Workplace Nursery Partnerships – does your scheme meet tax exemption requirements?

The provision by an employer of onsite nurseries facilities to their employees should be a tax free benefit as there is a specific exemption (S318 of ITEPA 2004 for tax nerds) available. Employees typically pay for nursery places via a salary sacrifice arrangement.

In the latest issue of HMRC’s Agent Update, there is an article clarifying the conditions that must be met if your onsite nursery is run by a third party to qualify for the exemption. Essentially, if you have a partnership with a third party commercial nursery provider for the provision of nursery facilities within your campus, the HEP must be wholly or partly responsible for financing and managing the provision of care. What does this mean?

Responsibility for financing – the employer must accept material financial responsibility

HMRC state: “This requires more than purchasing places at a commercial nursery and making contributions to fixed costs. HMRC does not consider only paying fixed costs of ‘£x’ (such as a notional £100 per month per employee’s child) to a commercially run nursery already in existence satisfies the requirement. Employers must accept the financial risk associated with running a childcare facility, which is likely to take the form of contributing to overall costs and is such that there is also joint responsibility for any losses.”

Responsibility for management – the employer must take an active role in inputting into and influencing/making management decisions.

HMRC examples include:

• Monitoring staff performance of nursery workers
• Deciding the conditions in which care is provided
• Responsible for allocating places

HMRC also provide examples of what isn’t an active role, including:

• Employer occasionally being consulted by nursery providers on broad childcare-related policies
• Occasional call with nursery for general update
• Employee having a place on a committee with no particular brief

Whilst HMRC are highlighting the issues they have found, they also state “HMRC believe the majority of workplace nursery partnership schemes satisfy the requirements, we have been alerted to a small number of scheme operators advertising their services with HMRC approval, where the partnership requirements are not met.”

Next steps

We recommend that if you have a partnership arrangement, you review to:

• Ascertain the financial responsibilities – are you jointly responsible for costs and liabilities or is it a standard £X per child?
• Ascertain the management responsibilities – what type of management role do you have, is it purely in name only and you don’t have any real responsibilities, or are you actively involved in it’s management?

For further information:

• HMRC’s view on commercially marketed nursery schemes
• HMRC’s view on financial and management tests
• For further information on the rules for exemption