The current rules allow employers to treat the costs of providing certain types of childcare arrangement – principally where it is financed and managed by the company – as a business expense for tax reasons. Employees can receive these benefits free of tax and National Insurance. Since this has usually required an in-house nursery operation not many small businesses have benefited from this.

From 6 April 2005, employers on small industrial estates or business parks can club together to operate such a facility and this will be treated as if it were financed and managed by one of the participating companies on their own.

Perhaps of more importance to employers with small numbers of staff will be the introduction of a new rule from the same date that will allow employers to finance all or part of the costs of childcare arranged by an employee.

To avoid paying tax and national insurance, this should not be paid as an additional part of such an employeeÂ’s salary. Instead the first £50 per week of the costs of such ‘employer-provided’ childcare will be exempt from income tax and national insurance.

The definition of such childcare has been extended to cover: registered child carers, via local authorities; carers provided by a school outside school hours; a provider of childcare, such as a private nursery, accredited under the tax credit rules; and approved carers offering such services principally in the childÂ’s home.

Businesses must make the offer available to all employees, or all those in a particular location. To fund the benefit employees can ‘sacrifice’ some of their taxed salary (but less than the cost of the childcare), so they can receive the sum free of tax and national insurance. Several companies offer voucher systems that help employers to provide this childcare tax relief.

A form is available on the Inland RevenueÂ’s website, called WTC5, which explains in more detail about the existing Child Tax Credit and Working Tax Credit. Click here to download it.