The tribunal ruled that Tripod, an agency that worked with the Home Office, unlawfully deducted employer’s national insurance (NI) from the salary of independent social worker, Michella Appiah.
The case rested on Appiah’s contract, and communications that confirmed her engagement by Tripod did not explicitly state that employer’s NI would be deducted from her salary.
“This case perfectly illustrates the complexities and potential pitfalls in implementing the off-payroll working rules and the necessity of all parties to fully understand the nuances of the statute,” Dave Chaplin, CEO of IR35 tax compliance firm IR35 Shield, told HR magazine.
Employers must ensure workers are aware of what tax will be deducted from their payslip, Seb Maley, CEO of contractor specialist firm Qdos, reminded.
Speaking to HR magazine, he said: “It’s vital that any organisation that engages a flexible worker does so compliantly and fairly, with particular regard to ensuring the worker is fully aware of how such an engagement will work.
“If there are multiple parties in the supply or payment chain, the business at the top of that chain should take responsibility for this compliance throughout.”
Read more: IR35 legislation change will help HR hire much-needed talent
Tripod engaged Appiah, an independent social worker, through a personal service company (PSC).
In 2021, the Home Office decided that Appiah fell within IR35 legislation, using the HMRC’s check employment status for tax (CEST) tool, and should therefore be taxed as an employee.
Tripod consequently asked Appiah if she wanted to work on a PAYE basis, to form her own PSC or to form a relationship with an umbrella company.
She decided to work under PSC, meaning that the Home Office paid Tripod, who paid her.
However, the tribunal ruled that the Home Office was not liable for Appiah’s IR35 classification.
Tripod’s chief financial officer emailed Appiah to confirm that she would work under PSC, meaning “all employment taxes” would have been deducted.
The agency deducted employee’s NI and employer’s NI and a small amount for the apprenticeship levy from her salary.
The tribunal report noted that this method of deducting payments was a company-wide approach Tripod made.
However, judge Housego ruled that Appiah’s contract did not authorise these deductions and therefore Tripod should not have made them.
Read more: Six steps to implementing an off-payroll "IR35" process
The tribunal assessed what the working relationship was between Appiah and Tripod.
The tribunal looked at the contract drawn up between Tripod and Appiah, and saw that the key information document created at the time Appiah was engaged noted the deductions required by law would be income tax and employee’s NI.
However, there was no mention of employee’s NI or employer’s NI in Appiah's contract, the tribunal document noted.
“The contract did not reflect the reality of the situation, which is that [Appiah] is in effect an agency worker,” the tribunal document stated.
As the employer in this scenario, Tripod should have paid employer national insurance contributions, the tribunal report stated, and deducted employee NI.
The tribunal also noted that Tripod should have expressly stated that it would deduct employer’s NI in the email from Smith confirming the nature of Appiah’s contract. Appiah had not given written consent for employer’s NI to be deducted from her payslip, judge Housego argued.
Housego ruled Tripod’s employer’s NI deductions were unlawful and ordered the agency to pay Appiah a total of £36,817.65.
Tripod’s incorrect deduction of NI was due to a confusion between new and old IR35 laws, Chaplin argued.
In April 2021, IR35 legislation changed so that the end-hirer became responsible for determining a contractor's IR35 status.
He commented: “What's particularly troubling is the apparent confusion between the old and new legislative coexisting frameworks."
Maley called on the government to simplify IR35 legislation.
He continued: “The decision serves as a stark reminder to the government of exactly why they need to push forward with the simplification of employment status, as set out in their election manifesto.
“The changes to IR35 in the public and private sectors, where responsibility for deciding status shifted from worker to engager, is the root cause of the issues in this case.
“Because engagers – in this case the Home Office – do not want to employ contract workers directly, workers are often forced to use payment models which treat them as PAYE but keep them at arm’s length from the ultimate engager.
“Often this results in multiple parties being involved in a payment chain. If the mechanisms and deductions are not clearly explained to the worker, it can result in cases like this.”
