'Inside-IR35' contractor forces HMRC into £4,000 holiday payout

A tax defeat for HMRC has raised the unprecedented prospect that contractors deemed inside IR35 by their clients -- ‘employed for tax purposes’ -- could be due employee-style rights.

Even if PSCs later maintain they were self-employed -- as ContractorUK can reveal Susan Winchester, the contractor who beat HMRC into settling; does, such rights remain owed.  

In the case, Winchester was engaged by HMRC in September 2016 to supply the department marketing services, but was later payrolled by officials after CEST deemed her IR35-caught.

A year-long “stressful” battle ensued, but she has now successfully claimed against HMRC (and four firms in the contractual chain including her agency), for £4,000 in holiday pay.

“Once her client, HMRC, forced her into an umbrella arrangement, where she was ‘employed for tax purposes’, she felt she should be entitled to employee-type benefits,” reflected Andy Chamberlain, deputy policy director for IPSE, which took up the case.

'Shove the contractor'

He also told ContractorUK: “This case has clear implications for clients.

“If they decide the contractor should be treated as an employee for tax, it may well mean they need to consider themselves as something like an employer.

“And that would oblige them to provide benefits such as holiday pay. It’s not good enough to simply shove the contractor into an umbrella and carry on as before.”

Lawyers are assessing whether Winchester’s victory constitutes a ‘test case,’ but already IPSE says that the case "directly challenges" public sector hiring practices put in place in the wake of April 2017’s off-payroll rules.

'Clear message'

The contractor body also says the case has exposed the “questionable” practice of contractors being deemed ‘employed for tax purposes’ without receiving any of the rights that go with employment. Until now.

“Susan’s case sends a very clear message to clients,” says former contractor Chris Bryce, the chief executive of the Association of Independent Professionals and the Self-Employed (IPSE).

“[That message is] ‘if you are going to treat contractors like workers, then you’ve got to give them worker entitlements.’

“You can’t just decide someone is inside IR35, shunt them onto an agency [or umbrella] payroll and expect someone further down the line to pick up the tab for your obligations like holiday pay.”

'Historic'

A hallmark of what the association is calling Winchester’s “historic” win over HMRC is that the ‘inside’ IR35 decision against the PSC, and the resulting move to payroll, was not contestable.

Indeed, the April 2017 rules do not afford a right of appeal to the hirer’s requirement to payroll the PSC worker. And unfairly, lawyers say, incorrect ‘inside’ decisions are not prone to fines (whereas ‘outside’ decisions are).

“When HMRC forced Susan onto an agency payroll, with no opportunity to appeal, they thought they could wash their hands clean of any repercussions,” Mr Bryce said.

“[This] case [has] exposed the fundamental unfairness of the IR35 changes brought in last year.”

'Right Vs Wrong'

The contractor at the heart of the case, lodged earlier this year at a Central London Employment Tribunal, hinted that the proceedings have also exposed coercion.

She was speaking after the morning on which the tribunal was due to start but saw HMRC and the other parties in the chain agree to settle -- in full, for the amount she was hoping for.

“[This] was about what’s right and wrong and not being bullied into a position”, said Winchester, the founder of SJW Marketing Solutions Ltd.

She added: “I just couldn’t understand why somebody could make some arbitrary decision about my tax and employment status on a brief, over-simplified questionnaire that I had no input in, and seemingly no right to challenge.”

'Disappointing'

But it seems others did understand. In fact, before IPSE took up her case, Winchester approached another organisation for help, only for them to instantly say HMRC was correct.

“[It] was very disappointing,” said the marketer, whose claim for a total of just £4,200 in holiday pay was under the Agency Workers Regulations. “[But] for me…[it] was never about money”.

Reflecting on her case, which she says became “a very significant part of my life”, IPSE’s Mr Chamberlain described it as a “David and Goliath-style battle” of principles versus power.

“Susan did not agree with the decision [of HMRC] to apply IR35 to her engagement,” he said. “She firmly believed, and still does believe, that she was self-employed.”