HMRC is taking an interest in commercially-marketed workplace nursery schemes. It's encouraging employers to check that their arrangements meet the conditions of the income tax and national insurance (NIC) exemption for workplace nurseries.
The workplace nursery exemption was established to enable employers to set up nurseries on their own premises without an income tax or NIC liability. There's also an extension to the exemption where the 'partnership requirements' are met. This enables more than one employer to join together to wholly or partly finance and manage such a childcare facility.
It's common for the benefit to be provided through a salary sacrifice arrangement, which can result in income tax and NIC savings for both the employees and employer.
What HMRC is focusing on and why
HMRC has provided further guidance in its July 2024 Agent Update Issue 121 of Agent Update - GOV.UK (www.gov.uk) on the workplace nursery partnership requirements. This is because it's been alerted to a small number of scheme operators advertising their services as having received HMRC approval, where HMRC doesn't consider that the partnership requirements have been met. HMRC has made it clear that it will never give approval for a business to advertise that the scheme they offer is tax compliant.
While there are no restrictions on employers in entering into partnership arrangements with commercial nursery providers, all of the conditions of the exemption need to be met. HMRC has provided further clarity on what it considers to be either wholly or partly responsible for financing and managing the provision of the childcare, including the following:
Employer must accept material financial responsibility
This requires more than purchasing places at a commercial nursery and making contributions to fixed costs. HMRC doesn't consider that 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. It has said that employers must accept the financial risk associated with running a childcare facility. This is likely to take the form of contributing to overall costs, as well as joint responsibility for any losses.
Employer must be involved in decision-making
HMRC also considers that managing the provision of care 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, the conditions in which care is provided and how places are allocated.
Employers' agents should be actively involved in management
Where an employee with a child is appointed to the management board of the nursery as an agent, HMRC has said it expects evidence that 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. HMRC also provides examples on actions it doesn't regard as taking an active part in management.
What is the potential outcome if exemption is not valid?
If the conditions of the workplace nursery exemption aren't met, generally the benefit should be reported to HMRC on an employee’s Form P11D or through the payroll (if payrolling benefits has been agreed) and subject to Class 1A NIC. If the arrangement was provided through a salary sacrifice, the optional remuneration arrangements would also need to be considered to determine the taxable value.
Should HMRC deem that an employer’s arrangements don't meet the exemption requirements, and this has been treated as exempt by the employer in the past, HMRC could seek to recover any underpayments of NIC going back six tax years, together with interest and penalties. It would also generally expect the employer to settle any underpayment of income tax on a 'grossed-up' basis on behalf of the employee, normally for the previous four tax years.
What action should employers take now?
Overall, it's thought that HMRC considered a need for significant substance in relation to compliance with the workplace nursery partnership requirements which must be evidenced to stand up to scrutiny.
If your organisation has entered into arrangements with a commercial nursery provider, we suggest you contact your workplace nursery scheme provider to understand the impact of HMRC’s recent guidance. But it's important to note that it is the employer who has the ultimate responsibility to ensure that all of the conditions of the exemption have been met – including the partnership requirements – and these should be reviewed in light of HMRC’s new guidance.
For more insight and guidance, get in touch with Julie Clarke or Jonathan Berger.
