It is a fundamental legal principle that couples going through a divorce are under a duty to provide “full and frank disclosure” of their assets when negotiating a financial settlement. This is true no matter how the settlement is being negotiated, whether it is by direct discussions between you, solicitor negotiations, mediation, or court proceedings. But what can you do if you suspect your ex is hiding or lowering their income in a bid to reduce their child maintenance liabilities? Does full and frank disclosure extend to child maintenance? Read on to find out.
It is a fundamental legal principle that couples going through a divorce are under a duty to provide “full and frank disclosure” of their assets when negotiating a financial settlement. This is true no matter how the settlement is being negotiated, whether it is by direct discussions between you, solicitor negotiations, mediation, or court proceedings. But what can you do if you suspect your ex is hiding or lowering their income in a bid to reduce their child maintenance liabilities? Does full and frank disclosure extend to child maintenance? Read on to find out.
If you have concerns about your finances as part of divorce and you feel you need legal advice, contact specialist family solicitor Mark Heptinstall of Slater Heelis Solicitors. He is recognised as a ‘Leading Individual’ in The Legal 500 and ranked in Chambers UK, and is described as having “the amazing ability to bring calm into troubled waters”.
Child maintenance payments and hiding income to reduce a divorce settlement are linked, and it is useful to take a quick look at what to look out for. If you have been separated for a while, it can be difficult to know with any degree of certainty what your ex’s financial situation is, but there are some red flags to look out for. If your ex is keen to set a figure for child maintenance and their lifestyle fails to accurately reflect the amount they are offering, or the CMS have set a really low payment liability, your suspicions should be raised.
What are the common ways people hide income?
There is a crossover in the methods that individuals use to hide or reduce their income during divorce or child maintenance assessments. The most common ways include:
- Transferring money – this could involve transferring sums of money to one or more friends and/or relatives and dress it up as payments for services/items bought
- Setting up trusts – if these are set up close to the point of divorce, this might draw suspicion, whilst longer standing trusts may be harder to link to concealed assets
- Transferring money offshore – international assets are much more difficult to trace and value than those in the UK
- Hidden bank accounts and savings – this is very common in cases where one party had financial control during the marriage
- Cryptocurrency – concealing money in this way is becoming more common in recent years. The anonymity and lack of a paper-trail makes them a viable option
- High value purchases – buying expensive items that retain their value, such as jewellery, intending to sell it later on
- Manipulating business assets – this could include falsifying business liabilities, devaluing or hiding assets, amongst other things
- Deferring bonuses – annual bonuses can include a significant portion of wages, and bonuses may be deferred intending to receive the full payment post-divorce/child maintenance assessment
- Choosing to pay themselves a low salary from their business whilst waiting for the settlement/assessment to be made
- Not declaring side hustles
There are many ways in which a committed individual can choose to conceal assets, and with advances in technology, it means that ways to hide assets are constantly evolving.
How does self-employment affect a child maintenance assessment?
It is a fact that self-employment can introduce additional complexities when it comes to calculating child maintenance. This is because self-employment income can fluctuate depending on the profitability of the business. In addition, self-employed individuals usually have business expenses and tax deductions that the Child Maintenance Service (CMS) needs to take into account.
The CMS uses a range of approaches to calculate child maintenance if the paying parent is self-employed. The most common method is using the parent’s gross income, although if this fluctuates, an average figure over a specified period may be used instead.
What are the factors the CMS consider when assessing child maintenance for self-employed parents?
Several factors can affect child maintenance calculations, which include:
- Income and profits from self-employment
- Business expenses and tax deductions
- Fluctuations in income
- Pension contributions
- Dividend income
- Any other taxable income the parent may have
What are the challenges in assessing income of self-employed parents?
Determining the income of self-employed parents for child maintenance purposes presents significant challenges because of the nature of self-employment and financial reporting. Unlike salaried employees, whose income is straightforward to verify through PAYE records, self-employed individuals often have variable earnings and complex financial arrangements that make accurate assessment difficult.
One key challenge is fluctuating income. Many self-employed individuals experience seasonal or irregular earnings, making it hard to determine a stable income for child maintenance calculations. A particularly profitable year may be followed by a downturn, leading to inconsistent payments. The CMS relies on HM Revenue & Customs (HMRC) data, but these figures often reflect past earnings rather than current financial circumstances, which can be misleading.
Additionally, self-employed parents can legally deduct business expenses before reporting taxable income. While legitimate expenses reduce the actual cost of running a business, some may be exaggerated or misclassified to artificially lower income. For instance, personal expenses might be recorded as business costs, reducing the declared income used for child maintenance calculations.
Beyond legitimate deductions, there is also the potential for income manipulation through accounting practices. Self-employed individuals may delay invoicing, retain profits within a business, or divert income through dividends or trusts, making their personal earnings appear lower than they actually are. This can significantly reduce the child maintenance obligation, disadvantaging the receiving parent and child.
Given these complexities, ensuring fair child maintenance payments requires robust enforcement mechanisms, forensic accounting assessments, and potential variations or appeals to challenge manipulated income reports.
What is the legal framework governing child maintenance for self-employed parents?
The legal framework governing child maintenance for self-employed parents is primarily based on the Child Support Act 1991 and subsequent amendments, which established the CMS as the body responsible for assessing and enforcing child maintenance payments. The CMS operates under government guidelines to ensure that both parents contribute fairly to their child’s upbringing, regardless of employment status.
For self-employed parents, the CMS relies on income data from HMRC, typically using the most recent tax return to calculate maintenance obligations. However, due to the complexities of self-employment, the CMS can conduct further investigations if there is evidence that the reported income does not reflect actual earnings. Under variation applications, receiving parents can request a review to include additional income sources, such as dividends, rental income, or retained earnings within a business.
If a parent is suspected of under-reporting income, the CMS can request further financial disclosures, impose default maintenance calculations, or take enforcement action to ensure compliance with child maintenance obligations.
What can I do if my ex is hiding or lowering their income to avoid child maintenance?
Sometimes, self-employed parents fail to provide detailed and accurate information about their income to the CMS. This may involve failing to provide records of business expenses, receipts, invoices, and bank statements. A recent study by the Department for Work and Pensions (DWP) that examined the attitudes and behaviours of self-employed parents liable for child maintenance stated that the “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.”
Unless challenged, a business owner paying themselves minimum wage but having a high dividend income, will have their child maintenance payments calculated based on the minimum wage. Rules do exist which allow the receiving parent to request a “variation” to the standard child maintenance formula to take account of “unearned income” and income diverted elsewhere, for example, through pension contributions. The CMS can even request “unearned income” information from the HMRC if asked by the receiving parent to do so.
Since 2009, the CMS have had the power to issue a “deduction order” without having to apply to court. In this instance, funds are taken directly from the paying parent’s bank account either as a lump sum or in regular instalments. However, this power is rarely used in reality. This may be down to a rule restricting deduction orders only to those accounts held solely in the name of the paying parent, creating a much abused loophole. And can result in the paying parent exploiting it by opening an account with a new partner, friend, or other family member.
How does the CMS detect and prevent under-reporting of income?
The CMS takes several measures to detect and prevent under-reporting of income by non-resident parents, including those who are self-employed. The CMS relies on financial disclosures, primarily using income data from HMRC, tax returns, and, in some cases, direct enquiries to the paying parent. If there are discrepancies or indications of undisclosed income, the CMS can conduct further investigations.
The CMS’s approach to identifying undisclosed income and assets involves cross-referencing reported income against other sources. This may include looking at bank statements, property ownership, and other financial records to identify potential hidden assets or unreported income streams. If there is suspicion that the paying parent is manipulating their reported income, the CMS can request more detailed financial documentation, such as business accounts, receipts, or information about alternative income sources.
In more complex cases, forensic accounting may play a role. Forensic accountants are specialists who analyse financial records to uncover hidden earnings, identify suspicious patterns, and assess the true financial position of the paying parent. They use detailed methods to detect manipulated records, fraudulent expense claims, or income disguised through complex business arrangements, such as offshore accounts or trusts. Their findings provide the CMS with the necessary evidence to ensure that child maintenance payments are accurate and fair.
How do I apply for a variation?
If you believe the CMS has not fully considered all the income sources of the paying parent, you can apply for a variation. This is a request to adjust the maintenance calculation based on additional financial information or income that may not have been included in the original assessment.
To apply for a variation, the receiving parent must provide evidence of additional income sources that were not initially considered. The CMS will then review this evidence and assess whether it should be included in the calculation of child maintenance.
To apply, the receiving parent needs to complete a variation application form and submit supporting documents to the CMS. If accepted, the CMS will recalculate the maintenance payments based on the new information.
Is there anything else a receiving parent can ask the CMS to look at in a variation?
The CMS will also consider a variation if it believes that the paying parent has “unreasonably reduced” the amount of income they receive by diverting it to another person or another purpose (see methods of reducing income above). Meaning the amount is not included in the figure used by the CMS.
If the variation is accepted, then the paying parent’s gross weekly income is adjusted to include the full weekly equivalent value of any diverted income, and the adjusted figure is used to calculate the child maintenance payment.
Regulations were also made that allow the CMS to assume that assets of a paying parent not generating any financial return, have an assumed notional income of 8% per year. Assets include for this purpose mean money, land, and some stocks and shares.
Practical advice for self-employed parents
Self-employed parents must maintain transparent financial records to ensure compliance with child maintenance obligations. Key guidelines include:
- Keeping detailed and accurate records of all business income and expenses, such as invoices, receipts, and bank statements.
- Separate personal and business finances, avoiding the temptation to use business accounts for personal expenditures.
- Regularly updating records and consulting with an accountant can also help ensure that all financial information is accurate.
Accurately reporting income to the CMS and providing necessary documentation when requested. Misreporting income or hiding assets can lead to legal consequences, including the possibility of higher maintenance assessments or enforcement actions. Parents should be proactive in disclosing all relevant financial information and, if in doubt, seek professional advice to avoid complications. This transparency ensures fairness and helps maintain a stable financial environment for the child.
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