HMRC has suffered an embarrassing setback after one of its contractors launched a claim for unpaid holiday pay, relating to work covered under the off-payroll working rules, also known as the IR35 rules.

At the end of 2016, HMRC employed a marketing consultant, who was required to go onto an agency payroll. The consultant wasn’t given a choice about this, because HMRC ran the engagement through their CEST employment status tool – HMRC abide by any decision issued by this tool. The contractor had to accept the terms if she wanted to continue working with HMRC, and that meant she was subject to salary deductions, including employer’s national insurance.

However, while HMRC considered the consultant as employed for IR35 purposes, it didn’t grant her employment rights that she would have had as an employee. The consultant claimed she was effectively an agency worker, which meant she was entitled to holiday pay and entitlement in line with other HMRC employees.

The case didn’t quite make it to the employment tribunal, as HMRC agreed to settle by paying £4,200 to the contractor on the morning it was due to start. This does mean that no precedent has been set, but the case serves as further example that contractors inside the IR35 rules should receive employment rights.

The government is still considering whether to extend the IR35 rules to the private sector – currently they only apply to public sector engagements. Many people across private industry are hoping this won’t be included in the forthcoming Budget.

With HMRC tripping up on its own rules, what is certain is more clarity is required.