Childcare Bill

Written evidence submitted by the Pre-school Learning Alliance (CB 08)

About the Pre-school Learning Alliance

The Pre-school Learning Alliance is the largest and most representative early years membership organisation, and the largest voluntary sector provider of quality affordable childcare and education, in England. A registered educational charity, the Alliance represents 14,000 member settings and supports them to deliver care and learning to over 800,000 families every year. We deliver family learning projects, offer information and advice, produce specialist publications, run acclaimed training and accreditation schemes and campaign to influence early years policy and practice.

1. Summary

1.1 The government review into the cost of delivering childcare has underestimated the cost of delivery, and is based on outdated data and unrealistic childcare business models. In additional, the government is relying too heavily on the results of the planned early years funding formula consultation, which may not yield the necessary information on which to base a sustainable childcare funding structure. As such, we are calling for clause 1 to remain a part of the Bill.

1.2 The revised eligibility criteria will exclude some of the families most in need of childcare support from the offer. Additionally, there is still a lack of clarity over how many families will be eligible for the scheme.

1.3 Given the Bill relies so heavily on secondary legislation, and given the concerns raised about this by the Delegated Powers and Regulatory Reform Committee, we believe that clause 5, subsection 4 should remain part of the Bill.

1.4 The government has underestimated the capacity issues of extending the free entitlement offer.

2 Clause 1: Funding

2.1 A detailed background to early years underfunding issues can be found in section 2 of the Pre-school Learning Alliance response to the Department for Education (DfE) call for evidence on the cost of providing childcare, available here: http://bit.ly/1WfpEhf

2.2 Clause 1 places into the Childcare Bill a requirement on the secretary of state to undertake an independent review into the free entitlement offer and use this to put in place a sustainable funding solution. An amendment has since been tabled that would remove this clause. We support the existing clause and believe that it should remain part of the Bill for the subsequent reasons.

2.2.1 Independent research undertaken by research company Ceeda, commissioned by the Alliance, suggests that the funding review undertaken by the DfE has underestimated the cost of delivering childcare. This research has found that if funded at the average rate announced by the government on 25 November of £4.83 per hour (£4.88 minus early years pupil premium, estimated by the DfE to be worth £0.05), PVI non-domestic providers (nurseries and pre-schools) would face an annual shortfall of £233.70 per child for three- and-four year olds taking up the existing 15-hour entitlement, and £467.40 for those taking up the full 30 hours. This equates to a total sector-wide shortfall of over £157m per year. It should be noted that this research takes into account the revised eligibility criteria announced by the government on 25 November, and the DfE’s estimate that "the extended entitlement will be available to up to 390,000 families" (source: http://on.fb.me/1Pv7B5E ).

This research additionally found that, if the two-year-old offer achieved 100% take-up by April 2017, at the funding rate announced on 25 November (£5.39 per hour), PVI non-domestic providers would face an annual shortfall of £456.00 per child, equating to a total sector-wide shortfall of over £102m per year. If take-up is a more modest £75%, the sector-wide shortfall will still be £76m.

For clarity, these losses relate to private, voluntary and independent pre-schools and nurseries only – no assessment has been made of potential funding shortfalls in the maintained sector or childminders. More information on this data is available in Appendix A.

2.2.2 We are concerned that the £300m increased funding pledged by government on 25 November appears to be a fixed annual investment, which does not adjust for increases in businesses costs, such as rents, utilities and staffing costs. In particular, we are concerned that it does not adjust for the introduction of the ‘national living wage’ (NLW) from April 2016, nor the likely consequential increases in wages already above the NLW required to maintain wage differentials. The DfE’s ‘Review of childcare costs’ states that "We are clear that the funding rate will enable providers to deliver high-quality places in line with statutory requirements alongside the introduction of the new National Living Wage" (p2) but there is no analysis in the document to support this assertion. It should be noted that the NLW is not referred to at all in the ‘Cost of delivering the early education entitlement’ research report produced by NLH Partnership.

2.2.3 During Second Reading on 25 November, the childcare minister stated: "The hourly rates that have been announced today reflect the data that were given to us by the sector, including the profit and loss accounts of providers" and "We looked at 2,000 responses, looked at the accounts, analysed the true cost of providing childcare and came up with a couple of rates." However, it should be noted that, although 2000 providers responded to the ‘Call for evidence: review of the cost of providing childcare’, the government analysis of the responses received stated that "The majority of responses listed the factors which providers perceive to be their main areas of expenditure, but these were often not supported by figures. This means that we have been unable to understand which costs are as a result of delivering the entitlement and which are not." (point 11, page 5 – our emphasis). We believe that this is a result of the lack of structure in the call for evidence, which stated that ‘The Department for Education welcomes any information you wish to provide to inform the review.’

Additionally, the ‘Review of childcare costs’ report predominantly bases its modelling, not on the responses to the call for evidence, but rather, on outdated departmental research. The report appendix reveals that data on overheads and on-costs including staff costs; rent/mortgages/cost of premises; business rates; insurance; utilities; maintenance costs; interests on loans and others several key data were sourced from the DfE’s ‘Childcare Provider Finances Survey 2012’, while the number of available places; proportion of attendees by age of child; staff to child ratios for 0-1 year olds; and two-year-olds were based on the ‘Provider Survey 2013’. This means that the government’s childcare cost modelling is based, in significant part, on data that is already two to three years out of date, and will be four to five years out of date by the time the offer is rolled out. We believe this is in no way an appropriate or adequate basis for such an important scheme.

2.2.4 We are concerned that many of the ‘cost-saving’ measures proposed by the DfE in the ‘Review of childcare costs’ report are either not feasible in practice, or would compromise quality of provision. The report states that "Looking across providers, there is scope for efficiencies in the staffing model, and specifically staff to child ratios. Providers typically use more staff than government regulations require." Given that the report acknowledges that "[providers] report, in part, that this [working to stricter ratios than legally required] is a quality measure, and that "‘slack’ is needed to enable them to cover peaks and troughs in demand," we are unclear as to why this has been (incorrectly) identified as a solution to the financial challenges facing providers.

Similarly, the report fails to recognise that it is almost impossible to deliver childcare in neat ratio-sized components. In order to deliver exactly to statutory ratio, a setting would always have to have children in attendance in each age range in an exact multiple of the relevant ratio. This would require that as children would start each session in multiples of ratio and at the end of each session, an exact multiple of ratio would have to leave. As the children arrive and leave in exact multiples of ratio, so too the staff would also have to arrive and leave. This is unrealistic for a number of reasons:

If a setting offers childcare flexibly (the importance of which has been stressed by government), children will arrive and leave throughout the day, meaning that there will never a perfect multiple of ratio in each age range.

Staff cannot be asked to work infinitely flexible shift patterns i.e. a provider cannot ask a member of staff to leave in the middle of the day and not pay them as they (the member of staff) will be contracted to set hours, which will be payable regardless of how many children the setting is delivering to.

New children will not join the setting in ratio-sized groups, nor will they leave in ratio.

The only way such an approach would be possible is if a setting were to be totally inflexible in the way it delivers childcare i.e. in theory, a setting that offered only full days could "stack up" its waiting list so that it would never allow new children to come in to the setting (even where space is available) unless they were to start in ratio-sized group. Staffing could then be based on the certain knowledge of numbers through the day. However, even in these (unrealistic) circumstances, this model would not work because children would not leave the setting (e.g. to start school) in ratio blocks (and even if this were a possibility, the setting could not reasonably be expected to reduce their staff hours if a ratio block were to leave).

2.2.5 We are very concerned at how heavily dependent the success of the 30 hour offer - and by extension, the Bill - is on the recently announced early years funding formula review. Much of the information that would enable greater scrutiny as to whether the government’s plans with regard to early years funding will help ensure that the scheme is sustainable will only be decided following the consultation, the exact dates of which are yet to be announced. This information includes:

how funding will be distributed via local authorities and whether some local authorities may actually face a reduction in funding.

if and how the funding rates for different provider types will vary (currently, the average delegated hourly budget for PVI providers in England is £3.99, compared to £7.19 for nursery schools and £4.22 for primary school nurseries – figures as of 2015/2016; source = DfE Early Years Funding Benchmarking Tool).

whether a mechanism will be put in place to ensure that funding rates continue to cover the cost of delivery as business costs rises (as previously stated, given the £300m funding appears to be a fixed annual investment, we are concerned this is not the case).

how much of the rates given to local authorities will be passed onto frontline providers. We note that when asked during Second Reading if the increasing funding announced on 25 November would be ringfenced, the education secretary said: "This goes back to the point I have just made about transparency. We need to know exactly how much of it is being spent and how much is reaching the frontline." We do not believe that improving the transparency of the funding process is enough to ensure that sufficient funding reaches providers. The government has previously pledged to take steps to increase the transparency of this process: in a speech in 2013, then-childcare minister Elizabeth Truss said: "The other thing we are working on is trying to improve the transparency and simplicity of the funding that we provide through the early years education offer through the Department of Education. We do want to maximise the amount of funding reaching the front line. I’ve had a lot of representations on this from nurseries. There is clearly unfairness in the system, about the amount that different local authorities get." (source: http://bit.ly/1NK1XMD ). In a speech in 2014, the current childcare minister said: "I know that some have said that the funding we’re providing isn’t enough. And you’ve told me the rates providers get from local councils is an issue. That’s why I can announce today that we’re publishing a benchmarking tool, to show how the funding for 2-, 3- and 4-year-olds is distributed across the country." (source: http://bit.ly/1N6eMez ). However, as it stands, government measures to improve transparency have had little to no impact on this long-standing problem. With local councils facing significant budget cuts, and the increased administrative implications of the additional 15-hours, without ringfencing, it is inevitable that early years funding will continue to be top-sliced, regardless of efforts to improve transparency.

Additionally, past experience shows that consultations have a limited impact on early years policy. Reception baseline tests, changes to the role of local authorities and the deregulation of out-of-hours providers are just a few examples of policies implemented despite majority opposition from consultation respondents. What’s more, as previously stated, the DfE’s call for evidence to providers, despite receiving 2000 responses, did not yield enough meaningful data for the government to gain a full understanding of the costs associated with delivering the free entitlement offer. If the planned early years funding formula consultation were to face these same issues, the result would likely be a substandard funding structure based on best guesses and assumptions on what might work, and would not adequately address the current problems facing the sector.

2.2.6 Given the above, we do not believe that the published funding review is a strong enough basis on which to base funding and rate decisions ahead of the roll-out of the 30-hours offer, and believe that it is vital that clause 1 remain part of the Bill. A large-scale review could provide a much more accurate and up-to-date overview of funding rates versus the cost of delivery, taking into account the realities of the childcare business model. Such a review could also model the impact of future changes that will impact on business costs, such as the NLW, and take into account funding ‘top-slicing’ to realistically model how much funding would be likely to reach the frontline. By nature of being independent, the review would not be influenced by a desire or need to minimise government spending, but instead would provide a true objective analysis of the funding needs of the early years sector.

As there are still 21 months until the full implementation of the offer, we refute the argument that an independent funding review would delay its roll-out. Given this, we are unclear as to the reasons behind the government’s reluctance to allow such a review to be carried out. It is vital that a sustainable funding solution is put in place before the scheme is rolled out to ensure that it is able to succeed in the long-term, and so is in everyone’s best interest that an independent review is launched as soon as possible. We are very clear that calling for this is in no way a delaying or blocking measure; it is a practical and necessary message to ensure that the government is able to deliver on its promise to parents and families.

3 Clause 2: Eligibility

3.1 We are concerned that about the impact that the change in eligibility criteria (from the equivalent of eight hours per week at national minimum/living wage to the equivalent of 16 hours) will have on families most in need of support. The DfE consultation on the introduction of the early years pupil premium, published in June 2014, stated: "Gaps between disadvantaged children and their peers are apparent in the early years, persist and widen throughout school and beyond. Eradicating this inequality is fundamental to ensuring all children get the best start in life." We believe that the decision to increase the lower eligibility threshold is in inconsistent with this goal.

During Second Reading, the childcare minister stressed that eligibility for the 30-hour offer will be judged on earnings, not hours worked, stating that "If someone earns £107 in half a day, that gets them 30 hours of childcare". We would question the logic of eligibility criteria that would entitle a parent working (to use the given example) four hours a week at a very high hourly wage rate to 30 hours of funded early years provision, but not someone working 15 hours a week a minimum wage (who might be volunteering or studying for the remainder of that week).

It is also notable that during Second Reading, the education secretary expressed the view that "it is right for those with the broadest shoulders to bear the greatest burden" in reference to the new eligibility criteria. While this statement may reasonably be applied to parents who earn more than £100,000 a year, we would argue that it certainly doesn’t apply to those earning less than £107 a week.

As such, we are concerned that the need to cut the cost of delivering the scheme has taken priority over ensuring sufficient access to early years provision for those families who would benefit from it most.

3.2 During Second Reading, education secretary Nicky Morgan stated that "The additional free hours will … be available where one parent is employed but the other has substantial caring responsibilities or where one parent is disabled." However, it remains unclear whether lone parents who meet this criteria would also be eligible for the additional entitlement. It is important for this point to be clarified during Committee Stage.

3.3 It is also important for the purposes of the implementation of the 30-hour offer to get clarity on how many families are eligible for the offer. When the pledge was initially announced prior to the 2015 election, the Conservative party stated that: "We expect around 630,000 3- and 4-year-olds in total will be covered by the extended entitlement" (source: Conservative press office). This estimate was subsequently revised to 600,000 (Gov.uk: "Currently around 600,000 families in England have 3 or 4 year old children with both parents in work - http://bit.ly/1XH7uTw ). However, following the revision of quality criteria, the government both stated that "We estimate that around 50,000 fewer children will be eligible as a result of these income thresholds" (source: http://bit.ly/1YKiWQB ) and that "the extended entitlement will be available to up to 390,000 families" (source: http://on.fb.me/1Pv7B5E ). Given the clear discrepancies here, it is vital that the government is clear how many children it expects to take up this offer as sustainable funding cannot be ensured without this information.

4 Clause 5: Regulations

4.1 Subsection 4 ensures that any regulations made under section 2 or 3 will be subject to affirmative procedure in parliament. An amendment has been tabled that would remove this provision.

4.2 The Bill, which has been described as a ‘skeleton’ bill, was criticised by the Delegated Powers and Regulatory Reform Committee for the "remarkable imbalance between the provision in the Bill and what was being left to regulations" (para 2, Eighth Report). The Committee further stated of the proposal to use affirmative procedure for most powers on the first exercise only that it was "not persuaded … that these scrutiny proposals are adequate in the case of this Bill" (para 4, Eighth Report). Speaking specifically about eligibility proposals, the Committee said it was "mystified" (para 7, Eighth Report) that this criteria was to be set out in regulations rather than the face of the Bill and that it didn’t regard the ‘first-time affirmative procedure’ proposals as satisfactory.

  Given the strength of the Delegated Powers and Regulatory Reform Committee’s concerns, we can see no good justification for the tabled amendment to subsection 4 and as such, are opposed to its inclusion in the Bill.

5 Other issues: capacity

5.1 We do not believe that concerns around capacity issues have been adequately addressed. During Second Reading, the childcare minister stated: "Many parents already buy more than 15 hours, which is the current free entitlement, of childcare. The policy changes who pays for it." It should be noted that the DfE’s ‘Review of childcare costs’ found that "across England, the average weekly hours taken by children [three-and four-year-olds] at each place are 18 hours". This means that, if parents take up the 30 hour offer in full, while it is not a doubling of take-up, it is still an increase, on average, of 12 hours (i.e. on average, a 66.7% increase in capacity will be needed). As it stands, there has been no indication as to how this significant problem will be tackled, and it is important that this is addressed at Committee Stage.

This is of particular concern for sessional pre-school settings, many of whom are unable to extend the duration for which they use their premises. However, it is important to recognise that this challenge exists for schools as well as the PVI sector. A survey by the National Association of Head Teachers found that "two thirds [of respondents] believe that increasing the provision of free childcare to 30 hours per week could mean they will end up reducing the total number of children they can take" (source: http://bit.ly/1lZeGil ).

It should also be noted that, even for those providers currently providing 30 hours of early years care and education (15 hours free entitlement and 15 hours paid by parents), unless the government funding rate for the additional 15 hours is equal to the rate currently charged to parents for these hours, these settings – while they will not need to create additional capacity – will face a sudden shortfall in revenue.

December 2015

APPENDIX A

Estimated distribution and sufficiency of hourly funding rates from April 2017   

 

The government has announced new national funding rates for childcare providers delivering the free entitlement of £4.83 for three- and four-year-olds (excluding EYPP) and £5.39 for two-year-olds.

To put the announced funding rates in context, tables one to three below show how the new national rates would translate into monies delegated to providers if local authorities distribute the new rate in the same way as 2015/16 funds have been delegated (3), in the absence of any information from government on how the new funding will be distributed by local authority or provider type ahead of the planned funding formula consultation next year.

The tables then compare these funding rates with delivery costs for non-domestic private voluntary and independent (PVI) providers based on Ceeda forecasts [1] (4).

Table 1 : Estimating the distribution and sufficiency of funds delegated to providers for delivery of the three- and four-year- old universal and extended offer from 2017  

Distribution of funds to providers of the three- and four-year-old entitlement based on 2015/16 averages

Market share

Children receiving 570 hours

Children receiving additional 570 hours

Total hours

Delegated funding rate

Estimated funds delegated to providers based on April 2017 delegated funding rates excluding EYPP

Cost based on Ceeda forecast of PVI non-domestic delivery costs financial year ending March 2017

(Average 4.68 per hr)

PVI non domestic settings

39.4%

520,860

153,669

384,481,680

£4.27

£1,641,736,775

£1,799,374,264

Childminders

0.8%

11,010

3,248

8,127,219

£4.27

£34,703,225

Estimate not available

Maintained nursery schools

2.8%

37,510

11,067

27,688,645

£7.70

£213,202,569

Estimate not available

Primary schools and other maintained providers

56.9%

752,520

222,016

555,485,455

£4.52

£2,510,794,257

Estimate not available

Totals

100%

1,321,900

390,000

975,783,000

£4,400,436,827

£4,558,074,316

PVI non-domestic funding shortfall per child per annum estimated as £233.70 for universal offer and £467.40 for 30 hours. Total annual shortfall -£157,637,489

· Market share and uptake of universal entitlement is based on latest available DfE Early Years Census data for three- and four-year-olds (5).

· The estimate of three- and four-year-olds eligible for the extended offer is based on DfE announcements (2). The table assumes 100% take-up of the extended offer.

· Delegated funding rates estimated on the basis of 2015/16 local authority delegated funds as published by DfE (3).

· Non-domestic PVI delivery costs based on forecasts published by Ceeda (4).

Table 2 : Estimating the distribution and sufficiency of funds delegated to providers for delivery of the two-year-old offer from April 2017 assuming 100% uptake of the offer  

Distribution of funds to providers of the two-year-old entitlement based on 2015/16 averages

Market share

Children receiving 570 hours

Total hours

Delegated funding rate per hour

Estimated Funds delegated to providers based on April 2017 delegated funding rates

Cost based on Ceeda forecast of PVI non-domestic delivery costs financial year ending March 2017

(Average £6.19 per hr)

PVI non-domestic settings

82.7%

223,811

127,572,075

£5.39

£687,613,486

£789,671,146

Childminders

3.5%

9,448

5,385,525

£5.39

£29,027,979

Estimate not available

Maintained nursery schools

1.9%

5,052

2,879,487

£5.73

£16,499,459

Estimate not available

Primary schools and other maintained providers

12%

32,448

18,495,543

£5.47

£101,170,621

Estimate not available

Totals

100%

270,759

154,332,630

£834,311,545

£936,369,205

PVI non-domestic funding shortfall per child per annum estimated as £456.00. Total annual shortfall -£102,057,660

· Market share based on latest available DfE Early Years Census data (5). The table assumes 100% take-up of the two-year-old offer.

· Delegated funding rates estimated on the basis of 2015/16 local authority delegated funds as published by DfE (3).

· Non-domestic PVI delivery costs based on forecasts published by Ceeda (4).

Table 3 : Estimating the distribution and sufficiency of funds delegated to providers for delivery of the two-year-old offer from April 2017 assuming 75% uptake of the offer  

Distribution of funds to providers of the two-year-old entitlement based on 2015/16 averages

Market share

Children receiving 570 hours

Total hours

Delegated funding rate

Cost based on April 2017 delegated funding rates

Cost based on Ceeda forecast of PVI non-domestic delivery costs financial year ending March 2017

(Average £6.19 per hr)

PVI non domestic settings

82.7%

167,858

95,679,056

£5.39

£515,710,114

£592,253,359

Childminders

3.5%

7,086

4,039,144

£5.39

£21,770,984

Estimate not available

Maintained nursery schools

1.9%

3,789

2,159,615

£5.73

£12,374,594

Estimate not available

Primary schools and other maintained providers

12%

24,336

13,871,657

£5.47

£75,877,966

Estimate not available

Totals

100%

203069

115,749,473

£625,733,658

£702,276,904

PVI non-domestic funding shortfall per child per annum estimated as £456.00. Total annual shortfall -£76,543,245

· Market share based on latest available DfE Early Years Census data (5). The table assumes 75% take-up of the two-year-old offer.

· Delegated funding rates estimated on the basis of 2015/16 local authority delegated funds as published by DfE (3). See also section 1.1 of this paper.

· Non-domestic PVI delivery costs based on forecasts published by Ceeda (4).

The basis for calculating funding allocations    

Delegated funding rates shown in tables one to three assume that local authorities distribute April 2017 rates in the same way as 2015/16 funds have been delegated. This distribution is summarised in tables four and five below.

Table 4 : Average delegated budget allocated to providers per hour for three- and four-year-old provision in 2015/16 and estimated rates from April 2017 by provider type  

England a verages for

three- and four-year-old s

Private voluntary and independent

Nursery schools

Primary nursery places

Average delegated budget allocated to providers per hour in 2015/16*

£3.99

£7.19

£4.22

Expressed as a % of the 2015/16 national rate of £4.51

Average delegated hourly rate as a % of the national rate

88.47%

159.42%

93.57%

The national rate from April 2017 is £4.83

April 2017 average delegated hourly rates if LAs distribute the new rate in the same way

£4.27

£7.70

£4.52

*Delegated rates as published by the DfE (3). Rates include the hourly base rate plus LA defined supplements e.g. quality, flexibility, and deprivation. Figures exclude EYPP and discretionary funding for children with additional needs.

Table 5 : Average delegated budget allocated to providers per hour for two-year-old provision in 2015/16 and estimated rates from April 2017 by provider type  

England a verages for

two-year-old s

Private voluntary and independent

Nursery schools

Primary nursery places

Average delegated budget allocated to providers per hour in 2015/16*

£5.09

£5.41

£5.17

Expressed as a % of the 2015/16 national rate of £5.09

Average delegated hourly rate as a % of the national rate

100%

106.29%

101.57%

National rate from April 2017 £5.39

April 2017 average delegated hourly rates if LAs distribute the new rate in the same way.

£5.39

£5.73

£5.47

*Delegated rates as published by the DfE (3).

The basis for calculating non-domestic PVI provider delivery costs    

Tables one to three (pp 3-4) show a comparison between announced funding rates (adjusted to reflect funding delegation patterns in 2015/16) and forecast delivery costs for non-domestic PVI providers. The Pre-school Learning Alliance commissioned Ceeda to produce forecasts of non-domestic PVI delivery costs utilising data from extensive research in 2014 (6) and factoring in recent and forthcoming statutory pay and pension changes (4). Forecasts for the financial year ending March 2017 are shown in table six, followed by notes on the assumptions behind these forecasts. Data is not available for childminders and maintained providers.

Table 6 : Estimated 2016-2017 delivery costs in graduate and non-graduate led settings with minimum 3% pay increase for all employees or statutory minimum where higher        

Funded places

Average breakeven hourly delivery cost

All settings

Two-year-old s

£6.19

Three- and four-year-old s

£4.68

Graduate-l ed

Two-year-old s

£6.43

Three- and four-year-old s

£4.75

Non-graduate l ed

Two-year-old s

£6.00

Three- and four-year-old s

£4.62

· All figures are exclusive of profit margin.

· All figures are exclusive of unpaid overtime.

· ‘Graduate-led’ is defined as a setting employing a qualified Early Years Professional or Early Years Teacher.

Base for cost data:

· England funded two-year-olds all settings: 383 children in 73 non-domestic childcare settings

· England funded three- and four-year-olds all settings: 3,488 children in 100 non-domestic childcare settings

· England funded two-year-olds in graduate led settings: 168 children in 34 non-domestic childcare settings

· England funded three- and four-year-olds in graduate led settings: 1,666 children in 45 non-domestic childcare settings

· England funded two-year-olds in non-graduate led settings: 215 children in 39 non-domestic childcare settings

· England funded three- and four-year-olds in non-graduate led settings: 1,822 children in 55 non-domestic childcare settings

Costs are inclusive of:

· Minimum wage increases as of October 2015

· 2016/17 estimated employer Class 1 NI earnings thresholds

· 2015/16 automatic enrolment earning thresholds

· Automatic enrolment employer contribution 1%

· National living wage of £7.20 for employees aged 25 plus from April 2016

· Minimum 3% pay increase on 2014 pay rates for all employees or higher where statutory minimums require. The 3% increase is applied to 2014 hourly pay rates reported in the ‘Counting the Cost’ study and is not compounded. Between March to May 2014 and March to May 2015 in nominal terms (that is, not adjusted for consumer price inflation) regular pay (excluding bonuses) for employees in the service sector in Great Britain increased by 3.0% (7). Ceeda forecast delivery costs assume a minimum pay increase of 3% on the base 2014 data after minimum wage and national living wage uplifts are taken into account; that is, no employee receives a pay increase of less than 3% but may receive a higher uplift where dictated by statutory minimum wage levels.

· No adjustment for inflation of non-labour costs

VAT and business rates in PVI settings   

 

PVI childcare providers registered with Ofsted are classified as business activities relating to welfare services in a state regulated institution (8); as such they are exempt from VAT, do not charge VAT on their services and cannot recover VAT input tax on business expenditure.

As private businesses operating from relatively large premises private sector childcare providers typically pay business rates based on the standard business rate multiplier without reliefs. Voluntary sector childcare providers receive 80% relief on business rates and up to 100% at the discretion of local authorities.

The Pre-school Learning Alliance commissioned Ceeda to conduct an exploratory piece of research to evaluate how VAT and business rates impact on PVI delivery costs. This has involved qualitative research with three case study organisations including a large voluntary sector nursery group, a large private sector nursery group and a childminder. In total the study has involved 83 settings. The work is due to report by the end of 2015; provisional draft data is shared for the purposes of informing the Public Bill Committee – finalised figures may vary.

Table 7 : Business rates and VAT input tax as a percentage of total expenditure  

Private nursery group

Voluntary sector

nursery group

Childminder*

Unrecoverable input VAT as a % of total expenditure

5%

4%

7%

Business rates as a % of total expenditure

2%

0.2%

NA

* To be approached with caution as based on the accounts of one childminder.

References

1. Spending Review and Autumn Statement 2015. HM Treasury, Cm 9162, November 2015.

2. DfE Free Childcare for 2, three- and four-year-olds frequently asked questions

3. Department for Education (2015) Early Years Benchmarking Tool: Delegated budgets allocated to PVI providers per pupil per hour 2015/2016.

4. Ceeda (2015) Counting the Cost: The Impact of a National Living Wage

5. DfE (2015) Provision for children under 5 years of age: January 2015

6. Ceeda (2014) Counting the Cost: An analysis of delivery costs for funded early education and childcare.

7. ONS (2015) UK Labour Market, July 2015. Table 17 Average Weekly Earnings - regular pay

8. Value Added Tax Act (1994) Schedule 9, The Stationary Office, London.


[1] Ceeda delivery cost forecasts are not available for childminders and maintained provision; possible funding gaps cannot be ascertained for these settings.

Prepared 8th December 2015