According to Government estimates, approximately 500,000 people nationally participate in a childcare voucher salary sacrifice scheme. These schemes enable employees to save tax and National Insurance on up to £243 per month, and the money goes into a special account which can only be spent on registered childcare. However, there has always been some uncertainty about what happens when an employee in a childcare voucher scheme goes on maternity leave.
Partly the uncertainty has stemmed from the fact that during maternity leave, an employee is entitled to all of their terms and conditions of employment, except for ‘remuneration’, i.e. pay (there is a separate right to statutory maternity pay for eligible employees). Therefore, if childcare vouchers are seen as a benefit, rather than being pay, they should continue during maternity leave.
This view was supported by HMRC guidance issued in 2008, which stated that childcare vouchers fell into the category of ‘non-cash benefits’ and therefore should be continued throughout maternity leave. For that reason, the vast majority of employers have tended to pay childcare vouchers in full during the maternity leave period. This has resulted in a ‘windfall’ of up to £2,916 for employees (£243 per month for 12 months of maternity leave) which was not necessarily envisaged by the Government when the childcare voucher scheme was being introduced. In fact, I benefitted from this windfall myself when taking my second maternity leave. However, it is of course a significant additional cost burden on employers.
A recent case has however brought this approach into question. In Peninsula Business Services v Donaldson (2016), the employer had a specific policy stating that childcare vouchers would not be continued during any period of maternity leave. Ms Donaldson brought a claim in the Employment Tribunal, arguing that this amounted to discrimination on the grounds of maternity and/or gender.
The Employment Tribunal upheld her claim for maternity discrimination, but Peninsula appealed to the Employment Appeal Tribunal (EAT). The EAT upheld Peninsula’s appeal and concluded that childcare vouchers did amount to ‘remuneration’ and therefore it was not discriminatory for Peninsula to cease paying them during maternity leave. The EAT felt that HMRC’s guidance was wrong.
However, it is worth highlighting that the EAT made their decision somewhat tentatively, recognising that the issue was a difficult one, and in my view it is highly likely that the decision will be taken to appeal. In particular, it is not clear from the judgment that the EAT fully understood the nature of salary sacrifice schemes.
The Chancellor announced in the budget on 16 March 2016 that all existing childcare voucher schemes will be closed to new entrants in April 2018 (as a new tax free childcare scheme is being launched in 2017), and some are predicting that employers may choose to cease their childcare voucher schemes before then.
So what does this mean for employers at the moment? Well, although at first glance this case may appear helpful in terms of reversing the ‘windfall’ effect, the position is currently still somewhat uncertain, so it may be best to wait for further developments before taking action. From a practical point of view, as the HMRC guidance has been in place for many years now, in my experience employees do now tend to expect that they will receive childcare vouchers during maternity leave, and it is not unusual now for scheme guidance and provider information to reflect the HMRC approach. This may make it difficult for employers to change their position in the short term, in contrast to this case where the documents already stated that childcare vouchers would cease to be paid during maternity leave. In researching for this article, I found information on a multitude of childcare voucher provider websites which inform employees that vouchers should continue to be paid during maternity leave, and at the time of writing the HMRC guidance has not been updated either.
We will of course continue to update you on any future developments in this area.
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