There’s been some publicity recently about the tax exemption for ‘workplace nurseries’. Specifically, HMRC have drawn attention to some perceived abuses of the special rules which apply where the nursery is off-site.
Some employers have the resources to provide on-site childcare facilities for their employees. Provided certain conditions are met, the provision of that benefit does not give rise to any charge to tax. This remains the case even if the facilities involve ‘salary sacrifice’ arrangements: there is an express exemption from the ‘optional remuneration’ rules which were brought in in 2017 and which rendered most ‘salary sacrifice’ arrangements ineffective for tax purposes.
Of course, many employers don’t have the space or other resources to provide on-site facilities. To ensure a level playing field (or perhaps we should say a level soft-play area?) the same favoured tax treatment can apply to an off-site facility, but only if the employer is ‘wholly or partly responsible for financing and managing the provision of the care’. Simply buying in places for employees’ children at a commercially-run nursery doesn’t cut the mustard.
HMRC have become exercised by what they describe as ‘a number of commercially marketed schemes which set out to exploit the benefit-in-kind exemption’ which they say fail to comply with the rules. Under such schemes, the employer typically pays for places in a commercial nursery in the usual way and purports to meet the statutory requirement for ‘financing and managing the provision’ by paying the nursery a small additional sum – perhaps £400 per year per place – and appointing the scheme promoter to act as its agent at meetings of the nursery management committee.
In HMRC’s view, arrangements of this kind fail both legs of the requirement. ‘Financing’ requires (in HMRC’s view) ‘some real and substantial commitment to funding the facility or providing it with capital. Such a commitment may take the form of an agreement to meet a set proportion of the overall cost of providing the care or it may be a guarantee to indemnify against losses a primary care provider who would otherwise be at real risk of losses.’ Similarly, ‘managing’ implies close involvement in monitoring things like staff performance, the extent of the care provided, the conditions under which it is provided and the allocation of places. The employer must ‘in a real sense, play a part in management’.
It’s easy to see how smaller employers may fall into this trap. For many such employers, involvement in ‘financing’ and ‘managing’ what is essentially someone else’s business is impracticable and unattractive. In practice, buying in places may be the only feasible option. And why, logically, should tax law differentiate between a benefit provided directly by an employer and a benefit which is bought in? Perhaps we can expect a new government to remedy the unfairness.
But meanwhile, the law is what it is, and care should be taken to comply with it: the last thing any employer will want is to saddle employees with a tax bill they can’t afford for a benefit they were promised was tax-free.
For more information on tax-free childcare, please get in touch with your usual BKL contact or send us a message.