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HMRC’s flaws exposed once more after admitting defeat in ‘David and Goliath’ battle

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By Contractor Weekly

As the creators of IR35, in theory, HMRC shouldn’t make mistakes when it comes to understanding or policing the rules around tax status and employment status. And yet, earlier this week, it happened again – the taxman was left red-faced as a contractor who was deemed inside IR35 by HMRC, won her case for holiday pay and successfully claimed back thousands of pounds.

Earlier this year, Susan Winchester, a marketing and business development consultant, took action against her client, HMRC, Kinect Recruitment Ltd (the agency she was made to work through) and three other parties in the contractual chain.

After being ‘forced’ onto an agency payroll by HMRC when it was decided her status should be set to ‘worker’ after her contract was run through the taxman’s much-criticised IR35 tool, Ms Winchester pointed out that she was entitled to holiday pay under the Agency Workers Regulations.

On the morning of the tribunal, all parties settled and Ms Winchester was awarded the full amount being claimed for, which totalled £4,200. Commenting on her lack of faith in the rules, CEST and the nature in which her status was so carelessly changed by HMRC, she said:

“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.”

It is believed the case, which has been described by IPSE as a ‘David and Goliath’ battle, could set a huge precedent.

Following public sector IR35 reform, many contractors have had their employment status changed by engagers and have been forced into working through umbrella companies or agencies.

The storm clouds are gathering, with IR35 experts predicting Ms Winchester’s victory will be a catalyst for many similar cases, placing financial pressure on non-compliant intermediaries and in-turn, the organisations that choose to work with them.

This case will do nothing to rebuild HMRC’s broken reputation among contractors either. It shows the taxman has failed to ensure a third-party is carrying out its obligations to pay holiday remuneration to Ms Winchester, who said she was made to work through an agency by HMRC without any right to appeal the decision.

It also casts an unwanted spotlight on HMRC’s neglect when it comes to understanding the impact these lengthy battles have on a contractor’s well-being, as Ms Winchester went on to explain:

“For over a year this has been a very significant and stressful part of my life. And while I’m happy the case has now concluded, I know this isn’t the end of our fight against IR35 rules. Because, until the Government realises how terrible this policy is for individuals working within this increasingly important business sector, nothing will really change for the better.”

Without doubt, this case adds to HMRC’s growing list of failures when enforcing IR35. Earlier this year, Qdos Contractor successfully helped an individual who also worked at HMRC through a particularly long IR35 investigation.

After a three year IR35 enquiry into IT contractor, Garry Philpot, HMRC dropped its case altogether, which raised question marks over the taxman’s grasp of its own legislation not to mention its ability to measure reasonable prospect of success.

As things stand, IR35 specialists do not think this will be the last time an individual will be mistreated by HMRC, as Qdos Contractor CEO, Seb Maley pointed out. Mr Maley believes the Government must address its inconsistencies when policing IR35 compliance and align tax status and employment status, describing it as a ‘situation that has to be resolved.’

Ms Winchester’s case will also increase the pressure for making absolutely sure that rights are handed to an individual who has their employment status set to ‘worker’ by an engager. And arguably, Government departments should be first in the queue to clean up their act.

This case also breathes more life into the argument that contractors working inside IR35 should receive employment rights. Calls for The Treasury to address the situation are coming in thick and fast, most recently reflected in a petition which has already gathered over 3,000 signatures in under a month.

With an enormous amount of uncertainty still hanging over possible private sector reform – which the Government has neither confirmed nor ruled out – IR35 experts believe this is a fundamental flaw in the legislation’s structure. And should The Chancellor announce private sector changes in the Budget this month, the debate could gather even more pace.

Given tens of thousands of contractors have found themselves inside IR35 since last April’s public sector changes and do not receive employment rights, the sector is understandably bracing itself for a similar scenario should private sector reform – a mammoth task in comparison – arrive.

Individuals demanding employment rights when classed as workers, or even when operating as contractors inside IR35, merely want a level playing field. As the victorious Ms Winchester explained, when all’s said and done, it’s a matter of fairness.

“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.”