Childcare and childcare vouchers

The Government has published draft legislation for the new childcare provisions that will come into effect from 6 April 2005. Subject to further change, the rules for the new provisions will be as follows.

Childcare in the context of these provisions means any form of care or supervised activity that is not provided in the course of a child's compulsory education.

Employer-provided childcare
No tax liability arises on the provision for an employee of childcare if all of the following conditions are met:

1. the child is a child or stepchild of the employee, resident with the employee and maintained wholly or partly at the employee's expense
2. the employee has parental responsibility for the child
3. the premises on which the care is provided are not used wholly or mainly as a private dwelling, and any applicable registration requirement are met
4. the premises on which the care is provided are either made available
   • solely by the employer, or
   • by a person, or one of a number of persons, with whom the employer is in partnership, under arrangements that make the employer wholly or partly responsible for financing and managing the provision of the care

5. the provision of the care is made under a scheme that is open to the employer's employees generally, or generally to those employees in a particular location.

If the conditions are met for a part of the childcare provision, the exemption from tax applies only to that part.

Other kinds of childcare
If all of the following conditions are met, tax liability arises on the provision of other kinds of childcare, but only on so much of the cash equivalent of the benefit as exceeds £;50 in a tax week in which the conditions are met:

1. the child is a child or stepchild of the employee, resident with the employee and maintained wholly or partly at the employee's expense
2. the employee has parental responsibility for the child
3. the childcare is one of a number of defined kinds of registered or approved childcare, including out-of-hours care for a child between the ages of 8 and 15 provided by a school or local authority (although the provisions vary in each country of the UK), but excluding care provided by the partner or a relative of the employee
4. the provision of the care is made under a scheme that is open to the employer's employees generally, or generally to those employees in a particular location.

If the conditions are met for a part of the childcare provision, the exemption from tax applies only to that part.

An employee is only entitled to one exempt amount of £;50, even if childcare is provided for more than one child. However, it is permitted for two people to enjoy the exempt amount for the same child.

This exemption is not available for any tax week in which the exemption for childcare vouchers applies.

Childcare vouchers
A childcare voucher is a non-cash voucher, i.e. a voucher, stamp or similar document, that is used to obtain the provision of care for a child. It does not matter whether or not the voucher is exchanged for the car provision.

If all of the following conditions are met, tax liability arises on the provision of childcare vouchers, but only on so much of the cash equivalent of the benefit as exceeds £;50 in a tax week in which the conditions are met:

1. the voucher is provided to enable an employee to obtain childcare for a child who is a child or stepchild of the employee, resident with the employee and maintained wholly or partly at the employee's expense
2. the employee has parental responsibility for the child
3. the voucher can only be used to obtain such childcare
4. the voucher is provided under a scheme that is open to the employer's employees generally, or generally to those employees in a particular location.

An employee is only entitled to one exempt amount of £;50, even if childcare is provided for more than one child. However, it is permitted for two people to enjoy the exempt amount for the same child.

This exemption is not available for any tax week in which the exemption for other kinds of childcare applies.
(Source: www.inlandrevenue.gov.uk/drafts/esc.pdf )
...back to 19 March 2004

Employer-provided childcare

In February 2003, the Inland Revenue made a number of proposals in a consultation document for broadening the tax and NICs reliefs on childcare facilities provided by employers. The current rules, in brief, are as follows.

• The provision of on-site childcare facilities is exempt from a tax charge. However, if the nursery is not on the employer's premises, the employer must be wholly or partly responsible for its financing and management.
• The cost of employer-provided childcare is exempt from Class 1A NICs.
• The provision of childcare vouchers is exempt from Class 1 NICs.
• The only situations where Class 1 NICs are due are where employees are paid cash allowances, or where the employer settles the employee's own contracted childcare bills.

After considering the responses to the consultation, the Inland Revenue announced its decisions to coincide with the Pre-Budget Statement. The tax and NICs exemptions that already apply to the provision of workplace nurseries will be extended to the direct provision of childcare, i.e. childcare contracted by the employer, and to the provision of childcare vouchers. However, the exemptions will only apply to the first £;50 of provision per week.

The exemptions will apply to all employer-contracted childcare, including registered nurseries, childminders, after-school clubs and approved home-childcare. Such provision will be exempt from both income tax and Class 1A NICs. The childcare scheme must be generally accessible to all staff.

Similarly, the existing exemption from Class 1 NICs for nursery vouchers will be extended to income tax, but both exemptions will be limited to the first £;50 of provision per week.

The purpose of the £;50 restriction is to limit the effect on an employee's contributory benefits and future pension entitlements that could be affected by salary sacrifice arrangements that reduce the level of pay normally liable to Class 1 NICs.

If the value of the childcare or nursery vouchers exceeds £;50 per week, the excess will,

• in the case of employer-contracted childcare, be reported in section N of form P11D and be subject to Class 1A NICs
• in the case of nursery vouchers, be reported in the appropriate section of form P11D or P9D, and be subject to Class 1 NICs in the earnings period in which the vouchers are provided.

Draft legislation will be published in January 2004. The changes will not be introduced until April 2005.
(Source: www.inlandrevenue.gov.uk/pbr2003/membership-discussion.pdf )
...back to 12 December 2003

Employer-supported childcare

At the end of February 2003, the Inland Revenue put forward proposals for extending the tax and NICs reliefs available for employer-supported childcare. The proposals were as follows:

• Tax exemption is currently available on the provision of childcare facilities by the employer. If the nursery is not on the employer's premises, the employer must be wholly or partly responsible for its financing and management. It is proposed to relax these conditions and extend the exemption to include all employer-supported formal childcare that is generally available to employees, including, for example, registered nurseries, childminders, after-school clubs and approved home-childcare. Exemption from Class 1A NICs would mirror the tax exemption.
• To set a financial limit to the exemption of £;50 per week, in order to protect employees' contributory benefits and pension entitlements from the adverse consequences of salary sacrifice arrangements. There would be a tax and NICs liability on the amount of financial support that exceeds the £;50.
• To extend the exemption from Class 1 NICs on childcare vouchers to tax, but limit the exemption again to £;50 per week, with tax and NICs being charged on any excess.

The consultation period on the proposals ended in May and the Government has now published an analysis of the responses. In summary:

• All respondents agreed that childcare vouchers should receive equal treatment for tax and NICs as other employer-supported formal childcare provisions. Many felt that this would lead to greater choice and flexibility for working parents.
• An overwhelming majority of respondents supported the proposal to extend the current workplace nurseries exemption to cover all forms of registered and approved childcare. Some commented that it would make it easier for employers to support childcare, others felt that it would widen access to childcare and some felt that it would help with recruitment and retention.
• On the proposed financial limit to the exemptions, the majority of respondents would prefer to see it set at a higher rate. Some suggested alternatives, varying from £;75 to £;150 per week. Others thought that it should be a variable limit, related to a percentage of childcare costs or that it should be related to the actual cost of childcare. Some suggested that it should mirror the childcare element of the working tax credit. There were also concerns about how fairly targeted the proposals were, particularly for lone parents and the extra costs for families with more than one child, while some respondents felt that the financial limit did not reflect regional variations in the costs of childcare.

Nothing has yet been said as the how the responses have affected the Government's thinking, and no indication has been given on when any changes are likely to take effect.
(Source: www.inlandrevenue.gov.uk/consult_new/esc_responses.pdf )
...back to 19 September 2003

Employer-supported childcare

In a joint document entitled Balancing Work and Family Life, published by the Treasury and the DTI in January, one of the further strategies proposed to help parents balance their work and family commitments was a review of the tax and NICs exemptions for employer-supported childcare. Details of these proposals have now been presented in a consultation document. It is available at www.inlandrevenue.gov.uk/consult_new/index.htm .

The proposals, in brief, are as follows:

• The current tax exemption for workplace nurseries requires that the nursery is either on the employer's premises or, if not, that the employer is wholly or partly responsible for financing and managing the nursery. The proposal is that the exemption, for both tax and Class 1A NICs, will be extended to cover all formal childcare supported by the employer, including registered nurseries, childminders, after-school clubs and approved home childcare, provided that the facilities are generally available to all employees. The requirement for the employer to wholly or partly manage the childcare will be removed, and the extent of the requirement to wholly or partly fund the childcare will be clarified.
• The provision of childcare vouchers is currently fully exempt from Class 1 NICs but not from income tax. The proposal is to limit the NICs liability to the provision of registered and approved childcare only but to extend the exemption to income tax.
• The current Class 1 NICs exemption for childcare vouchers allows employers and employees to take advantage of salary sacrifice schemes, whereby the employee's salary is reduced and replaced with childcare vouchers. This reduces the employer's NICs liability and, depending on the employee's earnings, the employee's NICs also. The proposal is to restrict the effect of such schemes by limiting the tax and NICs exemptions for the provision of both vouchers and employer-supported childcare to £;50 per week. If the value of the provision exceeds £;50 per week, only the excess will be liable to tax and NICs.

The Revenue's reasons for limiting the scope of salary sacrifice schemes has been explained in more detail in a separate document that was issued at the same time as the consultation document. This document is available at www.inlandrevenue.gov.uk/specialist/salary_sacrifice.pdf .

The Revenue's basic approach to salary sacrifice schemes is that they are a contractual matter between employers and employees and not, therefore, directly a matter of tax law. As a result, the Revenue does not give guidance on setting up such schemes. However, the Revenue does expect employers to provide their tax offices with details on new schemes so that their tax inspector can be satisfied that a salary sacrifice scheme achieves its objective.

The tax inspector will expect to see that, in exchange for a benefit, the employees' cash remuneration has been reduced contractually. If there is no contractual reduction in pay, the inspector will require the employer to subject the full value of the benefit to PAYE tax and Class 1 NICs.

The Revenue is also concerned that, before agreeing to enter into a salary sacrifice scheme, employees fully understand the effect that their lower National Insurance contributions might have on contractual and state benefits, such as tax credits, incapacity benefits and contribution-based jobseeker's allowance, state pension and the state second pension, and entitlement to SSP, SMP, SPP and SAP.
Payroll Briefing 19 - 14 April 2003