898.41 unaccounted for expenditure) was notional capital, making a total of £43,987.54. However, it was submitted to the tribunal by the Secretary of State that the whole of the £43,987.54 was actual capital, on the basis that the claimant and his wife possessed a caravan of that value and also remained in possession of the capital for which they could not account.
5. The local authority took a more generous approach, although it still resulted in the claimant not being entitled to benefit. It considered that £37,247.26 of the expenditure (including the cost of the caravan) had been otherwise than for the purposes of obtaining benefit and that the claimant and his wife had £20,724.86 actual capital (including expenditure that had not been accounted for to the local authority's satisfaction) and £6,935 notional capital (£2,935 spent on a car for their son and £4,000 given to their son and daughter), making a total of £27,659.86.
6. The claimant appealed against both decisions and the two appeals were heard together. The tribunal dismissed the appeals, preferring the Department's original calculation to that of the local authority. The claimant now appeals against the tribunal's decisions, with my permission. The Secretary of State submits that the tribunal's decision in the income support case was erroneous in one respect that would not have helped the claimant very much. It is submitted that the proper approach to the caravan was to value it as at the date of claim and treat its actual value as actual capital and the difference between the purchase price and its actual value at the date of purchase as notional capital. The local authority, who indicated at the hearing before the tribunal that it wished to adopt the local authority's calculation of capital, opposes the appeal in the housing benefit and council tax benefit case by simply supporting the tribunal's decision.
7. I have a certain amount of sympathy for the claimant and his wife. They plainly did not act dishonestly and they believed they were entitled to do what they did without prejudicing their future entitlement to benefit. A lot of notional capital cases arise where people have failed to report the receipt of capital and have hoped that the fact that it has been received and then disposed of will never be noticed. Here, the claimant immediately reported the receipt of the capital and never denied believing that, if his capital fell below £16,000, he would be entitled to income-related benefits again. This is not the first case in which I have been told that a claimant who has been refused benefit on the ground of capital has, upon asking for advice, been advised by the Department to return from time to time with receipts for expenditure with a view to claiming benefit again when the amount of capital has been reduced, without being warned that even receipted expenditure may be regarded as unreasonable with the consequence that the claimant is deemed still to possess it. The Department may wish to consider whether it should issue a standard leaflet or letter for those refused benefit on the ground of capital, warning them that reducing the amount of actual capital below the capital limit may not result in them becoming entitled to benefit if the expenditure appears excessive and therefore apparently for the purposes of obtaining benefit.
8. What the claimant really protests about is the finding that he disposed of the capital for the purpose of obtaining benefits and, in particular, that he bought the caravan with that in mind, when he was so open with the Department and the local authority.
9. It has long been recognised that a person may have mixed motives for disposing of capital and that the fact that a person intends to gain some other advantage from disposing of capital, by, for example, obtaining an alternative asset, does not mean that he or she does not also intend to obtain an income-related benefit if the alternative asset falls to be disregarded for the purpose of calculating entitlement to that benefit. In CJSA/1425/2004, I considered a number of earlier decisions of Social Security Commissioners and said –

"40. The effect of all these decisions is therefore that, if a claimant realised that one consequence of depriving himself of capital was that he might become entitled to jobseeker's allowance or income support and he nonetheless deprived himself of that capital, there arises the question whether obtaining benefit was a significant operative purpose of the deprivation. Because there will almost always be some other purpose as well, that question is determined by deciding whether, given his knowledge, it was reasonable in all the circumstances for him to act as he did, bearing in mind not only his obligation to tax payers to support himself, but also his obligations to other people. Moreover, insofar as his obligation to support himself is concerned, it is necessary to have regard to the long term as well as the short term.

41. This meets the problem caused by the use of the word "purpose" in the legislation in a context where it is possible to have more than one motive and where it is not always reasonable to assume that a person desires or intends the natural consequences of his actions. There is, in truth, no other practical test that could be applied. The test was clearly appropriate in relation to the supplementary benefit scheme, which appeared to confer an element of discretion on those making the decisions. I do not consider any different approach is intended under the present legislation, which must have been enacted with R(SB) 38/85 and R(SB) 40/85 well in mind. Although, in R(SB) 38/85, Mr Commissioner Hallett described the discretion in the supplementary benefit legislation as "unlimited", he qualified that by saying that it had to be exercised judicially and Mr Commissioner Monroe's view in R(SB) 40/85 was effectively that it was difficult to see how, once it had been decided that a claimant had deprived himself of a resource for the purpose of obtaining benefit, the discretion could properly be exercised in favour of the claimant, save to permit a non-statutory diminishing capital rule. Since the Tribunal of Commissioners has held in R(IS) 1/91 that even the non-statutory diminishing capital rule did not depend on the discretion, it seems to me that the discretion was more apparent than real and its removal has not made much practical difference. What the mandatory "shall" requires is merely due attention to the proper test of reasonableness for determining a person's intention, as explained in R(SB) 38/85 and R(SB) 40/85, with proper weight being given to the interests of the general body of tax payers and not just the interests of the claimant or his family and friends."

10. In CH/264/2006, Mr Commissioner Jacobs disagreed with that approach and said –

"With respect to my colleague, I consider that his reasoning is based on a misreading of the authorities and that his decision erroneously converts an evidentiary factor of reasonableness into a legal test and a subjective test of purpose into an objective test of reasonableness."

I am not persuaded. The statutory test is, of course, a subjective one but the requisite degree of subjectivity is obtained both because it is necessary always to prove that a claimant knew of the capital limit, at least in general terms, and therefore understood that a consequence of the expenditure would probably be entitlement to benefit (R(SB) 9/91, R(SB) 40/85) and because the claimant's personal situation will fall to be taken into account when regarding the reasonableness of his or her expenditure. The test of reasonableness is not, strictly speaking, a legal one but it is likely to be determinative in many cases once the required knowledge is proved because there are no other relevant considerations not subsumed within the assessment of the reasonableness of the expenditure. It is from the test of reasonableness that one infers whether the claimant intended to gain entitlement to benefit through the expenditure or merely knew that that would be the consequence of the expenditure. Mr Commissioner Jacobs suggests that a feckless claimant may escape the effects of the legislation because he or she simply gives no thought as to what will happen when capital has all been spent even though he or she knows of the capital limit, whereas a claimant who knows full well that benefit will become payable will not. That, I suggest is not an attractive distinction and cannot have been intended by the legislator. A person who knows of the capital limit must be taken to realise that benefit may be payable if he or she disposes of capital above that limit and to intend that consequence if the expenditure is unreasonable.

11. One question that is posed by the grounds of appeal in the present case is whether the fact that the claimant was unaware that he and his wife might be treated as still possessing capital that they had spent if they spent it unreasonably is relevant to the test of reasonableness itself. In my judgment, it cannot of itself make any expenditure whatsoever reasonable because that would fail to ensure "proper weight being given to the interests of the general body of tax payers" and would be inconsistent with ascertaining whether a significant operative purpose of the expenditure was to obtain benefit. On the other hand, one might expect the Secretary of State or a local authority to take a relatively generous approach to what amounted to reasonable expenditure in a case where a claimant had clearly not been dishonest and the Secretary of State or local authority had not taken an opportunity presented to them to warn the claimant of the possibility that he or she might be treated as still possessing capital that had been spent if the expenditure were to be considered unreasonable.
12. However, except in respect of the caravan and the unaccounted for expenditure, the Secretary of State and the tribunal did take a very generous approach. Effectively, they accepted all proven expenditure (including gifts), other than the cost of the caravan, as having been reasonably incurred. As the local authority's initial approach recognised, the fact that expenditure is proved through a receipt does not necessarily mean that it is reasonable. The point of requiring receipts is primarily to enable the department or local authority to be satisfied that the money has not been retained in an undisclosed account or in cash under the bed but receipts also generally show on what money has been spent so that they can also form a basis for a decision as to the reasonableness of expenditure. In any event, the tribunal was entitled to accept the approach conceded before it by both the Secretary of State and the local authority in relation to proven expenditure other than on the caravan.
13. So the question on this appeal is whether the tribunal erred in law in its approach to the caravan and the unaccounted for expenditure. It is noteworthy that the local authority and the Department initially took different views on both these issues and that the Department has now taken yet another approach to the caravan.
14. In relation to the caravan, the local authority decision-maker said –

"Ordinarily I would not have accepted £28,306.00 expenditure on a caravan, in my opinion a less expensive caravan could have been purchased. However I have accepted the total cost of the caravan purchase in my reassessment of the capital, due to the fact that including this expense has not reduced [the claimant's] capital below £16,000."

That is not a very satisfactory approach because, while it is true that it made no difference to the claimant's immediate entitlement. it affected the diminishing capital calculation and therefore the date from which he would requalify for benefit. In those circumstances, it was not necessary for the tribunal to explain why it preferred the Secretary of State's approach.

15. However, it was necessary for the tribunal to explain why it accepted the Secretary of State's argument that this item was purchased for the purpose of gaining entitlement to benefit when the claimant said it was not. In my judgment it has done so adequately, given the circumstances of this case and, in particular, the fact that the claimant did not ask for an oral hearing. The tribunal found that the claimant knew of the capital limits and that he had asked on a number of occasions when he could reapply for benefit, which showed that he knew that a possible consequence of buying the caravan was that he would requalify for benefit and,, more importantly, it found that the purchase of the caravan was not "an allowable expense", by which it plainly meant that that expenditure was not reasonable in the claimant's circumstances, unlike the expenditure on the smaller items. All that the claimant had said was that buying the caravan had seemed reasonable because his wife's disabilities had meant that her father's house could not be used by her and the caravan, which was suitable for her to use, was a good alternative. The tribunal was not bound to accept that the expenditure was reasonable in those circumstances, particularly as the value of a second home would not have fallen to be disregarded, and, in rejecting the claimant's case, there was little more the tribunal could have said. Had the claimant asked for, and attended, a hearing and had he given a fuller account of his and his wife's circumstances, it might have been different.
16. I accept the Secretary of State's point that, strictly speaking, the expenditure on the caravan ought not all to have been regarded as notional capital. It is well established that a person who deprives himself of an asset by purchasing another asset of equal value that falls to be disregarded may be found to have notional capital equal to the value of the original asset (see R(SB) 40/85 and R(IS) 8/04). However,, while a caravan is a personal possession (R(H) 7/08) and a personal possession is usually to be disregarded under paragraph 10 of Schedule 10 to the Income Support (General) Regulations 1987, paragraph 12 of Schedule 6 to the Housing Benefit Regulations 2006 and paragraph 12 of Schedule 5 to the Council Tax Benefit Regulations 2006, personal possessions are not disregarded if acquired with the intention of obtaining income support. Consequently, when purchased, the caravan fell to be treated as actual capital and there fell to be taken into account as notional capital only the amount by which its purchase price exceeded its capital value immediately after it was bought. Once purchased, the value of a caravan inevitably falls and it then depreciates. The actual capital to be taken into account was the actual value of the caravan at the date of claim and, potentially, from time to time thereafter. In R(IS) 8/04, it was held that the notional capital did not increase as the actual value fell.
17. The Secretary of State suggests that I refer the case to another tribunal on that ground. I am reluctant to do so if it would not be of practical value because the mistake in the calculation will not have affected entitlement to benefits up to the date of the decisions of the Secretary of State and the local authority. I accept that the decision of the tribunal is likely to have affected subsequent decisions. In particular, the tribunal observed that the claimant had sold the caravan for £14,000 before its hearing and it commented that the claimant should then be treated as having £14,000 as actual capital and the difference between that sum and the purchase price as notional capital. R(IS) 8/04 provides the answer to the question I raised when granting leave to appeal, which was whether the claimant should still be regarded as having deprived himself of the difference between the purchase price and the sale price of the caravan for the purpose of obtaining benefit, after he had endeavoured to restore the situation by selling it. In the light of R(IS) 8/04, the answer is "no" and the tribunal was wrong to suggest otherwise. I raised the question partly because I was struck by the difference between the purchase price and the sale price. The correctness of R(IS) 8/04 is illustrated by the fact that part of the diminution in value of the caravan appears to be due to the claimant's son having "trashed" it, possibly in anger at the derisory sum originally offered fro it by the site owner. The claimant's son was subsequently convicted of criminal damage but the point is that that part of the claimant's loss was not his own fault and should not have led to a loss of benefit.
18. However, the question of entitlement to benefit during any period after the date of the decisions that had been appealed to the tribunal was not in issue before the tribunal and the tribunal's suggestion as to the position after the caravan had been sold was not binding on the Secretary of State or the local authority. Referring the case to the First-tier Tribunal would enable the Secretary of State and local authority to revise decisions not before the tribunal under regulation 3(5A) of the Social Security and Child Support (Decisions and Appeals) Regulations 1999 (S,.I. 1999/991) or regulation 4(7) of the Housing Benefit and Council Tax Benefit (Decisions and Appeals) Regulations 2001 (S.I. 2001/1002) but this seems unnecessary when the Secretary of State and local authority have adequate powers of revision on the ground of "official error" under regulation 3(5)(a) of the 1999 Regulations and regulation,4(2)(a) of the 2001 Regulations because R(IS) 8/04 was not applied. I am not satisfied that the error identified by the Secretary of State requires me to set aside the tribunal's decision and refer this case to another tribunal.
19. In relation to expenditure that is unaccounted for, a tribunal may legitimately take any one of three approaches. First, it may take the view that it has not been spent at all and is still held by the claimant as actual capital. Secondly, it may accept that it has probably been spent but for the purpose of obtaining benefit. Thirdly, it may accept that it has probably been spent otherwise than for the purpose of obtaining benefit. Which of those inferences is to be drawn depends a great deal on the circumstances of the individual case.
20. In this case, the local authority treated all the unaccounted for expenditure as actual capital, without giving any specific reason for doing so. The Secretary of State also failed to explain why he took the same approach in his submission to the tribunal. Such a finding implies that the claimant was being dishonest when he said he no longer having that capital and that seems a little unlikely in this case. The tribunal did not allude to either of those submissions but relied wholly on the Secretary of State's original decision that the unaccounted for capital should be treated as notional capital, which implied acceptance that the claimant had spent the money. That seems far more likely, is the approach more favourable to the appellant and has not been challenged on this appeal on behalf of either respondent. What is effectively challenged by the claimant is the finding that the expenditure was for the purpose of obtaining benefit.
21. No explicit reason has been given for that finding but, against the background, of this case, that seems to me not to be fatal to the tribunal's decision. It is plain that the tribunal agreed with the Secretary of State's original decision that unaccounted for expenditure should not be regarded as "allowable" or reasonable and therefore should be assumed to have been for the purpose of obtaining benefit. That was an approach it was entitled to take, given the very swift spending of most of the claimant's wife's inheritance, and in respect of which the claimant had advanced no specific argument that required a response.
22. The tribunal could quite properly have reached a decision more favourable to the claimant and it is perhaps unfortunate that the claimant chose not to appear before the tribunal to persuade it to do so. However, an appeal lies only on a point of law and there are no grounds upon which I can properly interfere with the tribunal's decision that the claimant was not entitled to income support, housing benefit or council tax benefit at the date of the decisions appealed to the tribunal.

MARK ROWLAND

29 July 2009