No tax charge arises in respect of the provision of a nursery place for an employee’s child at a workplace nursery provided that the associated conditions are met. Unlike the exemptions for childcare vouchers and employer-supported childcare to the extent that these remain available, the tax exemption for workplace nursery places applies without limit.

For the exemption to apply, the employer must either make available the premises in which the care is provided or meet the partnership requirements. The partnership requirements make it possible for smaller employers without the resources to open a workplace nursery on their premises to provide nursery places to their employees within the terms of the exemption. To meet the partnership requirements, the care must be provided under arrangements that include the employer on premises made available by one or more of those persons and, under the arrangements, the employer is wholly or partly responsible for financing and managing the provision of the care.

An employer may enter into a partnership with a commercial nursery to provide the care. However, to satisfy the partnership condition, the employer must have some responsibility for financing the provision of the care and for managing it.

As far as financing the care, this requires more than simply buying places at a commercial nursery and making a contribution to fixed costs. HMRC do not regard this condition as being met if the employer pays a set amount per child per month towards the fixed costs of an existing commercial nursery. Rather, the employer must accept the financial risk of running a childcare facility, contributing to total costs and taking joint responsibility for any losses.

Responsibility for managing the provision of care, either wholly or in part, requires input and influence on management decisions and the way in which the childcare is provided. This may include monitoring staff performance or allocating places.

Commercially marketed schemes

A number of commercially marketed schemes are available which take advantage of the tax exemption for workplace nurseries. Typically, they include some or all of the following features:

· the employee enters into a salary sacrifice scheme, giving up an amount of pay equal to the cost of a nursery place;

· the employer pays for a nursery place for an employee’s child (either at a nursery run by a scheme promoter or at an independent nursery);

· the employer pays the nursery an additional sum in addition to the cost of the place (typically about £400 a year); and

· the employer appoints the scheme promoter as their agents to act on their behalf at meetings of the nursery’s management committee.

The scheme is usually offered as a package.

While HMRC are of the view that most partnership schemes meet the exemption condition, they are aware of marketed schemes where the partnership requirement is not met because the employer does not share the financial risk and has no real say in how the nursery is run. Where this is the case, the tax exemption does not apply and a tax charge will arise if the employer meets the cost of a nursery place for an employee’s child.

Smaller employers looking to offer workplace nursery places to employees should be aware of this when considering a commercially marketed scheme.