News update – Holiday pay plans face probe

Employers considering implementing a holiday pay scheme to make national insurance (NI) savings on the money paid to staff on statutory leave are being warned that they could fall foul of HM Revenue & Customs (HMRC).

The holiday pay scheme was introduced under statute as a way of paying employees in the construction industry and allied trades where employees traditionally move frequently between different employers. Ian Hopkinson, partner and head of employment tax at KPMG has warned that there is a strong risk HMRC will move to block the tax break for non-construction businesses and may even re-consider whether it is still appropriate for the industries it was designed to help. Under such a scheme, employers set aside money into a fund each time staff are paid so that a lump sum can be given when they take a holiday.

Neither employers nor employees are liable for NI on the amount. According to Hopkinson, an increasing number of firms outside of the construction industry have recently set up or are looking to set up such schemes. "Some advisers in the market have identified that there is nothing in the regulations that keeps this narrowed down to the construction industry and allied trades.

We do know that HMRC doesn’t like it. There is a high level of consultation going on as to whether it is appropriate that this exemption still exists." He added there is also a risk that introducing a holiday pay scheme could increase a company’s risk profile with HMRC.