A TAXING DECISION
Lessons from Appiah v Tripod Partners
Large and medium-sized employers engaging independent contractors through personal service companies (PSCs) are likely well-acquainted with the off-payroll working rules (commonly known as IR35), which have been in place since April 2021. These rules require clients (the recipients of contractors’ services) to determine the worker’s employment status for tax purposes. Using HMRC’s Check Employment Status for Tax (CEST) tool, clients assess whether the worker should be classified as a “deemed employee.” If the worker falls inside IR35, the party deemed the employer (often the fee-payer) must deduct tax and employee National Insurance Contributions (NICs) from the worker’s pay and account for employer NICs and any apprenticeship levy to HMRC. When a contractor is engaged via an agency, the agency steps in and acts as the deemed employer.
The recent Employment Tribunal case Appiah v Tripod Partners Limited and the Home Office provides a cautionary example of what can happen when these obligations are mishandled.
Background to the Case
Ms. Appiah, a social worker, was engaged by Tripod Partners Limited (TP), an agency, to work full-time for the Home Office. Through her PSC, she provided services on an assignment deemed to fall inside IR35. The Home Office conducted a CEST assessment and concluded that Ms. Appiah was a deemed employee for tax purposes. Both Ms. Appiah and TP accepted this determination.
In line with IR35 requirements, the Home Office paid TP a gross fee, which TP processed through payroll. TP deducted sums for income tax, employee NICs, employer NICs, and the apprenticeship levy before paying the remaining amount to Ms. Appiah.
“While the Tribunal’s decision may not be binding, it underscores the need for businesses to ensure their practices align with both tax and employment law.”
While Ms. Appiah accepted that deductions for income tax and employee NICs were lawful, she challenged the deductions for employer NICs and the apprenticeship levy, arguing that these were unlawful deductions from her wages. TP sought to have her claim dismissed, asserting that she was neither an employee nor a worker for employment law purposes and therefore had no standing to bring a claim under the Employment Rights Act 1996.
The Tribunal’s Decision
The Tribunal found in favour of Ms. Appiah, awarding her over £36,000 for unlawful deductions. It held that despite the absence of an express contract between Ms. Appiah and TP (as her PSC was the contracting party), there was an implied contract for her personal services, meeting the legal test for worker status.
Several factors influenced the Tribunal’s decision:
Personal Service: Ms. Appiah was required to perform the work personally and could not send a substitute.
Control: The Home Office exercised significant control over her work, supervising and directing her day-to-day activities.
Business on Own Account: Ms. Appiah was not running an independent business, and neither TP nor the Home Office could be described as her clients.
Payment Structure: Ms. Appiah was paid based on timesheets rather than invoices, further distancing her from operating as an independent contractor.
PSC as a Vehicle: The PSC was deemed a payment mechanism rather than evidence of genuine self-employment.
Interestingly, while these factors might typically point to an implied contract with the end client (the Home Office), the Tribunal determined that TP was the deemed employer for IR35 purposes and, by extension, responsible for all pay-related obligations under the Employment Rights Act.
This reasoning appears to rest on the notion that it was “necessary” to imply a worker contract with TP because of its role as the deemed employer under tax law. However, it remains debatable whether this conclusion was strictly necessary, as employment status for tax and employment law purposes are separate concepts.
Implications for Employers
Although this is a first-instance decision and not binding on other tribunals, it raises important considerations for businesses engaging contractors through agencies:
1. IR35 Compliance and Liability
This case highlights the financial risks when employer NICs or other liabilities are mishandled. Employers and agencies must ensure that deductions align with IR35 rules and avoid passing employer NIC costs onto workers. Non-compliance can result in costly claims for unlawful deductions and reputational damage.
2. Importance of Clear Contracts
Businesses should review agreements with agencies and contractors to ensure clarity about tax obligations and liability for employer NICs. Agencies should also ensure their terms of business explicitly address how IR35-related liabilities are managed.
3. Monitoring Agency Practices
To ensure that their employer brand and values are protected, clients may wish to audit the practices of their agencies to ensure compliance with both tax and employment law. Agencies must not unfairly pass costs such as employer NICs to contractors. However, this case also raises the prospect that agencies could increase their fees to recoup costs, potentially shifting the financial burden back to the client.
4. Worker vs Contractor Classification
Employers must recognise the differences between employment status for tax and employment law purposes. The Tribunal’s willingness to imply a worker contract in this case may lead to broader challenges where workers operating inside IR35 seek employment rights, such as protection from unlawful deductions or entitlement to holiday pay.Indeed, if the engagement is inside IR35, clients may wish to stipulate that the worker contracts in a different way (for example, via an umbrella company).
What Should Employers Do Now?
Employers engaging contractors through agencies should take proactive steps to mitigate risk:
Review Contracts: Ensure terms with agencies address liability for tax and NICs, and confirm that workers are paid lawfully.
Audit Current Practices: Conduct audits of IR35 compliance and payment practices within your supply chain.
Train Teams: Ensure HR, legal, and payroll teams understand the implications of IR35 and recent case law.
Seek Expert Advice: Employment and tax law are complex and intersect in cases like this. Consulting legal and tax experts can help ensure compliance.
Communicate Clearly: Maintain transparency with contractors about deductions and provide mechanisms to address disputes promptly.
Final Thoughts
The Appiah case is a timely reminder of the challenges surrounding employment status, IR35 compliance, and unlawful deductions. While the Tribunal’s decision may not be binding, it underscores the need for businesses to ensure their practices align with both tax and employment law.
If you have questions about IR35 compliance, contractor arrangements, or employment status, please contact our team for expert guidance.