Buyer’s Guide to childcare

The corporate childcare market is continuing to grow, but employers must ensure schemes are managed correctly to qualify for tax exemptions, says Bea Oaff

The childcare benefits market is one that is continuing to experience growth, and there is potential for it to broaden its appeal even further. There are now four main types of childcare perks available for employers to offer to their staff: childcare vouchers, emergency childcare, workplace nursery partnerships and on-site nurseries.

Over the last 12 months, anecdotal evidence suggests that the provision of on-site nurseries and emergency childcare has remained largely unchanged. When it comes to on-site nurseries, which are exempt from income tax and national insurance (NI) contributions, it seems these remain the preserve of larger organisations.

Although the concept of an on-site nursery appears to be quite straightforward, it can be difficult to implement in some cases, due to an organisation’s location. On-site facilities usually work best on out-of-town sites, where there is enough space available and it is easy for staff to travel into work with their children. The success of such a facility also relies on attaining buy-in and take up of the benefit by large numbers of staff, hence why they have been favoured by larger employers.

Emergency childcare, meanwhile, has attracted a mixed reaction in terms of the popularity of the concept. Speaking off the record, one source referred to it as “nothing more than an enhanced Yellow Pages”. This is a claim that providers of such services have been quick to deny. According to Tinies Childcare, which offers an emergency childcare service, the average working parent experiences a childcare breakdown nine times a year, so emergency childcare offers a solution that is “practical, flexible, trusted and cost effective for all parties”.

Benefits that have experienced greater growth are childcare vouchers and workplace nursery partnerships. These perks have also attracted a great deal of attention over the past year for other reasons, not always positive. According to providers in the market, an increasing number of parents are signing up to workplace nursery partnerships. This type of scheme allows employers to make a nursery available jointly with others and, provided the employer is wholly or partly responsible for financing and managing the nursery, childcare places will be exempt from tax and NICs. In order to qualify for these exemptions, however, employers must adhere to strict guidelines issued by HM Revenue & Customs (HMRC). Over the past year, there have been concerns that some employers have been given misleading advice on what they must do to qualify for the full tax relief. John Woodward, managing director of Busy Bees, says: “Spurious claims are being made [and] damage is being done. The cowboys doing this know it’s illegal and unethical but they just don’t care”.

In September last year, HMRC was compelled to hold seminars on workplace nurseries to clarify the tax position and help employers ensure their schemes were compliant with the requirements around the available tax exemptions so that they avoid potential tax charges.

Marcus Barrow, corporate sales manager at Kidsunlimited, says: “The grey area lies not in the management side, but the financial side.” He adds that employers must demonstrate that they are financially committed to running the nursery, for example, covering staff costs, or paying for equipment.

Some providers are now calling for action to be taken. “HMRC needs to investigate and then issue sanctions. This is needed not only to help the market but also the parents who will end up facing huge tax bills,” explains Woodward.

The childcare voucher market has also attracted some attention as it continues to grow, despite the fact there has been no further increase in the cap on tax savings, which remains at £55 per employee per week tax free.

Andy Lister, head of employee benefits at Grass Roots, says: “There has been very significant growth.”

Yet childcare voucher providers have come under fire from some nurseries for the lack of clarity around the administration that is placed upon them. Julian Humpdige, sales manager at Leapfrog, says nurseries are getting a raw deal: “More companies do need to improve their systems so that they fit in better with the childcare providers. It can be done comprehensively and efficiently.”

In extreme cases, some nurseries have threatened to stop accepting childcare vouchers from some providers, which could pose a problem for employees.

Looking to the future, Catherine Maddox, director of voucher provider Allsave, expects to see childcare vouchers starting to be used in a broader way. “I think they’ll start to become redeemable at places that are government approved to provide beforeand after-school clubs as well as holiday clubs. In my opinion, allowing parents to pay for sports, drama and arts activities in this way will tie in very nicely.”

But Louise Barker, commercial director at provider Sodexho Pass, believes there is scope for an education campaign around the tax savings that can be made with vouchers. “We surveyed 1,000 parents in November 2006 and while 61% of them had heard of childcare vouchers, only 7% understood them. And when the savings they can make are so significant it is really important providers get the message out there, especially to those working in SMEs. Our research indicates that over half of all businesses employing [between] 250 to 499 people don’t have any sort of employer-assisted childcare.”

Other providers agree that more needs to be done to raise awareness among smaller employers. Derrick Hardman, sales director of Accor Services, says: “It is time we did more to raise awareness within SMEs. The [large] corporates have blazed a trail. Smaller and medium-sized enterprises can now be encouraged to follow.”

Woodward adds: “Only a small part of the potential [market] for childcare vouchers has been tapped. There is now more confidence around childcare vouchers. In the last two years, they have gone from being seen as a bit of a quirky arrangement to a strong government policy. They have proved themselves to be robust, reliable and good value.”

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Focus on facts

What is corporate childcare?
This is any employer-supported childcare, of which there are four main types: on-site nurseries, workplace nursery partnerships, childcare vouchers and emergency childcare. On-site nurseries are childcare facilities provided by an organisation, while workplace nursery partnerships make use of off-site facilities where the organisation contributes management time and financial support to a government-approved nursery.

Childcare vouchers are either online or paper coupons used to purchase government-approved childcare free from tax and national insurance of up to £55 per week.

Emergency childcare enables employers to offer childcare to staff at short notice, either by block booking nursery places or providing a list of vetted carers.

What are the origins of corporate childcare?
On-site nurseries began to appear after World War II and were encouraged by the government as part of its aim to get more women into work. Childcare vouchers and workplace nursery partnerships were introduced in 1989 when the government introduced NI exemptions. Emergency childcare is a more recent development.

Where can employers get more information and advice on childcare?
Organisations such as the Day Care Trust, (, and Working Families, (www.workingfamilies can provide further information.

Nuts and bolts

What are the costs involved?
Childcare vouchers providers typically charge companies 4%-8% of the value of the vouchers. The cost of an on-site nursery will largely depend on its size, although there are some government grants available for smaller and medium-sized organisations.

What are the legal implications?
Employers must offer the childcare benefits to all employees for the tax breaks to apply. If they are offered through salary sacrifice the employee’s contract must be amended. All child carers and facilities used must be government approved.

What are the tax issues?
On-site nurseries qualify for a full tax break, as do workplace nursery partnerships if employers are involved in managing and financing the nursery, and meet strict HM Revenue & Customs guidelines. Childcare vouchers are exempt from both tax and national insurance contributions (NICs) of up to £55 a week, as is other childcare that is made available to employees.

In practice

What is the annual spend on corporate childcare?
According to care data specialist Laing & Buisson, the total spend on childcare by employers last year was estimated at £635m, of this, £400m-£425m was spent on childcare vouchers.

Which childcare providers have the biggest market share?
According to providers, Accor, Sodexho Pass and Grass Roots are the largest players, followed by Busy Bees.

Which corporate childcare providers have increased their share the most in the last year?