When Chancellor Gordon Brown confirmed in his recent pre-Budget report a tax relief of 50 a week for all employer-approved registered childcare, the proposal was greeted with enthusiasm throughout the sector, and a prediction from one of the principal childcare voucher providers that its business would increase ten-fold.
The measures, which come into force in April 2005, are an attempt to reverse the current state of play, in which only one in ten employers help working parents with childcare through voucher schemes and workplace nurseries, where the employer must have management responsibility (see box for details).
Stephen Burke, director of the Daycare Trust, anticipates 'a groundswell from employees and unions demanding that their employers take part. It is a nil-cost option to employers but something that every good employer will want to do and what every employee with children will want them to do, and in the process will help recruitment and retention of staff.'
John Woodward, director of nursery chain Busy Bees, says that existing arrangements allow substantial savings on childcare costs through national insurance (NI) exemption, but he reckons that only around 2 per cent of eligible parents take advantage of it. Despite this, Busy Bees'
Lichfield-based voucher business has seen a ten-fold increase over the past three years, lifting its annual turnover to 25m.
Now Mr Woodward foresees a further ten-fold increase in the wake of the Chancellor's announcement, pushing the chain's turnover from vouchers to between 200m and 250m. But he emphasises that the boom in business does not signal bumper profits, since commission on the sales at this level would only be between 12m and 14m, and profits considerably less.
However, in anticipation of a sharp rise in sales, Busy Bees has invested a further 500,000 in its voucher business, moved to larger offices and introduced new systems. It now employs nearly 60 staff and has around 1,000 employers on its books.
Mr Woodward says, 'Vouchers are the easiest way to support childcare. It's administratively simpler than through a tax code. The Government has produced something simple and effective, which will help the sector, and we believe it will be the way that people pay for childcare in the future.'
The other principal voucher provider, multinational company Accor Services, has around 700 employers involved in its scheme and 20,000 parents.
National sales manager Anne Ross says the tax break will 'open the floodgates' and describes the Inland Revenue estimate of 100,000 families participating as 'fairly conservative'.
Under Accor's paper voucher scheme, an employer sends in an order to the company with the employee's name and the value of vouchers, which are then sent on to the employee so they can pay for their chosen form of care. The company also operates an electronic voucher scheme, run along the same lines as telephone or online banking. When Accor receives an order from the employer, the employee's Accor holding account is credited and they can then pay their carer.
Under the existing NI exemption, basic-rate taxpayers earning under Pounds 31,000 were the ones to benefit most. As the new arrangements provide tax as well as NI relief on 50, higher earners paying 40 per cent tax stand to gain. 'In pure political terms, this could be seen as part of the childcare strategy for Middle England, which has not benefited to date,'
says Stephen Burke.
John Woodward has no qualms about the potential tilt in favour of higher earners in the Chancellor's latest proposals. 'If you take a look at the whole childcare budget, it's blindingly obvious that we really ought to be targeting money at people who can't afford childcare. But a lot of the sector is paid for by people who earn more, and stick a lot of money into nurseries, so why shouldn't they get some help?'
Some current voucher schemes provide NI exemption for unregistered childcarers, such as relatives. But the new legislation incorporating the tax and NI relief will stipulate that it can only be claimed by approved childcarers, including nurseries regulated by Ofsted, registered childminders or those caring for children in the family's home under the new home childcarers' scheme which was introduced last April. Parents using grandparents or employing a nanny will not be eligible for the tax break.
However, the Inland Revenue confirms that 'the Government is planning on consulting in the future on how to extend the current definition of approved home childcare'.
Maggie Dyer of the London Au Pair and Nanny agency hopes any review will result in the inclusion of nannies. She says, 'Cherie Blair employs a nanny and I daresay Gordon Brown and his wife will employ one, and yet the Government has refused to acknowledge nannies as professionals. I certainly would want them to be included in this scheme.'
There is also a degree of disappointment that the Government has limited the tax break to 50, while many childcare organisations advocate 100 as a more realistic level to help with the rising costs of childcare. However, the Inland Revenue has confirmed that the exemption applies 'per employee' and that where both parents are working, they can claim a total of 100 a week tax relief.
Stephen Burke says that the new proposals, which he believes 'effectively sanction salary-sacrifice schemes', have probably been set initially at the 50 level so that 'there will be a minimal long-term impact on people's pensions', balancing the need to protect the benefits of employees while extending tax advantages.
Rosemary Murphy, chief executive of the National Day Nurseries Association, echoes the views of many providers when she says a limit of 100 would have been preferable, but nevertheless the tax break is an overdue and major step forward.
However, her preference is for 'one clear-cut system of funding, a ring-fenced childcare or early years subsidy which includes nursery education and childcare and is an entitlement'. Such a measure, she insists, could clear away much of the confusion and lack of transparency surrounding funding and could have 'potentially the same effect on the nation as the setting up of the NHS'.
She says that, above all, the tax break must be easily understood by parents. Stephen Burke likewise believes that it must also be 'simple and straightforward' for small- and medium-sized businesses to run.
Carolyn Mason, the Inland Revenue's policy adviser on the childcare tax break, says that 'where employers contract with childcaring organisations, such as after-school clubs or childminding networks, it is anticipated that these businesses will become more sustainable. And businesses that support childcare will be more productive, with improved recruitment and retention, reduced training costs, more staff satisfaction and less absenteeism'.
The childcare sector shares the same enthusiasm, which is only tempered by the need to see the fine detail of the Government's proposal and a sign from the Treasury that the 50 tax relief limit is just a start and will be raised in due course to reflect the ever-increasing cost of childcare for working parents.
PRE-BUDGET REPORT: KEY POINTS
* The tax and national insurance exemption - it will be free of both employee and employer NI - will apply to the first 50 a week of employer-supported, approved childcare. This will include formal childcare directly provided by the employer, where the employer contracts with the childcarer, or for employer-provided childcare vouchers where they are used only for formal childcare.
* The scheme, which begins in April 2005, will be open to employees whatever their income level and as long as employers offer it to all their employees.
* The exemption only applies to non-cash employment benefits through the provision of childcare or childcare vouchers. If an employer paid an employee extra cash to meet their childcare needs, that money would be subject to tax and NI.
* The exemption applies 'per employee', so both working parents can claim the tax and NI relief. For those on the 40 per cent higher rate of tax, they will receive an extra 20.50 a week, while basic rate taxpayers will get 16.50 a week. Employers will save 9.76 per month, per employee, through the exemption on their NI contributions.
* The Government also announced plans to open 1,000 children's centres over the next five years and expects to double the number of childcare places to 1.5 million by 2006 from 750,000 in 1997.
