The introduction of the Coronavirus Job Retention Scheme in 2020 saw many businesses placing employees on furlough leave. Furloughed employees are able to carry forward their holiday entitlement for up to two years, which could have corporate tax implications for businesses.

Since March 2020, thousands of businesses have utilised the Job Retention Scheme to furlough staff. Whilst some furloughed employees will have used their holiday entitlement before their normal holiday year, it is expected that many more will take advantage of the ability of being able to carry forward their holiday entitlement for up to two years.

This flexibility is likely to result in an increase in the level of holiday pay accruals in company accounts for accounting periods ending after 31 March 2020.

Corporation Tax rules

Corporation Tax legislation sets out that any unpaid employee remuneration included in a company’s accounts can only be deductible for Corporation Tax purposes where that remuneration is paid within nine months of the year end. This has an impact on holiday pay accruals, where these are not paid or the holidays are not taken within nine months of the year end.

The ability to carry forward holiday entitlement for up to two years will mean that some businesses will be unable to claim Corporation Tax relief on the costs accrued. This is likely to increase their Corporation Tax liability or reduce any Corporation Tax refund that would otherwise be due.

Action to take

If your business placed staff on furlough, it is important to be aware of the potential tax implications so that you can manage your cash flow. Adjustments may need to be made within the company’s Corporation Tax computation.

If you would like to discuss how this may affect your business’s tax position, please get in touch with your usual Johnston Carmichael adviser or a member of our Corporate Tax or Payroll team.