With the rising costs of childcare, an increasingly popular benefit offered by employers is a creche or nursery for employees’ children. If properly structured, this can be a tax-free benefit, helping employers to attract and retain staff. While larger employers may establish an on-site nursery, smaller employers often prefer to partner with a local nursery provider.

Two key requirements must be met for the partnership to qualify for tax exemption:

Responsibility for Financing – Employers must genuinely take responsibility for financing the childcare provision. This involves committing to fund an agreed portion of the total costs and sharing in any financial losses. Simply paying a fixed cost per child for each employee is unlikely to satisfy this requirement.

Responsibility for Management – Employers must also be actively involved in the management of the childcare provision. This could include having a significant role in appointing and managing nursery staff and in the allocation of places. Merely offering occasional advice or approving decisions is unlikely to meet this criterion. If an employer representative is on the nursery’s management board, there must be clear evidence that they actively represent the employer in the nursery’s operations.

HMRC has recently been reviewing these arrangements to ensure that the conditions for tax exemption are being met. They have found that some intermediaries are promoting schemes where employers offer childcare provisions through salary-sacrifice arrangements. In these schemes, the intermediaries often handle all necessary arrangements, resulting in minimal employer involvement, which may cause the arrangement to fail the tax exemption tests.

If you are concerned about whether your childcare arrangements meet the tax exemption conditions, please get in touch with us.

For the self-employed or those working for organisations that do not offer nursery facilities, an alternative option is to set up a government tax-free childcare account.