The Winchester Case: An IR35 Lesson for HMRC if Friction is to be Avoided

There have been recent reports about a claim for more holiday pay raised by a contractor, Susan Winchester. This demand is a cause for further deep analysis. Ms. Winchester made the claim under the Agency Worker Regulations and became the recipient of an out of court settlement after a hearing was held at an Employment tribunal for the same. Her comments regarding the issue have been published, blasting the situation into the media spotlight. Discussions have been conducted about whether the case should be taken into consideration agencies and umbrella companies or handled directly by HMRC.

What happened exactly?

Ms. Winchester had earlier been of service to HMRC through her limited company, SJW Marketing Solutions before the new payroll rules were introduced. HMRC decided that its arrangement with SJW would come under the new rules. The existing tax law obliged the agency SJW to be supplied to pay SJW net of PAY and employee NICs, with the tax being accounted for employees. The rules mandated that the agency accounted for employer NICs from its own margin charge, thereby reducing the agency’s profit.

What transpired was that the agency refused to continue their supply on that basis and HMRC disagreed to an increase in rate, which would have resulted in higher profit margins for the company. It is an ambiguous fact, whether the agency offered to keep SJW at a lower rate. But what is clear is that SJW was abandoned. Ms. Winchester became an agency worker at an umbrella company, receiving a holiday pay and AWR rights which she would not have received had she stayed on at SJW the company.

More in depth

There are some important points to note here. Firstly, the case was not heard by a Tribunal and the settlement was more of a commercial decision than a subsequent circumstance of the case. However, from the publicity given to the case, it can be inferred that other affected contractors would also follow suit. Agencies and companies have to carefully consider the circumstances, which are typical when any contractor is caught by the current public sector IR35 rules.

AWR claims are usually made if an agency worker is not given the same pay and working conditions as another worker performing the same job. The claim, in this case brings nothing new to the table. There have been few AWR claims since 2011 and can be prevented from happening by following the proper procedure. The reports said the aggrieved party was forced to work at an umbrella company because of the IR35 rules. The agency defended its actions, saying they were normal, given the decision by the HMRC.

The complaint shows that Ms. W was aggrieved because by the HMRC IR35 assessment. Apparently, she was offered a full time job with the HMRC but she declined and her contract with SJW was extended. Unless the role offered was different, this piece of information shows that she was fell deep into the IR35 rules and SJW would have always accounted under the original IR35 rules. The validity of the AWR claims cannot be refuted without more clarity on the situation.

Actions for HMRC

The tackling point here is that HMRC should review its decisions which may be ineffective sometimes. The actions of the agency revolve around the decisions of the HMRC and their decisions affect contractors along with their agencies and companies. It is all a circle in the end and cannot be turned vicious. In case it does turn vicious, the result is significant friction and possibility of dispute in the supply chain as proven in this case which will directly affect the workers in different agencies and companies.

To sum up, the criteria of applying the IR35 rules should not be misunderstood and made susceptible to polarizing opinions. HMRC, as an employer had to pay a heavy price in this case. These kinds of problems can be avoided if clever decisions are taken.

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