Update on Workplace Nursery tax rules

In an update to this article, HMRC clarified and reiterated its position on the partnership requirements in the provision of a workplace nursery in Agent Update 121 on 17 July 2024.

HMRC reaffirmed that it expects employers that enter into a partnership arrangement to have a material level of financial and managerial responsibility for the ongoing operation of the workplace nursery.

HMRC refers to certain features of schemes which it does not consider meet the financial and management conditions to meet the tax exemption, such as those where the: 

• employer pays a £100 per month towards the fixed costs of a nursery already in existence 
• employer or an employer representative simply joins occasional consultations with the nursery 
• employer is only occasionally consulted on broad childcare-related policies 
• employee participants sit on a committee with a limited brief and/or powers.

There are scenarios in which employers can enter into a commercial agreement with a third party for the provision of a qualifying workplace nursery under salary sacrifice, but that would require far more participation than some of schemes currently being offered in the market.

The latest update from HMRC would indicate that some of these commercially marketed schemes would offer only a very low probability of success whilst posing significant employment and personal tax risks for participating employers and employees.

Cost of living: Childcare costs and salary sacrifice

Many employers have been asking us how they could support their employees financially through the cost-of-living crisis. We have commented previously on some tax saving tips here.

One question which is cropping up is whether employees can salary sacrifice their childcare costs, and in particular in relation to schemes offered by commercial providers. The simple answer is they can, but it is never that simple.

We look below at how a commercial scheme could operate and the potential tax and NIC consequences.

How does a scheme typically work?

Broadly, under these schemes: 

1. the employee enters into a salary sacrifice, giving up an amount of future pay equal to the cost of the nursery place which is to be provided 
2. the employer pays a nursery for a place for the employee’s child 
3. the employer also pays the nursery an additional nominal sum e.g. £100 per month towards the financing of the nursery 
4. the employer appoints someone else e.g. the employee or scheme promotor to act as their ‘agent’ at meetings of the nursery management committee.

Additionally, as the employer is paying the nursery fees, the employee is not awarded the 20% top-up contribution by the government to their childcare costs.

HMRC view

A tax exemption is available to an employer (or group of employers) when it provides its employees with childcare facilities. While there are many conditions to meet for the exemption to apply, one condition is that the employer is wholly or partly responsible for financing and managing the provision of the childcare.

To meet this condition, HMRC guidance states there must be some real and substantial financial commitment to the nursery e.g. an agreement to meet a proportion of the overall costs or indemnify against losses. HMRC guidance also states management of a nursery includes close involvement such as: 

• authority to appoint and monitor those looking after the children 
• close involvement with the care provided, and 
• allocation of places and conditions under which the care is provided.

As highlighted in steps 3 and 4 above, HMRC considers this no more than buying a place in nursery. Therefore, the conditions for the workplace nursery tax exemption are not met, even if provided under an effective salary sacrifice arrangement.

Furthermore, if an employee would be excluded from joining the scheme because the amount of salary sacrificed would breach National Minimum Wage this might jeopardise the workplace nursery tax exemption.

What’s the risk?

Under salary sacrifice arrangements, the employee’s net pay increases due to the income tax and NIC savings made, and the employer makes employer’s NIC savings too. Due to the cost of childcare, employees and employers might be tempted to enter into such arrangements by the significant tax and NIC savings advertised by scheme promotors.

However, if the scheme does not meet the strict conditions for the tax exemption to apply, or the salary sacrifice is not effective, the employer could be left facing significant bills to repay the tax and NIC savings made.

How we can help?

We have supported clients with reviewing their arrangements to help them make an informed decision before they enter schemes. We also highlighted the potential risks and tax or NIC exposures.

If you are thinking of entering into a similar scheme or are already signed-up but would like an independent view, please contact Glen Huxter.