Nursery places as a benefit in kind – what should an employer consider?

In recent months the interest in schemes offering nursery places funded by an arrangement involving employers, independent nurseries, a scheme provider and an employee (and parent) has grown.

The arrangements purport to provide nursery childcare on a tax/NIC free basis by accessing a tax exemption that allows uncapped provision – and with average full time childcare exceeding £1,500 a month, the level of interest is understandable. The nursery tax exemption (s318 ITEPA 2003) does however contain a number of qualifying conditions which can be subject to interpretation.

How the exemption works

The nursery exemption was first introduced to provide tax relief for employers who were able to provide suitable premises in which a nursery could be set up. There are four conditions set out in S318 that must all be met before the exemption can apply.

The third condition covers the premises used for the nursery. To be fair to the many employers that would not be able to use their own premises, this premises condition allows for “partnership arrangements” to allow employers without suitable premises to also take advantage of the exemption. It is this element of the exemption many of the current commercially available schemes seek to utilise.

For a partnership arrangement to be qualifying, the rules require that the employer is responsible for all or part of the ‘financing and management’ of the nursery in question.

Commercially marketed schemes

There are many ways in which third party providers have sought to offer employers an arrangement that can offer tax/NIC free nursery based childcare. The current schemes appear to contain the same key components:

• An employee enters into a salary sacrifice agreement which covers the cost of the childcare at a nursery of their choosing (i.e., not on premises provided by their employer or chosen by the employer);
• The salary sacrificed also includes an additional financial contribution, typically £100 - £150 per month, which the scheme provider purports will meet the employer financing requirement – presumably because these funds are paid to the nursery by the employer;
• The employee then acts as the representative of their employer and attends meetings (real or virtual) to fulfil the ‘management’ requirement of the tax exemption, and
• The scheme provider enters into a commercial arrangement with the employer and acts in a co-ordination role to ensure the arrangement runs smoothly.

Financing and managing the nursery

The legislation (s318 (7) (c)) simply states “that under the arrangements the scheme employer is wholly or partly responsible for financing and managing the provision of the care.” While this may appear to be an unambiguous statement, in practice, defining its application is more difficult. However, in its Tax Agent update (Issue 121), HMRC has outlined that for such marketed schemes it does not consider a monthly payment meets the financing test. Similarly, while the term “managing” (although not further defined in the legislation), HMRC has now described this as meaning that employers must, in a real sense, play a part in the management of the nursery or nurseries concerned.

Interpreting the conditions

The Agent update expands on pre-existing guidance in the HMRC Employer Income Manual (section EIM22007) which gives further examples of how HMRC sees the exemption applying. Stepping back from the detail, one can see that the points it raises are open to subjective interpretation and, whilst HMRC’s guidance is clear, it should be remembered that it does not have the same standing as the underlying legislation, it is only HMRC view of the law.

Unhelpfully, there is very little tax caselaw in this area – just the case of Lotus Group Ltd v RCC. The taxpayer won its case at the First Tier Tribunal on the basis that:

• The employer had agreed undertake maintenance, improvements and redecoration of the nursery in question as well as paying £500 per child – i.e. made an identifiable financial commitment (rather than a “token gesture” as mentioned in HMRC’s guidance).
• It was also the third party agent that met with the nursery on behalf of the employer rather than the employee acting on behalf of their employer.

In our view, these facts mean the ruling has limited application to the current schemes in the context of the financial commitment, for example, the employer was directly funding the places rather than simply passing on the monies collected from employees via salary sacrifice. The ‘management’ circumstances are also different. This emphasises an employer focused involvement in, and financial commitment to, a nursery rather than what could be seen an employee-focused approach taken by current marketed schemes.

With the new Government focusing on increasing employment opportunities and to bring parents back into the workforce, in future it may be that the current legislation will be revisited and, perhaps, the focus changed to cater for modern working practices to help expand nursery provision opportunities for employees and businesses.

What are your options now?

If you are approached by an employee that wants your organisation to implement one of the current schemes, or you are thinking of making this part of your employee benefits offering, what can you do?

As the rules currently stand and are interpreted by HMRC, it is clear that they do not believe the use of third party schemes will qualify for the exemption and will likely challenge them at every opportunity.

Therefore, a totally risk adverse approach would be to choose to ignore the idea of supporting nursery care provision despite the negative impact on your employees. However, each childcare scenario can be different, and some arrangements will definitely qualify for the exemption – benefiting all parties. So, a better approach would be to involve employment tax specialists at an early stage to help you take a measured view of your specific circumstances and the options available for providing this valuable benefit.