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The UK’s tax authority is clamping down on abuse of a workplace nursery benefit scheme in England set up to reduce childcare costs for employees, according to people close to the matter.
Experts have warned that an increasing number of employers claiming a tax break through the government support scheme are not meeting the eligibility criteria set out by HM Revenue & Customs.
Under the tax exemption, an employee’s nursery fees are deducted from their salary, meaning national insurance tax is applied to their reduced earnings rather than full salary.
Staff are also spared paying income tax on the salary sacrificed, potentially saving them thousands of pounds a year.
Companies that sign up to the scheme are expected to provide a workplace nursery for parents either onsite or in a partnership with local employers.
However, tax experts have warned that companies are increasingly using commercial “promoters”, which act on their behalf as agents to secure childcare places with providers, with these arrangements failing to comply with the terms of the scheme.
“This is certainly something HMRC are looking into more and they are definitely aware some employers may be using schemes failing to meet the requirements to be tax exempt,” said Lee Knight, a director at the audit, tax and consulting group RSM.
“For commercially marketed schemes, HMRC are concerned that many do not qualify,” he added. “You need to be certain as an employer that your arrangement does qualify before you enter into any agreement.”
Officials said the government would publish updated guidance for employers seeking to access the benefit later this week.
Intermediary agents, which are estimated to make £400 per place they guarantee, ask employers to pay a notional amount per month per employee’s child, to a commercially-run nursery already in existence.
They can also act on behalf of the company as their “agent”, representing them in meetings to discuss the management of the childcare provider.
But according to HMRC, an employer needs to be “wholly or partly responsible for the financing and managing the provision” of the childcare setting in order to qualify for the benefit.
Emma Rawson, technical officer at the Association of Taxation Technicians, a professional body, said an employer must “make a real and substantial funding commitment and play a meaningful part in managing the nursery.
“The relevant tests are unlikely to be met by commercially marketed schemes if the employer is effectively just buying places in a nursery,” she added.
Employers that fail to meet the scheme’s criteria are a risk of being ordered to pay back the unpaid tax by HMRC. Tax experts have called on HMRC to provide clearer guidance to both employers and nurseries being approached by these third parties.
“We would like to see HMRC taking a more proactive approach, including producing user-friendly guidance for parents and employers which sets out what they should think about, and what questions they should ask before signing up for a workplace nursery scheme,” said Rawson.
The clamp down comes as many parents are struggling with the cost of childcare.
Jonathan Broadbery, director of policy and communications at National Day Nurseries Association said: “In this context it is understandable that people are looking for ways to make the system work.”
HMRC said: “Where an employer provides a non-cash benefit to an employee, that benefit in kind is taxable.
“For childcare, where an employer arranges with a commercial provider to provide childcare for employees’ children or provides childcare vouchers for the employee to use, that is a taxable benefit in kind.
Where an employer provides a workplace nursery, that may be exempt from tax and National Insurance where certain conditions are met.”