Employer NIC deductions from contractors under IR35

Can you renegotiate contracts to include deductions for employer’s NIC?

The contract fee-payer is liable for employer’s National Insurance Contributions (NIC) (13.8 per cent) and the Apprenticeship Levy (0.5 per cent) in addition to the fee for the work of those deemed as employees under IR35 off-payroll rules.

Following the introduction of the rules in the public sector in April 2017, some employers tried to pass on these costs to contractors. This is potentially unlawful.

Legislation prohibits the direct or indirect recovery from employees of employer’s National Insurance Contributions (“NIC”). This includes employer’s Class 1A NIC due on benefits in kind. 

The Employment Rights Act 1996 also adds additional protections for workers who must not suffer deductions from their wages unless: 

• the deduction is required, authorised by statute or by the worker's contract (which won’t apply here); or

• the worker has given their prior written consent to the deduction.

Post-dated deductions

Under employment law even if the worker does give written consent, the Courts have indicated that any such consent does not authorise deductions on account of conduct, which must include services delivery, occurring before that written consent is signed.

It is therefore difficult to see when a contract can lawfully include such a deduction for employer’s NIC when you take into account the NIC legislation as well.

Renegotiating contractor fees

HMRC guidance states that “Because the fee payer has a liability to pay secondary Class 1 NICs, they are likely to wish to renegotiate the fee with the intermediary to reduce the rate for the job.” This appears to be an oversimplification even though the guidance does go on to say, ‘they cannot lawfully deduct the secondary NICs from a fee that has been agreed, but could, depending on the contractual terms, negotiate a lower fee’.

It is therefore hard to see how a fee-payer renegotiating the rates under an existing contract, because they will have extra costs going forward, is not in breach of these rules even if they do not explicitly mention employer's NIC.

If a fee-payer does deduct the employer’s NIC from the contractor, then the contractor has recourse via the courts - or more simply and cost effectively via an employment tribunal if the deduction did not have prior consent as an unlawful deduction from wages. It would depend on the circumstances. 

For fee-payers renegotiating rates on a contract that spans 6 April 2021, it looks strongly open to challenge as unlawful if the attempt directly or indirectly includes the employer's NIC. Contract fees should be agreed at the start of a project.

As a result, we could see many contracts or projects cancelled for this reason, and to protect the contractor’s own position on IR35 to date, albeit with some new commercial terms and contracts agreed between the same parties. 

If you are a fee-payer planning to re-negotiate contracts, we would recommend that you take advice.