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Commercially marketed workplace nursery scheme - HMRC clarifies its position

HMRC recently updated its guidance on commercially marketed workplace nursery schemes and the exemption in section 318 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003). Employers using such schemes should ensure that their arrangements satisfy the conditions for exemption.

What are the key rules?

Section 318 ITEPA 2003 provides an exemption from tax for certain employer-provided childcare, where all the qualifying conditions from A to D are met. Section 318 sets out these four conditions:

Where a workplace nursery scheme is provided under a salary sacrifice arrangement and qualifies for the exemption at section 318 ITEPA 2003, it is specifically excluded from the Optional Remuneration Arrangement rules (known as the ‘OpRA’ rules – see more on the OpRA rules in our newsletter article from November 2017).

What are the partnership requirements of Condition C?

Condition C allows employers who do not make a workplace nursery available on their own premises to jointly run a childcare facility with other employers. The partnership requirements must then be met for the exemption to apply, the conditions being that:

For the financing condition to be met, HMRC’s view is that the financing should be a commitment to the nursery or to the childcare. HMRC expects a capital contribution to the upkeep of the nursery or towards the salaries of the carers.

While the employer does not need to be involved in the day-to-day management or have direct responsibility for the care of the children, for the management condition to be met the employer should have meaningful input and close involvement in such matters as hiring carers, the extent of the care, the conditions under which the care is provided, and the allocation of places.

HMRC’s view is that management means much more than being occasionally consulted about broad policies related to the provision of the care, and/or having a right to a place on a committee that has no particular brief and little or no influence over the way in which the care is provided. Employers must, in a real sense, play a part in the management of the facility.

Furthermore, the HMRC guidance says that where an employee with a child at a nursery is appointed to the management board of that nursery as an agent of the employer, HMRC will expect to see evidence that the employee is fully empowered to act for the employer and actually does so.

Why has HMRC changed its guidance?

On 8 March, HMRC updated its guidance at EIM21970 to EIM21973 in relation to jointly-run childcare facilities and the partnership requirements set out in Condition C.

In the updated guidance, HMRC says it is concerned that there are commercially marketed schemes that set out to exploit the exemption. HMRC’s concern is primarily around employers entering into partnership arrangements with commercial nursery providers, where the employer does not engage with the commercial provider in such a way that it is wholly or partly responsible for financing and managing the provision of the care.

HMRC says:

‘Many of the schemes that fail to comply with the statutory provisions follow a similar pattern. They may have some or all of the following features or variants on them:

What if the section 318 exemption does not apply to workplace childcare?

The benefit will be regarded as liable to tax and Class 1A NIC.

The benefit in kind value (liable to tax and Class 1A NIC) for each employee will be based on the higher of the cost to the employer (for each employee) and (if it is provided under an OpRA, such as a salary sacrifice arrangement) the amount of earnings forgone by the employee for the benefit.

If HMRC successfully challenges an arrangement that has been treated as exempt in the past, and concludes that the exemption does not apply, it could go back six tax years to collect the underpaid Class 1A NIC and charge late payment interest and penalties. HMRC may also invite the employer to settle any underpaid tax due on a grossed-up basis, normally for the previous four tax years.

What should employers with such arrangements consider?

Employers making such arrangements available should carefully consider:

  1. Whether all the conditions for exemption apply, including whether the partnership requirements are met in relation to jointly run facilities; and
  2. If offered via salary sacrifice, whether the salary sacrifice is effective. If the salary sacrifice is not effective the amount of pay previously ‘sacrificed’ could be considered as normal pay liable to tax under PAYE (despite it not being paid).

For further guidance, or if you would like to discuss this in more detail, please contact Lee Knight, Susan Ball, or your usual RSM contact.

authors:lee-knight,authors:susan-ball