Skip to content Skip to footer

Tribunal rules Recruitment Agency made £37k in unlawful deductions from inside IR35 social worker

contractor business looking for IR35 information
A recent Employment Tribunal ruling has confirmed that a recruitment agency made unlawful IR35 deductions, amounting to £37K from an inside IR35 social worker’s pay. The case of Ms. M. Appiah v. Tripod Partners Ltd and the Home Office highlights yet another compliance failure under the IR35 reforms, with contractors once again footing the bill for non-compliance.
Background of the case

Ms. Appiah, an independent social worker, was engaged to provide services to the Home Office through recruitment agency Tripod Partners.

Following an IR35 status determination by the Home Office, she was deemed inside IR35 and subsequently paid via the agency’s payroll. However, despite an agreed hourly rate of £58, Tripod deducted income tax, employee National Insurance (NIC), and crucially, employer’s NIC and the Apprenticeship Levy – costs that are legally the liability of the fee payer, not the worker.

Ms. Appiah challenged these deductions at the Employment Tribunal, arguing that Tripod had unlawfully deducted sums. The Tribunal ruled in her favour, confirming that the deductions were unlawful under the Employment Rights Act 1996, and awarding her £36,826.65.

Implications for Agencies and Fee Payers

The ruling is significant because it is the first of its kind (unlawful deductions related to employer’s NIC under the Off-Payroll Working rules), and could have far-reaching implications for recruitment agencies and umbrella companies.

The Tribunal found that Tripod Partners had a company-wide policy of making these deductions from gross pay, meaning they could now face a wave of further claims from other affected workers. Given Tripod’s size and the likely large number of contractors they engage, this could spiral into a much bigger problem for them.

It is common practice for compliant fee payers to factor in the costs of employer’s NIC and the Apprenticeship Levy against the “assignment rate” – the amount they receive from the party paying for the worker’s services – before agreeing the actual rate of gross pay with the contractor and to which lawful deductions are then made. While this concept is not new, this ruling highlights that many agencies may still be unknowingly making unlawful IR35 deductions.

With the IR35 reforms increasing costs for fee-payers, some agencies may have mistakenly structured contracts in a way that shifts their financial burden onto contractors – without realising they are acting unlawfully.

The big question now is: how many other agencies have similar policies in place? This ruling could lead to increased scrutiny across the industry, with more contractors now likely to challenge deductions that have been taken from their agreed rates.

Lessons for Agencies and Umbrella Companies

Agencies and umbrella companies must ensure they are structuring contracts correctly from the outset. Employer’s NIC and the Apprenticeship Levy must be factored in transparently, not taken from the pay rate you have agreed with the worker. Getting this wrong could lead to significant legal claims, financial losses, and reputational damage.

Best practice includes:

• Ensuring assignment rates transparently include all necessary deductions before engagement begins

• Making it clear to contractors how their pay is structured

• Regularly reviewing contracts and payroll processes to ensure compliance

Lessons for Contractors

If you’re a contractor working inside IR35 and being paid via an agency or umbrella, check your payslip carefully. Employer’s NIC and the Apprenticeship Levy should not be deducted from your agreed rate of pay – these costs are the responsibility of the fee-payer and should be accounted for separately when determining your rate. If you suspect unlawful deductions have been made, you may have grounds to claim.

Key things to check:

• Is the amount you receive lower than your agreed gross pay rate due to employer’s NI being deducted?

• Are there deductions on your payslip that seem unclear or unexplained?

• Have you been given full transparency on how your pay is calculated?

If in doubt, seek advice – this case proves that contractors can and should challenge unlawful deductions.

HMRC has some useful guidance on working out pay from an umbrella company. This includes information on your right to request “reconciliation statement” from your umbrella, enabling you to make further checks: https://www.gov.uk/guidance/working-through-an-umbrella-company#how-you-get-paid

For further guidance, we recommend reviewing the information provided by ACAS, which outlines employees’ rights regarding deductions from pay. You can find their guidance here:

https://www.acas.org.uk/deductions-from-pay-and-wages

If you believe deductions have been made unlawfully, ACAS also provides advice on how to raise a formal grievance and, if necessary, pursue the matter through an employment tribunal.

Final thoughts
This ruling is another example of how IR35 reform continues to create disputes between contractors and fee-payers. However, the law is clear – fee-payers cannot shift employer liabilities onto workers without full transparency and prior agreement. With more contractors likely to bring claims in light of this case, agencies should take urgent steps to ensure compliance or risk costly legal challenges in the future.