Q: How do you think your nursery business will be affected by the rise in VAT to 20 per cent?
'Although our VATable costs are a relatively small percentage of our overall costs, investment and renewals of items such as toys and furniture will cost more. We purchased larger items before the VAT increase and will look to reduce our spending on non-essentials this year.'
'The VAT increase affects buying all our consumables and equipment and has already hit us, as we had ordered an outdoor play surface and now the cost has increased. The industry should be exempt from paying VAT.'
'I really do believe that the government should be looking at the VAT implications for our sector and designing a special registration so that we can claim the VAT back.We are such a government-regulated industry, and the extra implications of the VAT are going to cause providers even more pressure on the endeavour to remain sustainable, while trying to keep prices affordable.'
'We normally review our fees in January every year, but this year we had to raise them more than normal. We are already operating on a break-even basis, so just the increase in VAT on the rent will be a strain.'
'Badly! It's going to mean a huge rise in our commercial rents (over £2,000 per year over all my sites) as well as meaning that all our supplies cost us more. It's not life or death for us, because we are a profitable chain, but I can see how it will hit smaller settings, especially pre-school settings that work on very tight budgets as it is.'
'The increase in VAT will come straight off my bottom line - margins in this business are very low as it is, so this makes it worse. It will make it more difficult for us to purchase new resources and to replace those which have become worn. For example, I would like a water table to keep outside as well as the one we have inside. These are very expensive, which means that the VAT increase makes them unaffordable. My rent payments are subject to VAT, so these will increase and I think my accountants' fees are subject to VAT too - if so, this will be another extra cost.'
Q: Do you think the quality of nursery provision may be threatened because of this increase?
'Because of the current climate, nurseries can't increase fees over and above their normal increase as parents can't afford it, so the extra money will have to be found somewhere and this can only be from cutting back in other areas, such as not giving staff pay rises, not buying resources, serving cheaper food. This, coupled with the increase in the 15 hours entitlement and the costs nurseries have incurred, is going to have an impact on nurseries and children, even those not currently struggling because they are full.'
'The quality of provision, for me, will not be affected, as the business will swallow the cost. It will make me think twice about large purchases, though.'
'For quality provision it is important to have well-paid staff. This week one of my team, who is a young mum, came to me in tears over how she would manage with the VAT increases personally. She was concerned that there would be no wage increases due to the extra taxes. It is issues like this which can affect overall staff performance, which then has an effect on the nursery.'
'Yes, because when costs rise, you look to lower costs in other areas where you can.
Q: What do you cut first - expenditure on equipment? Reduce staff costs by recruiting staff with lower qualifications?'
'We are trying to minimise the impact on our provision and where a purchase is absolutely necessary to maintain the quality of provision, say to replace a cot, then of course we will make the purchase. However, our discretionary budget has been further squeezed by the VAT rise. Professional services such as recruitment agencies will also cost significantly more and as a result we may use them less, possibly reducing the range of candidates we look at for upcoming positions.'
'In conjunction with freezing or possible reduction in levels of Early Years Free Entitlement funding, yes, the quality will be affected, although of course we will do the best we can with what we have. I have given staff a modest pay rise (the first one in over a year) and have to cover the cost of this too; they have increased household costs due to the VAT rise. It is important to show that staff are valued as their qualifications and experience increases too.'
Q: How will you justify any changes to parents?
'We raise fees in January and therefore this year we have justified some of the rise on the VAT increase. All parents appear to have understood that we need to recover the additional costs and also understand that we are under significant pressure from the free entitlement, possible reduction in other grants and expectations that staff will be more highly qualified.'
'We will have to carry the costs and not pass them on to parents.'
'I will just be honest with them. Increased costs for us means passing the cost on to them.'
'I don't think our parents will be too conscious of any inability to purchase new resources, to be honest, and I'm not raising fees at the moment.'
Q: Do you know of nurseries that are raising fees to offset the increase?
'We've not heard of any in our area yet, but I wouldn't be surprised in the next few months.'
'Yes - we are.'
'Our fees are reviewed annually around April, so this VAT increase will be taken into account then.'
'Yes, I have heard that other local nurseries will be passing on costs to parents through increased fees. I haven't raised our fees since April last year and will only raise them in January 2012 (the first rise since April 2010), as I know our parents can't afford any more, and would just reduce the booked hours if I increase the fees. This means I am struggling to balance the books and can't have quite the same very high ratios I used to (due to the need to cut staff overtime hours to an affordable level).'
Q: Have parents expressed worry about struggling to afford childcare in the future, with many bills increasing?
'Since our return on 4 January I have already had three parents reduce their days because they can't afford to pay fees. One of those lost their job last year, but the others work and are struggling.'
'Although parents were understanding when we informed them in December that we were raising the nursery fees, we have lost a few due to fees going up and I think we may lose more as parents find it tight financially.'
'Yes, parents are starting to find childcare fees difficult and in some more affluent areas, where the child attends a nursery through desire rather than necessity, we are seeing a fall in attendance. Parents are finding it particularly difficult in periods when free entitlement is not available, as the additional cost is a significant burden for them. In areas where both parents tend to work, we are finding that more parents are questioning whether going to work and paying for childcare is worth the effort. With salaries at the lower end of the scale being pushed higher due to improvements in the minimum wage, there is no real possibility of driving costs down any further.'
'Parents do not expressly tell me about childcare costs, but we have had a few people leave due to redundancy and increased costs.'
'Yes, hence my decision not to raise fees for a long period despite our costs.'
AN EXPERT'S VIEW
By Derek Hayes, senior consultant/trainer, Childcare Consultancy 
Cold days and depressing headlines about the nation's finances have made for a gloomy start to the year. It's estimated that the rise in VAT will add £500 to household bills and families with babies will be worst hit. Rocketing fuel prices and inflation doesn't help matters and now there's an increase in interest rates too.
While childcare itself is zero-rated for VAT, many of the costs involved in running a nursery are going up. It's important to balance parents' financial concerns alongside the impact VAT rises may have on your sustainability. Being open and honest about any impact is essential to maintain trust.
A positive response to the rise in VAT would be to ensure tight control of your setting's finances. Carefully budget for the year ahead or you will struggle to make strategic decisions. My advice is to sharpen up those spreadsheet skills. Itemise every single cost and scrutinise your planned spend.
Invest time in reviewing your suppliers - utilities and consumables. Smaller companies or sole traders are often below the VAT threshold, meaning they should be cheaper. Be bold and ask for discounts. Check staffing levels and resolve never to rely on agencies. Better to boost your own pool of bank staff for more cost-effective cover.
When it comes to food, source local producers and buy direct. Seasonal produce is cheaper and makes a great selling point for nursery menus. Avoid processed foods that aren't VAT exempt in favour of raw ingredients that are; less expensive, healthier and more rewarding for talented cooks!
Think carefully before deciding to freeze fees and 'absorb' the VAT increase yourself - too few settings are profitable as it is, and it's not sustainable long-term. If you do increase fees, give parents plenty of notice. Write a straightforward letter explaining your reasons. If you know your budget and communicate sensitively, they may grumble but will understand. Also, use this as an opportunity to promote money-saving schemes like childcare vouchers and tax credits.
