With rising UK childcare costs, provision of a workplace nursery can be a powerful way to attract and retain staff. Done properly, childcare can be offered to your employees during their working day without creating a tax charge.
However, HMRC interpret the requirements for tax exemption very strictly, and have successfully challenged arrangements offered by some employers on the grounds they fall short of the required conditions.
Some promoters are offering seemingly attractive childcare schemes to employers which are unlikely to stand up to HMRC scrutiny, and could land the employer with unexpected tax bills.
What’s exempt?
The simplest form of exemption is for an employer to arrange their own, on-site nursery. As this is impractical for many employers, particularly smaller businesses, the exemption also covers situations where a number of employers join forces to provide childcare for all their employees.
These arrangements have a longer list of conditions to qualify for exemption than an employer-operated on-site nursery would, including the following partnership requirements:
- Responsibility for financing
The employer must take real responsibility for financing the childcare provision, such as agreeing to fund a proportion of costs and bearing a share of any losses.
- Responsibility for management
The employer must be closely involved in managing the provision of childcare, such as appointing and managing nursery staff.
What’s the risk?
Some scheme promoters target employers with apparently qualifying childcare schemes, which promise to require very little involvement from the employer by seeking to exploit the partnership requirements for tax exemption.
For instance, they might involve charging the employer a notional amount on top of the monthly childcare costs in an attempt to meet the financing requirement, and the promoter may offer to represent the employer on a nursery’s management board to meet the management requirement.
However, HMRC guidance indicates that such arrangements are unlikely to meet the conditions for tax exemption, which HMRC interpret very strictly:
“The exemption was not intended to apply, and in the opinion of HMRC does not apply, to commercially marketed schemes […] where the employer really does no more than to buy in places at a commercially run nursery.”
What to look out for
Employers considering offering childcare to their employees need to pay close attention to the details of the offering. In essence, they should be actively involved – delegation of responsibilities won’t be enough to secure tax exemption – so any scheme offering to manage the provision on their behalf should be approached with caution, and professional advice may be needed to check it meets the necessary tests.
Many promoters offer to arrange childcare provision under salary sacrifice arrangements – they may advertise tax and NIC savings for employees, and Class 1 secondary NIC savings for the employer. All they advertise the employer as needing to take care of are the salary sacrifice adjustments through their payroll – everything else will be done for them.
Finally, some promoters are even badging their childcare schemes as ‘HMRC approved’. This in itself should be a red flag, as HMRC say they "will never give approval for a business to advertise that a scheme is tax compliant".
This article reflects the position at the date of publication shown above. If you are reading this at a later date you are advised to check that that position has not changed in the time since.
We regularly publish articles on a range of tax and wider topical issues which affect employers. If you wish to subscribe to our monthly Employer Focus e-newsletter, please contact us.