The Supreme Court has failed to give a final judgment in the tax status case involving the Professional Game Match Officials Limited (PGMOL) and instead sent the case back to square one for a fifth hearing at the First-tier tax tribunal to rule on the tax status of engagements entered into over ten years ago.
The appeal to the Supreme Court by PGMOL focused on the correct application of the common case law of Ready Mixed Concrete, which is the accepted case law on how to consider employment status matters – and therefore has a bearing on firms who hire flexible workers, in particular the legislation around IR35 and off-payroll working.
Commenting on the ruling, Dave Chaplin, CEO of tax compliance firm IR35 Shield, who attended the hearing, said: "In the context of IR35 and off-payroll, which relies on the same common law to conduct status determinations, firms will welcome the clarifications provided, bringing an end to the ebb and flow of case law changes in recent years. Regrettably, PGMOL is another firm entering the 'Decade club' because it does not have tax certainty over engagements entered over ten years ago."
What was the PGMOL tax status case about?
The tax status case concerned whether Level 1 National Group football referees engaged as sole traders who they supply to officiate at football matches. The dispute was whether the engagements with PGMOL were ones of employment, thereby requiring PGMOL to deduct employment taxes at source, including the payment of employer National Insurance Contributions on top of the payments made to the referees.
PGMOL successfully appealed in July 2018 at the First-Tier Tribunal, and HMRC's subsequent appeal to the Upper-tier Tribunal was dismissed in May 2020. HMRC then appealed to the Court of Appeal, who identified errors in law, signalling a remittal back to the First-tier Tribunal in Sep 2021. PGMOL appealed the decision to the Supreme Court and was granted permission on 9th August 2022. The Supreme Court case was heard in June 2023, and 15 months later, the decision was released. The decision dismissed PGMOL's appeal and agreed with the Court of Appeal to remit the case to the First-tier tribunal.
What are the key aspects of the PGMOL ruling?
The hearing focused on the case law concepts of "sufficiency" of mutuality of obligation and extent (or "degree") of control and how those factors impact employment status decisions where there is no guaranteed offer and acceptance of work, similar to gig working.
The case ratified the principles laid down on April 2022 in the Court of Appeal case of Atholl House, an IR35 case involving broadcaster Kaye Adams – who, after four hearings, was found to have been wrongly accused by HMRC of being a "deemed employee."
The critical parts of the ruling:
- The requirement of payment for personal service and some element of control does not solely establish that an engagement is one of employment.
- The right to terminate is irrelevant at the first stage of the Ready Mixed Concrete test of determining whether there exists sufficient mutuality of obligation required for a contract of employment. The first stage requires an obligation to pay if work is done.
- The nature and extent of the mutual obligations are relevant at the third stage of Ready Mixed Concrete to determine whether the contract is one of employment.
- A sufficient element of control by the employer over the employee is essential to the potential existence of a contract of employment. When answering that question, what matters is the existence of a lawful authority (e.g. arising from the contract) to command so far as there is scope for it, if only in incidental or collateral matters. An employer doesn't need to have a contractual right to intervene in every aspect of the performance of a putative employee.
- When considering the degree of control, where the nature of the services provided by the putative employee leaves little room for intervention by the putative employer, the question of control may be difficult to answer.
- Sufficient control consistent with an employment relationship may take many forms and is not confined to the right to give direct instructions to the individuals concerned.
- Having satisfied that there is payment for personal service and some control, one must consider the nature and extent of the mutual obligations and the degree of control, along with all factors pointing towards and away from employment, before concluding.
Does the ruling impact HMRC's CEST tool?
Chaplin says: "CEST still needs to return to the workshop and has been broken since the Atholl House ruling in April 2022.
Chaplin points to two fundamental flaws which are misaligned with the law, which exposes firms which rely upon it:
If an "outside IR35" determination is given solely due to answering the right of substitution question or meeting the conditions in the control section, then those tests have failed to conduct a full multi-factorial determination, as required by the law, and failed to consider all factors in the round.
CEST does not consider the nature and extent of the mutual obligations, which the Supreme Court has ruled are a factor to be considered.
Chaplin says: "It is well documented that HMRC purposefully omitted the full consideration of mutuality from their tool based on their longstanding policy view of mutuality of obligation, which they claimed just meant payment for work done. The Supreme Court rejected that position.
CEST is broken. It's been broken for over two years, but HMRC has not bothered to fix it."
What can firms learn from the ruling?
The longstanding Ready Mixed Concrete framework (RMC) has three stages. The first two stages identify personal service, payment and some degree of control. Those are very low hurdles and will apply to all employed and self-employed people. However, their existence does not mean an engagement is an employment.
Chaplin says: "These preconditions are similar to determining whether a vehicle is a van or a car. Does it have four wheels and a steering wheel? Yes, then we are in the vehicle zone. No, it has no wheels but has a grey trunk and tusks – hmmm, never going to be a van or car."
Everything happens at the third stage of Ready Mixed Concrete, where all relevant factors should be considered, including the full nature of the mutual obligations and the degree of control exercisable.
Critical learnings for firms:
- "Exercisable" means a contractual right, whether expressed or implied. If the contract is silent on control, it could be implied based on the facts. If the contract clearly states the person has full autonomy, then there is no right, and a term cannot be implied, which overrides it.
- Where there is a realistic contractual right of substitution, where the client cannot control who or how the work is completed and is agnostic on who does it, the engagement cannot be employment.
- Mutuality is not a binary concept, except at the first stage of RMC, where payment will suffice. The nature of the obligations must be considered at the third stage.
Case law in a state of flux?
So, is the case law constantly changing and in flux?
Chaplin says: "The answer to that is a firm no. Nothing new in this ruling wasn't already known from the Atholl ruling over two years ago in April 2022.
The PGMOL case now heads to the First-tier fact-finding tribunal, which does not make binding legal precedents. Legal precedents are made by the upper courts, with the Supreme Court being the highest. No other cases are currently heading to either the Court of Appeal or Supreme Court that can displace the known law.
The law is now certain, and firms can rely on it."