Tax-free childcare proves more taxing than first thought
Justine Riccomini explains what led the payrolling of tax-free childcare to the tax tribunal.
A recent decision on a case concerning payroll and welfare benefits provides interesting insight into some of the anomalies which can appear when employers need to dovetail welfare benefits with payroll. Both tax-free childcare and the scheme available from the Department of Education to offer 30 hours of free childcare are administered by HMRC under a joint online application process. Even though the legislation underpinning the two schemes is different, the decision-making process for deciding eligibility is the same.
In HMRC v JS and Others  UKUT 264 (AAC), three cases were being decided which all centred around the same principle – a dispute in relation to the qualifying eligibility criteria for 30 hours of tax-free childcare per week. All three appeals by HMRC were dismissed because under sections 11 and 12(1), (2)(a) of the Tribunals, Courts and Enforcement Act 2007, a judge can, but is not compelled to set aside First-Tier Tribunal decisions on an error on a point of law. The judge declared that: “In this case the issues have become academic, and to set the decision aside would be futile.”
The claims had been rejected by HMRC in all three cases but were upheld at the First-tier Tribunal.
What was the court asked to resolve?
The court was asked to resolve two issues:
In the first two cases, the assessment of income under regulations 5 and 6 of The Childcare (Early Years Provision Free of Charge) (Extended Entitlement) Regulations 2016.
- (the calculation issue); and
- In the third case, whether the tribunal decision must be “prospective only” under regulation 15 (the ‘prospective decision’ issue which is taken into account when considering the timescale which is used when the claimant makes their declaration on submitting the claim).
To qualify for tax-free childcare, an individual must work at least 16 hours a week and earn at least the National Minimum or Living Wage. If the individual has a partner, they should have the same expectation.
Doing the maths – assessing the income
The way in which the eligibility was calculated was instrumental in deciding the outcomes. HMRC had taken a strict monthly received cash value as the reason for deeming claimants to be ineligible for the benefit, whereas if the value of pay earned was spread across the period in which the claimant had worked, the result was different. The Tribunal took the view that the purpose of the legislation was not to trip people up, but to give people assistance and the claimants were being denied something which it was technically their right to claim.
The First Tier Tribunal had not undertaken the same calculations as the Upper Tribunal for the claimants and looked at the spread of the payments over a year rather than the actual periods worked. However, by aggregating the payments from both sources of income for each individual over the year, it was still able to conclude that an entitlement existed as the payments exceeded the threshold on a quarterly basis.
HMRC had argued that the expected income under regulation 6(1) should be calculated by reference to the amount the person expects to receive during the 13-week period, not the amount that the person has actually earned during that period. The claimants argued that the periodic earned income approach gives a more equitable result because it offers entitlement to free childcare during the periods each year when the person needs the childcare the most – i.e. when they are working – which was surely the purpose of the regulations.
In his commentary the judge stated that: ”The approach advocated by HMRC would defeat the purpose of the scheme itself, which is to provide childcare for those who work at least a minimum number of hours at the minimum wage.”
The judge also felt compelled to point out that the First Tier Tribunal judge had erred in her classification of one of the claimants as self-employed when in fact she should have been classified as an employee – which meant that the criteria for assessment of eligibility were slightly different.
He went on to clarify: “Even if DL had been self-employed in that work, however, the judge’s approach was wrong because the regulations limit the way in which self-employed income is calculated where it is to be amalgamated with the expected income from employed earnings. A wholly self-employed person’s expected income can be calculated under regulation 5 (1) (b) (i) with its reference to the relevant threshold within the declaration period as for an employed person; alternatively, it may be calculated under 5 (1) (b) (ii): (ii) “The person’s expected income from the work in the period specified in paragraph (5) is greater than or equal to four times the relevant threshold.”
The judge referred to the case of Johnson and Secretary of State for Work and Pensions v Johnson  EWCA Civ 788 which he considered bolstered his own arguments for the way in which eligibility should be calculated because it, “considered the rationality of regulations under the Universal Credit scheme in the context of difficulties arising out of double payments from employers in some months due to the movement of pay days due to public holidays.” This caused difficulties in the calculation of otherwise regular benefit payments of universal credit to affected employees. The point was made that, "it is…no part of the policy underlying universal credit to encourage claimants to base their employment choices on the salary payment date offered by a prospective employer. Yet that is what is happening for these Respondents."
Prospective decision – were the claims time-barred?
When considering the period for which the claimant’s declaration has effect, Regulation 15 of the Childcare (etc.) Regulations 2016 provides that where a tribunal decides a case under regulation 24, the date of that tribunal decision counts as being the first day of the first period in which the declaration has effect – in other words, it is treated as if the claim has just been made on the date of the decision. The judge concluded that in accordance with Evans LJ in Chief Adjudication Officer v Woods reported as R(DLA) 5/98, “exceptionally, decisions may be made that are prospective in effect” and that the claims could therefore stand and the claimants’ entitlement to the funds would remain valid as if the expiration date had not yet passed or become time-barred.
There is an intricate mix of welfare and employment taxes legislation in this case which highlights the need for different government departments to align their policy and legislation to avoid anomalies arising.