Self-employed parent hiding or lowering their income – what can I do?

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

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 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.

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.