It has recently been reported that the Education Secretary, Bridget Phillipson, has asked the Competition and Markets Authority (the ‘CMA’) to examine the hidden costs some parents are being charged when they take up free childcare under the government’s Early Years Funding Scheme (the ‘Scheme’). At the time of writing, the CMA has acknowledged Bridget Phillipson’s letter and is developing a proposal to put to their Board in June. Under the terms of the Scheme, parents are entitled to (as applicable) 15 or 30 hours of free childcare – meaning childcare which is completely free of charge, without any mandatory extra charges or hidden costs. Historically, approaches to compliance and enforcement have varied. However, there is now no question that this is an area of particular focus for the Government which is keen to ensure fair access to the Scheme. This follows a high court case on the topic of mandatory extra charges which resulted in the Government revising and tightening its statutory guidance for local authorities last year. As a result, various local authorities updated their funding agreements with nurseries; and we have seen many local authorities taking a more proactive approach to monitoring and enforcing compliance. Now, it seems the Government has renewed its focus on this topic, and is likewise seeking the assistance of the CMA. This article sets out an overview of the Scheme and nurseries’ obligations under it, including in respect of their charging and invoicing arrangements. The Scheme The Scheme is made under the Childcare Act 2006 and the Childcare Act 2016, and (as mentioned) the Government has issued statutory guidance which is available here. Whilst the statutory guidance technically applies to local authorities, it is clear from its terms that: nurseries should have regard to the statutory guidance; and if a nursery were receiving funding in breach of the terms of the Scheme, that would be unlawful. In addition, nurseries are required to comply with the terms and conditions of the funding agreements issued by their local authority. Funding agreements usually provide that funding is granted by the local authority in accordance with the statutory guidance and expressly incorporate and/or mirror provisions of the statutory guidance. On that basis, nurseries are almost invariably required to comply with the statutory guidance as a matter of contract. Separately, the Consumer Rights Act 2015 and related regulations require traders (ie nurseries) to be transparent with consumers (ie parents) on fees. In addition, under the new Digital Markets, Competition and Consumers Act, “drip pricing” is prohibited and nurseries are expected to be fully transparent about the total price of their services – ie, nursery fees plus all mandatory extras. It will not be permissible to simply quote the core nursery fees and “hide” mandatory extras elsewhere. Charging and invoicing for funded childcare hours The entitlements under the Scheme must be offered “completely free of charge to parents”. In particular, “there must not be any mandatory charges for parents in relation to the free hours. Government funding is not intended to cover the costs of meals, other consumables additional hours or additional services.” In the Education Secretary’s letter to the CMA, she specifically asked for their views on “the impact of market practices, such as private paid hours/fees on parents and providers; restrictions on the use of government-funded hours; consumables practice; and waiting list fees/deposits.” Offering the funded hours “completely free of charge” means that (amongst other things) nurseries must: Not charge parents: a registration fee as a condition of taking up their child’s free place. (Nurseries can charge a refundable deposit. However, that deposit must be refunded within a reasonable period of the child joining and nurseries must be clear with parents about the circumstances in which that deposit may be non-refundable – for example if the parents do not take up a place for their child at the nursery); “top-up” fees (i.e., any difference between their normal charge to parents and the funding they receive from the local authority to deliver free places); any mandatory additional fees or charges, which must be genuinely optional. Sometimes, nurseries try to “hide” mandatory additional fees and charges by – for example – bundling them within an “all inclusive” fee; requiring children to attend a minimum number of sessions per week (such that parents are effectively “forced” to purchase additional hours on top of the 15/30 free hours); and/or structuring the timetable such that parents are “forced” to pay for trips, visits or other activities. Such practices are prohibited and, as mentioned, the government is asking the CMA to review this and make recommendations for improvement. Be completely transparent about their fees and charges for additional hours and optional Extras would include consumables (eg nappies), meals and snacks, and optional activities (eg trips or lessons). Nurseries must publish on their website: the costs of additional hours and optional extras; and the pattern of hours that parents can take the entitlements, in a way which is “clear, up-to-date and easily accessible to parents” so that parents can make informed decisions on their choice of childcare. The website should set out “the amount charges for all the chargeable extras listed, as well as the pattern of hours that parents can take the entitlements”. Importantly, paying for additional hours or optional extras must not be a “condition of accessing a free place” and parents must always be able to opt out of paying for additional hours and optional extras. Ensure that their invoices are clear, transparent and itemised. Specifically, invoices must breakdown separately: the free entitlement hours; additional private paid hours; food charges; non-food consumable charges; and activities charges. The Department for Education and local authorities expect invoices to have been itemised in this way since January 2026. This is to allow parents to see that they have received their child’s entitlement completely free of charge and so that they can understand the fees and charges for additional hours or optional services. Local authorities sometimes publish example invoices, which nurseries may find useful – not least to ensure compliance with their funder’s best practice. There are a few risks if the nursery is found not to have complied, or not to be complying, with the Scheme. Nurseries are encouraged to take legal advice on the risks which might apply to their setting, which will inevitably be fact and circumstance specific. However, in headline terms, the key risks are: The Local Authority “clawing back” funding and/or removing the nursery from the Scheme. Funding agreements usually include terms which entitle the Local Authority to do this. Reputational damage. This is an area which has attracted a not-insignificant amount of attention within the market and the press. There is likely a heightened risk of reputational damage if a nursery is found to be non-compliant in future – rather than actively taking steps to change its approach. Parents issuing a claim against the local authority and joining the nursery to proceedings (as was the case in the high court case mentioned). In theory the nursery might be joined to a judicial review of a local authority by parents. However, parents are more likely to make a complaint to the Local Government Ombudsman – as this is a straightforward, free process which can result in compensation. There is now also potentially the risk that the CMA takes enforcement action in light of the request from the Education Secretary. What should nurseries do now? We recommend that nurseries’ systems, procedures and terms and conditions are reviewed to ensure compliance with the Scheme, in particular with respect to charging and invoicing arrangements. We have supported a number of clients with audit exercises over recent years. If you would like to discuss any of the issues raised in this article, please contact one of the authors or your usual Farrer & Co contact. This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances. © Farrer & Co LLP, June 2026
