Holiday Entitlement and Holiday Pay

The Supreme Court case of Harpur Trust v Brazel (2022) has recently clarified the law in relation to pro-rated holiday entitlement, and the impacts for employers could be significant.

The case was about a Part-Year worker who had a continuing contract but did not work every week of the year. The decision affects Part-Year workers, Zero-Hour workers, Seasonal workers and potentially Annualised Hours and Casual workers; it does not affect part-time workers who are contracted to work every week.

The Supreme Court judgment is that anyone on a Part Year, Casual, Zero-Hours or Annualised Hours continuing contract who does not work every week in a year is entitled to 5.6 weeks’ holiday, not a pro-rated entitlement.

This means that employers will no longer be able to pay holiday to such workers at the 12.07% rate. Holiday pay will also need to be paid at the 52-week average.

How has this happened?

The Working Time Directive contained the ‘conformity principle’ meaning that anyone working less than full time, be that hours per week or weeks per year, would have a pro-rated entitlement. When the Directive was enacted in the UK as the Working Time Regulations, this was not included. Therefore, the Regulations state that all workers are entitled to 5.6 weeks’ leave per year. The Working Time Directive does not prevent a more generous provision being made by domestic law. The UK could have amended the domestic legislation but chose not to.

What are the implications?

Part Year, Zero Hours and Season workers continuing contracts should be amended to remove references to the 12.07% holiday entitlement or to the pro rating of holiday entitlement. Existing staff on these contracts should be issued with an Amendment to Contract, and this should be done within one month.

Employees on Part-Time and Annualised Hours contracts should also be reviewed to highlight anyone who does not work every week.

Employees on these contracts will be entitled to 5.6 weeks’ holiday per year from now on. Holiday pay will then be based on their average weekly pay over the previous 52 weeks, excluding any weeks which they did not work and taking into account the renumeration of earlier weeks to bring the total up the 52 weeks (if the worker has not worked for the employer for 52 weeks, then an average of the weeks worked should be used).

This should be implemented promptly to correctly pay workers holiday entitlement thus reducing the likelihood of claims for backdated holiday (there is a three-month time limit for such claims). Otherwise, employers could face costly Tribunal claims. Casual worker contracts which provide for no continuity of service between assignments will not be affected as these are not continuing contracts. Employees on Fixed Term contracts will similarly be unaffected.

MHA’s HR Solutions team can review Contracts of Employment and advise on the correct calculation of holiday entitlement and pay going forward.

This article originally appeared in the September edition of Not for Profit eNews.

Increasing interest rates provides a welcome opportunity for employers with defined benefit pension schemes

With rampant inflation, rising interest rates and a cost-of-living crisis, it’s very easy to think around every corner is something ever more negative. However, David Davison, a Director at pension consultants Spence and Partners, has explained how the upward trajectory of interest rates has created an unexpected opportunity for employers participating in Local Government Pension Schemes (LGPS) . Whilst David reports purely on the impact of rising interest rates on LGPS, the principle applies to other defined benefit pension schemes.

20-year annualised inflation peaked at about 4.1% at the end of March 2022, just when most employers were getting their triennial results. However, corporate bond yields (and gilt yields) had also increased – the higher the corporate bond yield, the lower the value placed on liabilities. The increase in corporate bond yields more than offset the increase in inflation, and as such many employers would have seen an improvement in their accounting position.

However, from April 2022 onwards the gap between inflation and gilt yields has narrowed as gilt yields have continued to rise while inflation has come down from its peak, reflecting an expectation of a future reduction as a result of higher interest rates. Most if not all employers will be unaware of the impact.

Participants in LGPS have seen exit debts at record highs over the past couple of years which has meant many organisations have been trapped in schemes that they are unable to afford to exit. These market changes however will have had a very material impact on exit debts; the assumptions used to calculate exit debts are now more in line with the assumptions used for accounting purposes, the latter of which are likely to be significantly smaller given the narrowing of the gap between inflation and gilt yields rates.

If employers are considering an exit from an LGPS, they should be looking at their position at the moment as they need to question if these market conditions are likely to persist indefinitely. The Bank of England’s Monetary Policy Committee meet again on the 15 September 2022 and the expectation is that we could have a further interest rate increase, however further increases will be less likely if and when inflation comes under control.

However, if employers are considering exiting a Scheme, note that this is rarely achieved over a period of less than six months, so if these underlying market conditions are likely to be a temporary phenomenon, then employers need to begin to examine their options now.

Employers in England, Wales and Northern Ireland should be getting their updated actuarial valuations as at 31 March 2022 in the next few months and this would seem to present an ideal opportunity to review their options

This article originally appeared in the September edition of Not for Profit eNews.

Tax reliefs remain steady throughout the pandemic

HMRC have recently released their UK Charity Tax Relief Statistics Commentary for the year ended 30 April 2022. In the year to a total of £5.4billion in tax reliefs were claimed by charities and their donors, less than a 1% decrease compared with the prior year.

  • Gift Aid paid directly to charities amounted to £1.3billion; whilst this is 3% less than in the previous year, it is understood that HMRC have put more March claims than usual on hold for extra risk assessment
  • Business rates reliefs were down less than 1% to just under £2.4 billion
  • Relief for higher rates of tax on Gift Aid donations, paid to individuals, is forecast to be steady at £0.5 billion
  • Inheritance Tax reliefs for donations totalled £0.8 billion, down 4%

The data shows that despite the impact of the global pandemic there is still the ability for charities and donors alike to benefit from making donations to not-for-profit organisations.

However, such tax reliefs will only continue to become more and more important with the rising pressures resulting from increased inflation, the cost of living crisis and other factors impacting the availability of funds for charities. With such pressures, there is welcome news that JustGiving and Streeva are working together to help maximise Gift Aid claims through their development of the Swiftaid solution.

Swiftaid is a new Gift Aid network and automation service that has been developed to reduce the amount of Gift Aid that goes unclaimed every year. It removes the need for donors to complete a Gift Aid form every time they donate. Instead, donors simply need to make one Gift Aid declaration per tax year, which is then shared across the Swiftaid partner network. Integrated into the JustGiving donation flow, Swiftaid enables people to register and add Gift Aid to that donation. Once registered on Swiftaid, Gift Aid is automatically applied in that tax year to any eligible donations that donor makes via JustGiving (or via other organisations registered on the Swiftaid network).

This article originally appeared in the August edition of Not for Profit eNews.

Charities to look at EDI as reports indicate minority representation in the sector is falling

Figures recently published by the Department for Digital, Culture, Media and Sport (DCMS) show that the proportion of workers in the charity sector who are from ethnic minority backgrounds has decreased, while representation in the wider UK economy has risen.

The proportion of workers in the charity sector from an ethnic minority background decreased from 10.2% (94,000) to 9.5% (88,000) from 2020 to 2021, while representation in the wider economy increased from 12.7% to 13.1% year-on-year. In contrast, charities have consistently had a greater proportion of employees that are disabled than employers across the wider UK economy. Since 2011, the proportion of charity sector workers that are disabled has increased from 14.1% to 20.6%, while representation in the wider sector has risen from 11.4% to 15.4%, with the rise of remote working as a result of the Covid-19 pandemic being cited as a potential reason for this nation-wide and sector increase.

As well as the DCMS statistics, The Living Wage Foundation has reported on low-paid workers in the third sector. The report notes that 14.1% of jobs in the third sector are paid less than the real Living Wage and that employees in these roles, which are often fundraising- or events-based, were disproportionately affected by the pandemic; almost half of low-paid third sector workers were furloughed during the pandemic compared to a fifth of third sector workers with better pay.

Diversity – and not just with regards to ethnicity, disability and level of pay as noted above – plays a huge role in the success of any organisation, and differences between the charity/third sectors and the wider UK economy is certainly something for employers and organisations to consider.

This article originally appeared in the August edition of Not for Profit eNews.

Four-day working week sees improvements in wellbeing and productivity for charities

June 2022 saw the commencement of the world’s largest ever pilot in which employees at 70 organisations across more than 30 sectors would receive 100% of their pay for 80% of their usual hours, whilst committing to delivering 100% of their normal productivity.

Organisations from the not-for-profit sector taking part in the pilot include The Royal Society of Biology, Scotland’s International Development Alliance and Waterwise. Over one month in to the pilot, these entities have all recently reported that they are seeing benefits.

  1. Whilst hours have been reduced, the commitment to ensuring that the same quality and quantity of work is delivered has resulted in staff finding more efficient and effective ways of working, leading to increased productivity.
  2. Employees report being happier, with a better work-life balance.
  3. Some of the biggest improvements have come from the fact that staff feel more valued and refreshed when they are working thanks to the extra day off at the weekend.

There are also reports that having a working week of only four days makes the participating organisations more attractive as an employer, and encourages a more diverse range of people to apply to work for them.

However, the practice has not been mandatory for all of the staff of the participating entities. In a number of cases there were a handful of staff who were not utilising the scheme, which highlights how a flexible approach within the scheme can work to suit the needs of all members of staff.

In the post-Covid world where working practices are becoming ever more flexible and catering to the needs and wellbeing of employees, adopting a four-day working week could be a deciding factor for prospective employees looking for new opportunities in the sector. We will be keeping a close eye on the outcomes of this pilot and how others in the sector respond to its findings.

This article originally appeared in the August edition of Not for Profit eNews.

Consultation on changes to the Annual Return to the Charity Commission

Charities with income over £10,000 are required to submit an Annual Return to the Charity Commission no later than 10 months after their financial period end. The Return has not changed since 2018, but the Commission is proposing to update the question set within the Return from 2023 onwards.

The Charity Commission are keen to ensure that the nature and volume of data that is gathered are appropriate to enable them to better identify risks and problems within the sector, as well as help the public make informed choices about charities. It is also important that it helps all stakeholders gain a richer understanding of the sector.

What are the planned additional questions from the Charity Commission?

The proposed new return is likely to include more questions, but in many cases, these will be simplified.

Some of the planned additions to the return include:

  • Additional questions to understand charities’ reliance on certain types or sources of income.
  • More information on roles and responsibilities within the Charity, including governance and control.
  • Further clarity on the geographical areas in which the charities operate.
  • Better capture of staff numbers and payroll costs in the sector.

How can I get involved?

The Charity Commission would like to involve a wide range of charities in a consultation on the proposed changes before it is launched in 2023. This consultation is running for 12 weeks ending on 1 September 2022, so there is still time to take part.

If you would like to participate, you can respond to questions via an online survey, and provide additional information or responses via a dedicated mailbox.

If you require any support on the Annual Return process, please get in touch with one of our charity specialists here at MHA Moore and Smalley.

Safeguarding and protecting people for charities and trustees

The Charity Commission updated their guidance on safeguarding and protecting people last month, providing the sector with a welcome reminder of how to protect people who come into contact with your charity through its work from abuse or mistreatment of any kind.

Protecting people and safeguarding responsibilities should be a governance priority for all charities. Accordingly, a charity must have appropriate polices and safeguards in place and ensure it is being proactive in protecting its beneficiaries, staff, stakeholders and anyone else who comes into contact with it. Such is the necessity of this governance matter, the Commission will refer concerns to relevant safeguarding agencies where needed to implement safeguarding legislation. Their expectations of charities are detailed below:

  • To have appropriate policies and procedures are in place, and they are followed by all trustees, volunteers and beneficiaries.
  • That checks are performed which ensure people are suitable to act in their roles.
  • A charity knows how to spot and handle concerns in a full and open manner.
  • There are clear systems of referring or reporting to relevant agencies as soon as concerns are suspected or identified.
  • Risks are identified and how they will be managed are set out in a risk register which is regularly reviewed.
  • That statutory guidance, good practice guidance and legislation relevant to their charity is all followed.
  • A charity’s response to concerns is quick and appropriate investigations are carried out.
  • Failures and harm are not ignored or downplayed.
  • A charity’s trustee board is balanced and does not let one trustee dominate its work.
  • Protecting people from harm is central to a charity’s culture.
  • Resources, including trained staff/volunteers/trustees for safeguarding and protecting people, are sufficient.
  • Periodic reviews of safeguarding policies, procedures and practice are conducted.

The Commission’s guidance provides updated links to useful advice and practical support:

  1. The National Council for Voluntary Organisations (NCVO) provide a resource for advice on how to get started with safeguarding.
  2. The Charity Governance Code includes best practice advice, including on safeguarding.
  3. Bond, the UK network for organisations working in international development, have produced a ‘Good governance for safeguarding’ guide in collaboration with UK Aid.

Finally, the Commission note that if a charity works with children or adults at risk then there are more safeguarding legal requirements applicable which must be worked with.

This article originally appeared in the July edition of Not for Profit eNews.

VAT – business and non-business activities

A recent brief published by HMRC sets out their updated approach to determining whether an activity is a business or non-business activity for VAT purposes.

Like so much tax law, HMRC’s policy for assessing whether an activity is of a business or non-business nature is grounded in case law. The 1981 Lord Fisher and 1978 Morrison’s Academy Boarding Houses Association cases in particular helped create the six criteria ‘business test’ previously used in making such an assessment:

  • Is the activity a serious undertaking earnestly pursued?
  • Is the activity an occupation or function that is actively pursued with reasonable or recognisable continuity?
  • Is the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies made?
  • Is the activity conducted in a regular manner and on sound and recognised business principles?
  • Is the activity predominately concerned with the making of taxable supplies for a consideration?
  • Are the taxable supplies that are being made of a kind which, subject to differences of detail, are commonly made by those who seek to profit from them?

HMRC’s long-standing policy had been that a business activity is possible even in the absence of a profit motive. However, more recent judgements, such as those in the 2016 Longridge on the Thames and 2018 Wakefield College cases, have helped clarify that the criteria above are only indicators and that they cannot replace the principles set out by the courts in determining what constitutes a business; in determining this, there should be no reliance on an organisation’s overall objective or profit motive. The recent cases have helped develop a new two-stage test, detailed below, which should be taken instead of the six criteria business test above:

The activity results in a supply of goods or services for consideration

An activity that does not involve the making of supplies for consideration cannot be business activity for VAT purposes.

The supply is made for the purpose of obtaining income therefrom (remuneration)

Even if the charge is below cost.

Whilst this change in approach is relevant to all not for profit entities, given the nature of the cases which resulted in the change, it will be particularly relevant to entities providing nursery and creche facilities and those receiving grants or subsidies. We expect to provide further guidance in the coming months as this ruling develops further.

This article originally appeared in the July edition of Not for Profit eNews.

Revisions to annual return – consultation

Over the last few years we have seen a staged increase in the information requested from charities by the Charity Commission through the annual return. We are now entering the next phase and accordingly the Commission is consulting on a new approach to the Annual Return which would apply to charities’ financial years starting on or after 01 January 2023. The new approach, which will include asking new questions to obtain more data, has the ultimate goal of helping the Commission regulate charities more effectively.

The Annual Return – a list of questions registered charities are obliged to answer once a year – exists in part as an information gathering device for the Commission. The publishing of responses is intended to allow the wider public to make informed choices about charities and identify any associated risks and to provide stakeholders with better visibility of the sector.

The changes to the Return also include changes to the Commission’s ability to add new questions to future Returns as required in response to unexpected sector-wide events. This comes from recent lived experience where the Covid-19 pandemic highlighted gaps in data the Commission held on charities. Furthermore, the new Return will be more flexible than before, albeit there is still a majority of ‘fixed’ questions and a small amount of questions relevant to the particular year in question.

The new Return is expected to include 52 questions in total, 16 more than the 36 currently being asked, and will include 24 questions from the existing return, five amended questions, and 23 new questions. The Commission are estimating that the financial impact of introducing the changes to the Annual Return will cost the sector £4.95m, reflecting the increase in the amount of time needed to answer the new requirements.

This article originally appeared in the July edition of Not for Profit eNews.