HMRC issues warning over UK’s workplace nurseries

The Revenue has issued a reminder to employers to check they are meeting the tax rules on workplace nurseries amid concerns that some businesses which advertise the schemes are exploiting the tax exemption. By way of salary sacrifice, employees’ nursery fees are deducted from their salary, meaning staff pay lower tax and national insurance contributions on the reduced salary. However, HMRC says they are aware of a number of nursery scheme operators advertising their services as having HMRC approval in cases where the ‘partnership requirements’ are not met. Some employers are signing up without realising the potential tax liability they could face. We’ll speak to a tax specialist about the potential risks. 

The scheme for workplace nurseries was introduced in 1990 to encourage employers to provide nursery places for employees’ children on their own premises. The partnership requirements, or rules, were introduced to extend the exemption to support those employers that couldn’t offer schemes on their own premises. They allow employers to partner with a commercial nursery provider to provide childcare for their employees. However, a key requirement is that the employer is wholly or partly responsible for financing and managing the provision of the care and it appears that is where the problem lies. HMRC has identified a small number of workplace nursery scheme operators where the nature of the services provided may mean that the partnership requirements are not being met meaning it is not exempt from tax. 

This issue has been doing the rounds in tax circles for some time and the HR press is now flagging it to HR professionals. Last week People Management ran an article on it called ‘Workplace nurseries: why getting the tax right is not child’s play’ setting out how the scheme operates and HMRC’s concerns. So let’s get a view on this from one of our tax specialist who is advising client on this issue. Earlier I spoke on the phone to Sinead Corcoran:

Sinead Corcoran: “So HMRC is essentially encouraging employers that partner with commercial workplace nursery providers to check that they meet the partnership requirements in HMRC’s guidance and the tax legislation. So that means checking that they meet the conditions of financing and managing the nursery provision which is set out in the tax legislation. These conditions require that employers must play a real part in managing and financing the nursery. So rather than playing a token role, they must really have some sort of level of responsibility over the nursery provision, recruitment of staff, contracts, that are being conducted by the nursery. So, it is actually a relatively onerous condition and HMRC is encouraging employers to check that they meet that standard.”

Joe Glavina: “How would an employer know whether or not, and to what extent, their particular childcare arrangement meets HMRC’s requirements? 

Sinead Corcoran: “So, it's a spectrum, and it's very much dependent on the facts of the nursery provision and any contract that you have in place with the commercial provider, but as a kind of broad principle HMRC requires that the employer has some sort of tangible input into the nurseries activities, whether that's attending regular board meetings, engaging in staff consultations and staff recruitment and the provision of care. So, it's not just like a tokenistic role, but a more of a material level of management responsibility.”

Joe Glavina: “The Revenue says they’re aware of a number of nursery scheme operators advertising their services as having HMRC approval where the partnership requirements are not met. What have you heard?”

Sinead Corcoran: Anecdotally, we have come across more frequently that clients of ours have been approached by commercial benefits providers that operate these nursery schemes for the purpose of availing of this tax relief and our general advice is to exercise some caution because the tax requirements are quite stringent. Many of the requirements may not be met by the contractual arrangements that nursery providers put in place. So, certainly HR professionals should exercise a level of caution and check the conditions in the contract and seek external professional advice if necessary.”

Joe Glavina: ““If a nursery scheme falls outside the tax exemption and the employer has not declared it correctly then, as I understand it, HMRC can go back up to six years to recover taxes due. So that’s a significant liability, potentially.”

Sinead Corcoran: “Yes, so employers do hold the initial liability for underpaid tax. So again, as you say, up to six years the HMRC can post-date that liability so employers really do kind of face a tax risk here. In addition, the involvement in a scheme which could potentially be viewed by the Revenue as exploiting a tax exemption could have wider HMRC relationship implications. So, HMRC could flag the employer’s, perhaps, higher risk in terms of its tax profile and, perhaps, instigate a kind of higher level of scrutiny over the employer’s tax affairs in future. So there are some risks for employers that they need to be alive to. Certainly, where we have found commercial benefits providers operating these schemes, they have not been alerting employers to some of these risks that they could face if they were to be caught by this provision.”

Joe Glavina: “What’s your advice, Sinead? What do you want employers to do?”

Sinead Corcoran: “So, in light of HMRC’s increased level of scrutiny and updated guidance, we would advise employers that operate these commercial workplace nursery schemes to check their arrangements, seek advice, and if they think, or they are advised, that they don't meet those requirements then to make a voluntary disclosure to HMRC. It is certainly best to be on the front foot with this if at all possible, rather than HMRC to be alerted themselves. So that is certainly the advice that we would give employers. In addition, if employers are consulted by commercial benefits providers offering these kind of very appealing packages, our word of warning is if it looks too good to be true, then in most cases, it probably is. So, certainly seek advice before signing up to these schemes if you aren't already signed up.”

In response to this issue HMRC has published some helpful guidance to help employers involved in these schemes to check they comply with the ‘partnership requirements.’ We’ve put a link to that guidance in the transcript of this programme for you.

Issue 121 of Agent Update - GOV.UK (www.gov.uk)