Child maintenance is initially calculated based on declared earnings, and so self-employed non-resident parents have more control over how they present their income. And even though there are ways through which such declarations can be challenged, these are neither made obvious to single parents nor exercised often. Janet Allbeson explains the current situation and writes that although the group make up a small percentage of the total caseload, tens of thousands of children are behind the figure, and so there is a strong case for revisiting the existing system.
A recent Department for Work and Pensions (DWP) study examining the attitudes and behaviours of self-employed parents liable for child maintenance noted that “category may contain some individuals who are less disposed to comply overall, and are actively seeking to reduce their liability by declaring themselves self-employed.” In one instance, a non-compliant parent reported:
“Citizens Advice Bureau told me I should say I was self-employed because I was worried about having enough money to make payments…so to register as the self-employed teaching job instead of my other work.”
The finding will come as no surprise to many single parents who contact Gingerbread to report their struggles to get the Child Support Agency (CSA) or Child Maintenance Service (CMS) to take proper account of a non-resident parent’s self-employed income, or to effectively pursue a self-employed ex-partner for unpaid child maintenance. Such maintenance is initially based on a non-resident parent’s declared earnings. This works fine when wages can be verified via an employer and PAYE returns. It works less well when the non-resident parent is not directly employed and has control over how they present their income. So, unless challenged, a company owner paying themselves a minimum wage but having a high dividend income, will have their child maintenance liabilities calculated solely on the minimum wage. In some self-employed cases, this is an unintended consequence of a tax efficient arrangement; in others, it is a deliberate attempt to minimise liabilities.
Rules do exist which allow a single parent to request a ‘variation’ to the standard child maintenance formula in this situation, and take account of ‘unearned income’ and income diverted elsewhere (e.g. through excess pension contributions). Look hard enough, and a summary of the variation rules can be found deep within the official DWP website. Yet it is clear from frustrated single parents who contact Gingerbread that the majority have been left in complete ignorance that a challenge to the standard formula is even possible, and that the CMS can, for example, request ‘unearned income’ data from HMRC if prompted by a parent to do so.
In clear-cut cases of evasion, a self-employed non-resident parent can fail to declare all their income. Where the CSA is involved, it is possible to ask for a variation on the basis that a non-resident parent’s lifestyle is inconsistent with their declared income. However, this variation ground has been scrapped within the new CMS scheme, because it is regarded as “administratively contentious and resource intensive”. Instead, the CMS simply rely on income data they get from HMRC. If a single parent believes their self-employed ex-partner is not declaring all their income, they are told to ring the HMRC tax abuse hotline. In reality, this could be just a way of getting rid of them. It is becoming increasingly clear that investigation of such cases has very low priority within HMRC, nor has the DWP set up any arrangements to ensure this happens. All the signs are that self-employment status also confers less risk of enforcement action when maintenance liabilities go unpaid.
“CSA is the reason I stay self-employed, because if you’re employed they can take payments straight off your wages, straight out of the company…With them being unpredictable and unorganised, they can hit you whenever they want…”
There are currently over 90,000 self-employed non-resident parents with CSA maintenance arrears. In such cases, the CSA and CMS cannot use their standard method of enforcement of getting an employer to take deductions from wages. Instead, since 2009, there has been a power to issue a ‘deduction order’ whereby (without applying to court) funds can be taken directly from a non-resident parent’s bank or building society account either as a lump sum or in regular instalments. But this power is little used. In the nine months to December 2015, only 1,020 deductions orders were authorised in CSA cases. This compares to 18,215 deduction from earnings orders over the same period.
One excuse might be that the rules restrict deduction orders to accounts held solely in the name of the non-resident parent. This creates an obviously exploitable loophole. Yet, despite Parliament having granted powers to the DWP in 2008 to make regulations to permit deduction orders from joint accounts, it was only in December 2014 that the Department admitted that research indicated this “might be a worthwhile pursuit” and so would be “exploring this.” Even still, the regulations remain unchanged over twelve months later. And, as Gingerbread has already reported, action has been dilatory in reporting child maintenance debtors to credit reference agencies – potentially a very useful enforcement tool against self-employed non-resident parents who choose not to pay.
The government could say that – with self-employed non-resident parents making up around 7.7 per cent of the CSA caseload – they represent only a small minority of cases within a ‘broad brush’ system that works for the majority. But the figure is almost certainly an underestimate, given that company owners can present themselves as low-earning employees, with all ‘unearned income’ from a business hidden – unless a single parent challenges a calculation. Even so, this means there are around 100,000 children potentially affected in the CSA alone. Gingerbread argues that the children of self-employed parents deserve equal treatment to the children of employed parents. We believe there is a strong case for looking again at the rules and operating systems which govern child maintenance in self-employed cases, to ensure that the children are not disadvantaged and parents’ liabilities reflect ability to pay.
Janet Allbeson is Senior Policy Adviser at Gingerbread. Formerly she was Committee Specialist to the Work and Pensions Select Committee and a lawyer specialising in social welfare law.