HMRC warns of exploitation of workplace nursery tax rules

HMRC has issued a reminder to employers to ensure that they meet the rules on workplace nurseries to avoid exploiting the tax break

While the majority of workplace nursery partnership schemes satisfy the tax rules, HMRC said: ‘We have been alerted to a small number of scheme operators advertising their services with HMRC approval, where the partnership requirements are not met.

‘HMRC will never give approval for a business to advertise that a scheme is tax compliant.

‘If the conditions around the partnership requirements are not met, then the exemption will not apply.’

The tax exemption for workplace nurseries was introduced in 1990 to encourage employers in providing nursery places for employees’ children on their own premises.

The partnership requirements were introduced to extend the exemption to support smaller employers who may not have the resources to open a nursery on their own premises, but who wished to provide support with childcare to their employees by grouping with others.

Employers may have multiple nursery scheme partnerships as required but the same criteria must apply to all partnership arrangements.

This benefit is usually provided to employees through a salary sacrifice arrangement. Generally, the amount of salary sacrificed by an employee in order to receive a benefit is liable to tax, but workplace nurseries are excluded from this.

HMRC has now discovered that some companies are exploiting the scheme to gain a tax advantage.

Under the partnership requirements, the employer may enter into partnership with a commercial nursery provider to provide the childcare, but they must still satisfy the requirement for the scheme employer to be wholly or partly responsible for financing and managing the provision of care.

Responsibility for financing, either wholly or partly, means the employer must accept material financial responsibility.

HMRC stressed: ‘This requires more than purchasing places at a commercial nursery and making contributions to fixed costs. HMRC does not consider only paying fixed costs of ‘£x’ (such as a notional £100 per month per employee’s child) to a commercially run nursery already in existence satisfies the requirement.

‘Employers must accept the financial risk associated with running a childcare facility, which is likely to take the form of contributing to overall costs and is such that there is also joint responsibility for any losses.’

Employers also have to take responsibility for managing the provision of care. This requires input and influence from the employer on management decisions and the way in which the childcare is provided.

This could mean monitoring the performance of staff providing childcare, deciding the conditions in which care is provided or allocating places.

Where an employee with a child is appointed to the management board of a nursery as an agent HMRC expects evidence the employee is fully empowered to act for their employer and actually does so.

This active participation would involve responsibilities such as liaising with the employer, co-ordination with other parents, agreeing action points and following them up.

Susan Ball, employer tax partner at RSM UK, said: ‘There could be potentially large tax and national insurance liabilities for both employers and employees as a result of this clampdown.

‘If a nursery scheme should have been taxable and the employer has not declared this as a benefit in kind, on their P11D form or via payroll HMRC can go back up to six years to check whether tax exemption has been claimed when it shouldn’t have been.

‘There may be interest and penalties going back several years, so the impact of this could be significant for many.

‘This has implications for employees too, who will not be happy if they are landed with an unexpected tax bill because their employer doesn’t pick up the liability.’

Ball stressed that employers should review their nursery schemes to ensure they comply with the rules.

‘Employers who offer such schemes should act now to review their position. Those that have incorrectly claimed the tax exemption should make a voluntary disclosure to HMRC as soon as possible.’

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