Tuesday, 3 December 2013

Tax-Free Childcare Proposal for 2015 - Understanding the Issues

The Government's plans for reforming childcare vouchers from 2015 are now well underway.  A consultation exercise covering the implementation of the proposed Tax-Free Childcare scheme closed on 14th October, and our response to the consultation can be viewed here.  The Government is now obtaining advice on the best market structure for the proposed scheme.

While KiddiVouchers welcomes the Government's focus on helping working parents, we remain concerned that the proposals for Tax-Free Childcare are flawed.  The childcare voucher industry has been unanimous in advising that the aims of Tax-Free Childcare could be achieved in a more efficient and cost-effective manner by simply amending the existing childcare voucher scheme.

Key points which we have asked the Government to consider include:
  1. Although the Government has consulted on the details of tax-free childcare, there has been no consultation on the underlying policy of replacing Employer-Supported Childcare (ie the current childcare voucher system) with the proposed Tax-Free Childcare scheme. We believe the underlying policy decision was taken without a full understanding of the current scheme and without an accurate cost-benefit analysis. We recommend that the Government should now pause to consider alternative solutions, including comparing the relative merits and costs of Employer-Supported Childcare, Tax-Free Childcare and intermediate models, examples of which are included in our consultation response.

  2. The Government has claimed that Employer-Supported Childcare is not available to a high enough number of working parents, with the result that fewer parents than desired are taking advantage of the tax-break. They appear to believe that employers are sometimes reluctant to set up a childcare voucher scheme and therefore some parents are being denied access to Employer-Supported Childcare. Along with other childcare voucher providers, we believe that the problem is not one of accessibility but rather of publicity. If the Government wishes to improve take-up of tax breaks on childcare, there are simple measures which could be taken to address this, such as engaging in public campaigns to raise awareness amongst parents. Separate facilities should also be introduced to make childcare vouchers available to the self-employed and to cater for the minority of parents whose employers decline to operate a scheme.

  3. The interactions between childcare vouchers and tax credits are complex and have tended to cause confusion for parents. The planned interactions between Tax-Free Childcare and Universal Credits appear to do nothing to reduce this complexity; instead, the current proposals require more extensive eligibility checks to prevent Tax-Free Childcare being provided to recipients of Universal Credit. We strongly recommend that the Government should break the link between Tax-Free Childcare and Universal Credits. This could be achieved by reducing the amount of childcare support available through Universal Credit, but at the same time allowing Universal Credit recipients to top-up their support to the original level by allowing them to use Tax-Free Childcare. This would provide clear cost savings, avoid the need for parents to choose between the two methods of support, minimise the scope for error and fraud and make Universal Credit recipients better prepared for when their Universal Credits eventually cease.  The SCMA has also called on the Government to allow recipients of Universal Credits to use childcare vouchers, as their members believe this reduces the risk of parents defaulting on childcare payments.

  4. The proposed Tax-Free Childcare scheme excludes couples where one parent is out of work or chooses not to work. Press comment on this issue appears to have confused the question of whether Tax-Free Childcare should be available to households where only one parent is in work with the separate issue of whether stay-at-home parents should receive any financial support for the nurturing role they perform. We would suggest that this latter issue should be dealt with separately and should not be allowed to cloud the issue as to whether such households should be eligible for Tax-Free Childcare. Instead, we recommend that the Government should focus on which parents are likely to require formal childcare and on the reasons why they might use childcare. In our experience, the overwhelming reason why parents pay for childcare is to enable them to work. A scheme aimed at making childcare more affordable would therefore naturally seem to assist the target audience of working parents, without the need for extensive eligibility checks. The Government's own research supports our view that parents who are not in work rarely pay for formal registered childcare. We recommend that the Government should conduct a full cost-benefit anaylsis, comparing the extensive cost of employment-based eligibility checks with the cost of allowing such households to access the scheme on the rare occasions that they wish to do so.

  5. The current proposals do not offer adequate protection for existing childcare voucher scheme members. Parents who move between employers after Autumn 2015 will be forced to leave the Employer-Supported Childcare system. We recommend that they should have a right to join their new employer’s dormant childcare voucher scheme within three months of changing employment.

  6. Parents of over-5's who wish to enter the employment market after Autumn 2015 will not be able to access either the current childcare voucher scheme or the new Tax-Free Childcare scheme. In order to prevent parents of older children from being excluded from childcare support, such parents should be allowed to join their employer’s dormant childcare voucher scheme until Tax-Free Childcare is fully phased in for older children.
We will continue to encourage the Government to address the unintended consequences of the 2015 proposals, with the aim of ensuring the new scheme is of genuine benefit to parents, employers and childcare providers.

More information about childcare vouchers, the proposals for Tax-Free Childcare and our consultation response can be found at