Over recent months, HMRC has been challenging commercially marketed schemes used for the provision of workplace nursery places, which seeks to take advantage of a specific exemption and which is commonly provided as part of a salary sacrifice arrangement.

Background

Under the terms of the exemption, unlimited tax free childcare can be provided by the employer where the following conditions are met:

• Condition A: The child is the employee’s child or stepchild and is resident with the employee, or the employee has parental responsibilities for the child.
• Condition B: The provision of the workplace nursery is not premises which are used wholly or mainly as a private dwelling and all applicable registration requirements are met.
• Condition C: The premises on which the care is provided are made available by the employer alone, or the partnership requirements are met.

Promoter schemes

As it is highly unlikely that many employers can provide the childcare arrangements ‘in-house’, the more common approach is to access childcare via a third-party provider which will have the following characteristics:

• An employee enters into a salary sacrifice which is intended to cover the cost of a nursery place. This will often be at a place of the employee’s choice.
• Under the salary sacrifice arrangement, the Income Tax and National Insurance Contributions (NICs) savings are intended to be used to meet the employer’s financing requirements of providing the childcare facilities.
• There is a requirement on the part of the employer to be actively involved in the management of the nursery. This will include attending meetings and making decisions about the running of the nursery.
• The level of monthly contributions typically paid range between £100 and £150 per employee.
• The scheme provider enters into a commercial arrangement with the employer, and acts as a co-ordinator across the various participants.

HMRC has provided in its Agent Update (Issue 121) three areas which it does not believe satisfies the conditions of taking an active part in the management of the nursery:

• An employer occasionally being consulted by nursery providers on broad childcare arrangements.
• An employer having an occasional call with the nursery for a general update.
• An employee having a place on a committee that has no particular brief.
• The level of financial contribution paid should represent a significant contribution towards the running of the nursery. This is likely to take the form of contributing to overall costs, as well as joint responsibility for any losses. HMRC has indicated that it does not believe the level of monthly contribution per employee’s child meets the financial test.

One question to consider is whether the exemption, in its current format, is ‘fit for purpose’, especially as the Government is trying to encourage parents to come back to work. Furthermore, working practices have changed following the pandemic and discussions around where childcare can be accessed is something which needs to be considered.

What do employers need to do now?

HMRC is clearly of the view that certain commercial schemes, operated through a third party, do not satisfy the conditions of the exemption. However, it will be necessary to review the specific arrangements which are in place between the employer and service provider.

The following actions should now be considered:

• Undertake an evaluation excise to see whether the terms of the exemption are being met.
• Where the exemption is not due, and an historic tax and National Insurance liability has been incurred, understand who will be responsible for paying the liabilities due.
• Managing employee expectations.

If you have participated in a workplace nursery scheme provided by a third party, please contact Nick Bustin, Employment Tax Director, or Dinesh Pancholi or Joanne Hennessy, Senior Managers, to discuss matters further.