Are childcare vouchers "remuneration" or "non-cash benefit"? Employment Appeal Tribunal declares HMRC guidance classifying salary sacrifice scheme as "non-cash benefit" simply wrong.

Many employers operate childcare voucher schemes as a benefit to their employees, usually by way of a salary sacrifice arrangement. Whether the childcare vouchers are classed as "remuneration" or a "non-cash benefit" has important implications for employees on maternity leave.

During maternity leave, the employee is entitled to all the usual benefits of her employment, except her remuneration, which is replaced by statutory maternity pay (SMP) or the employer's own maternity pay scheme. This means that while "remuneration" is not payable during maternity leave, all "non-cash benefits" will continue.

Her Majesty's Revenue and Customs (HMRC) guidance classes childcare vouchers administered under a salary sacrifice schemes as "non-cash benefits". This interpretation has a cost implication for employers. During periods of maternity leave when the employee is not receiving her salary, it will not be possible for her to make that salary sacrifice. Nonetheless, according to the HMRC guidance the employer must continue to provide the vouchers during maternity leave, the employer funding them instead.

The lack of any judicial guidance on the "remuneration" v "non-cash benefit" debate has made this a 'grey' area for years. Last year an employment tribunal in Peninsula Business Services Ltd v Donaldson followed HMRC guidance and found childcare vouchers paid via a salary sacrifice scheme were a "non-cash benefit". As such, a provision requiring a pregnant woman to opt out of the scheme when on maternity leave amounted to unlawful maternity and sex discrimination.

The Employment Appeal Tribunal (EAT) has now overturned the tribunal's decision stating that the HMRC guidance is erroneous and it could not have been Parliament's intention to require employers to continue providing vouchers at a time when there was no salary that could be sacrificed in respect of them.

The HMRC guidance

In 2008 HMRC issued guidance stating childcare vouchers were non-cash benefits rather than "remuneration", even if they have been provided by way of salary sacrifice. The guidance points out that, while an employee may sacrifice their salary in order to receive the vouchers, there is "no legal connection" between the two.

The impact of the guidance on SMP is twofold:

  1. The value of the childcare vouchers should not be included when calculating SMP (as the salary sacrifice scheme changes an employment contract - the employee becomes entitled to a lower salary plus childcare vouchers instead of their previous salary); and
  2. The employee is entitled to the childcare vouchers during her maternity leave without sacrificing any of her SMP. This in turn means additional costs for an employer operating such a scheme as the employer will have to fund the childcare vouchers during the whole of maternity leave with only a small saving in SMP to offset that cost.

Some scheme providers have questioned the HMRC interpretation, for which there has not been any authoritative judicial guidance until recently.

The EAT holds HMRC guidance simply wrong

The EAT found that there were two different scenarios in which childcare vouchers may be offered to employees: (1) cases where employers provide them as a benefit additional to salary and (2) cases where they are provided as part of a salary sacrifice scheme. In this case it was the latter.

Where childcare vouchers are paid as part of a "salary sacrifice" scheme they are part of remuneration. The fact that the taxing statutes deem them as a "non-cash benefit" for tax purposes is irrelevant. The common phrase of "salary sacrifice" is a misnomer. In reality it is not a "sacrifice" but a "diversion" of salary. As such, it constitutes remuneration rather than a benefit beyond wages and salary which may be discontinued during maternity leave.

The EAT went on to say that it didn't believe Parliament intended the potential windfall to employees and the resulting cost to employers created by the HMRC guidance if employers had to provide childcare vouchers when there was no salary that could be sacrificed.

In polite but critical language, the EAT describes the HMRC guidance as an "unknown official's interpretation of [the applicable legislation], supposedly in clear if cosy, and therefore perhaps over-simplistic, language, which is not a proper basis for a decision making in the courts."

What does this mean for employers?

Child care vouchers offered as part of salary sacrifice schemes are remuneration which are not required to be continued during maternity leave.

If an employer offers childcare vouchers as a benefit additional to salary then the employer would need to supply the vouchers during maternity leave.

One unintended consequence of this decision may be that employers who followed the HMRC guidance may possibly have underpaid SMP as the value of the salary "sacrificed" for the childcare vouchers, being diverted remuneration, should have been included when calculating SMP (first six weeks at 90% pay).

Future developments

In the 2013 Budget, the government announced that employer-supported childcare voucher schemes would be closed to new participants and a new tax free government childcare scheme would be introduced from Autumn 2015.

However, the original launch date has been delayed following an unsuccessful legal challenge before the Supreme Court by several existing employer scheme providers to the legality of the government's use of an existing outsourcing contract to deliver the new government scheme.

On 1 July 2015, the government announced that it is to proceed with its tax-free childcare scheme and that the launch date is now "early 2017". Exact rollout details for the scheme are to be confirmed "in due course".

The current employer-supported childcare vouchers system will remain open to new entrants until the new scheme launches. Individuals who wish to remain within the old system will be able to do so while their employer continues to operate it. However, after the new scheme launches, employers will not be able to offer vouchers to new employees on a tax-exempt basis.