What Happens If HMRC Asks About Your Workplace Nursery Scheme?

What makes our approach different?

We do not simply put the paperwork in place and leave employers to it. We create the contract and its inherent commitment to ensure clear and conspicuous evidence of the finance and management contribution as per the legislative requirements of HMRC. We ensure that all of the evidence is clear to demonstrate that the legislation requirements have been met by users of our scheme, providing evidence of the employer's financial and management contributions if HMRC ever questions the validity of a scheme we provide.

• A direct nursery contract: the employer contracts with the nursery for each child's place and pays the full nursery fee from its own funds.
• An additional financial commitment: on top of the full nursery fee, the employer pays the nursery £150 a month for every agreement for its full 9 to 12-month term, typically more than covered by the National Insurance saving the employer makes on the sacrificed amount of salary, even if the employee leaves early.
• Written management authority: the parent is appointed in writing as the employer's agent and controls how the employer's £150 contribution is spent, with nursery receipts or invoices checked by our administration team.
• Compulsory management participation: FTB arranges, chairs and minutes two meetings per agreement, recording agreed actions, owners and deadlines. If a required meeting is missed and the requirement remains unmet, the employee is removed from the scheme and their Income Tax and National Insurance savings are reversed across the whole agreement.
• Additional assurance: £100,000-per-claim professional indemnity insurance backs our contracts, our scheme and our advice
• We can tailor our contractual paperwork to reinforce clients' compliance or due diligence requirements.

This is how we go above and beyond: clear contractual commitments to the finance and management, ensuring active management participation and evidence retained throughout the agreement and beyond.

Financial and management contributions, clearly evidenced.

The workplace nursery exemption is in section 318 of the Income Tax (Earnings and Pensions) Act 2003. For employers relying on the partnership requirements, section 318(7)(c) requires that:

"under the arrangements the scheme employer is wholly or partly responsible for financing and managing the provision of the care."

Our approach is very deliberately that of a cautious perspective providing clear evidence that an employer using our scheme has met and exceeded the ITEPA requirements for proving a financial and management contribution to the nursery.

Terms designed for the more cautious employer.

Our terms respond to the HMRC July 2024 update and its guidance on the employer accepting financial responsibility and risk. We understand companies' hesitancy to depart from HMRC guidance, even though guidance is not legislation, hence the enduring contractual financial commitment to the nursery.

We therefore ensure our terms confirm the employer's financial commitment and risk to the nursery: the financial contribution continues even if the employee terminates the scheme early.

HMRC's EIM21925 and EIM21930 guidance on financing and management relates to arrangements before 6 April 2005. Most importantly, EIM22007 addresses both financing and management responsibilities under the legislation applicable from 6 April 2005. Our terms and methods of work are designed to make both contributions clear and demonstrable.

EIM22006 – Partnership requirements explains the partnership requirements concerning the premises.

How the employer contracts for the childcare.

The employer contracts directly with the nursery for each child's place. The parent does not. Under the salary sacrifice agreement, the employee gives up part of their salary. The employer then pays the full nursery fee from its own funds, under its own contract with the nursery.

Our terms also cover scheme employer status, open-to-all eligibility and checks that no employee's pay falls below the National Minimum Wage.

How the employer finances the care.

On top of the full nursery fee, the employer pays the nursery £150 a month for every agreement, to support the nursery itself. This funds things like staff training, playroom equipment or improvements such as a sensory garden.

This is a fixed commitment for the full term of the agreement, which runs for 9 to 12 months. It does not stop if the employee leaves early or ends their salary sacrifice.

Example: an employer signs a 12-month agreement, and the employee leaves after two months. The employer still pays the nursery £150 a month for the remaining ten months. That is £1,500, with no salary sacrifice in place to offset it. The employer carries that cost and that risk.

An employer may choose to make a separate agreement with the employee to help cover a loss. This is similar to arrangements some employers make in a cycle-to-work scheme if an employee leaves before the bike is paid off. Any such agreement is separate from the employer's commitment to the nursery.

How the employer manages the care.

The employer appoints the parent in writing as its agent. The appointment gives the parent authority to act for the employer in managing the provision of care. Acting for the employer, the parent controls how the £150 contribution is spent. Our administration team checks every item of spend against nursery receipts or invoices.

Each agreement includes two compulsory management meetings, which FTB arranges, chairs and minutes. Each meeting follows a set agenda:

Each meeting records agreed actions, with an owner and a deadline. The next meeting checks that they have been completed. Participation is mandatory.

What if the meetings do not happen?

If an employee misses a required meeting, they are removed from the scheme. Their Income Tax and National Insurance savings are then reversed across the whole agreement.

The management meetings are a compulsory part of how we operate the scheme. They allow us to provide our scheme in confidence and give employers the assurance that the financial and management contributions can be demonstrated under HMRC scrutiny.

Clear evidence of the employer's contribution.

Should HMRC question an employer's scheme, we can bring together the evidence of the financial and management contribution:

1. The agreements: who owes the funding, for how long and what happens on early exit.
2. The written agency appointment: the parent's authority to represent the employer.
3. Meeting records: attendance, substantive management contributions, evidence of governance, management decisions and action points.
4. Spending evidence: the agreed use of the contribution and checked nursery receipts or invoices.
5. Follow-up: progress on actions and escalation when obligations are not met.

Our approach is carefully constructed so that the contribution is evidenced, recorded and demonstrable.

The Lotus ruling and the evidence we keep.

The reported Lotus Group Ltd v HMRC case, referenced as TC/2010/5155, forms part of the discussion around workplace nursery partnerships. Our approach is to ensure the employer's financial and management contributions are evidenced through the agreements, meetings and spending records described above.

Insurance backing our paperwork, methods and advice.

We have such confidence in our scheme that we hold £100,000-per-claim professional indemnity insurance, backing our paperwork, methods of work and advice.

Paperwork to suit your compliance requirements.

Where clients have additional compliance requirements, whether around data protection, GDPR or other elements, we can accommodate changes in our paperwork so long as they reinforce our commitment to ensuring the HMRC legislative requirements are fully met and exceeded.

Or contact us or call 0800 888 6629.

Questions about how we operate the scheme.

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