Child Support: Here Comes the New Gross Income Scheme
Jody Atkinson TEP, barrister at St John’s Chambers, Bristol considers the new Child Support Gross Income Scheme.
Jody Atkinson TEP, barrister at St John's Chambers, Bristol.
Since this article was originally published, the new gross income scheme has been extended to all new applications from 29 July 2013 where there are two or more qualifying children. New applications in respect of a single child will continue to be allocated to the old net income scheme. Those parents with existing cases involving two or more children who wish to move on to the new gross income scheme will have to ask the CSA to stop acting, wait 13 weeks, and then make a fresh application. For full details see Child Maintenance and Other Payments Act 2008 (Commencement No 11 and Transitional Provisions) Order 2013.
The Child Support system has been in a state of continuous revolution since its inception, and this shows no sign of stopping. A somewhat telling example of this is the name. In 2008 the Child Support Agency (CSA) was re-branded as the Child Maintenance Enforcement Commission (CMEC). One rather suspects that it was hoped that this would symbolise the beginning of a new more efficient era. However, rather like the Consignia/Royal Mail debacle, the change of name fooled nobody, but confused many. In Summer 2012 CMEC was abolished, and the name was changed back to the CSA again.
This article is about the new 'gross income' scheme. As will be seen, this is currently only in force for a tiny minority of new applicants ('the pilot group'). However, it is likely that the gross income scheme will be brought in for all new applicants at some future date. Therefore, practitioners have an element of choice: they could advise clients to wait for the gross income scheme to come into force for all applicants before they approach the CSA for a maintenance calculation, or, alternatively, they could advise clients to apply now in order to get into the current 'net income' scheme before it ends.
By way of a refresher, the current 'net income' scheme was introduced in March 2003, when it replaced the horrifically complicated 'old rules' scheme for all applicants after that date. The 'net income' scheme generally creates a child support liability of 15%, 20% or 25% of pay after tax and national insurance. The percentage level depends on whether the 'non resident (paying) parent' has one, two or three children living with the 'parent with care'. No account is taken of the parent with care's income at all. As this system has been in place for 10 years now, many family lawyers will advise their clients to agree to pay the relevant percentage between themselves without involving the CSA at all.
The legislation allowing the gross income scheme, the Child Maintenance and Other Payments Act 2008, has been on the statute book for some time now. Until recently, I expected that it would never be brought into force, as it was a project of the previous Labour government.
However, without much fanfare, the gross income scheme has now been belatedly introduced for a pilot group of cases from 10 December 2012. The only parents that will fall into the gross income scheme at the moment are new applicants with four or more children (presumably a small minority of applicants). The order bringing it into force is the Child Maintenance and Other Payments Act 2008 (Commencement No. 10 and Transitional Provisions) Order 2012/3042
For those in the new gross income scheme there is completely new regulatory code, the Child Support (Maintenance Calculation) Regulations 2012/2677
Assuming it goes well, one expects that the gross income scheme will be rolled out to more and more applicants. However, I have been unable to locate any information on when the Department of Work and Pensions plan for this to happen. It is also not clear whether existing cases will be transferred into the gross income scheme. I would guess that this is unlikely, as this did not happen in 2003 when the current net income scheme was introduced. Those families already in the preceding complex 'old rules' scheme were generally stuck in it. Those cases are only now finally dying out as the children grow up! From the government's perspective to do so would create a lot of work for the CSA as they would then have to re-assess all of the cases that need to be transferred from the net income scheme to the gross income scheme. Re-assessments tend to result in appeals and other complications so there may be a sense of 'letting sleeping dogs lie'. Therefore, it seems likely that those who are in the 'net income' scheme will remain in it, and those with less than four children who apply now may never be transferred into the gross income scheme. However, the government might take a different view if the gross income scheme turns out to be much cheaper to run.
The gross income scheme.
Due to the incidence of higher rate income tax, the gross income scheme is slightly more complicated than the net income scheme.
The basic formula is that a non resident parent, depending on whether he has one, two, or three children living with the parent with care, pays 12, 16, or 19% of his gross income up to £800 per week, and then 9, 12, or 15% of his income from £800 up to the new maximum of £3,000 per week.
At the bottom of the system, the minimum 'flat rate' for those with an income of less than £100 per week is increased from £5 to £7. Students, who are currently automatically 'flat rate', will now be assessed on whatever their income actually is.
There will continue to be a reduced rate for those earning between £100 and £200 gross per week.
At the top, the maximum possible calculation has actually fallen. A non resident parent with gross income of more than £3,000 per week and three or more children pays £482. Under the net income scheme a non resident parent with net income of more than £2,000 per week (the old maximum) and three children paid £500. However, under either scheme, where there is a maximum calculation it is possible for the parent with care to apply to the court for 'top up' maintenance under Schedule 1 of the Children Act 1989.
The effect of the gross income scheme is that maintenance liabilities should be broadly similar to those under the current net income scheme. For example, a self employed person with gross earnings of £52,000 per annum will usually have net income after tax and national insurance of £37,850. If they were a non resident parent to two children, under the net income scheme they would pay £145 per week. Under the gross income scheme they would pay £152, a small increase.
One group that will see a more marked increase is non resident parents who enjoy a discount due to having a 'relevant other child' living in their current household. This could be a step child, or a child with a new partner. This discount is being reduced slightly, so that the same self employed person, if he had one 'relevant other child' from his current relationship living with him, would currently pay £123 under the net income scheme. He would pay £139 if his case was assessed under the gross income scheme.
The shared care system, where a one seventh discount is awarded to those non resident parents who have their child staying with them for more than 52 nights a year, remains with some slight alterations.
How the scheme will be administered.
The reason that the gross income scheme is being brought in is that the CSA hopes to be able to secure substantial savings in administration costs through close collaboration with HMRC. This is 'joined up government'.
Whenever the CSA wishes to make an assessment against a non resident parent they will be able to contact HMRC directly and obtain either the PAYE data (for employed persons) or the self assessment tax return (for self employed persons). Where both are available, for example because an employed person gets substantial income from investments or property rental, the self assessment return is to be preferred.
The figure that will be used to calculate the maintenance liability is the amount upon which the non resident parent was charged to tax (as defined by the tax statutes) in respect of the total of his employed income, trading income (ie. self employed), non state pension income, and taxable welfare benefits in the most recent tax year for which HMRC has figures. Where a non resident parent has made pension contributions these will be deducted from their assessable income (though there is an anti-avoidance provision for excessive pension contributions).
The only exception to this rule is where either there are no tax records for the non resident parent within the last six years, or the non resident parent's current income is at least 25% greater or lesser than the figure given in the most recent tax return. Then the CSA will attempt to establish or estimate the non resident parent's current income.
In most contentious child support cases that come before the Tribunal service the variations scheme, which adds a discretionary element to an otherwise rigid system, looms large.
The grounds under which a non resident parent can argue that his liability should be reduced have been slightly expanded under the gross income scheme. It is now easier for joint debts with the parent with care that the non resident is paying to be taken into account.
It is now possible for a reduction on the grounds of contact costs (eg. where the non resident parent spends more than £10 per week on fuel or train tickets travelling to contact) to be claimed at the same time as the non resident parent getting a reduction on the grounds of shared care. Previously the two were mutually exclusive and the one seventh discount was usually preferable, so that contact costs were rarely claimed.
The changes to the grounds of variation which allow a non resident parent's liability to be increased are sweeping.
Currently, the process by which income that is not 'self employed earner' or 'employed earner income' is brought into account though a variation is somewhat cumbersome. This situation frequently happens where a non resident parent pays himself through dividends from his company, or draws income from a property rental business.
The gross income system greatly simplifies this process. Where a non resident parent has 'unearned income' (eg. income from property rental, dividends or interest, as defined by reference to the tax statutes) of more than £2,500 per annum, this income can be taken into account through a variation.
Significantly, the extent of this unearned income is to be determined solely by reference to the tax return. Where the tax return does not identify any 'unearned income', the system will proceed on the basis that non resident parent does not have any unearned income. This is explicit in the regulations, the unearned income 'will be treated as nil'.
Furthermore, the 'assets' ground of variation has gone under the gross income scheme. Under the current scheme this can allow the CSA to deem a return of 8% on any assets over £65,000. Disputes regarding the application of this ground feature in many of the cases in which I appear, as non resident parents, particularly those with investments or property rental businesses, find this feature of the system particularly unfair in the current economic environment where 8% returns are wholly unrealistic.
Currently, a non resident parent's liability can be increased if his 'lifestyle is inconsistent with his income.' This ground of variation has also gone under the gross income scheme.
The 'diversion of income' ground of variation remains under the gross income scheme. This can come into play where a non resident parent makes excessive pension contributions, funnels his earnings through his new partner, or simply fails to pay himself a reasonable salary from his business.
Advice to practitioners.
I believe that the new gross income scheme provides a much more favourable environment for non resident parents who seek to reduce their liability.
Under the current net income scheme the CSA, and ultimately the Tribunals, have approached the income claims of self employed non resident parents in a similar fashion to that taken in ancillary relief courts. Where it is apparent that the non resident parent has under declared his income, they have been ready to fix liability at a much higher level, even in the face of the declared level of income being accepted by HMRC.
In Gray v Secretary of State for Work and Pensions  EWCA Civ 1412 this approach was endorsed by the Court of Appeal, which had no problem with two government bodies, HMRC and the CSA, reaching different conclusions about what a person's income was.
The gross income scheme's reliance upon the figures supplied by HMRC and the loss of the 'lifestyle inconsistent with income' ground of variation, suggests a statutory reversal of this decision.
I would expect the new gross income scheme to make it far harder and in some cases impossible for parents with care to go behind the figures accepted by HMRC as the non resident parent's income.
The justification for this change must be that the CSA cannot afford to spend time and money investigating non resident parents' income. Presumably, the remedy is for the parent with care to ask HMRC to investigate the non resident parent to establish whether he is under declaring his income. The scheme explicitly says that a historic maintenance liability can later be revised at any time if the underlying tax documents are subsequently amended by HMRC. However, one anticipates that in many cases HMRC will simply refuse to investigate, and thus the parent with care will be left without a remedy, and deprived of the correct level of child maintenance.
Accordingly, I would advise those practitioners who have clients who are potentially able to make an application to the CSA to seriously consider doing so before the gross income scheme is rolled out for all applicants where there is a fear that the non resident parent may misrepresent his income to HRMC and the CSA.
Jody Atkinson TEP is a barrister at St John's Chambers, Bristol. He is part of both the Family and Chancery departments. He specialises in advising and representing clients in all kinds of family finance disputes: divorce/ancillary relief and cohabitation/trusts cases as well as probate and Inheritance Act disputes. He is ranked in the Family/Matrimonial section of Chambers 2013, which comments that he is 'outstanding in child support cases'. He is available for direct access work.