A contractor has won a key tax battle with HMRC, claiming back thousands of pounds of holiday pay in the process.

Susan Winchester, a marketing and business development consultant, had her employment status changed from contractor to worker when providing services to HMRC. However, she did not receive the holiday pay to which she was entitled.

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Winchester challenged HMRC and claimed back £4,200 in unpaid holiday pay under the Agency Workers Regulations.

From contractor to worker

HMRC said it changed Winchester’s employment status as the off-payroll rules in the public sector were about to come into force. The tax authority ran the engagement through the Check Employment Status for Tax (CEST) tool and determined that IR35 applied.

IR35 establishes whether people who are self-employed should be classed as employees for the purposes of paying tax. In this instance, it meant that Winchester was deemed a worker for HMRC. As such, she was required to go onto agency payroll and could not challenge the decision.

Holiday entitlement due

However, as Winchester effectively became an agency worker, she was entitled to the same holiday allowances as other HMRC employees. Although, she didn’t receive this allowance at the time.

On the morning of the tribunal, both parties agreed to settle the case for the full amount.

“For me, the case was never about money. It was about what’s right and wrong and not being bullied into a position because of a flawed tax law,” Winchester said. “I’m a very fair person, with a strong moral compass. I would never have taken someone to court without a very good reason. 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.”

Full rights

The case was funded and backed by the Association of Independent Professionals and the Self-Employed (IPSE).

IPSE CEO Chris Bryce commented, “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.”

IR35 chaos and confusion

Bryce added that since the IR35 reforms were introduced in the public sector last year, they have only served to cause chaos and confusion. “What’s even more extraordinary is that one of the culprits here is HMRC,” he said. “If HMRC don’t understand their obligations under a system they’ve created, how can they expect businesses to get it right?”

For other contractors pushed into similar arrangements, this case could prove to be hugely significant. And may open the floodgates for similar legal fights going forward.

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