UK: Salary-sacrifice childcare vouchers - EAT rules that employers can suspend provision during family leave

Employers offering childcare vouchers through a salary sacrifice scheme have often questioned HMRC Guidance that they must continue to provide the vouchers during periods of maternity or other family leave, even when the employee is only receiving statutory pay and therefore there is no salary from which the value can be deducted. The Guidance was based on the view that, once an employee opts to sacrifice salary for vouchers, the vouchers are to be treated as benefits in kind (which must be continued by the employer during family leave) rather than "remuneration" (which stops and is replaced by statutory, and potentially contractual, leave pay).

The EAT has now ruled that the HMRC Guidance is wrong: where vouchers are provided by salary sacrifice, this should be viewed as a diversion of salary and therefore still within "remuneration" rather than as having been converted to a benefit in kind. In contrast, if childcare vouchers are provided in addition to salary, they will be a benefit which must be continued.

In Peninsula Business Services Ltd v Donaldson, the employer was therefore entitled to provide that entitlement to sacrifice salary for childcare vouchers was conditional on the employee agreeing to suspend the vouchers and return to pre-sacrifice salary during maternity leave.

It is notable that the employee was not represented or present at the hearing, and the EAT did express some hesitancy as to whether it had been referred to all the relevant legislation. Certainly its view of salary sacrifice being no more than a diversion of salary does not accord with the usual analysis in a tax context, where exemptions are conditional on the arrangements amounting to a legally binding change to contractual entitlements (to a lower salary plus benefits). The ruling could well be challenged at a higher level, even if an appeal is not made in this case.

Employers currently providing salary sacrifice vouchers during family leave should carefully consider the possible legal and other implications (eg, damage to goodwill, impact on diversity) before changing their practice. Note that the government plans to introduce a new tax-free childcare scheme not involving employers in "early 2017" (although employers will be able to continue to offer vouchers to those enrolled before the new scheme is launched).