In 2017, Susan Winchester was working on a contract at HMRC. When the IR35 changes came into the public sector, she was informed that the legislation applied to her engagement and that, under the new off-payroll working rules, tax would be deducted at source from her payments.
Susan strongly disagreed with the decision and wanted to shine a spotlight on what she thought was clearly unfair practice. She had no route to challenge the determination itself, so following advice from legal professionals, she attacked the employment rights angle, and ultimately submitted a claim for unpaid holiday pay.
Susan’s claim was paid out in full by HMRC, the agency and two umbrella companies, all of whom were keen to avoid the employment tribunal. So what does this settlement mean for other contractors that may find themselves in the same position as Susan? And are there any lessons for policy makers now tasked with extending the IR35 changes to the private sector?
At the heart of Susan’s case was the question of whether it can be right for an individual to be deemed ‘employed for tax purposes’, but not employed for any other purpose, e.g. employment rights. It may be helpful to consider here how the new IR35 rules work in practice.
IR35 requires public sector clients to consider the nature of each of its ‘off-payroll’ engagements. If the client decides that the engagement exhibits characteristics that are consistent with employment, it will have to declare that IR35 should apply.
Applying IR35 will mean the individual (the contractor) will have to go onto a payroll, (not necessarily the client’s payroll) and PAYE and NI will be deducted at source, as it is for employees. However, the business will not be obliged to employ the individual or provide them with employee rights such as holiday or sick pay.
According to the trade body IPSE, these rules provide clients with a simple route to absolve themselves of their responsibilities as employers. If the client analyses the relationship and decides that it is really one of employment, why aren’t they then compelled to employ them, and provide them with the benefits they would be entitled to as employees, like holiday pay?
That’s what Susan’s claim was all about. And, inasmuch as she was awarded the full amount of holiday pay she was claiming, it was successful. But this doesn’t necessarily mean all contractors caught by IR35 are automatically entitled to the same. The law, as it stands at the moment (and it is currently under review), is that tax and employment status are separate. It is quite possible for an individual – or more accurately, an engagement – to have one status for tax and one for employment rights.
But the tests for determining status are essentially the same. Determinations are made after consideration of the same factors, such as personal service, control and mutuality of obligation. There is confusion over what some of the factors really mean (particularly mutuality of obligation, over which there are stark divergences of opinion) – but the important thing to note here is that both tax and employment status are judged against the same criteria.
When considered like that, it becomes difficult to justify why an engagement, such as Susan’s, can be deemed employed for tax and not for employment rights. And it’s extremely hard to explain clearly to someone in Susan’s situation why it is a legitimate and logical position.
It’s interesting that the much-maligned tool which HMRC has developed to help clients make IR35 determinations is called Check Employment Status for Tax (CEST). It’s clearly intended to make it clear that this tool is all about tax and nothing else, otherwise why not just call it Check Employment Status?
So the legislation itself, and the tool which is supposed to enable clients to navigate the legislation, reinforces the view that even where individuals are to be taxed like employees, that doesn’t mean they are employed.
Yet, when Susan sought to challenge that paradox at the employment tribunal, the other side settled the claim, before it went to trial. If they were certain of their position, why didn’t they argue their case? We will never know the answer to that, but one potential reason must be that they felt it was a difficult position to defend.
Now the government is looking to roll out these disastrous rules to the private sector, which means private companies are likely to find themselves on the wrong side of similar claims from contractors to whom they have applied IR35. Do we really want UK businesses to be bogged down in employment status disputes? I don’t think we do, and I don’t think the government wants it either, which is why it must clarify the rules around tax and employment status.
Susan’s case shines a spotlight on the new IR35 regime, and it reveals that there are fundamental problems which must be resolved in order to avoid a rash of costly court battles which disrupt businesses and weaken our economy as a result.