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Hirers face huge rights claims pay-outs after inside IR35 contractor legal settlement

End-user clients, agencies and umbrella companies may face substantial employment rights claims from the contractors they force into IR35 using the Off-Payroll rules. This follows contractor Susan Winchester’s out-of-court settlement with agencies in HMRC’s supply chain over unpaid holiday pay during her engagement with the tax agency.

Marketing consultant Winchester brought an employment tribunal claim for unpaid holiday pay after HMRC applied its discredited Check Employment Status for Tax (CEST) tool and decided she was a ‘deemed employee’, forcing her onto an agency payroll.

By launching her Association of Independent Professionals and the Self Employed (IPSE)-supported action against HMRC and four other supply chain members under the Agency Workers Regulations (AWR), Winchester successfully recouped the 12.07% holiday pay entitlement which would have otherwise gone unpaid.

Winchester settlement: winners and losers

“This case is a game-changer for public sector contractors who may be eligible for similar substantial pay-outs, having been forced by their public sector clients into umbrella and agency arrangements following the introduction of the Off-Payroll tax,” explains ContractorCalculator CEO Dave Chaplin.

Some non-compliant umbrella companies, agencies, and in some cases end-hirers have failed to account for holiday pay, or have tried to claim that holiday pay is included within the rate paid to contractors working on payroll since the new rules took effect.

“The agency supply chain is now clearly vulnerable to legal challenges,” continues Chaplin, “having been reminded that it cannot simply shun its responsibilities and force contractors to fund their own employment rights.

“Given the amount of public sector contractors who have been bundled into these types of arrangements, we expect that this settlement will give rise to a number of similar challenges. Inevitably, this will create financial difficulties for the non-compliant intermediaries, which will hopefully help stomp out this malpractice.”

HMRC does not understand the legislation it is supposed to enforce

The news also serves up another body blow to HMRC in its bid to extend the Off-Payroll tax into the private sector, as Chaplin notes: “HMRC cannot possibly continue to deny the problem of non-compliance with Off-Payroll amongst hirers and agencies within the public sector, now that it has been shown to be playing an active role in the problem.

“This case shows that HMRC does not understand the legislation it is supposed to enforce, nor that if you force workers into agency arrangements, they become agency workers and so benefit from the rights provided by the AWR.

“Until Government can demonstrate that its own practices, and those of all other public sector bodies, don’t result in non-compliance and the exploitation of contractors, these rules should not be considered within the private sector.”

How the settlement was won

Winchester had already been engaged with HMRC for several months via her limited company, SJW Marketing Solutions Ltd, when her arrangement was assessed using HMRC’s Check Employment Status for Tax (CEST) tool prior to the April 2017 implementation of the Off-Payroll tax.

HMRC deemed that IR35 applied and insisted that the engagement continue with Winchester providing her services via an agency payroll. Unable to challenge HMRC’s decision, Winchester proceeded to work via a series of agencies and umbrella companies, as per the taxman’s request.

Though Winchester suffered a sharp increase in taxation – including the unlawful deduction of employer’s National Insurance (NI) from her payments - HMRC continued to pay the same gross fee for her services.

Contractors forced to become agency workers benefit from AWR

After exploring the option to mount a legal challenge against her deemed employment status, Winchester, backed by IPSE, opted to make an employment rights claim under AWR. An agreement for the full amount was only agreed between the parties on the morning that the tribunal was due to begin.

The £4,200 cost was shared between Kinect Recruitment Ltd and three other service providers whose identities will remain confidential as part of the settlement agreement. The companies in the supply chain have 28 days to pay this fee. As a result of forcing Winchester to work via an umbrella company, HMRC was not found liable for any portion of the sum.

“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,” notes Winchester.

“This result is excellent news for contractors impacted by the draconian Off-Payroll tax,” adds Chaplin. “While the legislation does not allow contractors to challenge their status, it shows that there are at least other routes to mitigate the financial impact.”

How many public sector contractors are due unpaid holiday pay?

“You have to question why the respondents agreed to cough up on the morning of the tribunal,” says Chaplin. “My guess is that they didn’t want this point of law tested in court. Setting a legal precedent to this effect would have been extremely damaging to non-compliant agencies and umbrellas, although the settlement alone says all that needs to be said.”

Winchester’s arrangement when working on payroll will sound familiar to many public sector contractors. After forcing her to work via an umbrella, HMRC continued to pay the same gross fee for her services as it had done prior to April 2017. Income tax and NI were deducted by the provider, which also passed its employer’s NI costs onto Winchester, whose rate was not adjusted to account for holiday pay.

“This arrangement is indicative of the non-compliance that has been rife within the public sector since the Off-Payroll tax came into effect,” notes Chaplin. “Any contractor that has been similarly impacted has a strong case for employment rights and holiday pay.”

Contractors eligible for holiday pay under AWR must act quickly

Contractors can calculate how much they might be owed by working out 12.07% - the statutory rate for holiday pay entitlement which employees and workers are eligible for - of their total earnings from their fee. However, contractors can only submit a claim within three months of the termination of their engagement.

Like Winchester, many contractors have been given no option other than be forced onto an agency or umbrella company payroll. However, for others, working via these arrangements before later submitting claims may be unnecessarily onerous, as Chaplin highlights:

“Though this case shows that some parity can be restored when working via a payroll model, we can’t ignore the fact that contractors required to operate within IR35 are far better off continuing to trade via their limited company. There may be more admin involved, but it is also much more transparent, and a lot easier to claim tax back in the event of an incorrect IR35 assessment.”

Published: 24 September 2018

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