Childcare and OpRA: A day can be a long time for childcare
Mixed messages about the cut-off date for employer-supported childcare schemes has created confusion for employers over which employees are eligible for this tax relief.
When the tax exemption for employer supported childcare was introduced in 2005, the phrase ‘salary sacrifice’ had connotations of taking a pay cut due to company cash flow issues. That is, not something you’d jump at.
In the intervening 14 years a benefits’ industry has grown up utilising various tax exemptions available for benefits in kind, and childcare, generally given in the form of childcare vouchers, has remained by far the most popular salary sacrifice – until now.
The closure of employer-supported childcare schemes to new joiners was first announced in 2014, to take effect in late 2015, but it finally came into effect at the start of October 2018.
The delay was a result of a legal challenge around the tendering process for the IT contract to run the new tax free childcare accounts and then, ironically, problems with that new IT system.
This closure process has been mired in confusion. Firstly, this has been due to imprecise wording around the employee’s eligibility date for joining an employer supported childcare scheme.
Secondly, when the salary sacrifice agreement needs to be in place to make it effective scheme. There are two important concepts to salary sacrifice for employer supported childcare; eligibility and the effectiveness of the sacrifice.
The legislation (ITEPA 2003 ss270AA and 318AZA) requires the employee to meet three conditions to be eligible to join, or remain in employer-supported childcare:
She was employed by her employer before the relevant day and has not ceased to be employed by that employer on or after that day.
She has been in receipt of employer-supported childcare at least once in a period of 52 weeks ending on or after the relevant day.
She has not given her employer a 'childcare account notice' to say that she no longer wants to receive employer-supported childcare, so that she or her partner can open a tax-free childcare account.
The employee may be male or female.
The relevant day is set as 4 October 2018 (SI 2018/462) and hence the employee had to be in employment on 3 October 2018.
Different dates have been published over the last two weeks in respect of eligibility. For example, page 7 of October 2018 Employer Bulletin says that childcare voucher schemes and directly contracted childcare “closed to new applicants on 4 October 2018”.
Whilst this additional day of eligibility is welcome, it’s important that employers and tax agents are aware that this date is not in line with the legislation.
It would be sensible to retain evidence of official communications that indicate that the deadline for starting employment is 4 October 2018 (per the Employer Bulletin) rather than 3 October 2018 (per the legislation).
This is not new. Since the tax exemption for employer supported childcare was introduced, in order to remain a member of an employer supported childcare scheme, the employee must receive support for eligible childcare for at least one tax week in any 52-week period.
An employee who is engaged on the 3rd or 4th October (depending on your interpretation of the legislation) is eligible to remain a member as long as they receive childcare support in at least one week in the 52 weeks that run from their eligibility date.
Employers who have chosen to withdraw childcare support at the start of maternity leave as a result of the case: Peninsula Business Services v Donaldson (UKEAT/0249/15/DM) ruling, need to be mindful of when childcare support needs to restart in order for the employee to retain eligibility.
Childcare account notice
A childcare account notice is not a physical HMRC form, it is simply the requirement for an employee to tell their employer in writing within 90 days of setting up a joint online childcare account for tax-free childcare, that they have done so and can no longer receive employer-supported childcare.
salary sacrifice agreement
To be effective in saving tax and NI for the employee and employer, there must be a salary sacrifice agreement (aka optional remuneration agreement: OpRA) in place, that provides the eligible employee to receive tax-exempt employer-supported childcare.
HMRC updated their salary sacrifice guidance on 9 October 2018 and amended it the same day to follow the wording in the Ocotber 2018 edition of the Employer Bulletin.
Initially this guidance referred to eligibility for employer-supported childcare as being before 4 October (in line with legislation). The latest version reads: “childcare vouchers and directly contracted employer provided childcare that started on or before 4 October 2018”.
The salary sacrifice guidance is silent on when the contract change must be in place for there to be an effective sacrifice in respect of newly eligible employees, but further clues are found in the Employment Income Manual (EIM).
In relation to the contract change the EIM says: “In practice this means that the employee who is entering into a salary sacrifice arrangement must agree to vary the employment contract well in advance of the date when the first payment under the new arrangement is due to be made.”
Whilst the cautious employer would get the contract change signed before the start of the pay period that includes 4 October 2018, following this guidance would mean that as long as the contract amendment was signed before payday it would be a valid variation, as long as the employee gives up the right to remuneration before it is received.
At present, HMRC seem content that eligibility is extended to those who were employees on 4 October 2018, as well as those who were employees before.
It is vital that employees receive employer-supported childcare at least once in a 52-week period to retain eligibility.
The salary sacrifice contract change simply needs to be in place ahead of the pay day for the period that includes 4 October 2018, so pay is given up before it is received.