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Spotlight On: Companies accruing large holiday pay amounts need to understand the tax implications

Are you currently preparing your accounts and tax provisions, and notice a large holiday pay accrual on your balance sheet? If so, you need to understand the tax treatment and implications of the accrual, says Genevieve Morris.

As a result of the Coronavirus pandemic, many employees’ travel plans were disrupted last year. Some employers recognised this and allowed staff to carry forward holiday from one year to the next, often with a more generous period in which the carry forward leave could be used.

This is relevant for all companies that employ staff and have allowed them to carry forward holiday, and particularly relevant for employers that are allowing the carry forward to be used over an extended period.

Where un-used holiday is carried forward at the company year-end, an accrual must be made in the balance sheet for this.

However, from a tax perspective, holiday pay accruals are treated in the same way as all other remuneration.

This means that unless the holiday has been taken within nine months of the company year-end, the accrual is not tax deductible in the period of accrual. Instead the amount will only be tax deductible in the period when the leave is taken.

What should you do next?

If you have permitted staff to carry forward holiday, you should review your policy to see whether the carry forward period may extend past nine months from the company year-end.

Where this is the case, you will need to review how much of the accrual has been used in the nine months after the year-end, and any amount remaining will need to be added back in the tax computation.

The amount added back for Corporation Tax purposes should be tracked in the tax computation in order that a deduction can be claimed in a later period.

It is also worth considering how you recognise leave taken by employees. Approaching this by recognising that any leave taken in 2021 is brought forward leave, until the accrual has been used, will reduce the amount that needs to be added back in the tax computation.

If you then permit staff to carry forward further 2021 holiday in to 2022, then introducing a policy that this must be used before nine months have elapsed will ensure no add-back is required in your tax computation.

Would you like to know more?

If you would like further information on the above matter or would like to discuss your Corporation Tax compliance more generally, please speak to your usual Blick Rothenberg contact or Genevieve using the details on this page.