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Last Updated: Tuesday, 9 October 2007, 18:42 GMT 19:42 UK
Halt to national insurance scam
New house being built
The construction industry gets five year's grace from the new rules
A widespread scam in which employers and staff avoided national insurance on holiday pay is being stopped.

From the end of October, full national insurance will be taken from the holiday pay of all employers and staff.

Only the construction sector will be protected from the new rules, with a five year transition period instead.

The exemption was first introduced in the 1960s to cope with the frequent movement of construction workers, but has been adopted by other businesses.

The move was announced by chancellor Alistair Darling in his pre-Budget review.

"With the increasingly widespread use of holiday pay schemes outside the construction sector, it is not surprising that the chancellor has decided to phase out this relief," said Stephen Herring of accountants BDO Stoy Hayward.

Union agreements

The government says its measure will save it around 200m a year.

The exemption will be withdrawn completely from 30 October 2012.

Its original justification was that in an industry with an itinerant workforce, a particular employer might be paying the holiday pay of an employee who had only been on the books for a short while and who might soon leave the firm.

However it has recently become common for employers in other very different industries to do the same.

"In recent years there has been widespread abuse of this exemption across many sectors including retail and financial services," said Ronnie McCombe of KPMG.

"Theis will have considerable implications for the construction sector as this relief is embedded in various union agreements on working practices," he warned.

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