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AIA

PTP's Tax Tip No.5 ' Childcare: keep it in the family?

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7th Mar 2005
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Q: My partner and I have struggled to keep our jobs whilst ensuring our young children are properly looked after. My employer is now prepared to provide some help with childcare, having heard that this is to become tax efficient from April 2005. My partner's mum, who has already shared in looking after the children, has offered to do so on a full-time basis. Can my employer and my partner's employer both pay her free of tax and national insurance contributions?

A: It is possible that this child care will qualify under the new s318C ITEPA 2003, but there are several issues to deal with. Firstly, the individual providing the care must be either:
a) registered under Part 10A of The Children Act 1989;
b) a child care provider approved by an organisation accredited under the Tax Credit (New Category of Child Care Provider) Regulations 1999; or
c) (if the care is to be provided in the child's home) approved in accordance with the Tax Credits (Approval of Home Child Care Providers) Scheme 2003.
There are other categories of approval, but they relate to organisations, not individuals.

If your partner's mother does not look after children other than her grandchildren, then she will not need to be registered under (a). (c) cannot apply, since childcare provided in the child's home (or the parent's home if this is not the same) may not be carried out by a relative (including a grandparent) of the child. In order to qualify, therefore, Granny will have to seek out an organisation accredited in relation to the Tax Credits system. It has to be said that this is intended principally for commercial providers of child care (see for example the requirement to be able to demonstrate a ' planned programme of supervised activities that reflect the developmental needs of the children being cared for').

Secondly, as has been mentioned, there is an outright ban on qualifying care being provided by relatives wholly or mainly in the home of the child. So your arrangements will have to involve other premises, presumably Granny's house.

Thirdly, if the above hurdles can be surmounted, there is the possibility of 'doubling up' on the relief, given that both you and your partner work. If each of your employers is prepared to offer this benefit, you would each be entitled to a maximum tax- and NIC-free amount of £50 per week, and this would be the case even if only one child were involved. There is however no multiplying of the benefit for each employee on the basis of more than one child being cared for.

Finally, the benefit might be provided tax- and NIC-free for you and your partner, but your partner's mother could be liable for tax and NIC on amounts received under the contractual arrangement she would have with your respective employers, depending on the level of her other income.

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