Agency made unlawful deductions of £36k under new IR35 rules, rules tribunal

Employment business Tripod Partners, which provided social workers to the Home Office, may face mounting claims from contractors who had taxes unlawfully deducted.

This is as a result as a failure to properly implement the new off-payroll (IR35) working rules, an employment tribunal has found.

At the Employment Tribunal, Judge Housego awarded claimant Michelle Appiah, an independent social worker, £36,826.65 due to the respondent, Tripod, making unlawful deductions of employers’ National Insurance Contributions.

While 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 judgement was important to them.

The engagement of the social worker, via an agency, to the Home Office was determined by the Home Office to be ‘inside IR35’ under the new off-payroll rules. The agency offered the social worker various operating options, including working via their own limited company, which she chose. However, 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’ NI 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. 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.

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 said: “The status decision was made in June 2021; therefore, the rules around 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.

“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.

“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.”

Read the full report here.

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