The Winchester case – an IR35 lesson for HMRC if friction to be avoided

Recent reports involving a claim by the contractor Susan Winchester (Ms. W) for holiday pay deserve more analysis. The reports, published by Contractor Calculator (CC) and on the IPSE website, state that Ms W received an out of court settlement on the day of an Employment Tribunal hearing for her claim for unpaid holiday pay based on the fact that she was an agency worker, the claim apparently having been made under the Agency Worker Regulations. Ms. W’s comments have also been published, giving this issue a significant amount of publicity. However, whilst clearly Ms. W is aggrieved, should the case be of concern to agencies and umbrella companies, or indeed HMRC?

It appears that Ms W already provided services through her limited company, SJW Marketing Solutions Ltd (SJW), to HMRC before the new off payroll tax rules (Chapter 10 IR35) applied. Using it’s own criteria through the online CEST tool, HMRC decided that the arrangement with SJW would be caught by those rules. As such the tax law would oblige the agency SJW was supplied by to pay SJW net of PAYE and employee NICs, the tax being accounted for as if Ms. W were a deemed employee. The rules would also oblige the agency to account for employer NICs from its own margin charge, so reducing the agency’s profit.

Unsurprisingly the agency was not willing to continue the supply on that basis, and HMRC is unlikely to have agreed any increase in rate. The agency and Ms. W would then have to work out an alternative deal. It is not clear whether the agency offered to retain SJW at a lower rate, but one way or another it appears that SJW was abandoned and she became an agency worker operating through an umbrella with AWR rights and entitlement to holiday pay. Had Ms. W remained operating through SJW the company would have received a lower rate, net pay only and she would not have received any entitlement to holiday pay from any party save her own company.

Having analysed what has happened, there are some key points. Firstly the case was not heard by the Tribunal and the settlement appears to be based on a commercial decision to avoid wasted time rather than as a consequence of a proven case. However as CC and IPSE claim, the publicity given to this case by Ms. W, the Telegraph, IPSE and CC has raised the profile of the issues and indeed could be followed by other contractors in a similar position. Agencies and umbrellas would do well to take note of the specific circumstances, which may be typical where any contractor is determined as caught by IR35 under the current public sector IR35 rules and any private sector extension which may apply.

AWR claims are always likely if an agency worker is not given the same pay and working conditions as an equivalent worker on the client site engaged to do the same job, and so there is nothing new from this case in that respect. There has been a paucity of equal pay claims under the AWR since its onset in 2011, and risk can be offset by using correct procedures and contracts. It follows that agencies and umbrellas certainly ought to check their contracts and processes carefully to ensure that all angles are covered off.

The reports say that she was forced to use an umbrella, but is that correct? The context is important. Was it simply that given the application of the off payroll IR35 rules, the agency and Ms. W both decided that she would be better off if she were to operate through an umbrella. Certainly the actions of the agency appear entirely normal given the decision by HMRC that the IR35 rules applied, why should it take the financial hit of the employer NICs?

The complaint by Ms. W appears really to be that she was aggrieved at the HMRC IR35 assessment. However that too should be considered. The IPSE report states that she was personally offered a full time role with HMRC, but that she declined and her contract (with SJW) was extended. Unless the role offered was entirely different this information indicates every reason to believe that she fell square into IR35 (would she have been an employee were it not for the existence of SJW?) and SJW should perhaps always have been accounting for IR35 taxes under the original IR35 rules in any event.

It is not possible to comment on the validity of the AWR holiday pay claim in the absence of more detail. However the overriding point is that HMRC should take note that its own status decision, which may or may not be correct, then followed by the agency’s actions only mirror the decisions and actions that private sector employers, their agencies and contractors, are likely to take if the current public sector IR35 rules are extended.

The result may well be significant friction and potential for dispute in the supply chain as evidenced by this case, frustration of hirers, agencies, umbrellas and contractors alike, whilst the flexibility of the workforce will be indelibly damaged.

On the plus side, where public sector employers (and private sector employers if the extension is applied) follow this pattern with contractors, agencies should be the net beneficiaries particularly in the case of direct hire contractors, so long as they know what they are doing.

In summary the villain of the piece is the criteria for applying the IR35 tax rules, which is too easily misunderstood and open to differing opinions, and the use of the flawed CEST tool. In settling the case HMRC as a hirer has had to pay some of the price for this. A clearer test would mean that, regardless of the rights and wrongs of this case, no one is taken by surprise and this kind of invasive issue is avoided.

Author Adrian Marlowe, MD Lawspeed

If you service the public sector and supply contractors or your non public sector hirers are already worried about the threatened extension to IR35 public sector rules, check your contracts and processes now and call for more information on 01273 236236.

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