Nursery Management: Sustainability - Swings and roundabouts?

In a mixed economy, it can be hard for the private, voluntary and independent (PVI) sector to take control of its destiny and it is fair to say that current actions of Government are poised to heap yet more change on how nursery businesses are run, and how sustainable they are.

On the positive side, many settings are reporting increased occupancy fuelled by the free entitlement. The National Day Nurseries Association's (NDNA) latest business survey highlights that occupancy is indeed edging up, but also cautions that the free entitlement will not be sustainable in the long term unless the Government hikes funding to realistic rates.

In its More Affordable Childcare report, the Government has committed to remove burdens and simplify processes to create a more flexible and responsive childcare market. Proposals on how childcare is regulated and on how new planning freedoms could enable providers to more easily adapt existing buildings are all currently out to consultation.

Meanwhile, the sector continues to grapple with time-honoured problems such as business rates and VAT.

Here, we have gathered together a group of nursery owners, managers and consultants to discuss the key issues affecting their businesses, and to suggest some solutions.

Our contributors

Trevor Tasker, owner of Small World Kindergarten in Suffolk

Ken McArthur, owner Polly Anna's Day Nursery in York

Scott McCubbin, owner It's the Little Things Day Nursery in Merseyside

Sarah Steel, director of the Old Station Nursery chain

Gordon Beck, director of Nursery Business

Should nurseries receive the same business rates as maintained settings?

Scott McCubbin: 'Unquestionably. It's a nonsense to think the Government has insisted on a commitment to "quality nursery care" while owners are being penalised for having bigger, better premises. The higher the rent, the more they'll hammer you on rates. They're incentivising poor quality.'

Trevor Tasker: 'High business rates is a problem that afflicts huge numbers of businesses in all sectors. For our sector, at the very least a re-examination and recalculation of the square metre rates would be a start. Then look at the multipliers. But, of course, exemption to bring us in line with the state sector would be the only fair way forward.

'An alternative could be a local income tax, with local authorities keeping the income. Again, this would not solve the problem of equality on its own. I am also wary of business rates being the responsibility of local authorities alone; there is a danger that some might try to squeeze every last penny out of businesses.'

How about VAT?

Ken McArthur: 'VAT and education are governed by EU regulations and it would take the EU to change its rules to allow a change to VAT and early years providers.

'The only type of providers that can offset the VAT supplier's charge are those that are part of a larger company that is a VAT-rated business.

'Maintained settings operated by the local authority have a different relationship with VAT. In reality, purchases of supplies and services to maintained settings are paid for by the local authority using the money allocated to individual school budgets that require those purchases.

'But at the end of the day, the difference is an unfair playing field, with maintained settings paying 20 per cent less on VATable services and goods compared to the PVI sector.

'A simple solution would be to make early years settings VATable but at zero per cent, which would mean no VAT on fees but that the VAT on purchases can be claimed back from HMRC, similar to farmers.'

Sarah Steel: 'I agree with Ken - this is another potential 'quick win' for the Government. If there is a real desire to drive down nursery fees, then any way of reducing operating costs and levelling the playing field with the maintained sector would be welcome.'

Are nurseries getting access to the funding they need?

Ken McArthur: 'In my experience, banks never like lending money to small independent businesses such as mine without using my private house as security. This was true even in the supposedly heady days when banks were lending to all and sundry.

'The last time I spoke to a bank manager was after the Government announced yet another scheme to get banks to lend SMEs money under a loan guarantee scheme. All he said was, "We still want your house first." He did say that if I did want to raise money to expand or make improvements, it would be much cheaper and easier to raise the money as a personal loan.'

Sarah Steel: 'I believe that a good relationship with your bank is essential for any business, and you need comprehensive management accounts for your own use and for raising funds. If you can't prove your proposal is sound, why would anyone else support you? However, we've worked closely with our bank for several years and it is very supportive.'

How should nurseries be supported to develop provision to meet Government plans for two-year-olds?

Scott McCubbin: 'There is a real fear this two-year-old sum, like that for the threeto four-year-olds, won't cover costs. It's the same old story and the same debate we've been having about the latter.

'The funding for twos not only needs to be ring-fenced, but more considered to take into account the quality delivered. Nurseries are now expected to carry out pre-schoolers, development checks previously carried out by health visitors - for free. More is being demanded of nurseries, better quality is being demanded, but investment is poor.'

Trevor Tasker: 'We have been able to establish from our local authority (Suffolk) through the mist and fog of the Dedicated Schools Grant (DSG) that it receives £5.19 an hour. The single funding formula distributes between £3.70 an hour with a Quality Supplement for QTS and £3.10 an hour for Level 3. Some of the balance is to pay a block allowance to the PVI sector, £690 per term to cover additional premises costs that the state sector would not have to cover, plus, for example, the SEN and disadvantage formula.

'From the published Schools Forum documents, the LA is keeping about ten per cent to provide for early years staffing costs. So a significant sum is simply not reaching the front line. Whether this is representative across the country I don't know.'

Sarah Steel: 'It's interesting to hear Trevor's comments. I also sit on the Schools' Forum in Oxfordshire as the PVI representative and I understand that the amount of DSG that is centrally retained there is nearer 20 per cent, with the Government planning to reduce this to ten per cent nationally.

'I welcome this, as while any local authority support may benefit providers, it is not always evenly distributed and, at the end of the day, what really benefits providers is being paid a fair rate for funded sessions to allow them to run a sustainable business.

'I think many nursery owners would be more than happy to see a minimal level of LA support (indeed, this is already the case in some areas), but need sustainable funding levels. This applies for three-year-olds as well as two-year-olds; current rates for two-year-olds are better, but any reduction in this will make the offer unviable for providers.'

Could funding reform in the long term bring together the money for childcare tax credits, childcare vouchers and free nursery places?

Gordon Beck: 'For the first time, parents will register on a system to confirm their eligibility/entitlement and to set up an online voucher account. Once a parent has a childcare account for their tax-free vouchers, the next logical step is to make any other entitlements - such as two-, threeand four-year-old funding - also available as online vouchers. Part of the registration process can check the eligibility for free funding and provide free-funding vouchers. Parents will then have a single point of access/eligibility to all childcare funding, and their childcare providers will be assured of regular payments. This also means the Government will have a secure system, with control over the amount of free funding going to providers.

'The step change, to me, is the setting up of a very large online centralised database linked to HMRC, which has the potential for parents to use electronic vouchers for all their childcare needs.

'The size and scale of the proposed tax-free voucher scheme is huge, with the annual voucher turnover for the scheme expected to be £7.5bn, covering 2.5 million families. The Government is expecting interest from a range of organisations to administer the scheme, including banks, building societies, the Post Office and supermarkets with financial arms.

'Combining the free entitlement funding within the tax-free scheme should be a relatively simple exercise for those with advanced technology resources and infrastructure.'

More information

For the latest policy information, go to Nursery World's legislation section online, www.nurseryworld.co.uk/legislation.