A contractor has won a David and Goliath-style battle with the tax office, clawing back thousands of pounds in holiday pay.

Susan Winchester had her employment status changed by Her Majesty’s Revenue and Customs (HMRC) from ‘self-employed’ to ‘worker’, but then did not receive holiday pay she was entitled to.

Winchester, a marketing and business development consultant, claimed £4,200 in unpaid holiday pay under the Agency Workers Regulations.

Winchester’s company, SJW Marketing Solutions Ltd, had provided HMRC with marketing services in September 2016.

With changes to the off-payroll rules in the public sector about to come into force, HMRC ran the engagement through the Check Employment Status for Tax (CEST) tool and determined that IR35 applied.

IR35 is designed to tackle tax avoidance by establishing whether people who are self-employed should actually be classed as employees for the purposes of paying tax.

HMRC required Winchester to go onto an agency payroll, a decision that could not be challenged. Winchester claimed that, as she was then effectively an agency worker under the regulations, she was entitled to a clear, transparent amount of holiday pay and to the same holiday entitlement as employees of HMRC.

The parties agreed to settle the case for the full amount claimed on the morning a tribunal was due to take place.

Winchester said: “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.

“I’m a very fair person, with a strong moral compass, I would never have taken someone to court without a very good reason. But 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.”

The landmark action was funded and backed by the Association of Independent Professionals and the Self-Employed (IPSE), the representative body for the UK’s self-employed community.

Winchester said: “IPSE has been amazing throughout the whole process – and I really couldn’t have done it without them. Before IPSE took on my case, I spoke with another organisation and they seemed to accept the decision immediately, which was very disappointing. But I’ve been extremely happy with the way that IPSE got behind me and helped me take on HMRC.

“I’m absolutely delighted that it’s now complete – for over a year this has been a very significant and stressful part of my life.”

Chris Bryce, IPSE CEO, said: “When HMRC forced Susan onto an agency payroll, with no opportunity to appeal, they thought they could wash their hands clean of any repercussions.

“Susan’s case sends a very clear message to clients, that if you are going to treat contractors like workers, then you’ve got to give them worker entitlements.

“You can’t just decide someone is inside IR35, shunt them onto an agency payroll and expect someone further down the line to pick up the tab for your obligations like holiday pay.”

The case directly challenges controversial 2017 changes to off-payroll rules in the public sector, according to Chris Bryce.

He said: “This is further proof that the IR35 changes have sown chaos and confusion since they were introduced in the public sector last year. What’s even more extraordinary is that one of the culprits here is HMRC.

“If HMRC don’t understand their obligations under a system they’ve created, how can they expect businesses to get it right?”

He added: “With Brexit hanging over the country, IPSE’s response to the government’s consultation on extending the changes to the private sector is clear: abandon this disastrous proposal. We appeal to the government to harness the talent provided by the freelance community and stop hounding them.”

Winchester added: “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.”

An HMRC spokesman said the government department “does not discuss identifiable individuals”.

He added: “In general, in deciding if the off-payroll working rules in the public sector applied, HMRC would consider a number of factors, including how the engagement worked in practice, as well as examining the contract itself. HMRC were committed to ensuring that its approach to the changes as an engager was clear and transparent.”