Holiday pay funds face axe?

Holiday pay funds that operate outside the construction industry may follow the home computing initiative (HCI) into oblivion as HM Revenue and Customs (HMRC) says it is reviewing the practice. This comes as high street retailer WH Smith, media group Informa, and the wholesale banking division of ING have implemented such schemes. The holiday pay scheme was introduced under statute as a way of paying holiday to transient employees in the construction industry and allied trades. The legislation does not limit the funds to the construction industry. Under these schemes, employers pay funds in to a third-party administrator and reclaim these when staff take leave. Neither employees nor employers are liable for National Insurance (NI) on the amount.

Lower-paid employees tend to benefit most because they save a higher proportion of NI. Patrick O’Brien, a Revenue spokesman, said it would not normally expect employees outside of construction work to be included. “However, there is nothing in the legislation to prevent employers in other industries using these provisions. We are reviewing the operation of the legislation by reference to its original policy intention, and changes since it was first introduced,” he added. Des Dunleavy, chief executive of Flexible Remuneration Services (FRS), which provides holiday pay funds, said HMRC had revealed an “aggressive” attitude. “You’ve seen what they’ve done with HCI. I have no doubt that they will be reviewing [this].” FRS has communicated the scheme to approximately 100,000 employees and has about 10 major clients.

Six of these have since gained HMRC approval. Keith Brownlie, group HR director for Informa, said its employees would save an average of £280 a year. “Basically, it saves [more of] their take home pay. Holiday’s important, and we’re trying to get ahead of the game.” However, Gary Hull, a director of employment solutions for PriceWaterhouseCoopers: “My expectation is that legislation will be changed to stop this from happening at some point in the future. If a client wants to explore it, we are under obligation to make sure that they understand the risk.” David Heaton, a tax partner at financial management firm Baker Tilly, added: “There is interest in it but I think people are not expecting it to survive because it’s moved beyond where it originally started.”