Challenging a nil assessment by the Child Maintenance Service: part one

This is the first of two articles concerning challenging a nil assessment by the Child Maintenance Service. This article covers two potential routes for applying for variation: income not yet taken into account, and diversion of income. Next week, we will consider two further reasons: unearned income and notional income from assets.

It’s a frustratingly familiar story to many family practitioners: Mr A and Ms B separate, and after failing to come to an agreement between them, Ms B (as the resident parent) makes an application to the Child Maintenance Service in respect of their children. Mr A, the non-resident parent (NRP), is historically a high earner, earning hundreds of thousands of pounds per year, but he abruptly declares that his income is now zero. The CMS assess Mr A’s current income, finds that it is non-existent, and make a nil assessment. His historic income is entirely disregarded. Ms B finds herself with no child maintenance. What can she do?

First, it should be noted that the CMS have acted appropriately in assessing Mr A on his current, rather than historic, income position. This is because the CMS are able to assess income on two bases: current or historic. Historic income is more typically used, because the CMS can simply collect information on the NRP’s historic income from HMRC rather than obtaining the information directly from the NRP or their employer, and therefore avoiding delay and expense. However, in circumstances where the historic income differs significantly from the current income position, the CMS are able to seek information on current income: under Regulation 34(2) of the Child Support Maintenance Calculation Regulations 2012, the CMS should make their assessment using historic information unless the current income differs from historic income by an amount that is at least 25% of historic income.

So far then, the CMS have acted entirely appropriately. Mr A’s income has suddenly dropped from hundreds of thousands of pounds to nothing. He has clearly satisfied Regulation 34(2). The current income basis is the correct basis on which to assess him. The initial nil assessment in correct.

Ms B is not without a remedy, however. She can apply to vary the assessment on two possible grounds: that Mr A has additional income, or assets that should be taken into account. The additional income ground comprises three categories: income not taken into account, diversion of income, and unearned income. This article will consider the first of the two additional income categories, while the companion article to this will consider the third additional income category (unearned income) as well as the assets variation ground.

First, turning to income not taken into account. This part of the additional income ground allows the CMS to take into account income that they would usually disregard, either because of the nature of the income (for example, benefits) or because the NRP’s status puts them outside of the Act altogether (they may be under 18, a student, a prisoner, or a resident of a care home, for example). It must be established that the NRP has net weekly income in excess of £100.

Unfortunately, this ground will not be of much use to Ms B in her specific circumstances, and it is only included here for the sake of completeness. Practitioners should not forget the existence of this category however – in certain cases, it may prove useful, for example if the NRP announces a sudden intention to return to education, for example, or where the NRP is elderly or unwell and may be resident in a care home, but is still in receipt of significant income.

Of rather more use to Ms B is the second category that this article will consider, namely diversion of income. In order to succeed on this ground for variation, the CMS must be satisfied both that the NRP has the ability to control the income that he receives, and that has he unreasonably reduced the amount of income that he would have received and which would have been taken into account by the CMS in their calculations, by diverting it to another person or for some other purpose.

With regards to controlling income, the NRP’s sole control of income is not necessary: the CMS are looking for effective control, with the focus on the realities and practicalities of the particular case (RC v CMEC (CSM), reported as part of [2011] AACR 38.) For example, the NRP may be one of several shareholders in a small business, but if it is clear that the other shareholders are likely to agree to any distribution of income that the NRP proposes, then he will be considered to be in control.

As for the ‘reasonableness’ element, it is important to note that the CMS apply an objective, rather than a subjective, test here: the question is not whether the NRP diverted their income specifically to avoid paying child support, but rather whether in all the circumstances, it was unreasonable for the non-resident parent to divert their income. This is at the discretion of the CMS.

GO'B v CMEC (CSM) [2010] UKUT 6 (AAC) makes it clear that the question of what is ‘reasonable’ is a matter for the tribunal, exercising a broad discretion – the legislation places no restrictions on the circumstances which could be taken into account. As Upper Tribunal Judge Howell QC commented at [22] of GO'B v CMEC, ‘in making financial decisions a parent will obviously have a number of factors to take into account but providing maintenance for his or her children must be very high up on the list of priorities.’ In the context of the NRP running a business for example, the tribunal will take into account recognised business and accounting practices, as well as business strategy, but do not have to accept the NRP running their business in any way they see fit. Instead, they will strike a balance between the NRP maintaining a viable and successful business, and providing a reasonable income stream so that maintenance is available for the children's immediate needs, as they are obliged to do.

In TB v Sec of State for Works and Pensions and SB (CSM) (Child support - variation departure directions - diversion of income) [2014] UKUT 301 (AAC), the Upper Tribunal found that the NRP’s reduction of their income was to an extent unreasonable, but not in its entirety. In that case, the NRP had worked as a self-employed dentist. In 2007, he sold his dental business to a company of which he was the sole director and shareholder. He also transferred 60% of his shares to his two siblings for no consideration. The company paid him £1,500 per month, which had the effect of reducing the CMS calculation by two thirds. When he had set up the company, he had transferred assets to it worth £137,284, of which £115,000 was recorded as being goodwill. Since the new company had no funds from which to repay these amounts, he established a director’s loan account in his favour. At first instance, the goodwill was found to be a sham. On appeal, the Upper Tribunal found that although the sum for goodwill had not been a sham, the amount of payments to the DLA were not entirely reasonable. He determined that around half of the reduction of income had been unreasonable, and so the CMS calculation should be varied.

As well as diverting sums to a business and taking a lower income, other examples of diversion include diverting money to a third party (often a new partner or family member), to a pension scheme from which the NRP will benefit later, or towards other purposes, such as using company assets for private use or business funds for day-to-day expenditure.

How can this help Ms B? Depending on her specific circumstances, the diversion of income ground could potentially be of assistance. Let’s imagine that Mr A runs a business, which also employs his new girlfriend and his mother. He has reduced his income to zero, but pays a large income to both his girlfriend and mother, neither of whom do any actual work for the company. The CMS may well find that this is a clear attempt to divert income.

Of course, if Mr A is simply a regular employee rather than self-employed, the diversion of income category is far less likely to assist Ms B. Typically, self-employed NRPs will find it much easier to artificially depress their income (although if Mr A is an employee within his family’s business, this may warrant further investigation.) In the event that Mr A has simply stopped working altogether, Ms B would be better advised to rely on the unearned income category, or the assets variation ground. An overview of these can be found in the companion piece to this article, to be published next week.