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Child support, or “Child maintenance” as it is now called under the new scheme of 2012, has been in the news again this week as “notice of charging” letters are being sent out to all parents already on the 2012 scheme to remind them of the imminent introduction of collection charges. These charges will not apply to parents while they remain on the previous two schemes of 1993 and 2003.
Three schemes – 1993, 2003 and 2012
The new “gross income scheme” was phased in from 10 December 2012 and has applied to all new claims since November 2013. It is expected that all existing claims under the previous two schemes of 1993 and 2003 will be closed by 2017; parents on these schemes will receive a letter six months prior to the closure of their case informing them that they will have to make private arrangements between themselves or make a fresh application to the Child Maintenance Service under the 2012 scheme.
The relevant agencies
The Child Support Agency (CSA) is overseeing the closure of all claims under the previous two schemes. The agency dealing with all claims under the new scheme is the Child Maintenance Service (CMS). However, the first point of contact for all new claimants is “Child Maintenance Options”, the gatekeepers to the new scheme.
The “non-resident parent” (NRP) is now the “paying parent” and the “parent with care” (PWC) is now the “receiving parent”. CMEC has been abolished and the new scheme introduces the “family-based arrangement” (FBA) also referred to as “private agreement” or “voluntary arrangement”.
In the absence of evidence to the contrary, the CMS will assume that the parent in receipt of Child Benefit is to be the receiving parent. If there is an equal shared care arrangement (evidenced by an agreement or court order), there will be a nil liability calculation decision.
If there is a disagreement between the parents as to the care arrangements, the CMS will assume that the paying parent has the children overnight for one night a week on average and apply a one seventh reduction (overnight stays discount) to the calculation decision.
Gross income of paying parent, not net
Under the previous scheme of 2003, child maintenance liability was calculated by reference to the paying parent’s net income as identified by the CSA. Under the new scheme, it is calculated by reference to the paying parent’s gross income as most recently declared to the HMRC, so in the case of the employed, their PAYE information, and in the case of the self-employed, their last filed tax return. Note that a paying parent may not have filed a tax return for several years. If this is the case and the paying parent’s current income is 25% less or 25% more than the last filed tax return reveals, either parent can ask the CMS to look instead at the paying parent’s gross income for the current year.
What constitutes income?
A paying parent’s income for these purposes is “earned” income – any income on which income tax is payable. Private pension contributions are deducted from the gross before the formula is applied and rental income and dividends are not taken into account by the CMS, being unearned income, unless a variation application is successful.
Under the 2003 scheme, the percentages applied to the paying parent’s net income according to the number of qualifying children were 15% for one child, 20% for two and 25% for three or more. The same percentages were applied in looking at deductions where the paying parent has children in his household.
Under the new scheme, three(!) separate series of percentages are applied according to the number of relevant children. Firstly deductions of 11%. 14% or 16% are applied for other children in the paying parent’s household. Then maintenance is calculated at 12%, 16% or 19% on the paying parent’s first £800 a week gross income and 9%, 12% or 15% on the paying parent’s gross weekly income above £800. Thereafter, as with the previous scheme, any overnight stays discount is applied.
If all that seems overly confusing, there is useful Child maintenance calculator on the Child Maintenance Options website.
Under the new scheme, paying parents can still seek a reduction for example if they have certain contact costs or continuing joint debts with the receiving parent. Equally receiving parents can still seek an increase if the paying parent is diverting income (for example through excessive pension contributions) or receives “unearned” income such as dividends or rental income. However, “unearned” income is to be assessed solely by reference to the paying parent’s tax return so that if it has not been declared to HMRC the “unearned” income will be treated as nil.
It will no longer be open to a receiving parent in this scenario to seek an increase under the “lifestyle inconsistent with declared income” category as this and the category of “underused assets over £65,000” have been abolished.
This leaves receiving parents such as Ms Blair in the recent case of Hakki Hakki in difficulty under the new scheme. In that case, although Mr Hakki was able to support himself from his poker winnings, the Court of Appeal concluded that his winnings did not constitute “earnings” from gainful employment!!
Under the new scheme reassessments are to be carried out each year on the paying parent’s previous year’s declared income. Mid-year changes will only be possible of there has been a 25% change (up or down) in the paying parent’s income.
A significant development is that, under the new scheme, the CMS will not accept evidence from a receiving parent as to the paying parent’s current income; it will rely solely on information provided to it by HMRC. Therefore if a receiving parent considers that the paying parent’s actual income is 25% greater than their declared income they will have to ask HMRC to investigate the paying parent to establish whether they are under-declaring their income. It may be that HMRC will simply refuse to investigate, leaving the receiving parent without a remedy and deprived of the correct level of child maintenance.
All applications for child maintenance are now made over the ‘phone rather than by written application form so you should keep notes of all conversations in case you need to track your claim. You will first need to speak to an adviser at Child Maintenance Options who will encourage you to enter into a family-based arrangement (FBA) with the other parent direct rather than through the CMS. If you indicate that you wish to proceed with an application to the statutory child maintenance service, you will be given a passport number and charged a fee of £20. The CMS will then write(!) to HMRC to request the paying parent’s income information and a calculation decision will be provided.
Both parents may then agree that payments be made via Direct Pay (i.e. from one parent to the other without the involvement of the CMS). If so, the paying parent should label the payments clearly so that proof of payment can be provided to the CMS if there is a future dispute. Otherwise, payments will have to be made via the CMS’ collection service at a cost to both parents.
Letters have been sent to all members of the new child maintenance scheme this week notifying of its collection charges. Essentially, if payments are not made by Direct Pay, the CMS will collect child maintenance from the paying parent at a charge to that parent of an additional 20% of the award on top of the award itself. In turn, the receiving parent will receive only 96% of their award as a 4% levy will come off the amount owed. Thus, if the award is £100 a week, the paying parent will have to pay £120 and the receiving parent will receive £96.
Currently, both parents have to agree to payments being made by Direct Pay to avoid collection charges. However, the law will soon change so that a paying parent can choose to pay by Direct Pay without the receiving parent’s consent. The only exceptions to this will be where the CMS believes the paying parent is unlikely to pay without the intervention of the collection service. They will make this decision based on the paying parent’s behaviour and/or payment history – so it is more important than ever that the paying parent pays in full and on time (and labels payments clearly) to have the best chance of avoiding hefty collection charges.
In her comments on 21 May 2014, Fiona Weir the Chief Executive of Gingerbread, a charity for single parents, made it clear that she fears that the charges will result in children losing out on vital support.
The pensions minister, Steve Webb, defended the government’s position on Radio Four’s Today programme on 21 May 2014: “The goal here is to get more child maintenance for more children and to make the default for parents, even though they are separated, to sort things out for themselves, rather than using a sort of state bureaucracy”.
Commentators appear to concur that there will be fewer applications to the CMS once collection charges have been introduced than is currently the case, but it remains to be seen whether it is children who stand to benefit in financial terms. Certainly the government will benefit – to the tune of £1,200 million according to Gingerbread’s twitter feed on 21 May 2014.
Image by Christopher Hawkins under a creative commons licence