Crack down on child maintenance evasion

It has long been a problem that some non-resident parents avoid paying the correct and fair amount of child maintenance, by arranging their financial affairs in a certain way. A recent tribunal decision (AS v Secretary of State [2018] UKUT 315 (AAC)) is a timely reminder that without sound reasons and substantial evidence, a paying parent voluntarily reducing (on paper) their income risks a finding of unreasonable diversion of income. Importantly, a tribunal can then uphold higher child maintenance payments for the parent with care (receiving parent).

So, how does the child maintenance system work?

Calculation

Child maintenance is generally unrelated to the actual cost of maintaining a child’s home and looking after them. A statutory formula balances various factors including the non-resident parent’s (the “paying parent”) gross income, number of children, and the amount of nights they stay in each household. Unless the paying parent’s gross income exceeds a certain threshold (£156,000 per annum), the simple and helpful calculator at https://www.gov.uk/calculate-your-child-maintenance should be conclusive. This helps the majority of families to agree the amount of maintenance.

Child Maintenance Service

Where there is disagreement, an application can be made to the Child Maintenance Service (CMS) for formal calculation of the amount and, if required, collection of the maintenance. A modest charge is levied for this, which will reduce the amount paid to the receiving parent. This can be a relatively small price to pay for resolving child maintenance issues though.

In the first instance, the CMS uses HMRC information about the paying parent’s income for calculations. Problems can start to creep in though, including where a paying parent has a high degree of control over their income. For example, a self-employed parent, or parent who receives significant dividend payments from a company they own in whole or part, may be able to misrepresent their total income and argue that it is considerably lower than it really is. On the other hand, such parents may be concerned that genuine reductions in their income since the last tax year need to be taken into account.

If either parent thinks a CMS decision is wrong then they can request that it be reconsidered (by application to the CMS within 32 days of the decision letter). If there is still concern that the decision is wrong, there can be an appeal to an independent tribunal, such as in AS v Secretary of State.

It is also important for parents to note that if there is something unusual, or complex, about the paying parent’s income, or particular expenses relating to the child, then an application for variation can be made at any time.

Additional income variation

Of particular focus in the recent tribunal decision was the CMS’s ability to vary child maintenance on the basis of additional income. Unearned income (e.g. rental income from an investment property), earned income (from pension/employment/self-employment/taxable benefits) and diversion of income can all form the basis of an application for ‘additional income variation’.

In AS v Secretary of State the paying parent was a father whose income was from dividends paid by a company of which he was initially the sole shareholder. The father voluntarily transferred 40% of his shares in the company to his new wife, on the basis that she was doing some work in the business for him (emails and checking some drafting). At best, it seems the new wife was doing no more than 20 hours work a week, for which she had no employment contract and received no wages. The transfer of shares substantially reduced the father’s personal income from dividends and his initial argument was that his child maintenance liability should also reduce.

The Tribunal was unimpressed by the father’s evidence. There was no evidence that the father’s new wife was receiving the dividends from her shares to the exclusion of him, no clear or consistent evidence that she was doing work for the company which would justify the share transfer, and no evidence that her dividend income from the shares now in her name correlated with fair remuneration for any work that she might be doing.

The transfer of shares was valid and that the father was no longer legally entitled to 100% of the dividend income from the company. The tribunal found, however, that he had voluntarily and unreasonably (per regulation 19(4) Child Support (Variations) Regulations 2000) diverted/reduced his income and on this basis was able to uphold a higher level of child maintenance than would ordinarily be calculated on his remaining income.

What can we learn from this?

Receiving parents who believe their former partner is misrepresenting their income to reduce child maintenance but who have perhaps previously believed there to be no hope, should reconsider a potential variation application to the CMS.

Paying parents whose circumstances change should be very careful to justify and document any decisions or steps taken which have the effect of reducing their income and thus child maintenance.

UPDATED 25 JULY 2021: Over the last couple of years issues with the current system have been raised with the Government. In June 2021, the Government confirmed they are keeping child maintenance policy under review. New digital services, including ‘apply online’ are said to allow greater flexibility for parents.

Further, the National Audit Office is consulting about whether the child maintenance system is delivering value for money for children, separated parents and the taxpayer with comments to be lodged by 12:00 on 30 July 2021.