Thought for the month

Anthony Rentoul

For childcare vouchers, fairness has a special meaning

February 2012

Abacus Voucher Solutions sheds light in dark corners

Fairness, like beauty, is in the eye of the beholder. The government needs stronger spectacles.

A laudable concept

From April 2005, to encourage the take up of high quality childcare and enable employers to recognise and support childcare needs, the tax and national insurance (NICs) treatment of childcare vouchers was aligned. A tax and NICs exemption on childcare vouchers of £50 per week was introduced.

This was the catalyst for the foundation of Abacus Voucher Solutions. The senior partner, Anthony Rentoul, who is a retired solicitor, foresaw that employees in a family concern chaired by him would be likely to want to take advantage of the tax breaks. Having looked at what was being offered by newly founded businesses seeking to exploit an opportunity to profit from helping employers set up voucher schemes, Rentoul, unimpressed by the quality of the offerings, decided he would himself devise a scheme for his staff. Over a period of several days in the proverbial darkened room, he mastered the legislation and logistical problems. With the effort behind him, Rentoul decided to commercialise his handiwork. Abacus Voucher Solutions was born.
From April 2006 the limit on vouchers was increased to £55 per week. Quaintly, despite the fact that more than three quarters of all employees on the nation’s payrolls are paid monthly, HM Revenue & Customs persists in using a week as its yardstick. Even more quaintly, it reckons there are 53 weeks in each year. Hence the monthly equivalent of £55 weekly being officially £243, the product of £55 and 53 divided by 12. For most employees, this limit has remained unchanged ever since.

Basic rate relief for higher rate taxpayers

From April 2011, however, in the interests of “fairness” the government introduced a restriction on the level of income tax relief available to employees liable to higher rate and additional rate income tax. The intention was paraded by the Brown government, and adopted unchanged by the Coalition, as being that anyone joining a scheme from then on and paying tax at 40% or 50% should receive, as the value of tax relief, no more than employees paying tax at only the basic rate.

In terms of newspaper headlines and soundbites, this sounded fair.

But the law of unintended consequences took hold. This is not the place to go into the details, but suffice it say that whereas a basic-rate taxpayer taking the maximum allowed as tax-free vouchers saves £933 in the current tax year 2011-12, his or her better paid colleague liable to tax at 40% can save no more than £623 and anyone at the top of the earning tree, paying tax at 50%, can save only £606.

Bad law offers good opportunities

The legislation is however poorly drafted. Abacus Voucher Solutions has developed the means whereby many employees paying tax at more than the basic rate can, perfectly legitimately, take advantage of the shortcomings in the detailed provisions.

Self-employed are out in the cold

Sadly, Abacus Voucher Solutions has not yet cracked a bigger nut, the blatant unfairness of the tax breaks associated with childcare vouchers being beyond the reach of the self-employed. So if a husband and wife conduct their business in partnership, either an “ordinary” partnership governed by the Partnership Act 1890 or a limited partnership governed by the Limited Partnerships Act 1907 or the most popular arrangement nowadays, the Limited Liability Partnerships Act 2000, saving tax, whether £933pa or any other amount, is beyond their grasp. But if they choose instead to be incorporated as a limited company, with the help of Abacus Voucher Solutions the savings can be grasped easily enough – enriching the family unit by £933 x 2 = £1,866.