HMRC publishes clarification on tax exemption for workplace nurseries

HMRC recently provided clarification to employers on the conditions for the workplace nursery tax exemption. This is expected to affect many employers but particularly those using schemes that are commercially marketed by a promoter.

This could leave many employers and employees with hefty tax and national insurance contributions (NICs) liabilities where schemes are non-compliant.

We have seen a marked increase in commercially marketed workplace nursery schemes. These schemes claim to offer significant tax savings for employees. The increase in popularity is hardly surprising given the rising costs of childcare and ongoing cost of living crisis. However, the legislation governing the relevant tax exemption is complex and care must be taken to avoid falling foul of the various conditions.

How do these schemes operate?

In our experience, these commercially promoted schemes tend to operate broadly as follows:

• Employees enter into a salary sacrifice/exchange, agreeing with their employer to reduce their pay equal to the cost of the nursery place to be provided.
• The employer arranges and pays for a nursery place for the employee’s child. These tend to be places at independent nurseries that have ‘partnered’ with the scheme promoter.
• In addition to paying the nursery fee, the employer pays the nursery an additional sum, which is often funded from the employer’s NIC savings made by the salary sacrifice.
• The employer appoints the scheme promoter or the employee to act as their ‘agent’ at meetings of the nursery management committee. Often, this is by way of an initial call between a nursery worker and the employee at the outset of the scheme. In our experience from speaking with clients, employers generally have no material or ongoing oversight in the running of the nursery.

What are the rules?

The ‘workplace nurseries’ exemption provides a tax exemption for certain employer-provided childcare. The rules were introduced to encourage employers to establish their own childcare facilities or for groups of employers to jointly run a nursery on a partnership basis.

The exemption applies, broadly, where the following conditions are met:

1. The care must be provided for a qualifying child under the age of 16.
2. The premises on which the care is provided must meet registration requirements set out in legislation and not to be wholly or mainly a private dwelling.
3. The premises must be made available by the scheme employer alone or, alternatively, jointly with other employers with the partnership requirements being met.
4. The arrangement under which care is provided must generally be open to all employees or to employees at the particular location at which the scheme operates.

The third condition, notably, allows employers to jointly run a childcare facility with other employers and many scheme providers are promoting this as an offering. Where this is the case, the ‘partnership requirements’ must be met for the exemption to apply, the conditions being that the scheme employer must be included in the arrangements for providing the care, the premises where the care is provided are made available by one or more of the participants, and the scheme employer must contribute to both the ‘financial and management’ elements of the care provision.

HMRC’s clarification

HMRC has now clarified their views on what is required for a scheme employer to be wholly or partly responsible for the financial and management elements of the childcare. HMRC has confirmed that this requires more than purchasing commercial nursery places and contributing to fixed costs.

Employers must have material responsibility by assuming some of the financial risk involved, ensuring some input and influence over management and operational childcare decisions. Employers must do more than merely input on broad childcare policies or seek general updates from the nursery. HMRC has also confirmed that they expect employees appointed to the management board to have evidence of the appointment and to actively participate in management activities.

In our experience, some commercially marketed schemes may not, in light of HMRC’s clarifications, satisfy the conditions for the tax exemption. Most notably, we have seen some instances of schemes only requiring fixed contributions. This means that the scheme employers are not contributing sufficiently to the financial elements of the care provisions.

Where the exemption is found not to apply, the amount of salary sacrificed would be taxable as earnings under the optional remuneration arrangements legislation and the salary foregone reported on the employee’s P11D.

How we can help

We encourage any scheme employers, promoters and participating employees to review their arrangements in light of these clarifying comments from HMRC and seek professional advice where appropriate.

If you do require any further assistance, or want to discuss any of the above, please do contact our employment tax team at Moore Kingston Smith LLP.