Early years providers remain in the dark about whether they can apply for the Employment Allowance, which reduces an employer's National Insurance liability, due to conflicting Government advice.
There is widespread confusion about whether PVI providers can claim the Employment Allowance, which is increasing from £5,000 to £10,500 in April, from HMRC due to guidance that states businesses are ineligible if they provide more than 50 per cent of ‘public work’ and receive more than 50 per cent of ‘public funding’.
It comes just months ahead of employer National Insurance contributions (NICs) increasing from 13.8 per cent to 15 per cent in April and the per-employee threshold at which employers start to pay National Insurance reducing from £9,100 to £5,000 per year. The National Minimum Wage is also rising.
The Government has repeatedly said that early years providers will be able to claim the Employment Allowance, which reduces employers' annual National Insurance liability, to help offset the additional costs.
However, with many settings delivering the funded entitlement and expanded offer, which is set to increase to 30 hours for all children from working families by September, there is confusion about whether it pushes them over the threshold of more than 50 per cent of ‘public work’ and receiving more than 50 per cent of ‘public funding’, making them ineligible for the allowance unless they are a registered charity.
The National Day Nurseries Association (NDNA) estimates that with the expanded offer, from April most settings will be providing 80 per cent of funded places. It says that research suggests nurseries will have to find around £2,600 extra a year per employee from April with the NICs increase.
With this additional cost and not being able to access the Employment Allowance, many nurseries could be at risk of closure or forced to further increase parental fees.
When Nursery World contacted HMRC for clarification, it said, ‘Most businesses or charities can apply for Employment Allowance. However, if they are a public body or a business whose activities wholly or mainly involve the performance of functions which are of a public nature and are mainly publicly funded, then they cannot.’
It went on to say that all of its guidance is ‘subject to ongoing review’, and, ‘If an employer applies for the Allowance and realises later in the year they are not eligible, they would amend their RTI returns to remove it.’
Accountancy firm Hazlewoods believes that early years providers should continue to be eligible for the Employment Allowance, regardless of the proportion of their income that comes from the public sector.
The NDNA, which has written to the Chancellor's secretary, James Murray, for an answer, has also flagged whether receiving Tax-Free Childcare payments via their parents makes nurseries ineligible for the allowance.
Purnima Tanuku, chief executive of NDNA, said, ‘The increase in employer National Insurance contributions will have a huge impact on early education and care employers across the UK. This is such a crucial issue for our sector because staffing costs make up around three-quarters of the cost of running a nursery.
‘NDNA has been trying to get clarity on whether nurseries are classed as carrying out public work to avoid losing this support, because from April, 80 per cent of childcare will be funded by the Government.
‘Secretary to the Treasury James Murray said in Parliament that he believed that the majority of childcare providers should be able to claim this allowance. To ensure all early years providers can have confidence in this position, we need to see the Government make this explicit in guidance as they do for schools.’
What is the Employment Allowance?
The Employment Allowance reduces eligible employers' annual National Insurance liability. Currently businesses can claim up to £5,000, but this is increasing in April to £10,500.
Previously only businesses and charities were eligible if their employers' Class 1 National Insurance liabilities were less than £100,000 in the previous tax year, but this is changing from the new tax year when there will be no threshold, making all businesses paying NICs eligible.
What the guidance says
Under Government guidance (see https://bit.ly/40r2UCk), businesses cannot claim the allowance if they do more than 50 per cent of their work in the public sector and receive more than 50 per cent of public funding, unless they are registered as a charity.
It states that if a company's business is ‘less than 50 per cent of a public nature, it will be entitled to the Employment Allowance. When considering the proportion of the business which is of a public nature, this could be based on the number of employees engaged in public nature duties or the percentage of time spent on public nature duties. Alternatively, a business can consider turnover derived from the public nature activities.’
Section 4 of the guidance, ‘Educational Institutions’, states, ‘Schools, academies, further education colleges and universities are entitled to claim the Employment Allowance if they are private businesses or charities. This includes local authority or central government funded institutions provided they have charitable status.’
It goes on to say, ‘If your institution or charity is connected to others, then there will be entitlement to just one allowance for all of the institutions or charities within the group. For example, an education trust which controls several academies will be entitled to just one allowance and it will be up to them to decide which academy makes the claim.’
Eligible or ineligible?
While the Government has claimed that it is likely that many childcare providers will be able to access the Employment Allowance, the Early Years Alliance is warning that in many cases, this won't be possible due to the public work and public funding rules, which make them a ‘public body’, although unlike other public bodies, including schools, they will not receive financial support.
In December, during a debate in the House of Commons on the rise in NICs, the secretary to the Chancellor said, ‘The Government will provide support for departments and other public sector employers on additional employer National Insurance costs, including central Government, public corporations and local government. Independent contractors, including primary care providers, social care providers, charities such as hospices and nurseries, will not be supported with the costs.’
He went on to say, ‘I recognise that some honourable members have shown an interest in the impact of this Bill on childcare settings, as highlighted in the amendments tabled by the honourable members for St Albans, for Grantham and Bourne, and for Lagan Valley, and in the new clause tabled by my honourable friend Ms. Creasy.
‘Early years providers have a crucial role to play in driving economic growth and breaking down barriers to opportunity. We are committed to making childcare more affordable and accessible, which is why the Government committed in our manifesto to deliver the expansion of Government-funded childcare for working parents, and to open 3,000 new or expanded nurseries, by upgrading space in primary schools to support the expansion of the sector.
‘Despite the very challenging circumstances that the Government inherited, the Chancellor announced in her Budget in October significant increases to the funding that early years providers are paid to deliver Government-funded childcare places. This means that the total funding will rise to over £8 billion in 2025-26.’
However, less than a month later, when shadow education secretary Laura Trott asked for an estimate of the number of early years providers eligible for the allowance when the NICs rises in April, Murray said there were no estimates available.
He added that the ‘eligibility of a specific employer will depend on the nature of their work, which can be determined by the employer according to HMRC guidance’.
The alliance called it ‘deeply concerning’ that the Government ‘might be underestimating the scale of the challenge facing our vital sector’.
It is hoping the Chancellor will announce support for PVI settings in the Spending Review in March, and is reiterating its call for the Government to either exempt early years providers from the National Insurance changes or to commit to funding the rises in full.
Chief executive Neil Leitch said, ‘Early years providers are stuck between a rock and a hard place. With the next phase of the entitlement expansion now just months away, we know that Government-funded places are likely to account for the majority of many settings’ offerings to parents. It seems absurd that as a result of this, many won't be able to claim Employment Allowance because they will be deemed to be “public bodies” – and yet, unlike public sectors, they will still be hit with the full force of the upcoming National Insurance changes in April.
‘With Government now confirming that it has no estimates to support its suggestion that many early years providers will be able to claim Employment Allowance, we are deeply concerned that ministers may well be underestimating the scale of the challenge facing our vital sector.
‘With our own research showing that providers will simply have no option but to raise fees and limit entitlement hours to mitigate the impact of April's changes, there is no question that without further Government action, the upcoming changes to National Insurance are likely to hit both families and providers hard. We once again urge the Government to rethink its decision before it pushes even more settings to the brink.’
Accountancy advice
While accountancy firm Hazlewoods believes there is an argument that nurseries should continue to be eligible for the allowance, its director, Carly Wild, told Nursery World that until specific guidance is issued by HMRC, ‘the position remains unsatisfactorily uncertain’.
She explained, ‘In many circumstances, HMRC guidance is open to interpretation; however, in this case there are a number of reasons why it could be expected that nursery operators should continue to be eligible to claim the employment allowance. They are:
- Are nurseries doing their work in the public sector? The service privately owned nurseries provide is to the parents/carers of the children they look aft er, not to the local authority, despite where the funding comes from. The local authorities have no say in the service provided; the nursery chosen, hours/sessions attended, stipulations about the care provided are all agreed with the parents, and therefore it would be very difficult for HMRC to argue that the work is carried out in the public sector. If this test is failed, then the amount of income is irrelevant.
- What does “more than half” actually mean? HMRC guidance states that, “When considering the proportion of the business which is of a public nature this could be based on the number of employees engaged in public nature duties or the percentage of time spent on public nature duties. Alternatively, a business can consider turnover derived from the public nature activities.” This suggests that turnover is not the main focus of the proportion test – it is the nature and quantity of the work, rather than the value, that should first be considered.
- What has been said in Parliament? In response to a question from Laura Trott, James Murray stated that, “The eligibility of a specific employer will depend on the nature of their work, which can be determined by the employer according to HMRC guidance.” Again, this appears to be in support of the key factor for eligibility being the public nature of the work, as opposed to the origin of the funds. In the absence of a more specific statement from HMRC, the guidance appears to be quite clear on this point.
- Are there any comparable examples? The further guidance provided by HMRC on employer eligibility gives a specific example of educational institutions being entitled to claim the allowance, which adds weight to the argument that the same treatment should apply to nurseries. Independent pharmacies are also specifically mentioned, with the guidance confirming that those “conducting a business, including over the counter sales as well as dispensing NHS prescriptions, are entitled to claim the employment allowance”. While the industry differs, the nature of providing a service to the public which is part funded by the local authority is directly comparable to PVI nurseries.’
Nursery World contacted the Department for Education and Treasury for a comment, but neither provided a response.
At the time that Nursery World went to press, neither HMRC nor the Government had clarified whether PVI nurseries providing funded places would be eligible for the Employment Allowance.
Case study: Susan Raftery, co-owner of Child's Play Pre-School in Guildford
Raftery believes the fact that the majority of her setting's places are funded makes it ineligible for the Employment Allowance.
To help cover the increase in the NICs and the minimum wage, she has increased fees this month as this is the only way to boost income.
‘Being a small setting, our parents question everything and, unlike bigger nurseries and groups, we don't have the scope to increase private hours, which would boost our income and potentially make us eligible for the Employment Allowance if then parents took fewer funded hours,’ said Raftery.
‘Unless you are registered as a charity, I don't see how any setting can be eligible for the allowance. In the past, I've applied for the allowance, but not recently and not now. Sometimes we get a few Pupil Premium children join the setting during the year and that then changes our income.’
NDNA underfunding campaign
In response to nurseries' concerns about meeting the rise in NICs and National Minimum Wage, the National Day Nurseries Association (NDNA) has organised a Week of Action on 10-14 February to encourage providers and parents to speak up for early years as a collective voice.
It has put together ‘10 steps to stop underfunded childcare’, which it hopes settings will share with parents and encourage them, along with early years staff, to share on social media, tagging their local MP.
Under the campaign, the NDNA wants nurseries to ‘get creative’ about what they love about their job and to share these messages under the hashtag #underfundedchildcare.
Purnima Tanuku, chief executive of NDNA, said, ‘We hope to see early education and care providers and parents across the country speaking up for early years. Since the Budget, when increased employer National Insurance contributions and minimum wages were announced, nurseries have told us how worried they are about meeting these costs and the impact of this on parental fees.
‘Our Week of Action will also raise awareness among families and the wider public. If the early years sector struggles then that impacts on children's outcomes and parents’ ability to work, affecting the whole economy. We hope that elected representatives across the UK will show their love and support for nurseries by the end of the week on Valentine's Day.’
