SE21971 - Benefits: exemption for workplace nurseries: commercially marketed nursery schemes: tax consequences

For tax purposes, the schemes described in SE21970 have to be considered in 3 stages:

• firstly, is the salary sacrifice effective? If not, then the employee remains chargeable on their original gross pay and the employer should continue to operate PAYE, and account for NIC, on that amount;
• secondly, if the salary sacrifice is effective, is the employee’s nursery benefit chargeable as an emolument from employment under Section 19(1)1 ICTA 1988, or only as a benefit-in-kind under Section 154 ICTA 1988?
• finally, if (and only if) the benefit is chargeable only under Section 154, do the arrangements satisfy the conditions for exemption in Section 155A?

The salary sacrifice

For guidance on this aspect, please see SE42750 onwards and SE01141.

Section 19(1)1 or Section 154?

This point is important because the workplace nursery exemption applies only to benefits chargeable under Section 154 (see SE21900). If the benefit is chargeable under Section 19(1)1 the question of exemption under Section 155A does not arise.
In general, Section 19(1)1 will apply if

• the contract for the nursery place is between the employee and the nursery, so that when the employer pays the nursery they are satisfying the employee’s pecuniary liability (see SE00580) or
• if the employee can at any time give up the nursery place and revert to their original salary (the 'Heaton v Bell' principle – see SE00570).

The major scheme promoters generally manage to avoid these situations, but the points are worth bearing in mind if you are dealing with a one-off scheme.

Does the workplace nursery exemption apply?

The exemption for workplace nurseries in Section 155A ICTA 1988 was introduced to encourage employers to provide nursery places for employees, either by opening a nursery on their own premises or by combining with other employers to jointly finance and run a nursery. The exemption was not intended to apply, and in the Revenue’s opinion does not apply, to commercially marketed schemes of the kind described in SE21970, where the employer really does no more than to buy in places at a commercially run nursery.

Specifically:

• the additional monetary contribution that the employer is required to make does not satisfy the 'financing' requirement (see SE21925) and
• the appointment of the scheme promoter to act as the company’s agent does not satisfy the 'management' requirement (see SE21930).

For guidance on dealing with disputes if the employer or employee will not accept the Revenue view, see SE21973.