The move was a blow to childcare voucher provider companies that had won a legal challenge for a second Treasury consultation on who would run the scheme after the Government initially chose NS&I.
The current voucher schemes will be phased out and closed to new entrants when TFC is brought in.
The Childcare Voucher Providers Association (CVPA) said it was 'obviously disappointed' by the decision and that opening the market to other providers would have provided a better solution for parents and taxpayers.
Fiona Shields, chair of the CVPA, said, 'We believe, and we have consistently made this clear to Government, that there are some serious design flaws with TFC, which could impact the operation and benefits of the scheme for parents, childcare providers and, of course, the taxpayer.
'The primary concern would be the counterparty risk. What this means is that by placing all accounts with a single public sector provider, Government has increased the risk of payment failure having serious ramifications for all childcare providers that receive funds through TFC. Given the potential scale of the scheme, and the number of parents expected to benefit from it, any failure of NS&I's systems could be disastrous for childcare providers' cashflow.'
The CVPA also warns of an increased risk in the new scheme of delayed payment to childcare providers. It says the mechanism for childcare vouchers means funds are taken directly out of parents' salaries on a regular basis. These funds then move to the childcare provider. But for TFC, payments will depend on parents actively paying into accounts.
Childcare providers will have to wait until the Government has topped up the funds with the 20 per cent subsidy and then for NS&I to transfer it in to them.
Keith Appleyard, treasurer for Fiveways play centre in Brighton, anticipates that TFC will account for about 40 per cent of his income, whereas currently employer supported childcare through vouchers amounts to 25 per cent.
Some GP parents, he said, will now be eligible for childcare support as they are considered self-employed contractors.
Currently he deals with about 10-12 childcare voucher companies regularly, all of which present the information about payments in different ways, with up to 20 transactions a day.
'I would like to see an efficient data flow,' he said. 'Until we see it working we don't know whether we will suffer.'
He added that he was concerned that NS&I was 'not wired up for a 24-hour business' and that there would be errors.
Neil Leitch, chief executive at the Pre-school Learning Alliance, said, 'We believe what works best for parents should be placed at the heart of such decisions and by offering the new contract to a single service provider, we would hope it will make the process easier for beneficiaries - parents and those who support them - to access their entitlements.
'It's important that the system is constantly reviewed and providers are heavily involved in assessing and making recommendations regarding delivery.'
The National Day Nurseries Association (NDNA) says that moving to one operator should cut down on red tape for childcare providers and parents and make the system more streamlined.
But Purnima Tanuku, NDNA chief executive, said, 'By using just one voucher provider and creating a closed market the system must be thoroughly tested and closely monitored to ensure parents and providers are getting the best possible service.'
TFC: HOW IT WORKS
'Under the tax-free childcare scheme the Government will contribute 20 per cent of the cost of each child's childcare, up to a maximum of £2,000 per child per year,' says Sarah Jackson, chief executive, Working Families.
'A parent paying the UK average cost of £5,710 for 25 hours in a nursery for their two-year-old will see their costs reduced by £1,142, for example.
'Parents who are already in voucher schemes will have to work out which form of tax-free childcare is most cost effective for their situation. Voucher schemes can remain open, although not to new entrants after the new tax free scheme is established - it will be up to employers whether they keep them going for existing users, and up to parents whether to stay in them or not. The complication is that TFC may be more generous (depending on what level of tax relief someone gets from a voucher and whether one or both parents are in a scheme), but vouchers can be used for older children, up to 15. Tax-free childcare is only available up to 12. Once out of a voucher scheme, you cannot go back in.
'You either get Universal Credit (UC) - with its housing element, standard allowance, child element and childcare elements - or you get TFC. That means if you qualify for UC, you will normally be better off on it, but it depends how much UC you are entitled to. Choosing UC may also mean you have access to passported benefits (perhaps free school meals), but may mean that you have to look for more hours of work whether you want to or not. TFC has no such conditionality.
'So it will be complicated for parents to decide which scheme is best for them, assuming they already receive vouchers (far more parents will be eligible for tax free childcare than currently use vouchers). And it will be especially complicated for parents who might qualify for UC to decide which is the best option for their family. We are expecting many complex calls to our helpline.'