Challenging a nil assessment by the Child Maintenance Service: part two
10th October 2019
Florence Jones, Pupil Barrister, 1 Hare Court
This is the second of two articles concerning the routes for challenging a nil assessment by the Child Maintenance Service. The first article looked at: income not yet taken into account and diversion of income. This week, we consider: unearned income and notional income from assets. (click here to read the first article)
Last week we met Mrs B. She was in an unfortunate position: her previously high-earning ex-partner and the non-resident parent (NRP) to her child had received a nil assessment from the Child Maintenance Service. Mr A had been earnings hundreds of thousands of pounds, but declared that his income was suddenly zero. The CMS made an initial nil assessment which, on the basis of his employment, was correct. The question was: what options did Mrs B have to challenge this assessment?
Mrs B explored whether she could apply to vary the assessment on the basis of income not taken into account (additional income, such as benefits) and diversion of income (for example paying a family member through a business). Mrs B discovered Mr A had no additional income. Mrs B was hoping that Mr A had set up a business in his girlfriend’s name. However, as she feared, he has stopped working altogether.
Mrs B must now consider applying for a variation under the two remaining categories: unearned income and assets variation.
Unearned income is income that is not earned, either through self-employment or regular employment, but is received and therefore taxable. Income can only be subject to a CMS assessment if it is over £2,500 (S69(1) of The Child Support Maintenance Calculation Regulations 2012). The income must also be taxable as land or property, savings and investments, or miscellaneous.
Whether income falls under the CMS assessment depends entirely on the assessment by HMRC: if the income is not taxable, there will be a nil assessment. Practically, information on unearned income is collected by HMRC through self-assessment tax returns and the CMS will only request this information from HMRC following an application for variation.
The first category is income from land or property – this includes property abroad. Typically, this is rent (see Part 3 of Income Tax (Trading and Other Income) Act 2005 for a full list). If a NRP is receiving rental income there are a couple of things to remember. First, as with tax, when calculating unearned income the CMS first remove the costs incurred running the property - such as maintenance and furniture. Second, if a NRP rents a room in their primary residence, he has a lodger, the first £7,500 is not taxable and would not fall within the CMS assessment.
The second category is income derived from savings and investments. This is a broad category which includes: income from invested money; dividends from companies; payments from a trust; interest received from a loan. There are exceptions, the most relevant is likely to be an ISA or an individual investment plan. As above, the question is whether the income appears on the NRP’s tax return, a full list of income and exceptions can be found at Part 4 of Income Tax (Trading and Other Income) Act 2005.
The final category is miscellaneous income. Once again, the CMS will take into account what is taxable (see Part 5 of Income Tax (Trading and Other Income) Act 2005). For example, royalty payments would be included within the assessment but winnings from the lottery or gambling would not. Therefore, if a NRP is a professional gambler his profits would not fall in this category. Incidentally, profits from gambling do not fall under self-employed income either - confirmed recently in French v The Secretary Of State For Work And Pensions & Anor (2018) EWCA CIV 470.
Mrs B obtains a draft of Mr A’s upcoming tax return and, unfortunately, he is not receiving any unearned income. Mrs B therefore hopes she can apply for a variation under the final category: notional income from assets.
Notional income from assets
Mrs B can ask for a variation on this ground if Mr A has high-value assets. The CMS can attribute to Mr A a notional weekly income from these assets, and make a variation of the assessment on the basis of this notional income.
The 2008 regime abolished assets as a ground for variation. However, following a public consultation, the Child Support (Miscellaneous Amendments) Regulations 2018 reinstated the ground with effect from 14 December 2018 (69A Child Support Maintenance (Calculation) Regulations 2012).
First: what counts as an asset? The definition of “asset” is broad and includes: money (including foreign currency), land, stocks, shares, gold. However, there are exceptions. The most notable of which are: first, the NRP’s primary residence; second, assets being used in the course of trade or business - a complete list can be found at s2(2) of the Child Support (Miscellaneous Amendments) Regulations 2018.
Second, what is meant by high-value? The asset has to be valued at over £31,250. This value must be a single asset, rather than 10 items worth £3,125. Further, the CMS is only concerned with the net value of the asset – so it must be worth £31,250 after any mortgages or charges.
Third: what income will be attributed to the NRP? If these conditions are met, the CMS will attribute to the NRP a weekly income at the judgment debt rate (i.e. 8% divided by 52).
If a NRP owns a property which is rented, as set out above, that rent falls under either self-employed income or unearned income. The CMS would not attribute a notional income to the rental property under this ground, because there is already an actual income. Although this issue is not directly addressed in the regulations, the CMS only makes a variation if it is “just and equitable” to do so (s 21F (1) Child Support Act 1991). It is unlikely it would be considered just and equitable to count the income twice.
It is worth noting that there is no checklist for the “just and equitable” requirement, but the statute does list issues which are not relevant (Reg 60 The Child Support Maintenance Calculation Regulations 2012) such as if the child was planned.
It may well be that notional income from assets is the most useful ground for Mrs B. If Mr A was historically a high-earner and is now able to stop work, it is highly likely that he has assets set aside to fund his lifestyle. For example, if Mr A has holiday homes and cash worth £1,000,000, Mrs B can apply for a variation and, providing the assets do not fall into the exceptions above, he will be attributed a notional income of (£1,000,000 x 0.08)/52 = £1,538.46 a week.
If Mr A has capital, Mrs B must bear in mind the obvious strategy for Mr A to avoid paying child maintenance would be to purchase a large property as his primary residence or invest in a business, frustrating Mrs B’s claim.