Employment Status & IR35 expert Re Legal Consulting Ltd
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Employment status: HMRC gets a red card

In a case against HMRC, the upper tribunal found individual football referees to be self-employed. The case shines a harsh light on HMRC’s view of mutuality of obligation and has implications for the CEST tool. 

15th May 2020
Employment Status & IR35 expert Re Legal Consulting Ltd
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Whistle and red card

The case (UKUT 0147) concerned football referees engaged by Professional Game Match Officials Limited (PGMOL) and whether they were self-employed individuals when officiating at league matches, or employees of PGMOL. The appeal relates only to the National Group of referees who undertake their match duties in their spare time. 

The referees won the first round at the FTT. The decision has again gone in favour of the match referees at the UT, making the decision a binding precedent.

Mutuality of obligation

The UT concentrated on mutuality of obligation (MOO) in relation to the individual contracts and the overarching contract, and also looked at the element of control in the individual contracts.

HMRC submitted that mutuality of obligation is relevant only to the question of whether there is a contract at all. If there is a contract, whether it contains an obligation to provide services personally, and obligations which are in some way “work related”.  It is not to question whether such a contract is one of employment or for services. This fits with the interpretation of mutuality that HMRC uses in its CEST tool.

Is there a contract in existence at all?

HMRC’s argument stems principally from Elias J’s judgement in Stephenson v Delphi Diesel Systems Ltd [2003] ICR 471. Elias J said that the significance of mutuality was solely that it “determines whether there is a contract in existence at all…” but, that case concerned an agency worker. 

The relevance in Stephenson was whether there was a contract in existence at all between the agency worker and the client, bearing in mind that there is an agency intervening in the relationship. It seems that the statement made by Elias J was very much fact specific to that case, so HMRC applying the argument to the facts of the referees' case hasn’t quite worked.

Employee and employer obligations

The UT went through the case law on MOO in fine detail and then derived the following propositions as to the required content of the mutual obligations:

  • For the employee the minimum requirement is an obligation to perform at least some work and an obligation to do so personally. In line with the principles of substitution, it would be inconsistent with that obligation if the employee could decide never to turn up for work.
  • The minimum requirement on an employer is an obligation to provide work or, in the alternative, a retainer or some form of consideration (which need not necessarily be pecuniary) in the absence of work. The UT thought it would be insufficient to constitute an employment contract if the only obligation on the employer was to pay for work if and when it is actually done.
  • In both cases, the obligations must subsist throughout the whole period of the contract.

Overarching contract

The UT dealt with the requirement of MOO in relation to the overarching contract. In reliance on the principles above, the UT concluded that the FTT was correct to conclude that there would be insufficient MOO to characterise the overarching contract as a contract of employment. This would be in the absence of an obligation on PGMOL to provide at least some work.

However, HMRC contended that the FTT was wrong to conclude there was no obligation on PGMOL to offer work and no obligation on the referee to accept it. HMRC submitted that references in the Code of Practice where referees are “expected” to adhere and are “expected” to do various specific things, including “be readily and regularly available for appointment to matches” are to be construed as legal obligations. 

“Expected” or “obliged”?

The UT was not persuaded that the use of the term “expected” is to be read as “obliged”. “The fact that the drafter of the Code of Practice has used both “obligation” (stating expressly that the referees are “not obliged to accept any appointments to matches offered to them”) and “expectation” (stating what referees are nevertheless expected to do) demonstrates an understanding of the difference in meaning between the two phrases, and an intention that each is respectively to be read according to that different meaning.”

The analysis by the UT of the wording used in PGMOL’s legal and non-legal documents shows how important the drafting is and how much attention needs to be paid to understanding whether documents are contractual or not.

HMRC also submitted that the “realistic and worldly wise” approach mandated by the Supreme Court in Autoclenz v Belcher [2011] UKSC 41, should have determined that mutual obligations existed.

Realistic and 'worldly wise'

In Autoclenz, the court pointed out that it is more common for a tribunal to investigate allegations that the written contract does not represent the actual terms agreed, and that the court must be “realistic and worldly wise” when it investigates those written terms.

HMRC, therefore, argued that in taking a “realistic and worldly wise” approach there was an obligation on PGMOL to provide some work and an obligation on the referees to perform it if asked and that would constitute a contract of employment.

The UT disagreed, as it considered this case was to be contrasted with an ‘ordinary’ situation. “[W]here an entity whose function is to provide the services of a number of highly qualified individuals from a limited pool of talent on a regular basis for important commercial events would wish to impose a legal commitment on its staff to work.”

In contrast, in the present case, the referees were highly motivated and wished to make themselves available as much as possible such that “there is no need for a legal obligation”.

HMRC disagrees!

The court considered HMRC’s real complaint is that it just “disagrees with the conclusion the FTT reached.” The UT said that even if it did agree with HMRC, that would be insufficient grounds to permit the tribunal to interfere with the FTT decision. In the UT judgement, the express terms of the overarching contract negating any obligations to offer and take on work reflect the true agreement.

Individual contracts

The FTT found that in relation to the individual contracts each engagement constituted a separate contract in which there was some level of MOO. There was some obligation for the referee to officiate as contemplated (unless he informed PGMOL that he could not) and for PGMOL to make payment for the work actually done, but the FTT thought that this was insufficient to render them employment contracts.

The right of the referee having accepted an engagement to officiate at a single match and then to withdraw from the match because of injury or work commitments or for any other reason, without breaching the contract, was inconsistent with the obligations of an employee. As was the right of PGMOL to cancel an appointment once made.

HMRC argued that so far as PGMOL were concerned, mutual obligations were satisfied by PGMOL’s obligation to pay if the referee worked. This argument was again rejected by the UT which held that there was insufficient MOO to create a contract of employment.

Control

The FTT identified the test for establishing control as requiring a “sufficient framework of control” in the sense of “ultimate authority”, rather than there necessarily being day-to-day control in practice. The FTT added: “This means some contractual right of control, in the sense of the employer having the right to step in, even if that right is not exercised in practice and even if the individual is engaged to exercise his or her own judgment about how to do the work.”

The FTT concluded: “Overall, we are not persuaded that PGMOL had a sufficient degree of control during (and in respect of) the individual engagements to satisfy the test of an employment relationship”.

In the UT judgment, the authorities established that there is a practical limitation on the ability to interfere in the real-time performance of a task by a specialist, whether that be as a surgeon, a chef, a footballer or a live broadcaster, but that does not of itself mean that there is not sufficient control to create an employment relationship. It is also important to note that most of the authorities contemplated a relationship of a longer-term than a single engagement.

Error on control

When it came to control, the UT considered that the FTT had, in fact, erred in law.  Although, this did not necessarily mean that PGMOL did exercise sufficient control over the referees in the context of each individual contract to render them employees.

In order to reach a conclusion on the issue of control, the UT considered that a full evaluation would need to be undertaken but, that given their conclusion on mutuality of obligations, it was unnecessary to undertake the task themselves or to remit it to the FTT.

No error on MOO

Ultimately, the UT concluded that there was no error of law in the FTT’s conclusions that there was insufficient mutuality of obligation in relation both to the overarching contract and the individual contracts. It follows that there was no error of law in its conclusion that the referees in the National Group were engaged under contracts for services, they were not employees, and the appeal was dismissed.

Conclusion

HMRC has already declared that it is going to appeal this case. This case is very thorough on the issue of mutuality though, so it is hard to see how HMRC would appeal it. It is more likely then to be appealed on the point of control but then that is unlikely to outweigh the lack of mutuality.

It will be interesting to see what avenue HMRC will use to challenge this case. Hopefully, it will bring some much-needed clarity on the issue of mutuality of obligation and in turn, an amendment of the CEST tool.

Replies (17)

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By johnjenkins
18th May 2020 10:24

I have always said that if the "contract for services" is correctly worded and participants stick to the contract, then HMRC don't have a leg to stand on. Don't forget, as much as they would like to, HMRC cannot control employment status. It is a commercial decision and the sooner HMRC give up on this ludicrous crusade the better. HMRC should stick to what it should be doing, investigating and collecting, not meddling.

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Rebecca Seeley Harris
By Rebecca Seeley Harris
18th May 2020 10:40

Thanks John, I would just add to that, that the contract for services needs to be a true reflection of the working practices. It's no good having a well drafted contract unless the reality shows self-employment.

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By tedbuck
18th May 2020 10:43

Typical case of HMRC overreaching itself on what it thought was low hanging fruit whilst ignoring the bigger cases because they are too much effort.
Jim Harra is no better than his precursors and so far that isn't good.
The real problem, of course, is lack of skilled staff as HMRC seemingly don't train them preferring to rely on computers to work the system.
The only trouble with that is that errors made on computers disappear into the mass of numbers and can therefore be manipulated by those less honest than the rest and of course lack of understanding of how the programs work doesn't help.
Then, of course there are all the Tax Laws - who on earth can be expected to grasp several thousands of pages of largely incomprehensible legislation? I heard a while back that HMRC had to engage a tax training company to explain how some new tax law worked. Says it all doesn't it?

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By tonyaustin
18th May 2020 10:44

Mutuality of obligation has been used as a factor to decide whether or not there is employment in a number of cases. If HMRC were correct in their interpretation, it would not be a factor at all because if there is no contractual relationship, there is no source of income and no case to take to court. There must therefore be a difference in terms of MOO between an employment contract and a "self-employed" contract.

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By flightdeck
18th May 2020 10:48

Is this a good use of HMRC's time [our money]? This example just sounds like a lot of expensive lawyers getting their rocks off on seeing who can be cleverest with semantics and tautology. Surely there are better things for HMRC to spend money on? Like having a look at large farms and their workers situation.

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Replying to flightdeck:
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By dmmarler
18th May 2020 12:15

No, it is not a good use of our money. Our new Chancellor should get rid of the root of the problem when he revises all the taxes (to start paying back our Covid borrowings). NI should be scrapped as a separate tax on both the employer and the employee. Employers should be encouraged to take on people, not be penalised for doing so. People should just pay tax (not tax and NI) on their earnings (from all sources) so taxation is equalised. The government should simplify all taxes so the people (including MPs) can understand them. By simplifying taxation the need for expensive staff at HMRC with office space, computer systems, gold-plated pensions, etc., should be dramatically reduced. Then the UK economy can concentrate on making money, not paying consultants (accountants, lawyers, etc.) to sort things out all the time.

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Replying to dmmarler:
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By flightdeck
18th May 2020 14:11

A voice of reason! I agree with you (but I'm afraid that's just qualified you out of holding public office!).

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Replying to dmmarler:
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By kenatnam
19th May 2020 09:32

Unfortunately the Government won't simplify taxation for the simple reason that if the ordinary man in the street could see the exact percentage of tax he was paying there would be a revolt! At the moment, by smoke & mirrors most people think they are paying 20% tax.
I agree that it doesn't make any sense in its current form and it is well out of date but I wouldn't bet on the system being made any clearer.

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By edp
18th May 2020 11:11

This is very interesting.
I am an exam marker for one of the examining bodies. Every year, for the past 15 years I have waited to be invited to mark. So far this has happened, however, there is no guarantee of this. Even if I accept a contract to mark I can withdraw at any time before or during the marking window (and will be paid for what I have done) with no consequence other than that I might not be offered a contract in the future. HMRC class my marking income as employed for PAYE purposes but self-employed for NI. Seems to me that I'm not an employee at all.
Currently this has implications for me. All my marking income has gone due to SATS and GCSE exams being cancelled. I don't qualify for self-employed grant as my exam-marking income being treated as employed means my s-e income is less than 50% of my earnings. If it is really s-e income then my total s-e income is more than 50% of my earnings. Exam bodies have been trying to get clarification from HMRC what they can do about furloughing - still waiting for that.

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Replying to edp:
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By johnjenkins
18th May 2020 12:11

This is probably a case where you have a "service contract" rather than a "contract for services". I have looked at a few "contract for services" and they basically say your self-employed, however if it is found that the work is to be one of employment you are liable for all costs.
The whole situation is ludicrous.

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Replying to edp:
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By flightdeck
18th May 2020 14:08

Just ridiculous, I doubt you could be less of an employee.

I don't understand the rationale for you being treated differently for tax and for NI? Is this common?

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By Mr J Andrews
18th May 2020 14:40

Several respondents have hit the nail on the head. in respect of our creaking tax system burdened by the weight of legislation imposed by successive Chancellors and their stooges. Vote pulling attempts have added thousands of pages open to interpretation whilst pompous overgrown schoolboys have tried unsuccessfully to add the joke element after one too many glasses of port.
From what I see of Mr Sunak , I believe here's a man who can undo the abuse caused by his predecessors over the last half century.

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Replying to Mr J Andrews:
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By johnjenkins
18th May 2020 14:42

Will he be allowed to by the civil servants?

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7om
By Tom 7000
18th May 2020 14:45

been wondering about that for years ever since the 14 year old was getting paid to referee 11 year olds.....

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7om
By Tom 7000
18th May 2020 14:46

.

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By matthew pennifold
18th May 2020 17:51

I would like to know how many cases HMRC have lost whilst relying on their own CEST tool.

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By kenatnam
19th May 2020 09:37

This smacks of HMRC being "bloody minded" and as taxpayers we should be demanding that they use our tax money wisely. At the moment it just seems like 2 Government departments slogging it out at vast expense to ourselves.

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