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Childcare Facilities
For a couple with young children, childcare is a cost of earning employment income, if both parents wish to work.
The tax relief introduced in the Finance Act 1999 did not seem to deal with this point successfully.
W e are approaching full employment. Future economic growth and prosperity may require an increasing number of women to join the commercial workforce. Where there are young children, childcare costs are a direct cost of earning employment income. Until the Finance Act 1999 this economic reality was not recognised in the form of any tax allowance against the employment income for childcare costs of earning that income. That was unjust, and not very sensible in a period in which it was hoped more women would join the commercial workforce.

The Finance Act 1999 attempted to address the issue. What it did was to provide an exemption from benefit in kind charges where an employer meets the cost of childcare services for an employee. The problem with this measure is twofold.

Firstly, it only removed a potential benefit in kind charge. It did not remove an income tax charge. A benefit in kind charge arises where the employer provides (either alone or together with other persons) the childcare facilities in question, and permits the employee to use them. If however the employer simply paid the employee’s childcare bills, that would be the subject matter of an income tax charge, for which no exemption is provided.

Secondly, the removal of the benefit in kind charge is dependent on the employer being wholly or partly responsible for the financing and the managing of the childcare service. In other words, the measure will rarely benefit anybody who is not using a creche which is actually in the workplace. In limited circumstances (e.g. where the employer goes into partnership with an external creche) it could apply also, but those circumstances will be few and far between.

The broad picture that emerges is that an in-house creche provided by an employer free of charge will not lead to a tax bill on the employee. If however the employer meets the employee’s costs at an external creche a tax charge will arise.

It is not clear what public policy objective lies behind promotion of in-house creches at the expense of professional external creches. It is difficult not to suspect that the relief introduced in 1999 was more a gesture than a real attempt to address the problem. It has the appearances of action, while costing little, and achieving little. In the meantime the basic inequity of not providing a tax deduction for a real cost of earning employment income will remain for most workers with children. A major disincentive to couples to both earn a living will remain in place.

The problem is not confined to married couples. The injustice in tax treatment, an obstacle to taking up employment, applies equally to a widow or widower with young children, or to a single parent. It can also apply in the case of parents where one is seriously incapacitated, and the other can only go out to work by arranging for childcare. The problem equally exists where a couple are both engaged in a trade or business, rather than in employment. It arises in any circumstance where the reason why childcare has to be taken on is that it is a real necessity where the parents wish to earn income.

This argument, that tax relief should be available where childcare is a real cost of earning income, is a separate argument from one sometimes advanced, to the effect that the general body of taxpayers should bear the cost of childcare for all families, whether the childcare is freeing up a parent to work in employment or on their own behalf, or merely freeing them up to watch television. Clearly, the same arguments do not apply to the two situations.

It would seem inevitable that this area will have to be revisited in a future budget, possibly that in December 1999.

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