Childcare vouchers: Relief is more than a taxing matter

Two months on from the shock announcement that tax relief on childcare vouchers would be phased out from 2011, what is likely to happen?

When news came through at a certain employee benefits show in September that the government planned to stop tax relief on childcare vouchers, the shock might have troubled the Richter Scale. Two months later, the benefits business and worried parents are stepping up a campaign to persuade the government to change its mind.

It looks like it might achieve partial success. Signals emanating from 10 Downing Street, at time of going to press, indicate that the government is about to make a partial U-turn and keep tax relief for lower-rate taxpayers. However, that will still leave more than 100,000 childcare voucher users losing tax relief.


So what lies behind this threat to tax relief on vouchers? First, this government and the next one face dealing with public debt that is at truly frightening levels. They can only reduce it through spending cuts and raising taxes.

Estimates of UK public debt rise with each passing month. In July, the Office for National Statistics (ONS) put UK public debt at £800.8bn – 56.8% of gross domestic product (GDP). Earlier this month, ONS said the financial crisis – principally the bailing out of some banks – could add up to £1.5trn to national debt.

It sounds horrendous – it is horrendous – but in percentage terms, it has been worse. At the end of the Second World War, UK national debt was more than 150% of GDP. Japan’s national debt is about 194% of GDP, and Italy’s more than 100%.

Second, Brown, as stated at the Labour Party conference in September, wants the money saved from abolishing tax relief on vouchers to be used to fund free nursery places for 250,000 two-year-olds, rather than to raise tax revenues. If tax relief for lower-paid voucher users is to be kept, this raises the issue of where will the government find the money to pay for the extra free nursery places?

That is unlikely to be clear until after the pre-Budget speech next month but no doubt it will be another rob Peter to pay Paul exercise.


In the meantime, concerned parties need to keep up the pressure on the government: first, to keep tax relief for the better paid (those earning circa £45,000 a year plus) in place; second, to champion the benefits business; and third, to warn the other main parties that they mean business.

It’s certainly been an impressive campaign thus far. More than 70,000 people have signed a petition on the Downing Street website, and benefits specialists raised the issue with the government and the Conservatives. The Save Childcare Vouchers Campaign website was launched earlier this month.

Iain McMath, managing director of voucher specialist Sodexo Pass, said “the industry is starting to work together on this issue,” and “detailed information is being gathered to demonstrate how effective childcare vouchers are in supporting families”.

Simon Moore, managing director of Computershare Voucher Services, which provides vouchers to 14,000 employers and 120,000 working parents, said: “We have made contact with Conservative MPs and shadow ministers and our main focus has been with shadow families minister Maria Miller. We have had informative conversations with her because we want to ensure she is aware of the facts.”


This pressure yielded the positive result for the lower-paid thanks to senior female backbenchers, such as Caroline Flint. But the Conservative Party is very wobbly on the tax relief issue.

It said: “We believe the government is wrong to scrap this support which so many parents rely on. However, in this difficult economic climate, we cannot commit to reinstating the tax and national insurance exemptions.” That indicates the Conservatives will not look too favourably on benefits tax breaks across the board.

The tax relief farce also shows how vulnerable some benefits are. As Charles Cotton, Chartered Institute of Personnel and Development reward adviser, pointed out: “The only reason employers provide vouchers is tax advantage.”

This view is echoed in a members’ poll by the Institute of Payroll Professionals, which found four in five think employers will discontinue voucher schemes if and when tax relief is abolished.


Meanwhile, benefits specialist Benefex said it has seen evidence of the targeting of other benefit tax reliefs by HMRC, including cycle-to-work schemes. “We expect to see a much more strict view overall while the Exchequer remains under such immense fiscal pressure.”

Moore added: “This move – removing tax relief on vouchers – is a major threat to the benefits industry because it is by far the number one used and appreciated benefit in existence.”

McMath is of a similar view: “If such a successful benefit programme can be vulnerable to a U-turn, then the indication is that all benefits could be exposed.”

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