Rt Hon Gordon Brown MP
Prime Minister
10 Downing Street
London
SW1A 2AA

10th November 2009

Dear Prime Minister,

Extension of free childcare entitlement and removal of tax relief for Employer Supported Childcare (childcare vouchers)

We write with concern about the recent decision to phase out the tax exemptions that underpin employer supported childcare (childcare vouchers) from April 2011. The intention to provide 10 hours of free childcare for 250,000 two-year olds by 2015 is clearly laudable and clearly should remain a commitment, but it is greatly unfair that the government plans to fund it by removing an effective and popular benefit from other hard-working parents.

Childcare vouchers are an essential support to over 340,000 parents, enabling more than 33,000 employers to help their employees, especially women, balance work and family responsibilities. Withdrawing them will penalise a significant number of lower rate taxpayers, reduce the overall amount of funding available for childcare, reduce parental choice, and impact negatively on the economy as the UK moves towards recovery. Crucially in the run up to an election, it will remove support for working parents and for businesses in key marginal constituencies.

Childcare vouchers benefit large numbers of basic rate taxpayers. The government asserts that the scheme is regressive, but is using out of date figures from 2006, based on data from the end of 2005. This data does indeed show a high usage rate amongst higher earners, but is now a highly inaccurate reflection of usage of employer supported childcare. Before the tax breaks were implemented in 2005, childcare vouchers were mainly offered by large businesses in the financial services sector (even so, 60% of the scheme’s users were basic rate tax payers at that point), and these businesses were the first to take advantage of the new tax exemptions.

However, since 2005, large numbers of employers in sectors with lower paid workforces have joined the scheme, with a surge in usage of the scheme from manufacturers, retailers and the public sector. The latest survey of 3,000 parents using the scheme show that 74% are basic rate taxpayers, and withdrawing the scheme will hit these parents hardest financially.

It is also clear the proposed changes will reduce the amount of funding available for childcare, marking the undoing of one of Labour’s landmark achievements. We know that paying for childcare is a major cost for many households, and the removal of tax relief for childcare vouchers would mean that these costs are increased by more than 20% for a basic rate tax paying two parent family currently using childcare vouchers.

The flexibility provided by childcare vouchers is one of their core strengths. Parents can choose to spend them with any Ofsted registered carer, and they are also a valuable means of funding after school and breakfast clubs for young people up to the age of 16. Re-allocating funding away from this scheme to focus purely on two-year olds, will reduce choice for parents and will cause a funding gap in other parts of the early years education sector.

The business case for childcare vouchers is compelling. They are an integral component of employers’ recruitment and retention strategies. They help attract the highest calibre of applicants and, particularly for female employees, support them to return to work after having had children, ensuring their valuable skills are not lost to the economy. Removing the tax relief for childcare vouchers may mean that many parents choose not to work, preferring instead to remain at home rather than paying for quality childcare.

We believe the government must look again at this decision, carefully considering the full impact of removing the tax relief on parents, employers and the childcare sector. Surely this is not the time for us to be removing a key support from hard-working families, at the very point at which we need them at their most engaged and productive to fuel the recovery from recession.

Yours sincerely,

Jessica Asato, Acting Director, Progress
Patricia Hewitt MP
Hilary Armstrong MP
Beverley Hughes MP
Caroline Flint MP
David Cairns MP
Denis MacShane MP
Baroness Estelle Morris
Sally Keeble MP
Tom Levitt MP
Meg Munn MP

You can read the government’s response to this letter here.

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