Tribunal ruling could encourage more inside IR35 limited company freelancers to reclaim unlawful Employer’s National Insurance Contributions
THIS ARTICLE WAS UPDATED AT 14:00 ON 09.01.24
A social worker engaged by the Home Office has successfully claimed nearly £37,000 (£36,826.65) from a recruitment agency after an employment tribunal deemed that “unlawful deductions” had been made from their pay. According to contractor sector experts, more cases like these could surface. Here’s a breakdown of the case and what to learn from it:
Who’s involved?
- Michelle Appiah (Claimant): An independent social worker
- Tripod Partners Ltd (Respondent 1): A health and social care recruitment agency that finds social workers for organisations such as the Home Office
- Home Office (Respondent 2): A UK government department responsible for immigration, security, and law and order
What happened?
The Home Office hired Michelle Appiah (the claimant) through Tripod Partners to carry out age assessments on young people arriving in the UK unlawfully, at a reception centre in Kent.
Initially, Appiah worked for the Home Office outside IR35, and through umbrella companies. She then changed to a personal service company (“PSC”) when the Home Office decided Michelle’s work fell “inside IR35”. This meant she had to be taxed as an employee, even though she wasn’t technically one.
Tripod Partners then started deducting money from Michelle’s pay for things like income tax, employee’s National Insurance, and employer’s National Insurance.
Michelle agreed that some deductions (income tax, employee’s National Insurance) were okay, but argued that deducting employer’s National Insurance was wrong.
Her work and end-client relationship did not change. As Qdos CEO, Seb Maley, explains, “Nobody is questioning if the worker belonged inside IR35 and therefore should have been subject to PAYE tax.”
“The employers’ NI was still being paid to HMRC, so nobody pocketed anything.” according to Maley.
“The issue was that rather than the agency paying it, it ended up looking like it was deducted from her gross pay,” Maley tells The Freelance Informer.
Since the social worker was initially working for the Home Office through an umbrella company, this could mean she might have been paying the employer’s/umbrella’s national insurance via the assignment rate. Although the tribunal wasn’t clear on this.
According to Maley, “umbrella companies will generally make the transactions very clear at the outset. In this case, the agency has attempted to do it themselves but in a ham fisted way.”
Given the recruiter specifically works in health and social care, it could be the case that this is not the only PSC candidate they have hired and taken unlawful deductions from.
The Court’s Decision
The judge ruled in favour of Michelle. Here’s why:
Employer’s National Insurance: It’s the employer’s responsibility to pay this, not the employee’s. Tripod Partners shouldn’t have deducted it from Michelle Appiah’s pay. As the case suggests this is because, by law, deemed employees should not have employers’ NI deducted from their pay directly.
Worker Status: Even though Appiah had her own company, the judge said she was essentially a worker and therefore protected by employment law.
Contractual Terms: The judge looked at the contract between the social worker and Tripod Partners and found that it didn’t allow for employer’s National Insurance deductions.
The 2nd Respondent had assessed the Claimant on the HMRC tool CEST (Check Employment Status for Tax). According to the case notes, the CEST tool determined that she fell within IR35, and so should be taxed as if an employee.
The 1st Respondent then made deductions from the £58 an hour pay she was to be paid for her work. This was the Claimant’s income tax, employee’s National Insurance (“ee’s NI”), and employer’s National Insurance (“er’s NI”), and a small amount of Apprenticeship Levy.
The Claimant accepted that she fell within IR35, and that income tax and ee’s NI were properly deducted. However, she says that the ER’s NI was an unauthorised deduction contrary to S13 of the Employment Rights Act 1996. It is agreed that the Apprenticeship Levy should not have been deducted.
The 2nd Respondent (the Home Office) said that it was not obliged to pay the Claimant anything– it paid the 1st Respondent (the recruitment agency). Accordingly, even taking the Claimant’s case at its highest, the claim against them cannot succeed, because it made no deduction from money paid to the Claimant, not being liable to pay her anything.
The judge agreed that this was the case and so struck out the claim against the 2nd Respondent.
Michael Lee, Head of Tax for the Home Office in the Finance Directorate in the Home Office, agreed to remain to give evidence for the Claimant about the effect of IR35. It was agreed that he would not be asked for opinion evidence (as he was not an expert witness) nor anything about the Claimant herself.
What was the outcome of the case?
The judge ordered Tripod Partners to pay Michelle £36,826.65, which was the total amount they had wrongly deducted from her pay.
This case [reference 2302929/2023], according to Rebecca Seeley Harris of ReLegal Consulting, “could be the catalyst for many more like it, given this is common practice in the industry. If this proves to be the case, it would cause havoc in the labour supply chain, at a time when the government is looking to stimulate growth.”
Harris says the case’s outcome signified “justice for a contractor working inside IR35, who’s taxed as an employee but doesn’t receive any of the rights or protections of employment.”
What makes this an interesting case?
Whilst the tribunal stated that the Claimant was not part of a multiple claim, it noted that it was a company-wide practice of the Respondent and that the judgment was important to them.
Dave Chaplin, CEO of IR35 tax compliance firm IR35 Shield, suggests that the tribunal decision demonstrates the difficulty of navigating the legislation for all parties and the tribunal, and it is possible that the ruling could be challenged.
Chaplin says:
The status decision was made in June 2021; therefore, the rules around Status Determination Statements (SDS) would be in play. While the ruling found that a determination was made, there was no finding that an SDS was given to either the worker or the agency. If the SDS had not been given, the Home Office would remain liable for the tax, not the agency.
He continues, “The ruling indicated that ‘The Respondent accepts that is the deemed employer because of the IR35 decision’, but that’s not how the legislation operates. The agency only becomes the deemed employer if the SDS is given to both the agency and the worker, not just because the decision was made. It’s possible that the agency was never authorised to make any deductions, leaving the Home Office liable for the tax.
Chaplin says a surprising argument was put forward by the Respondent, who sought to rely on the tax calculations under the old IR35 rules (Chapter 8 ITEPA), which were not applicable in this instance since the newer rules (Chapter 10 ITEPA) applied. One of the key differences under the newer rules is that payments to the limited company must be treated as employment income, which means employers’ NI cannot be deducted.
“Depending on the full facts presented to the tribunal, which won’t be in the decision, the Judge may have erroneously concluded that the agency was the ‘deemed employer’ instead of the Home Office. If that’s the case, none of the deductions made by the agency would have been lawful, and the Home Office may be facing a very large tax bill,” says Chaplin.
In this particular case, the recruitment agency offered the social worker various operating options, including working via their own limited company, which she chose. However, according to Chaplin, the error was made whereby the agency appeared to adopt the tax calculations from the old legislation (Chapter 8 ITEPA 2003) rather than those of the new legislation (Chapter 10 ITEPA 2003) – the significant difference being that under the new legislation, the payments to the PSC should be treated as employment income. Under tax law, Employers’ National Insurance cannot be deducted from employment income.
Under section 61NA(5) of Chapter 10 ITEPA 2003, the agency would only become a “fee-payer” and be liable for the tax if a valid Statement Determination Statement was passed from the Home Office to the agency. Had that not occurred, or the SDS was invalid, the Home Office would remain liable for the tax, and the agency would not have been effectively authorised to deduct any taxes.
“The statute and case law on IR35 status matters indicate that the contracts’ contractual terms and conditions are central and must be considered part of the status assessment,” says Chaplin. He continues, “According to the decision, the Home Office assessed before the contractual arrangements were agreed upon, indicating that they may not have taken reasonable care in coming to the status conclusion in the SDS, thereby invalidating it.”
In simple terms
An end client or recruitment agency can’t deduct money from an employee or inside IR35 contractor’s wages to cover their own business expenses – that’s not the contractor’s responsibility.
As Maley highlights, “The tax that was unlawfully deducted from the workers’ pay – left them worse off and, ultimately, the recruitment agency [was left] with a sizable bill.”
He says, the case brings the issue of “compliance into sharp focus for businesses engaging and placing flexible workers, not to mention the need for Labour to deliver on their recent pledge to simplify employment status once and for all.”
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