As part of the July 2024 agent update 121, HMRC confirmed that many of the new salary sacrifice arrangements claiming to be based on workplace nurseries do not work. This is because the employer either doesn’t have enough responsibility for or is not involved enough in the provision. This could be viewed that an employer is trying to take advantage of significant reductions in secondary NIC liabilities, and schemes which do not align with the workplace nursery requirements place their employees in a position of underpayments of both tax and NIC’s.
The tax exemption for workplace nurseries was introduced in 1990 to encourage employers in providing nursery places for employees’ children on their own premises. 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.
In order to qualify for the workplace nursery tax exemption in section 318 of ITEPA, certain conditions must be met. In order for the exemption in respect of the provision of workplace nurseries to apply, either the premises on which the care is provided must be made available by the scheme employer alone or could be part of a joint scheme as long as the relevant conditions are met.
- Under the partnership requirements, the employer may enter into partnership with a commercial nursery provider to provide the childcare, but the employer must be wholly or partly responsible for financing and managing it.
- Employers have to accept the financial risk associated with running a nursery and will therefore need to be contributing to overall costs and is such that there is also joint responsibility for any losses. And this associated risk is key.
- Responsibility for Financing, either wholly or partly, means the employer must accept material financial responsibility. This means more than just purchasing places at a commercial nursery and making contributions to fixed costs
- Responsibility for Managing, either wholly or partly means taking responsibility for managing the provision of care. This means that the employer is required to make management decisions and in the way that 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.
HMRC believes the majority of workplace nursery partnership schemes satisfy the requirements, but they have been alerted to a small number of scheme operators that may not be fully meeting the partnership requirements. If the conditions around the partnership requirements are not met, then the exemption will not apply.
