The Supreme Court rules on employment status for tax
The Supreme Court released their long-awaited judgment on employment status for tax purposes, in the case of HMRC v Professional Game Match Officials Ltd [2024] UKSC 29 (PGMOL) on 16 September 2024.
Employment status
The employment status test, famously formulated in a case from 1968, prescribes a three-stage test which must be satisfied for an employment relationship to arise. The three stages are:
- There must be sufficient “mutuality of obligation”, broadly recognised as involving an obligation on an employee to provide a personal service in return for payment.
- There must be a sufficient “framework of control” under which the employer controls the employee’s personal service.
- Under an overall analysis, the entirety of the contract is consistent with it being an employment contract.
The distinction between a contract of service (i.e. an employment contract) and a contract for services (i.e. a non-employment contract) is fundamentally important. Income from “any employment under a contract of service” will, from both an employee’s and employer’s perspective, give rise to increased national insurance contributions (NICs), a more stringent deductibility test for expenses, and more onerous administrative requirements under the pay-as-you-earn (PAYE) scheme.
Facts
This case concerns the nonprofit-run Professional Game Match Officials Ltd (the Appellant), which provides referees and match officials to the Premier League, FA Cup and English Football League. Under the classification system for referees, the highest grade (Level 1) is categorised into two sub-sets, namely the “Select Group” and the “National Group”. This dispute concerned the employment status of the part-time National Group referees for the 2014/15 and 2015/16 tax years. It was accepted that the National Group was both subject to an overarching contract with the appellant when they were appointed on an annual basis and individual contracts when they were offered, and subsequently accepted, specific match appointments.
By the time the case reached the Supreme Court, it was accepted that the overarching contract was not an employment contract and the dispute was focused on whether the first two stages of the employment status test (i.e. mutuality of obligation and control) were satisfied in connection with the individual contracts for match appointments.
Supreme Court decision
The Supreme Court confirmed that the minimum requirements for mutuality of obligation and control were satisfied in connection with the individual contracts. With the first two stages satisfied, the Supreme Court sent the case back to the First-tier Tribunal (FTT) for it to reconsider the third stage (i.e. the “overall analysis”) and whether the individual contracts were otherwise consistent with them being employment contracts.
The Supreme Court decision deals with mutuality of obligation and control under separate headings, concluding as follows:
- Mutuality of obligation is importantly conceptualised differently in the context of continuous and single engagement employments. Subsisting obligations to provide personal service and pay for such service are not required for single engagement employments. The Supreme Court focused on whether mutuality of obligation existed solely during the engagement itself, being from when the referee accepted the match appointment until the submission of their match report. Whilst either party could cancel the arrangement without any penalties, this did not detract from the contractual obligations and mutuality of obligation existing during the course of the arrangement.
- On control, it was not necessary for an employer to give direct instructions to employees, have a contractual right to direct every aspect of their service, or intervene during the performance of the service. What will constitute sufficient control will be fact-dependent and a combination of various factors, including contractual obligations and post-engagement sanctions, capable of creating a sufficient framework of control.
Moore Kingston Smith comment
This is an important decision which may have wide implications for both businesses and individuals considering their employment tax exposure and obligations. Although not unexpected, the parties will be frustrated that the case is being sent back to the FTT after a lengthy litigation all the way up to the Supreme Court. Unlike the Court of Appeal, the Supreme Court was more decisive and concluded that there was sufficient mutuality of obligation and control to indicate an employment contract. Therefore, the FTT will “only” be required to consider the third and final stage of the employment status test.
The overall analysis has notably been given increased prominence in recent off-payroll working (IR35) cases, this prominence now further reinforced by the Supreme Court judgment. Arguably, the Supreme Court lowers the “irreducible minimum” for both mutuality of obligation and control. The fact that mutuality of obligation can be sufficient despite both parties being able to terminate the arrangement at will, without financial implications, is significant as it confirms the 2021 reasoning of the Court of Appeal on this issue.
On the point about control, the Supreme Court went further than the Court of Appeal in considering that post-engagement sanctions were relevant in contributing to the framework of control, thereby agreeing with the Upper Tribunal and extending the factors one might consider as contributing to that framework. In lowering the irreducible minimum, the Supreme Court accentuates the importance of the overall analysis, requiring consideration of all the relevant terms and contextual circumstances reasonably known to the parties (with the nature and extent of mutuality of obligation and control also to be given additional weighting).
Importantly, the Supreme Court affirms the 2022 Court of Appeal decision in Atholl House, which will now need to be referred to as one of the leading cases on employment status for tax purposes. However, from a practical perspective, the judgement will not generate clarity in this area given the prominence afforded to the most subjective of the three tests (ie the overall analysis). We have seen this third stage give rise to highly variable results in several IR35 cases across the tax tribunals in the past year. This overall analysis remains the most complex and important aspect of the employment status test. Clarity is unlikely to be found unless the government makes changes in this area, such changes arguably more warranted than before.
In light of this complexity, please do contact our employment tax specialists if you want to discuss the employment status for tax case or want to explore how we can assist with your employment tax concerns.
