A recent decision of the Supreme Court has a significant impact on how employers now need to calculate holiday entitlement and pay for workers who do not work all year round. This will particularly impact casual workers on zero hour contracts, seasonal contracts and term-time workers. It is important that action is taken now to manage the cost, risk (especially the social and brand impact if found to be underpaying workers) and the operational implications of this decision.
The decision confirms that employees accrue holiday entitlement based on the period over which they are employed, irrespective of work they have completed over the period. This is different to previous ACAS guidance and the approach employers often take to calculate holiday pay for workers without fixed hours. Typically we see employers calculate holiday pay for workers without fixed hours, for example casual workers, based on 12.07% of hours worked, or pay this out as holiday pay in addition to hourly rates (often termed ‘rolled up’ holiday pay) both of which have now been found to be unlawful by the courts.
What effect does this case have on calculating holiday pay for workers without fixed hours?
There are two calculations employers must complete when calculating holiday pay for workers with no fixed hours:
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Holiday entitlement: The decision confirms this should be based on time employed in the holiday year and not calculated in respect of hours worked. The only pro ration to the 5.6 weeks statutory holiday entitlement should be in respect of starters and leavers in the holiday year.
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Holiday pay: This should be based on the average week’s normal remuneration over a 52 week period (please note a 12 week period applies to any employees working in Northern Ireland). This period should exclude weeks in which no remuneration was paid (which is very different to the basis for holiday entitlement).
The above is likely to increase holiday pay due for workers who continue to be employed in weeks they are not paid for hours worked.
As a simple example, if a worker without fixed hours works 10 hours at National Minimum Wage in the first week of January and is retained as an employee (although doesn’t work) until the following year they will accrue the full 5.6 weeks holiday entitlement. Their average working week’s pay would be £95.00, therefore they will be entitled to take time off and receive holiday pay of £532 for the year. In our experience employers will often pay based on a percentage of pay, i.e. £95 * 12.07% = £11.50 (e.g. rolled up holiday pay which has previously been found to be unlawful), therefore this represents a risk of significant underpayments, over £520 in this example.
What should employers do now?
Employers with employees who have atypical working patterns should:
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Review their approach to calculating holiday entitlement based on this decision.
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Review their approach to calculating holiday pay based on a week’s average normal remuneration (over a 52/12 week lookback period).
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Make changes to processes and systems to calculate holiday pay compliantly moving forwards.
Completing the above will assess your risk in terms of workers making a claim for underpaid holiday ahead of future planned government enforcement.
UK R&D Tax Relief Developments
There has been a recent announcement from HMRC about some changes to UK R&D tax relief, which include measures requiring claimants to share certain information with HMRC when making a claim. These new measures apply to accounting periods which start on or after 1 April 2023 and form part of HMRC’s strengthened resolve in policing the R&D regime.
These changes follow the investment HMRC have made in additional specialist resources which are dedicated to reviewing the accuracy of UK R&D tax relief claims, with more investment expected in coming years. It is clear that there is a renewed focus within HMRC to ensure that UK R&D tax relief claims are accurate.
For example, HMRC’s Fraud Investigation Service have recently issued a series of ‘nudge letters’ to businesses where the profile of their claims differs from what HMRC would ordinarily expect from businesses in the sector in which they operate, asking them to proactively demonstrate that their claims are valid.
Given the above there is an increasing likelihood of historic claims coming under HMRC scrutiny by either further nudge letters or formal enquiries, and it is therefore vital that businesses are able to demonstrate the accuracy of their claims in the event of an enquiry being opened by HMRC. This includes giving appropriate attention in real-time to matters such as:
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Evidence that systems and processes relevant to the R&D tax relief claims are documented and are robust. (How is information relevant to the claims captured, how is qualifying spend identified, what real time testing/controls are in place).
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Documenting the process of preparing a claim and applying that process consistently. (How is information extracted from systems to arrive at claim numbers, and how is this process evidenced? Who has responsibility and how do you ensure the appropriate amount of input from design and tax experts throughout the process?)
- Ensuring the claim is strongly evidenced and complies with the relevant legislative requirements: (What supporting documentation is prepared? Can you provide a full explanation of how the claim was calculated, provide contemporaneous evidence of the process, and details of any advice taken?)
Please reach out to PwC if you have any questions on the recent announcements
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