ATT calls for HMRC to clarify workplace nursery tax rules

Employers can offer nursery places to their employees as a tax-free “benefit in kind” using a salary sacrifice scheme, but HMRC is reportedly cracking down on those claiming the tax break despite not meeting eligibility criteria.

To qualify, businesses must have a nursery on-site or group together with other employers in the area to jointly finance and run a facility. Partnering with a commercial nursery will only qualify for the tax exemption if the employer is “wholly or partly responsible for the financing and managing the provision of the care” and simply buying places at a nursery is unlikely to be exempt from tax.

The Association has been made aware of some employers being approached by promoters offering places at commercial nurseries, which obtain tax relief on the cost,¹ and has urged HMRC to be clear on what schemes will benefit from the exemption.

ATT President Senga Prior said:

“Given increasing childcare costs, it is understandable that employers will want to help their staff and, now that childcare vouchers are closed to new entrants, a workplace nursery is the only real way to help in a tax efficient manner.

“There is a tax exemption for workplace provided nurseries, which will generally apply if the employer has a nursery on site, though certain partnerships with commercial suppliers can also qualify.

“However, HMRC’s guidance² makes it clear that many commercially marketed schemes are not eligible, despite being promoted as such. Whether or not the conditions for exemption are met in practice will depend upon the actual arrangements. A possible alternative for individuals is to use the government’s tax-free childcare scheme.³

“While some guidance has been issued⁴, we are urging HMRC to be more proactive in clarifying what schemes do and do not qualify – such as issuing some focused guidance or publicity on what employers and employees should think about, and what questions they should ask, before becoming involved in these schemes.”

Notes to editors:

1. How the schemes typically work:

   The employee sacrifices a part of their salary equal to the cost of a nursery place.

   The employer pays for nursery place, either at a nursery run by the promoter or an independent nursery.

   The employer also pays the nursery an additional sum (typically £400 p/a per place).

   The employer appoints the scheme promoter to act as their ‘agent’ at meetings of the nursery management committee (though in practice employer has no real say in how the nursery is run).

    

2. HMRC’s Employment Income Manual says: “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.”
    

3. This scheme gives a 20% top up, to a maximum of £2000, a year on funds invested but does not have the reduction in national insurance and higher rate tax that salary sacrifice provides.

    

4. Issue 121 of HMRC's Agent Update provided further clarification on the scheme.