HMRC pays out in IR35 workers’ rights dispute

Employment tribunal documents, note pad and glasses
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An HMRC contractor has successfully claimed for unpaid holiday pay after being forced to work through an employment agency when the IR35 rules for public sector engagements came into being in 2017.

Earlier this year Susan Winchester launched an employment tribunal claim for £4,200 against her customer: HMRC and four other parties in the contractual chain, after it required her to go onto an agency payroll, but did not make arrangements for holiday pay. All the parties agreed to settle the case in full on the morning the tribunal was due to start.

As a consequence of IR35 reform in the public sector, thousands of contractors have been judged to fall inside IR35 by their public sector customers, but in many cases they do not receive equivalent employment rights to employees.

Because no judgment was issued, the case does not establish a precedent, but according to one employment status expert it is still an important reminder for those engaging workers via a limited company that their use is no longer a ‘safe option’ against workers claiming similar employment rights.

Effectively an agency worker

Working through her company, SJW Marketing Solutions, consultant Susan Winchester was engaged by HMRC in September 2016 to provide marketing services to the department.

However, with the changes to off-payroll rules in the public sector about to come into force in April 2017, HMRC ran the engagement through its CEST employment status tool and determined that the IR35 tax avoidance legislation applied.

The tax authority then informed Winchester that if she wished to continue her engagement she needed to go onto an agency payroll, a decision that could not be challenged. She then found herself subject to large deductions, including employer’s national insurance and the apprenticeship levy – something she found confusing and unfair.

Winchester took action against HMRC in early 2018, launching a claim in the central London employment tribunal against the department, the agency Kinect Recruitment Ltd and three other parties in the contractual chain for £4,200 in unpaid holiday pay under the Agency Workers Regulations.

She claimed that under the regulations she was effectively an agency worker, and was therefore entitled to a clear, transparent amount of holiday pay, and to the same holiday entitlement as employees of HMRC.

On the morning the tribunal was due to start, the parties agreed to settle the case for the full amount being claimed.

‘Arbitrary decision-making’

Speaking after the settlement Winchester said she was relieved the case was over. “I’m absolutely delighted that it’s now complete – for over a year this has been a very significant and stressful part of my life.”

She also stated that the case was about “what’s right and wrong and not being bullied into a position because of a flawed tax law.

“I would never have taken someone to court without a very good reason,” she continued, “but 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.”

‘Chaos and confusion’

Winchester sought legal advice from contractor association IPSE, and according to the organisation’s CEO Chris Bryce the case exposed the fundamental unfairness of the IR35 changes.

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

“Susan’s case sends a very clear message to clients, that 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 payroll and expect someone further down the line to pick up the tab for your obligations like holiday pay.

“This is further proof that the IR35 changes have sown chaos and confusion since they were introduced in the public sector last year. What’s even more extraordinary is that one of the culprits here is HMRC.

“If HMRC don’t understand their obligations under a system they’ve created, how can they expect businesses to get it right?”

‘A timely reminder’

Employment Tax Specialist Alastair Kendrick told AccountingWEB that the case does not relate to the tax changes to those providing their services within the public sector via a personal service company.

“The case asks the question whether, given the nature of the engagement, the individual providing their services could be considered a worker,” said Kendrick. “The existence of the limited company in my understanding gives no protection to the engager over worker or employment rights.”

“I have seen press comment that therefore surely the claimant must have been ‘employed’ by HMRC,” continued Kendrick. “The case found the person to be a ‘worker’ and not an ‘employee’ but it may be that those representing the claimant only argued for worker rights, seeing it left their client in an identical financial position to if they had been employed. This follows what was done in cases like Uber and Deliveroo.

“This case is a timely reminder for those suggesting workers provide their services via a limited company to consider whether they have entitlement to rights. If so, is the use of a limited company still the safe option? I guess the case finding will lead to some questioning whether engaging a worker via a limited company is always the best answer.”

About Tom Herbert

Tom is editor at AccountingWEB, responsible for all editorial content on the site. If you have any comments or suggestions for us get in touch.

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26th Sep 2018 09:56

HMRC. Hoisted by their own petard!

Thanks (6)
to Justin Bryant
26th Sep 2018 11:00

Justin Bryant wrote:

HMRC. Hoisted by their own petard!

Precisely the thought that went through my mind.

Couldn't happen to a nicer bunch...

Thanks (2)
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to Justin Bryant
26th Sep 2018 11:35

Right sentiment but it should read:

"hoist with its own petard"

Thanks (3)
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By IANTO
26th Sep 2018 10:17

"“The existence of the limited company in my understanding gives no protection to the engager over worker or employment rights.”"

It did in the case of J.M.Williams v's Hewlett Packard, heard at the EAT in December 2002. This case set a precedent and so I guess clients could use the judgement to protect their position, which is exactly why they have always insisted on engaging individuals in this way. However, this case clearly muddies the waters further and is a wake up call to clients and HMRC alike.

Thanks (3)
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By mumpin
26th Sep 2018 10:18

I don't know if this is true or not but someone told me that before petard came to mean a bomb or explosive device, it was Old French for a fart.

Thanks (2)
to mumpin
26th Sep 2018 10:35

Apparently it is a bomb. They were discussing this on a recent episode of the radio five film podcast, when the host erroneously referred to being 'hanged' by his own petard, prompting a long (and slightly rambling) discussion.

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By IANTO
to mumpin
26th Sep 2018 11:47

well, fart is an explosion of sorts, if only minor!

Thanks (2)
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By Dandan
to mumpin
26th Sep 2018 17:53

mumpin wrote:

I don't know if this is true or not but someone told me that before petard came to mean a bomb or explosive device, it was Old French for a fart.

It is indeed derived from old french word meaning breaking wind and it did eventually get used to mean fireworks and explosion.
Remember the movie "Le Petomane" with Leonard Rossiter ?

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to Dandan
26th Sep 2018 18:26

Anyone with a basic knowledge of French or French bangers (fireworks not sausages) will know its correct meaning.

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26th Sep 2018 11:03

Maybe Susan Winchester should now go back and have another go at HMRC for the same pension rights as an HMRC employee?

Thanks (1)
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By IANTO
to paul s&w
26th Sep 2018 11:51

Given that not all of the respondents were identified, I guess there was some horse trading to avoid this. Without seeming to be critical, if as the appellant declared, that the issue was one of principle, the settlement amount would not have encouraged me in any way to settle out of court. The whole issue is far too important than that.

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By gordo
to IANTO
26th Sep 2018 14:07

Is that why HMRC settled out of Court (on exactly the terms the taxpayer was arguing for).

So no legal precedent.

That way HMRC success statistics appear to remain robust and can be used to make other taxpayers think that there no point in fighting HMRC.

This is how HMRC now operates.

Thanks (4)
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By IANTO
to gordo
26th Sep 2018 14:29

I would tend to agree.

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26th Sep 2018 11:26

The petard was an explosive device used to breach the walls/gates of cities during medieval sieges. Carried by some willing(?) peasant, the device was placed by hand at the bottom of the wall. Often the fuse burned through before he got there.... boom!

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By NeilW
26th Sep 2018 12:14

This would all be sorted out if sense prevailed.

When a hirer hires somebody and treats them like an employee, they get an employee - no matter how many other entities there are in the way between the master and the servant.

Sort that out in employment law, and the tax code follows - regardless of who runs the payroll.

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By Matrix
27th Sep 2018 05:26

Why do they need a marketing consultant? This would suggest that there is a choice in being a customer of HMRC.

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By IANTO
to Matrix
27th Sep 2018 08:43

customers have the right to take their custom elsewhere. Not sure where HMRC's customers could take their custom!

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to IANTO
27th Sep 2018 09:29

As customers we can choose to move to another tax jurisdiction, but not sure HMRC are marketing how wonderful it is to be taxed in the UK rather than going abroad!

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By IANTO
to alan.rolfe
27th Sep 2018 11:20

"As customers we can choose to move to another tax jurisdiction"

Yes, and many have by using dubious off shore facilities, which HMRC are also targeting. Granted, a move to Eire might prove to be profitable also.

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