Workplace nursery – really!

Clarifying the workplace nursery partnership requirement rules at section 318 ITEPA

As part of the July 2024 agent update 121, HMRC have confirmed the suspicion of PAYadvice that some of the actively promoted new salary sacrifice arrangements claiming to be workplace nurseries do not work as the employer has too little involvement or responsibility and some are a pretence to take advantage of significant reductions in secondary NIC liabilities of the employer. The schemes which do not align with the workplace nursery requirements place their employees in a position of underpayments of both tax and NICs

Agent update 121 – Clarifying the workplace nursery partnership requirement rules at section 318 ITEPA

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.

For further information see rules for exemption.

To qualify for the workplace nursery tax exemption at section 318 ITEPA, certain conditions must be met.

For full details on these qualifying conditions.

As part of these conditions, the scheme employer must make the premises on which care is provided available or satisfy the partnership requirements.

Further details on the partnership requirements.

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.

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.

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

Responsibility for Managing, either wholly or partly, means taking 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 management board of the 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.

Examples of actions that are not regarded as taking an active part in management include:

• an employer occasionally being consulted by nursery providers on broad childcare-related policies
• an employer having an occasional call with the nursery for a general update
• an employee having a place on a committee that has no particular brief

HMRC’s view on these tests is explained.

HMRC’s view on commercially marketed nursery schemes.

HMRC believe the majority of workplace nursery partnership schemes satisfy the requirements, 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.

PAYadvice.UK 20/7/2024