Lees of Scotland savings scheme breaches National Minimum Wage regulations
By Justine Riccomini, Head of Tax (Employment and Devolved Taxes)
30 October 2024
Justine Riccomini explains why HMRC won their case on an employee savings scheme which breached National Minimum Wage regulations.
On 23 July 2024, HMRC was successful at the Employment Appeal Tribunal (EAT) when the court found against Lees of Scotland.
Not a tax case – but still important
While this case is not a tax case, it does contain important information for those involved in employment taxes and payroll. This is because of the decision made by the court in relation to National Minimum Wage (NMW), and a savings scheme which had been run by the company for 30 years to help employees save for holidays.
Lees of Scotland is a producer of Scottish food products – its most famous product is probably the ‘Snowball’ – a delicious marshmallow, chocolate and coconut confection!
What happened?
Lees allowed staff to voluntarily make savings throughout the year by paying money into a holiday fund. When some staff made contributions, those contributions were classified as money ‘unlawfully deducted’ from their wages, which technically meant under NMW legislation that their pay fell below the NMW rates in place at that time.
HMRC issued Lees with an arrears notice of assessment totalling £81,000 in respect of the employees named in the assessment who were deemed to be affected by the deductions. Lees appealed to the Employment Tribunal which concluded that there had been no intention on the company’s part to benefit from the deductions or underpay NMW.
HMRC stance
Previous work undertaken by HMRC in this area tells us that if savings club funds are deducted from employees and then held in a company bank account which the employer is free to access and use, the employer receives a benefit from the scheme.
There is a massive similarity between this case and the Iceland case, which concerned itself with a Christmas savings club which was deemed to fall foul of NMW regulations back in 2019 and which led to that business facing a £21m arrears assessment.
What did the court conclude?
The EAT found for HMRC, overturning the earlier Employment Tribunal (ET) decision – ultimately concluding that the ET had asked the wrong question. The right question would have been to determine whether there was any form of legal limitation on the use of funds set aside by the company for holiday savings. As things stood, the monies were retained as part of Lees' main business account and the company could therefore potentially benefit from earning interest on those additional amounts. This enabled the funds to be used to ‘benefit the business’.
Learning point
In this case, the EAT acknowledged that had the holiday fund been kept in a separate, third-party account, there would have been no breach of NMW.
If you’ve spotted a tax anomaly that is producing an inequitable result or getting in the way of doing business, why not share it with us at tax@icas.com
