When it comes to child maintenance assessments, what is deemed allowable by HMRC does not always align with what is considered acceptable by the Child Maintenance Service (CMS). In some cases, business practices that comply with tax regulations can still be viewed as a diversion of income by the CMS First Tier Tribunal, leading to adjustments in child maintenance calculations.
Our child maintenance consultants frequently assist Limited Company directors and shareholders in understanding how their financial decisions may be interpreted differently in a child maintenance tribunal and what steps they can take to avoid potential pitfalls.
What is Considered Diversion of Income by the CMS?
Diversion of income refers to financial decisions made by a paying parent that result in a lower reported income for child maintenance purposes. This often arises when a company director or shareholder structures their earnings in a way that reduces their taxable income while still benefiting from business profits.
Common examples include:
- Distributing income to a partner or family member who does not contribute to the business.
- Retaining profits within the company instead of taking dividends.
- Claiming business expenses that are acceptable for tax purposes but may be challenged by the CMS.
Even if these decisions comply with HMRC guidelines, the CMS may assess them differently, leading to higher maintenance liabilities or claims of income diversion during a tribunal.
Examples of CMS Diversion of Income Cases
Distributing Income Through a Spouse or Partner
A Personal Service Company (PSC) director appoints their partner as a shareholder and pays them a salary or dividends to utilise lower tax bands. While this may be an effective tax strategy under HMRC rules, a Child Maintenance tribunal could view this as a diversion of income – especially if the partner does not contribute to the business.
Retaining Profits to Avoid Dividend Payments
A technology contractor chooses not to take dividends, instead retaining profits in the company while living off other income sources (such as an inheritance). Although this might make financial sense, the CMS tribunal may deem those retained profits as potential income, increasing child maintenance liability.
Claiming Allowable Business Expenses
A company director rents a property near their workplace instead of paying for hotels during the week. HMRC allows the rent and utility bills as a business expense, but the CMS tribunal partially disallowed this, arguing that it reduced the director’s reported income and could be considered a diversion of income.
How to Avoid CMS Diversion of Income Issues
If you are a company director or shareholder, it is crucial to:
- Understand CMS rules regarding income assessment.
- Review financial decisions with child maintenance implications in mind.
- Seek expert guidance before structuring income in a way that could be challenged.
- Prepare evidence to justify financial decisions if questioned in a tribunal.
How CMSAS Can Help
Our consultants work with business owners to assess their income structuring decisions and help mitigate risks in child maintenance cases. We provide:
- Advice on financial arrangements to prevent CMS disputes.
- Support in preparing for CMS assessments and tribunals.
- Guidance on how business decisions impact child maintenance obligations.
If you’re a company director or shareholder and need expert guidance on CMS diversion of income, contact CMSAS today for professional support.
