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Child Support Update

Jody Atkinson TEP, barrister at St John's Chambers, Bristol, takes stock of the developments in child support law and practice and considers the implications for parents.

Jody Atkinson TEP  barrister at St John's Chambers, Bristol

In two previous articles, 'Child Support: Here Comes the New Gross Income Scheme' , and then 'Child Support – What Is Going On?', I set out how the Department for Work and Pensions ('the DWP') have implemented a major change in how child support is both calculated and administered.

In summary, all new applicants for child support after 25 November 2013 were placed into the new scheme. The new scheme is administered by the DWP under the name of the 'Child Maintenance Service' ('the CMS'). One of the main features of the new scheme is that maintenance is assessed by applying a percentage to the paying parent's gross (pre-tax) income, hence I call it the 'gross income scheme'.  In 'Child Support: Here Comes the New Gross Income Scheme', I break down the main differences between the gross income scheme and its predecessor, the net income scheme. No prizes for guessing that under the net income scheme parents were assessed by applying a different percentage to their net (after tax) income.

The DWP often refer to the gross income scheme as the '2012 scheme', because this is the date of the regulations that underpin it. Similarly, the DWP refer to the net income scheme as the '2003 scheme'. The net income system is administered by the Child Support Agency ('the CSA'), but in reality that is just the DWP operating under another name. The CSA and the CMS are basically the same employees of the DWP using different headed paper.

Closure of the old net income cases.

The DWP took the decision that, rather than automatically transition all of the existing cases on the net income scheme onto the gross income scheme, as they could have done, they would instead close the net income scheme cases, and force parents who wanted to continue to use the service to re-apply.

The DWP set themselves a target of closing all of the net income scheme cases by the end of 2017. This is going very well by comparison to other DWP projects.  According to the September 2017 figures published by the DWP they have now contacted 98% of the old net income scheme cases that they intend to close, and are on track to close all net income scheme cases by December 2018.

The most interesting statistic is that parents have only applied for a new gross income scheme assessment in 21% of the net income cases that have been closed so far. The DWP are trying to put a positive spin on this, by claiming that this means that more parents than ever are agreeing maintenance between themselves (in CMS speak 'reaching a family based arrangement').

However, there may be reason for concern. The DWP has gone out of its way to trumpet the fact that they are now charging fees. As I explained at length in 'Child Support – What Is Going On?', in fact most applicants for a CMS calculation will only ever pay a one off fixed fee of £20. The collection and enforcement fees are only for the minority of cases where the non-resident parent fails to pay and the CMS has to take action.

Nonetheless, I expect a lot of parents with net income scheme cases, and also those who have no previous contact with the system who were thinking about making an application, were confused by the change and put off by the talk of fees. Indeed a minister said that the whole point of the fees was to get the number of cases down (and that is the reason that the £20 had to be paid upfront and was not simply taken off the first payment of maintenance). I suspect that the DWP's decision to close the net income cases (rather than simply transfer them across to the new gross income scheme) has left many parents receiving little or no maintenance, and with the false belief that it would be expensive to pursue it with the CMS.

This is unfortunate, as the new CMS gross income scheme in fact represents great value for money, and for the majority of users it will be a much better experience than its predecessors would have been. The CMS can now obtain information directly from Her Majesty's Revenue and Customs ('HMRC'), which will be either the paying parent's most recent tax return or PAYE information submitted by their employer. This is obviously preferable to the paying parent submitting information about their income, and it usually speeds up the process considerably. The downside is that parents are assessed on information that can be a year or two out of date, unless it can be shown that current income is 25% lower or higher that the historic HMRC information.

Another innovation is that calculations are automatically updated every year by the CMS making a fresh request to HMRC. This is an excellent feature, compared with the previous system where parents would often be stuck on an out of date calculation for many years. Indeed, I have recommended that family solicitors consider making a CMS application, simply because the facility of having an automatic annual update of the client's previous partner's income is so useful, for example, if there is spousal maintenance as well. It is well worth a one off payment of £20.

Unearned income under the new gross income scheme.

One of the flaws of the gross income scheme is that parents are initially only assessed in respect of their 'earned' income, which is defined as their self-employed or employed income. They are not initially assessed on any other 'unearned' income, such as income from a rental property, or the dividends which make up the majority of the income of many company directors.

The CMS can assess on rental or dividend income, but only if the person with care makes an application for what is called 'a variation on the grounds of unearned income'. Once that application has been made, the CSA will obtain the most recent self- assessment tax return information from HMRC, and can, so long as the 'unearned income' is more than £2,500 in that year, assess on that income.

This additional step seems completely superfluous. Given that the CMS now have access to self assessment tax returns, why not look at all sections of the return in every case to see if there is 'unearned income', and then leave it to paying parents to point out the rare cases where it would not be just and equitable to take that income into account? There must be a huge number of parents receiving maintenance who are losing out because unearned income is not being considered, and they have not asked for it to be considered. 

Removal of the 'assets' and 'lifestyle' variations.

Under the net income scheme it was possible for the CSA or the Tribunal to make a 'variation' to the amount of income that was assessed for maintenance on the grounds of 'assets' and also on the grounds of 'lifestyle inconsistent with income'.

Where an assets variation was made, the paying parent would be deemed to be earning income of 8% from his assets, so long as they were worth more than £65,000. There were complicated rules on what assets could be taken into account, and the figure of 8% could be reduced if it was just and equitable to do so. That ability is not available under the new gross income scheme.

The assets ground of variation sat uneasily with the rest of the scheme. The approach of the whole scheme is based on the assessment of income, rather than capital. Also the CSA were ill equipped to assess the value of property, and this generated a large number of appeals. Under the new gross income scheme parents will instead, be assessed, by way of an 'unearned income' variation, on the income that their assets actually produce. So in the case of a rental property, they will be assessed against the rent rather than the value of the property. In the vast majority of cases that will produce a simpler and fairer outcome than imposing an arbitrary 8% deemed income based on the property's value.

In Green v Adams (Rev 1) [2017] EWFC 24 (03 May 2017), the father presented as penniless, but there were about £5million of assets held by discretionary trusts or companies, which the mother said should be taken into account. Mostyn J found that the trustees of the discretionary trust would follow the father's directions, and that, even though the majority of the shares in the companies were held by the father's adult children from a previous relationship, the companies were in reality under the father's control. Accordingly, the judge found that £5million was available to meet the mother's (modest) claims under Schedule 1 of the Children Act for lump sums. At the end of the judgment, Mostyn J noted that the father had recently been assessed under the new gross income scheme, and had been told that he only had to pay £7 per week. The judge bemoaned the removal of the assets ground, and called for its reinstatement.

It is easy to see why the judge made the comments that he did, but I suspect he spoke too soon, and that, had the mother pursued a 'diversion of income' variation, the father's maintenance calculation would have increased considerably. It is inevitable that a father in these circumstances would initially receive a low assessment, as he did not work and thus had no 'earned' income. However, although the 'assets' ground of variation has gone, the 'diversion of income' ground remains and is a potent weapon to combat avoidance.

In any case where the paying parent is able to control 'whether directly or indirectly' their income, and 'unreasonably reduces' that income, the CMS, or a Tribunal on appeal, has the power to deem them to be in receipt of the diverted income. In the light of Mostyn J's findings that the father controlled the companies and that the trustees would do whatever he said, the case for a variation on the grounds of diversion of income appears overwhelming.

The 'diversion of income' ground of variation is not limited to such extreme circumstances, and variations have been made in cases that I have been involved in on the more everyday basis that the paying parent has made manifestly excessive pension contributions, or has failed to pay themselves a reasonable salary from the company that they control.

Similarly, while the 'lifestyle inconsistent with income' ground of variation has also gone, that does not mean that the CMS or Tribunals are now powerless to deal with persons whose affairs are wholly mysterious.

Under the new gross income scheme, the starting point is meant to be the tax return or PAYE information that comes in from HMRC. In the overwhelming majority of cases it will be the finishing point as well.

However, where there is no HMRC information, or the HMRC information is that there is nil income, the CMS, or the Tribunal on appeal, can calculate or estimate what the paying parent's current income actually is. Where the information available in relation to current income is 'insufficient or unreliable' (ie. the paying parent has failed to co-operate) they may 'make any assumption as to any fact', and, for example, deem the paying parent to have the average income for their particular occupation.   

Of course, it is one thing for the CMS to have these powers, and it is quite another for the CMS to have the energy or resources to use them. Under the old system, the CMS would quite frequently assess at a low value and leave it to the receiving parent to appeal if they were dissatisfied. This approach has not changed markedly, and means that many receiving parents will only receive the full amount of maintenance that they are entitled to if they have the energy and resources to appeal their cases to the Tribunal.

Parents who share care equally.

One of the features of the old net income scheme that caused particular grief was the insistence that there had to be a non-resident parent, who was liable to pay child support. Even where the child's time was split 50:50, the CSA would determine that one of the parents was the non-resident parent, and thus liable to pay some child support. Often this would come down to one parent having this child a couple of nights more than the other in a given year. Sometimes the receipt of child benefit was used as a 'tie breaker'. Unsurprisingly this led to great feelings of injustice, and a large number of appeals.

The gross income scheme changed the rules and provided that there would be no liability to pay child support if 'day to day care' is provided by the other parent to 'no lesser extent' than by the applicant.

The concern was that that this sensible change would be rendered a dead letter by the sort of pedantic application of rules that characterised the child support regime in the past. As there are 365 nights in the year, it is mathematically impossible for a given child to spend an equal number of nights with both parents. Also, in reality even if patterns of shared care are intended to be equal, they are inevitably disrupted by illness, holidays and the like.

In JS v Secretary of State for Work and Pensions [2017] UKUT 296 the Upper Tribunal held that the precise number of nights the child spent with each parent would not  by itself be determinative of the question of whether there was a liability, and it was necessary for the CMS and Tribunals to first consider the broader question of whether day to day care was provided by the respondent parent to 'no lesser extent.' If it was, then there would be no liability. Only if the day to day care was found to be unequal, would the CMS or Tribunal then have to go on to consider the number of nights the child spent with the non-resident parent, which would be relevant to the level of the 'shared care discount' that they received.

It is important to emphasise that this decision does not mean that no maintenance will be payable wherever there is a 'shared residence' or 'joint custody' agreement, or court order, in respect of the children. There will only be no liability to pay child support where, as a matter of fact, the child's care and time is divided on a practically equal basis between the parents.

However, hopefully this does mean that the kind of damaging situations where children are withheld for one night to ensure that child maintenance is payable will become a thing of the past. 

1st March 2018