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

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.