In July, the House of Lords allowed the appeal of Helen Smith against a decision that in calculating the liability of her former husband, Robert Smith, for child support, a deduction should be made for capital allowances.

The ruling was the culmination of a five year battle and family law solicitors' group Resolution said the Smiths' case highlighted the 'nightmare' the system has proved to be where the paying parent is self-employed.

Capital allowances
In 1999 the child support regulations were changed to make it simpler to work out how much fathers should pay by allowing them to use the figure of "total taxable profits" from their tax return. But it was left uncertain whether capital allowances for assets bought for the business could be deducted, as they can be for tax purposes, in working out the final figure.

Mr and Mrs Smith separated in 1997. They had three children, of whom Mrs Smith was the "parent with care". At the time Mr Smith owned a car business.

From April 2000 to March 2001 he made a taxable profit (before capital allowances) of £169,520, reduced by capital allowances of £148,628 to £20,892, on which he was charged to tax.

Mrs Smith applied for a maintenance assessment under the Child Support Act 1991. She appealed against the assessment, and by the time the tribunal heard the appeal Mr Smith's tax return for 2000- 01 was available. The tribunal made a new determination based on the figure of £20,892 for his taxable income. Mrs Smith appealed to a child support commissioner, who defined the issue of law he had to decide as whether, in calculating a self-employed trader's earnings for child support purposes, he was entitled to any deduction for capital depreciation or capital allowances. He resolved the issue in Mrs Smith's favour.

The Court of Appeal allowed Mr Smith's appeal against that decision. The court held that the definition of 'earnings' , namely 'the total taxable profits from self-employment of that earner as submitted to the Inland Revenue...' meant that one had to look to the earner's tax return to see if it assisted in ascertaining 'total taxable profits', and that the answer was in box 3.92 of the tax return, ie 'total taxable profits from this business'. Mrs Smith appealed to the House of Lords.

In a 3-2 decision, the House of Lords determined that, in calculating a self- employed trader's earnings for child support purposes, there was was no entitlement to any deduction for capital allowances.

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Susie Hughes © Hardhatter.com 2006
The Editor