Employers facing potential exposure in HMRC crackdown on workplace nursery provision misuse
On average, childcare costs have been increasing at a higher rate than wages for the last couple of decades in the UK, placing a significant financial burden on many families.
In London, for example, childcare costs can be as much as 50% of the national average wage, with a report in 2023 by charity Coram stating that the average annual cost for a child under two had reached approximately £15k per year - as noted here.
To help alleviate this burden, the government introduced workplace nursery exemptions back in 1990, to encourage employers to set up nurseries either on their own premises where possible, or by grouping together with other local employers to provide facilities off site.
The payments made by the employees to access the service could then be paid via salary sacrifice arrangements, reducing the income tax of the individual, and reducing both the employees' and employers' National Insurance payments. This had the dual impact of providing financial relief for the individual, whilst encouraging employers to participate in supporting childcare costs.
Whilst the availability of these schemes has offers much-needed financial aid for many, HMRC has identified a small number of commercially marketed schemes which have led to misuse of the exemption in circumstances where tax relief is not available.
The focus of HMRC’s scrutiny
To qualify for the scheme, the ‘workplace nursery’ in question must be directly and primarily financed and managed by the employer (either solely or in partnership with other employers).
Under the partnership requirements, the employer may partner with a commercial nursery, but the requirement to be wholly or partly responsible for financing and managing must still be present, which extends to more than just the purchase of a place and contributions to fixed costs, and there must be some financial risk for the employers related to the running of the facility in general.
However, it is known that a small number of commercially marketed nursery scheme operators are advertising services where the partnership requirements are not met. One such example cited by HMRC is a scheme where, in addition to paying the nursery fee the employer pays the nursery an additional sum, typically £400 per annum per place.
Should HMRC deem that an employer’s arrangements do not meet the exemption requirements, employers may be required to pay HMRC all of the tax and NIC savings made, together with interest and potential penalties.
Is clarity required on appropriate set up?
In response to suggestions that HMRC’s guidance on ‘financed and managed’ facilities was too vague, leading to some confusion amongst those who benefit from the scheme, HMRC have issued further guidance to clarify the parameters of the relief available.
HMRC’s guidance states that HMRC will never give approval for a business to advertise that a scheme is tax compliant.
Given HMRC's increased focus on compliance, and the technicalities involved, employers should exercise caution when introducing workplace nursery provision. If there is any ambiguity regarding eligibility or correct use of the scheme, it is advisable to seek guidance from a specialist tax advisor, to cease any existing arrangements that are in place and to not engage in any commercially marketed schemes without first commissioning a thorough tax compliance review. This approach will help to protect the employer from potentially significant tax exposure.
We are here to help
Azets has always advised caution when approached by employers who are considering using third-party agent nursery provision as, in our view, they do not satisfy the exemption requirements. It is essential for employers and employees to remain compliant and seek help when there is any uncertainty as significant exposure can arise very quickly across a workforce.
If you have any questions regarding the workplace childcare scheme, please get in touch with Clair Williams, Employment Tax Partner, via the form below or your usual Azets advisor.