Employee benefits and salary sacrifice

For as long as I have worked in payroll, there has been very little change in the regulations around what is and isn’t available to offer as salary sacrifice benefits to employees.

Notable additions in my 25 years in payroll have been electrical goods and electric cars, with the NHS seemingly at the forefront of what is legally possible.

One area of focus more recently has been around the salary sacrifice of nursery and pre-school fees. There has been an increase in the number of companies who offer salary sacrifice schemes in this area. The salary sacrifice scheme in question relates to a set of rules dating from 2003, whereby an employer is allowed to set up a Nursery for their employees. If you provide places for employees’ children in a workplace nursery, you do not have to report or pay anything in relation to direct employee payments to the nursery for childcare, before tax and NI deductions.

To be exempt, a workplace nursery must:

• Have the appropriate registrations and approvals

• Be available to all your employees

• Provide childcare for your employees’ children, or children they have parental responsibility for

• Provide childcare up to the maximum age its registration and approval allows for

Wording directly from the HMRC regarding workplace nursery settings is below:

'There are a number of commercially marketed schemes which set out to exploit the benefit-in- kind exemption for workplace nurseries in section 318 ITEPA 2003 (see EIM21900 onwards). There is no statutory bar that prevents employers from entering into partnership arrangements with commercial nursery providers. However, the employer must engage with the commercial provider in such a way that he is “wholly or partly responsible for the financing and managing the provision of the care.'

The HMRC handily goes on to explain how NOT to run a workplace nursery scheme illegally in the Employment Income Manual EIM21970, whereby it sets out that by sacrificing salary, paying a nominal additional sum and sitting on a monthly meeting, does not constitute a significant control of the nursery.

Again, in the words of the HMRC:

‘The exemption for workplace nurseries in Section 318 ITEPA 2003 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 opinion of HMRC does not apply, to commercially marketed schemes of the kind described in EIM21970, where the employer really does no more than to buy in places at a commercially run nursery.’

The HMRC also clearly state that they will never provide blanket approval to any company that acts as a broker for businesses, and if a business enters into a scheme, they must seek approval from the HMRC prior to commencing a salary sacrifice arrangement with their employees.

So, what happens if you have entered into a scheme, and the HMRC consider it to be illegal? As an employer, it is your responsibility to ensure that all relevant taxes are paid to the HMRC. This means that if any deductions from pay have been made illegally through disguised income, all relevant unpaid employee and employer taxes will be the responsibility of the employer to make good, for which there is no time bar. This would then in turn create an employee overpayment situation, which would be the employer’s responsibility to recover. Effectively a lose-lose situation for the employer.

If the scheme is too good to be true, it usually is! All of the risk and responsibility sits with your company, and none of it is with the broker. Always check with a responsible 3rd party like the HMRC or ME to make sure you are compliant.