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As you may have read in the news recently, the issue of caring for a child at your home for periods exceeding 2 hours a day, falls under the Childcare Act 2006.
There are however some workarounds.
The easiest of which is that you care for the child in the child's own home. So you would care for your child and your friends child in your friends home... and your friend would care for your her child, plus your child, in your home. Then you are both Nannies - which currently is not regulated.
In England, Ofsted have been told to overlook arrangements between families... but I'm not sure in reality if they will actually do so. The law is quite clear, so until that law is changed, Ofsted will retain the right to request that an unregistered childminder registers if they are found to be caring for a unrelated child in excess of 2 hours in any day (for more than 14 days a year).
we are not intending to pay each other, so do we need to declare anything etc?
Legally the law does not appear to me to define Reward. It is left up to a Tribunal / Court to define that on a per-case basis. So the fact that you are not paying each other doesn't really matter that much, as the Reward could be seen as the childcare itself, or any thing you may give to each other.
So lets look at you being nanny for the other family. Technically a nanny should be paid National Minimum Wage. But if neither of you pay each other, if neither of you register as an employer, then who's to know? You could both be a nanny on a voluntary basis.
Hope that is of some help.