A recent European Court of Justice ruling could have wider implications for the future of childcare vouchers. Some commentators are seeing it as yet another blow to working families.
The way childcare vouchers work is pretty simple. You enter what’s referred to as a salary sacrifice scheme where you give up part of your pay in return for vouchers of the same value. But whereas your salary is taxed, childcare vouchers are tax free.
As things currently stand, you can reserve up to £55/a week of your salary (or £2,860 a year) to pay for the vouchers –this potentially saves £1,173! If two parents enter such a scheme, then you can double the amount as both parents can take part.
Unfortunately, one thing we can say for sure is that the value childcare vouchers will be reduced for new claimants from April 2011. The maximum you’ll be able to claim is £28 (down £17!) a week – all part of the coalition Government’s efforts to balance the books.
And now, the future of childcare vouchers are being questioned altogether after the aforementioned European Court of Justice ruling. The case surrounded a major drug company who had been paying staff retail vouchers in a salary sacrifice scheme similar to the way that childcare voucher’s are operated. Many companies run similar voucher schemes where they recover the VAT from HMRC.
In this case, however, the court ruled that although it was okay for the company to buy the retail vouchers at a dicounted price, but rather than claim the VAT they had to account for it themselves. Will such companies be quite so willing to bear the VAT burden? Or will they pass on the costs to employees?
Being realistic, surely the latter scenario is the more likely!? And with that being the case, many of the benefits of such schemes are thereby wiped out.
The problem is, as result of this ruling HMRC are reviewing all ‘salary sacrifice’ arrangements in regards to their VAT liabilities. Until that review is completed, childcare voucher schemes can continue as normal.
As for the future? Watch this space because the situation could well change for the worse which may, in turn, see working parents crying over spilt baby milk.