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HMRC has recently issued a further warning to employers regarding the proper use of the workplace nursery scheme exemption.  

The tax exemption for the provision of childcare through workplace nurseries was introduced in 1990 to incentivise employers to provide nursery places for employees’ children, either by setting up a nursery on their premises or collaborating with other employers to provide one.

In recent years an increasing number of providers have offered employers the ability to join schemes, with employees contributing via salary sacrifice arrangements, thereby reducing the income tax liability of employees and both the employees' and employers' National Insurance contributions (NICs) liabilities.

In 2022, HMRC provided guidance on commercially marketed workplace nursery schemes and the income tax exemption available for qualifying schemes. As highlighted in our earlier article, employers using such schemes were told to ensure that their arrangements satisfy the conditions for exemption. However, HMRC remains concerned many schemes do not qualify and has issued in its July 2024 agent update.

Why has HMRC issued new guidance on workplace nurseries?

HMRC updated its guidance in relation to jointly run childcare facilities and the partnership requirements which must be met for the tax exemption to be available. It has done this because it is concerned that there are a small number of commercially marketed workplace nursery schemes that set out to exploit the exemption and where it believes the partnership requirements are not met. 

HMRC’s concern is primarily around employers entering into partnership arrangements with commercial nursery providers where the parties do not engage in such a way that the employer is wholly or partly responsible for financing and managing the provision of care.

HMRC is aware that some workplace nursery scheme operators have advertised their services as having been approved by HMRC. It says that it ‘will never give approval for a business to advertise that a scheme is tax compliant’. It is the responsibility of the employer to make sure they only claim the tax exemption for any qualifying scheme they join, and employers are required to file forms P11D or payroll the benefit to employees if the exemption does not apply.  

HMRC states that, to meet the partnership requirements, employers must assume ‘material financial responsibility.’ This goes beyond merely paying for places at a commercial nursery and making a notional contribution to fixed costs of, say, £100 per month per place. It involves accepting the financial risks associated with operating a nursery, including sharing responsibility for any potential losses.

HMRC also asserts that for employers to effectively manage the provision of childcare, they must have significant input and influence over management decisions and the way childcare is delivered. This could involve overseeing the performance of childcare staff and determining the conditions under which care is provided. Simply being consulted occasionally by the nursery provider on broad policies or having infrequent calls for general updates does not suffice. If an employee is appointed to the nursery’s management board, HMRC expects clear evidence that the employee is fully empowered to act on behalf of their employer, actively does so, and is involved in managing the delivery of childcare as described above.

What should employers with such arrangements do now?

Employers with an existing scheme in place should urgently review it against the exemption criteria and the most up to date HMRC guidance to see if it meets the requirements for claiming the tax exemption. If there is any ambiguity regarding eligibility or the correct use of the scheme, specialist advice should be sought.

Given HMRC’s increased focus on compliance in this area and the complexities involved, employers should also exercise caution when introducing any new workplace nursery provision.

What if an employer has incorrectly claimed the exemption?

If the exemption has been incorrectly claimed, employers should consider making a voluntary disclosure to HMRC and settling the outstanding liabilities arising.

Where an arrangement has been treated as exempt in the past but it is concluded that the exemption does not apply, HMRC can go back six tax years to collect any underpaid Class 1A NICs and charge interest on late payment and penalties. HMRC may also invite the employer to settle any underpaid tax due from employees on a grossed-up basis, normally for the previous four tax years.

For more information, please get in touch with Susan Ball or your usual 91探花contact.