When it comes to child maintenance assessments, HMRC and the Child Maintenance Service (CMS) do not always treat income and expenses in the same way.
In some cases, a First-tier Tribunal considering a child maintenance appeal may view tax-compliant business practices as a diversion of income. This can result in adjustments to a child maintenance calculation.
Our child maintenance consultants regularly help Limited Company directors and shareholders understand how a tribunal may interpret their financial decisions. We also help them identify steps they can take to avoid potential problems.
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 can arise when a company director or shareholder structures their earnings to reduce their taxable income. They may still benefit from the profits generated by the business.
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 HMRC accepts but the CMS may question when assessing income.
These decisions may comply with HMRC guidelines, but the CMS can assess them differently. This could result in a higher maintenance liability or an allegation of income diversion at 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.