Recognising that, in the case of salary sacrifice schemes involving childcare vouchers, employees may need to change regularly the value of the vouchers they receive, some commercially-operated childcare voucher schemes allow employees to vary the salary sacrifice as frequently as each pay period. Employees can, in effect, order the quantity of vouchers they require each month and, if it differs from the quantity of vouchers from the previous month, the order triggers a change in the salary sacrifice. If necessary, the scheme allows the full salary to be paid and no vouchers supplied for one or more pay periods. It is a mechanism that maintains the overall value of each employee's remuneration package but varies the cash element each month.

In practice, the order form completed by the employee states that the variation in the value of the vouchers supplied, and the consequent variation in the salary for the pay period, constitute a contractual change made between the employer and employee. However, such schemes appear to conflict with HMRC's clear statements as to what constitutes a "successful" salary sacrifice scheme. But it seems unlikely that popular commercial schemes would have introduced such arrangements without some measure of approval from HMRC.

HMRC's guidance on what constitutes a "successful" salary sacrifice scheme is set out in the Employment Income Manual, available to read at www.hmrc.gov.uk/manuals/eimanual/EIM42750.htm and subsequent pages. The following are some extracts:

HMRC's website also provides a series of questions and answers on salary sacrifice schemes at www.hmrc.gov.uk/specialist/sal-sac-question-and-answers.htm. The first question asks "Does HMRC require an employee to sign up for a salary sacrifice scheme for a set period of time, or can they opt in and out?" The answer says, in part,

In the light of this guidance, we asked HMRC to comment on childcare voucher schemes that provide for regular changes to the value of the vouchers supplied. We also provided a copy of an employee order form used in one of the schemes. We wanted to know:

1. If the employee can take the initiative and change the contractual salary and number of vouchers whenever it suits, saying "this is what I want for the next pay period", and can do it each pay period if required, doesn't that mean that "the employee can give up the benefit at any time and return to the original salary" - creating a "money's worth" situation?
   
   
2. If the employer does not see the form before the voucher supplier processes it, despite what it says on the reverse, can there be said to be a contractual change?
   
   
3. Even if the employer sees the employee's order form before approving it and forwarding it to voucher supplier, doesn't that mean that the employer is effectively "rubber-stamping" the change and that the employee is dictating the change?
   
   
4. The wording on the front of the form says "I will cease to be entitled to my Original Salary each Pay Period during the salary sacrifice period which starts on the date set out above". The reverse of the form defines "Original Salary" as what the employee's salary would be if the salary sacrifice were not in place. To be a contract variation, should not each variation be defined as a change to the previous variation, not on the original salary - which could last have applied several variations earlier? Otherwise, the effect is that the previous period's variation is treated as not having existed.
   
   
5. The form does not show the employee's salary, either the "Original Salary" or the salary for the pay period for which it applies. It simply refers to it as the "Adjusted Salary". Is it, therefore, acceptable evidence of a contract variation? To quote the Question and Answer, at any given time, is it "clear what the employee is actually entitled to"?

HMRC's reply, although declining to comment on any particular scheme, provides some helpful guidance. Taking each of the numbered questions above:

1. Provided there is a legally enforceable agreement between the employer and employee about the variation, there would not be a tax charge under the money's worth principle. We introduced legislation in Finance Act 2005 (s 16) to prevent the tax charge arising in situations where the employee can revert back to their original cash salary for specific benefits in kind - employer-supported childcare, computers under the Home Computer Initiative, workplace parking and employer provided cycles.
   
   
2. In our view, the employee cannot unilaterally vary the terms and conditions of employment without the agreement of the employer, or vice versa.
   
   
3. 4, 5 To consider these points it would be necessary to see all the documentation relating to the scheme, not just the voucher order form. It would then be a matter of deciding what would constitute an effective variation of the terms and conditions of employment according to the relevant law. But varying the terms and conditions of an employment contract is not, in itself, a tax law issue.

The response to the final three questions reinforces HMRC's clearly stated position on giving approval for specific schemes. Setting up a salary sacrifice scheme and defining the rules that govern its operation are contractual matters between employers and employees and HMRC will not comment on any scheme until it is actually in operation.

Similarly, we cannot comment on whether a childcare voucher scheme that allows employees to vary the value of the vouchers they receive and the amount of their taxable salary each pay period is a "successful" scheme. Our advice is that, as soon as such a scheme comes into operation, the employer should invite its local tax inspector to look at the scheme, the way it operates, and the way in which contractual changes are handled. In the absence of specific approval from HMRC for a scheme that is in operation, the employer is vulnerable to an unfavourable assessment at some future point that could be very expensive to settle.

...back to 6 April 2006

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Three new two-page leaflets have been published by HMRC to help employers and child carers understand the arrangements introduced in April 2005 that provide up to £;50 tax and NICs relief each week for the provision of childcare or childcare vouchers for employees. The leaflets are:

• Employer Supported Childcare - Short Guide for Small and Medium Businesses
  
  
• Childcare Tax and National Insurance Contributions - employers' factsheet
  
  
• Employer Supported Childcare - Short Guide for Childcarers

...back to 3 November 2005

Source:
Employer Supported Childcare Short Guide for Small and Medium Businesses
Childcare Tax and National Insurance Contributions - employers' factsheet
Employer Supported Childcare Short Guide for Childcarers

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