To be 100% factual, it is not only childcare vouchers that come to an end from 04 October 2018, it is all Employer Supported Childcare (ESC) schemes.
So, in the first instance, it is worthwhile looking at the current ways in which employers can help employees with childcare costs, falling into 3 types:
- ESC Childcare Vouchers
- ESC Directly-contracted childcare
- Workplace nurseries
(Note that employers can also pay for childcare costs by, say, reimbursing expenses. This is not tax or NICs exempt and should be regarded as remuneration or, maybe, included in a PAYE Settlement Agreement).
The date of Thursday 04 October 2018 was set in The Income Tax (Limited Exemptions for Qualifying Childcare Vouchers and other Childcare) (Relevant Day) Regulations 2018 and reflects the delay in the original proposal to close ESC schemes from the start of the 2018/19 tax year.
ESC schemes were due to close on 06 April 2018 to new entrants. However, after a debate surrounding Universal Credit on 13 March 2018, the Secretary of State for Education Damien Hinds announced the delay of six months.
If an employer did close their ESC scheme to new entrants based on the original intention that ESC was to end in April 2018, note that this has not invalidated the all-important ‘available to all’ criteria.
The purpose of the rest of this article is to briefly explain the reasoning behind the closure and the implications for employers and employees. I have tried to include links to guidance as well. It is purely my interpretation of the facts and is not designed to be for or against either ESC or Tax-Free Childcare.
The Childcare Payments Act 2014 introduced Tax-Free Childcare. This is promoted by the UK Government as ‘fairer and better-targeted’ than ESC, simply because it is available to all families, including the self-employed. Subject to eligibility requirements, Tax-Free Childcare advertises that for every 80p put into an online Childcare Account, the UK Government will add 20p up to a maximum of £2,000 per year (£4,000 if the child is registered disabled).
As employers, we have to be so careful about giving guidance and advice, however, it is absolutely worthwhile looking at the following notes and links to guidance given that new and existing employees will be asking questions.
The Working Tax Credit / Child Tax Credit and / or Universal Credit is not available to claimants of Tax-Free Childcare. This is not just the childcare element but the whole of the benefit / credit.
See the Gov.UK guidance to familiarise yourself and this may be something you wish to make your employees aware of.
Parents are already and increasingly entitled to free childcare. However, childcare provision is a devolved issue and it is exceedingly complicated.
This is, perhaps, one of the best Websites to direct our employees to. This includes a ‘childcare calculator’ that comprises the Tax-Free Childcare scheme with other childcare initiatives.
However, it is ostensibly designed for working families in England.
New entrants to the ESC scheme are not allowed on or after 04 October 2018. Therefore, the above guidance becomes invaluable.
Existing members of the ESC scheme are unaffected (as are those using or wanting to take up a future place in a workplace nursery). This is as long as the employee continues to receive ESC in at least one tax week in any 52-week period on or after 04 October 2018.
Closure of ESC brings with it new terminology, therefore, I thought it worthwhile to compile a short glossary of terms, old and new:
Below, I detail some of the common situations employers may face and questions employees may ask about the closure of ESC on 04 October 2018:
Yes. The Income Tax and NICs provisions are not devolved, unlike free childcare provision.
They are eligible to go into the employer’s ESC scheme.
However, even though they may not have received their voucher on or before 03 October 2018, the contractual changes must be in place before the start of the pay period that includes 04 October 2018 for them to receive ESC (vouchers or directly-contracted childcare) with Income Tax and NICs relief.
The abolition of ESC does not abolish the requirement to perform the BEA for entrants to the ESC scheme on, or after, 06 April 2011.
They are not eligible to go into the employer’s ESC scheme, regardless of the fact that a scheme was available at the previous employment – though see TUPE transfers below.
If the employee moves to a new business under a TUPE transfer, the nature of such a transfer means that their terms and conditions in the new employment are protected. Therefore, they are able to join the new employer’s ESC scheme or the new employer can establish one – but only if they were members of the previous employer’s ESC scheme.
The concept remains that new entrants are not allowed to enter ESC schemes on, or after, 04 October 2018.
Yes, in England, where it is a joined-up application process via the Government Gateway. Employees that are eligible for ESC should be careful that they do not sign up for TFC at the same time as applying for free childcare. That is unless they have decided that TFC is better for them than the Income Tax and NICs provisions under their existing ESC scheme.
In the devolved nations, free childcare and TFC are separate application processes.
If the employee decides to open a TFC Childcare Account, they are only eligible if neither parent is in an ESC scheme. It is not possible, for example, for the ‘mother’ to receive TFC whilst the ‘father’ claims childcare vouchers.
As mentioned above, with regards to the successful application for a TFC Childcare Account, employees should be aware that Tax Credits are stopped immediately. The employee must cancel their Universal Credit.
Employees really do have to do their research and decide whether TFC is better for them compared with losing their entire Tax Credit and Universal Credit.
There is no specified format for the CAN, so this can just be an E-Mail notification from the employee to the employer terminating their ESC arrangement.
The employee has an obligation to submit the CAN to their employer within 90 days of opening a Childcare Account. During that time, it is possible for the employee to be in both.
However, if the CAN is not submitted to their employer, they will be unable to confirm their eligibility for the next EP and will be liable to repay any UK Government top-up that they have received (the 20p for every 80p that is saved into the Childcare Account).
Whilst this is not advice or a recommendation at all, I wonder if employees should use the 90 days to consider whether TFC is the best option for them and delay sending the CAN to the employer. Submission of the CAN is really the ‘full and final’ point of no return to ESC.
The employee cannot re-join the ESC scheme once they have submitted the CAN to the employer on, or after, 04 October 2018. Therefore, the decision to join TFC in preference to ESC must be carefully considered by the employee.
If the employee does not submit their CAN to their employer, they can continue to be in the ESC scheme. Potentially, they can be in the ESC and TFC at the same time, however, this exposes the employee to the fact that they will be getting Income Tax relief from both schemes. The employee will be unable to truthfully reconfirm their eligibility for TFC at the end of the EP.
However, if the CAN remains submitted to the employer and the employee does not draw monies from the Childcare Account (or makes good monies that have been withdrawn), they can continue in ESC with the employer.
There is no obligation on the employer to verify whether the Childcare Account has been accessed and funds withdrawn.
Yes. Employers are free to pay monies into the employee’s Childcare Account using the bank details and unique reference number provided by the employee. All payments must be made individually and the employer cannot ask HMRC to make the payments for them.
Employers must regard any payments as remuneration. As such, payments are fully subject to Income Tax and Class 1 NICs.
Further, employers can facilitate payments from the employee’s net pay into their Childcare Account. As this is a deduction from net pay there are no Income Tax or NICs considerations and the employer must use using the bank details and unique reference number provided.
ESC provision is purely a commercial decision by the employer and a change of provider on or after 04 October 2018 does not mean that employees become ‘new entrants’ and are disqualified.
This is important for employers to note, as the number of ESC recipients will inevitably dwindle in the coming years. Possibly, employers may wish to choose self-administered vouchers that may have a lesser cost implication.
There are likely to be queries and situations that are not covered above or in any published guidance. Therefore, E-Mail firstname.lastname@example.org.
Alternatively, as detailed above, there is Childcare Service helpline on 0300 123 4097.
I hope that this is helpful.