Inside IR35 worker wins unlawful Employers’ NI deductions case against agency

A recent tribunal ruling has highlighted the ongoing challenges surrounding employment status – and demonstrates the complexities of dealing with the IR35 legislation.

A social worker engaged by the Home Office has won a tribunal case against a recruitment agency, securing nearly £37,000 (£36,826.65) due to “unlawful deductions” made from their pay.

How the case unfolded

The claimant, an independent social worker, Michelle Appiah, had previously provided services to the Home Office under an arrangement deemed outside IR35.

However, after starting a new position with the Home Office via Tripod Partners in June 2021, the contract was deemed to be inside IR35 (courtesy of the official CEST tool), meaning her relationship with the client was one of ’employment’.

Appiah was given three options: operate via her limited company under IR35, work via an umbrella, or take on agency worker status where employment taxes would be deducted at source.

She continued working through her limited company on an inside-IR35 basis, with Tripod Partners making employment tax deductions before paying her company.

However, the deductions included employers’ National Insurance contributions (NICs), which the tribunal ruled to be unlawful.

Legally, deemed employees should not have employers’ NI directly deducted from their earnings, a mistake that led to a successful claim against the agency.

What does this case mean for contractors in general?

Seb Maley, CEO of tax advisory Qdos, told us:

This case is a stark reminder about the importance of making sure all parties – from workers to agencies and end-clients – understand and agree to the tax implications of an engagement from the off. Typically, this is communicated via a Key Information Document (KID), which should detail this clearly and transparently.

These types of situations aren’t uncommon, which is why this case in particular could spark many others like it. From a legal perspective, workers shouldn’t have employers’ NI deducted directly from their pay – irrespective of whether they operate inside IR35, via an umbrella company or otherwise.

Rebecca Seeley Harris, of ReLegal Consulting, told us:

This case has been a long time coming and highlights a really important point about being open and honest with the candidate about their fee.

It always seems to be smoke and mirrors when it comes to this thing called the ‘assignment rate’ but, it’s a complete misnomer.

There should be clearer legislation on what is required when it comes to advertising the pay rate for both inside IR35 and umbrella workers.

You can download the employment tribunal judgement here (PDF format).