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John Andrews of LITRG warns that official statements on childcare vouchers do not necessarily tell the full story in terms of the potential effect on employees in receipt of tax credits.

Introduction

We return once more to our perennial health warning about tax free childcare vouchers provided by employers. If employees are receiving tax credits of more than £545 a year, they can lose money by accepting these vouchers.

We still see far too many incorrect statements on government and other websites; and still HMRC do not accept that it is something on which they should take the lead.

In brief, an employer may offer a childcare voucher to an employee which can be used to pay a childcare cost of the employee. Almost invariably the employer offers the voucher as an alternative to a cash salary increase, or by arranging for the employee to “sacrifice” their salary in exchange for the voucher.

These arrangements are made because the vouchers, within limits, are not taxable income and the employee does not pay National Insurance Contributions (NICs) on them. Employers may be attracted to them because if the employee takes a voucher instead of salary then the employer also saves NICs.

So far, so good; but very many of the people who might take vouchers are also tax credits claimants, and they cannot claim childcare support through tax credits on the childcare costs that are covered by the vouchers. They will lose the valuable 80% subsidy that comes with tax credits. For most claimants on middle incomes who are receiving more than £545 a year in tax credits, this loss is usually more than the gain from the tax/NICs advantage.

Also, it is easy to forget to tell HMRC if you start receiving childcare vouchers from your employer. But unless you do so, you can generate a considerable overpayment if you receive tax credits and vouchers in respect of the same childcare costs. You might even have to pay HMRC a penalty.

We have written on this subject a number of times.

So who can gain?

Although not a comprehensive list, the following categories of people are most likely to benefit:

• People who pay a significant amount of tax at 40% on their income, both before and after accepting vouchers.
• People whose childcare costs exceed £175 per week for one child or £300 for two or more.
• Couples whose joint income is too high to benefit from the childcare element of working tax credit.
• People who are not entitled to claim working tax credit, for example, because their hours worked are too low or because they are subject to immigration control.
• People whose employer is only prepared to give an increase in pay by means of childcare vouchers with no cash alternative.

How government departments mislead

HMRC

HMRC misleads its customers by providing a childcare indicator ( http://www.hmrc.gov.uk/calcs/ccin.htm ) which:

• can give incorrect calculations because it does not take into account the £25,000 disregard that can apply to tax credits;
• instructs you to include income which is exempt for tax credits purposes;
• informs you that you are not entitled to claim tax credits in certain circumstances, when in fact you are;
• misleads, if dealing with combinations of a child and a qualifying young person;
• gives some incorrect definitions;
• will not apply if your employer is offering vouchers in exchange for a future pay rise.

Ministry of Defence

Many government departments now offer childcare vouchers. Some have started to offer them quite recently. The Ministry of Defence is one of them and their schemes are covered here ( http://www.modchildcare.co.uk/ ). You have to look extremely hard to find any reference to the dangers for its employees of sacrificing salary.

Instead they abrogate responsibility by referring their military and civilian personnel off to consult HMRC’s flawed calculator.

National Health Service

The NHS has very many low-paid staff. The following seems to be the only warning ( http://www.busybeesvouchers.com/nhs/about-tax-credits.php ) for their scheme and which seems to us to be misleading in itself:

As good practice, families who receive tax credits should inform the Revenue of their intention to receive childcare vouchers through their salary. Childcare Vouchers are a salary sacrifice scheme and therefore change an individual’s cash salary.

It is the childcare element of the Working Tax Credit that is affected by Childcare Vouchers. Parents cannot claim childcare vouchers for what financial help they are already receiving from the Inland Revenue – this would be classed as a double benefit.

E.g. What are your total childcare costs? Deduct what you are receiving for childcare from the Revenue. Any remaining costs you have to pay for can be taken as childcare vouchers.

Higher income families who do not receive any help from the Tax Credits will benefit the most by using Childcare Vouchers.

The HMRC helpline is 0845 300 3900 or visit their website.

Civil Service

The Civil Service Childcare toolkit  does not give any warnings at all and the amounts of eligible childcare are incorrect. But if you track it down there is a small reference to the HMRC website.

Directgov

Directgov, the public services website has a section on childcare ( Tax Credit Child Benefit ) . It explains that you cannot claim tax credits for your childcare costs if they are paid with vouchers from your employer; but nowhere does it tell the tax credit claimant to inform HMRC within one month if the receipt of vouchers changes the level of childcare costs by £10 per week.

Conclusion

As we have said consistently for the last three years on the LITRG website, there is a lot of misinformation out there. You cannot really blame the voucher companies or the employers; after all they are not tax credits specialists. The specialists are HMRC and they have not asked anyone to provide prominent warnings for the low- and modestly-paid in their literature.

HMRC have allowed themselves to become the validating body for the voucher sales push. The provision of poor information and a deficient calculator has potentially allowed many thousands of people to take vouchers when it has not been in their interests to do so.

We are also concerned that HMRC will in due course find many thousands of working tax credit claimants who have not notified HMRC that they have reduced their childcare costs through taking vouchers.

HMRC must shoulder a good part of the blame.