There is a tax exemption for what is commonly referred to as a ‘workplace nursery’. Broadly, this is a benefit that may arise for an employee where the employer provides for the care of the employee’s child. However, there is no charge to income tax where certain conditions are met. It is common for the benefit to be provided to employees through a salary sacrifice arrangement. 

The partnership requirements 

The conditions include that the care is provided at premises which are available to the employer only or are shared in such a way that the ‘partnership requirements’ are met. A key partnership requirement is that the employer is wholly or partly responsible for financing and managing the provision of the care.  

It is possible for employers to enter into partnership with a commercial nursery to provide the childcare. However, HMRC has identified a small number of workplace nursery scheme operators where the nature of the services provided may mean that the partnership requirements would not be met. HMRC has published guidance which it hopes will clarify the partnership requirements.   

Financing the provision of the care 

HMRC says that for the arrangements to satisfy the partnership requirements, the employer must accept ‘material financial responsibility’. This is more than paying for places at a commercial nursery and making contributions to fixed costs. It means accepting the financial risk associated with running a nursery, including being jointly responsible for losses, for example.  

Managing the provision of the care 

HMRC believes that managing provision of the care requires input and influence from the employer on management decisions, and the way in which the childcare is provided. This could include monitoring the performance of staff providing childcare, and deciding the conditions in which care is provided, for example. The employer occasionally being consulted by the nursery provider on broad policies, or having an occasional call with the nursery for a general update, would not be sufficient. 

If an employee is appointed to the management board of the nursery, HMRC will expect to see evidence that the employee is fully empowered to act for their employer and actually does so.  

HMRC does not give approval 

HMRC is aware that some workplace nursery scheme operators advertised their services as having been approved by HMRC. HMRC says that it ‘will never give approval for a business to advertise that a scheme is tax compliant’. 

Further information 

• HMRC’s Employment Income Manual from EIM21900 onwards 
• Legislation: s318-318D, Income Tax (Earnings and Pensions) Act 2003