What are the rules for tax and NICs relief on workplace nurseries?

The statutory provisions affecting the tax liabilities on the provision of childcare are set out in sections 270A and 318-318D of the Income Tax (Earnings and Pensions) Act 2003. The special Class 1 NICs rules covering the provision of childcare vouchers are to be found in Schedule 3 of the Social Security (Contributions) Regulations 2001.

The legislation draws a distinction between three different ways in which childcare benefits may be provided, namely

1. childcare provided by the employer on the employer's premises
   
   
2. childcare provided by the employer through external childcare providers
   
   
3. childcare vouchers for employees to redeem at nurseries of their choice.

Each of these provisions has it own, somewhat complex, statutory rules. This article will consider the rules for the first of these ways of providing childcare, i.e. in workplace nurseries, crèches and play schemes. This approach is likely to be the mostly costly option for employers but it has the most beneficial tax and NICs relief.

A number of conditions must all be met if the benefit is to enjoy tax and NICs relief, namely:

• the child must be a child or stepchild of the employee, resident with the employee and maintained wholly or partly at the employee's expense
  
  
• the employee must have parental responsibility for the child
  
  
• the scheme must be open to the scheme employer's employees generally (even if there is a waiting list), and
  
  
• the employees receiving the benefit must be employees of the scheme employer or employees working at the same location.
  
  
• the premises in which the care is provided must not be used wholly or mainly as a private dwelling
  
  
• the premises must be correctly registered for the provision of childcare
  
  
• the premises must be made available either
  
  
  • solely by the scheme employer, (not necessarily the employer of the employee), or
    
    
  • by a person, or one of a number of persons, with whom the scheme employer is in partnership, under arrangements that make the scheme employer wholly or partly responsible for financing and managing the provision of the care.

The last of these conditions, the manner in which the premises are made available, requires special consideration. There are three ways in which workplace nursery facilities are generally provided:

1. Childcare provided on the employer's premises

This approach involves the employer setting up childcare facilities on his own premises, which may be existing premises or premises purchased or rented for the purpose. Because the premises are provided by the employer alone, the statutory conditions do not require that the employer be involved in the running of the facilities. Therefore, the provision of the childcare can be subcontracted to a specialist childcare provider, such as Buffer Bear.

2. Childcare provided on other premises

Under this arrangement, two or more local employers club together to finance and manage childcare facilities. The premises may be existing premises, or premises purchased or rented for the purpose, that are provided by one of the employers or by some other person involved in setting up the arrangement. One of the employers, the "scheme employer", is responsible, wholly or partly, for financing and managing the provision of the care.

The requirement for the "scheme employer" to be "wholly or partly responsible for financing and managing the provision of the care" is critical.

The "responsibility for finance" test requires real and substantial commitment to funding the facility or providing it with capital, e.g. an agreement to meet a set proportion of the overall cost of providing the care, or a guarantee to indemnify against losses a primary care provider who would otherwise be at real risk of losses, or a long term undertaking to pay a fixed periodical contribution.

The "responsibility for management" test does not necessarily mean day-to-day management or direct responsibility for the care of the children but it does mean more than occasionally being consulted about operational policy. It requires close involvement in such matters as:

• appointing and monitoring the performance of those engaged to look after the children
  
  
• the extent of the care provided
  
  
• the conditions under which that care is provided,
  
  
• the allocation of places, and
  
  
• the financial management.

3. Childcare provided through commercial schemes

In this arrangement, the employer agrees to provide childcare places through a commercial scheme promoter. Depending on the scheme, the employer's payment is made to the scheme promoter or to an independent nursery. The employer also pays an annual fee to the nursery, typically £400 per annum per place. The employer appoints the scheme promoter to act as a representative "agent" at meetings of the nursery management committee.

The exemption for workplace nurseries was introduced to encourage employers to provide nursery places for employees, either by opening a nursery on their own premises or by combining with other employers to jointly finance and run a nursery. The exemption was not intended to apply, and in HMRC's opinion does not apply, to the third of the schemes described above, where the employer really does no more than to buy in places at a commercially run nursery. The exemption is not met because

• the additional monetary contribution that the employer is required to make does not satisfy the "financing" requirement, and
  
  
• the appointment of the scheme promoter to act as the company's agent does not satisfy the "management" requirement.

Employers thinking of participating in such a scheme that is operated by a childcare scheme promoter should consider carefully the explanation of "financing" and "managing" in Appendix 11 of Booklet 480 Expenses and Benefits - A Tax Guide.

It should be noted that these questionable schemes are not the same as nursery operators that are subcontracted to run a workplace nursery that operates on the employer's premises, the first of the schemes described above.

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