To avoid a benefit-in-kind (BIK), the provision of childcare has two tax exemptions (inserted into ITEPA 2003, Ch 4):
- Employer-supported childcare, possibly provided by way of a childcare voucher and often via salary sacrifice. ITEPA 2003, s 318A outlines the limited exemption of up to £55 per qualifying week. This exemption from tax and National Insurance contributions ceased to be available to new employees on and after 4 October 2018; and
- Employer-provided childcare (as outlined in ITEPA 2003, s 318). Commonly referred to as the workplace nursery, this exemption has not ceased. An HMRC article in its July 2024 Agent Update referred to the criteria for this exemption.
The Workplace Nursery
As with the childcare tax exemptions themselves, there are two ways they can operate to avoid a BIK charge:
- via the ‘employer premises’ test, as outlined in HMRC’s Employment Income Manual at EIM22004. Simply, this is where the employer uses part of their own premises or buys or hires new premises solely for the use of the employer; or
- the ‘partnership test’, which is an alternative to the employer premises test. Also outlined at EIM22004, this is where the workplace nursery is provided in partnership with other employers, possibly allowing smaller employers to offer a joint facility and benefit from the exemption.
HMRC’s Agent Update article refers to the tax exemption applying to workplace partnership nurseries.
Meeting the Partnership Nursery Tests
HMRC’s Agent Update expresses concerns that the exemption conditions in ITEPA 2003, s 318 may not be met, possibly unintentionally, by employers in the partnership. For the exemption to apply, the following conditions must be met:
- the child must meet the qualifying conditions (referred to in ITEPA 2003, s 318 as ‘Condition A’);
- the premises of the nursery must meet the registration requirements and must not be used as a dwelling (referred to in ITEPA 2003, s 318 as ‘Condition B’; and
- the nursery care provision must be available to all employees (or all employees at a particular location) (referred to in ITEPA 2003,s 318 as ‘Condition D’).
In addition, the partnership requirements must be met, as follows (also detailed in ITEPA 2003, s 318):
- the care is provided under arrangements made by persons who include the scheme employer;
- the premises on which it is provided are made available by one or more of those persons; and
- under the arrangements, the scheme employer is wholly or partly responsible for financing and managing the provision of the care.
HMRC’s Agent Update focuses on the ‘financing and managing’ condition, indicating that to meet the tax exemption conditions, these must be met in practice.
Example 1: Not Meeting the Requirements
An employer contracts with an existing local childcare provider and purchases nursery places as a tax-exempt BIK for its employees. If the employer does not undertake responsibility for financing and managing the care, the partnership requirement is not met. The result is that the cost of provision becomes taxable.
Example 2: Meeting the Requirements
A group of small employers work in partnership to establish a qualifying nursery, contracting with a nursery care business to supply qualified carers. Even though a commercial provider is involved, provided all employers in the partnership take responsibility for financing and managing the provision of the care, this will meet the tax exemption conditions.
On 21 August 2024, HMRC updated EIM21971, which refers to arrangements as ‘commercially marketed nursery schemes’. This detailed that the financing and management partnership condition was their concern, reinforcing the July 2024 Agent Update message.
Practical Tip
The workplace nursery exemption is a valuable one to legally avoid the BIK charge. However, the requirements must be met, and it is important to check these. If a mechanism is not undertaken correctly and fully, exposure to BIK charges can arise.