Increased Risk in Employment Tax Status; PGMOL v HMRC

The Supreme Court has handed down its much-anticipated decision in Commissioners for His Majesty's Revenue and Customs (Respondent) v Professional Game Match Officials Ltd (PGMOL). In this article, we explore the key implications of the ruling for businesses engaging off-payroll workers and how this decision may significantly increase risk and uncertainty around employment status for tax purposes.

The PGMOL decision has broad implications, potentially opening the door for HMRC to challenge the tax status of self-employed off-payroll workers more aggressively. This is likely to elevate the risk profile of businesses that engage individuals on a self-employed basis.

Key Takeaways from the Decision

1. Control and Mutuality of Obligation: The tests for control and mutuality of obligation appear easier to establish for individual assignments, making employment status disputes for tax purposes more likely to hinge on other, fact-specific factors. These elements have ceased to be the "gatekeepers" they once were, leading to less predictability and increased difficulty in status determinations.
2. Ongoing Uncertainty: Ambiguity persists around what documents, obligations, or expectations demonstrate employment-like control.
3. Outdated CEST Tool: HMRC’s CEST (Check Employment Status for Tax) tool, which emphasises control and mutuality of obligation, appears out of sync with recent case law, which calls for a more nuanced, multi-factorial assessment of employment status. Doubt is also implicitly cast in PGMOL on the importance of substitution when determining status.
4. Convergence of Employment and Tax Law: The decision reflects a closer alignment between employment law and tax law, with the Supreme Court endorsing the Uber employment law decision.
5. Increased HMRC Scrutiny: We anticipate that HMRC will be emboldened to challenge and litigate employment status in arrangements involving off-payroll workers, raising the stakes for businesses.

Background on the Decision

The central issue in PGMOL was whether referees and part-time referees provided to the Football League were self-employed or employed for tax purposes.

The test for employment, originating from Ready Mixed Concrete, has evolved over the years, but consists of three limbs:

1. Mutuality of Obligation: The worker agrees to provide their services in return for remuneration.
2. Control: The worker agrees to be sufficiently controlled by the employer in the course of performing the service.
3. Other Provisions: The other terms of the contract must be consistent with an employment relationship.

At the First-tier Tribunal (FTT), the referees were found to be self-employed. The FTT ruled that the individual contracts lacked sufficient mutuality of obligation and control, so it did not consider the third limb. However, after multiple appeals, the case ultimately reached the Supreme Court.

The Supreme Court addressed two key questions:

1. What level of mutuality of obligation is required to establish employment, particularly given the ability of both parties to cancel the engagement?
2. What degree of control is necessary for a contract to be considered one of employment?

The Court ruled that the ability to cancel the contract before the engagement did not negate mutuality of obligation. Moreover, the Court found that the framework documents provided sufficient control to indicate employment status. The case has been remitted to the FTT to consider the third limb.

Key Insights from the Ruling

1. Distinction Between Overarching and Individual Contracts: The decision clarified that, for umbrella contracts, ongoing mutual obligations are necessary to establish employment. However, for individual engagements, mutual obligations do not need to exist before the engagement commences.
2. Easier to Establish Employment for Individual Contracts: The Court’s ruling makes it easier to prove employment status for individual contracts, as it lowered the threshold for establishing mutuality of obligation and control.
3. Broad Definition of Control: The Supreme Court emphasised that control is time and context-specific, requiring only a "sufficient framework of control." This test is broad, implying that control does not require an employer to have the right or ability to intervene in every aspect of the worker’s duties.

Impact of the Decision

The Supreme Court deliberately refrained from placing strict limitations on the tests for mutuality of obligation and control. This means that more individual engagements may now qualify as employment relationships.

One of the most significant effects of the ruling is the reduced 'gatekeeper' role of mutuality of obligation and control. These factors are now more flexible, shifting the focus to the third limb — whether the contract terms are consistent with an employment relationship. This change makes businesses more vulnerable to challenges regarding employment status.

The Third Limb: A Source of Future Disputes

The third limb — the consistency of the contract terms with an employment relationship — is wide-ranging and prone to disputes. It allows HMRC to consider not just the written terms, but all relevant circumstances known or reasonably assumed to be known by both parties (as seen in Atholl House). This broad test will likely fuel further disputes and challenges.

Conclusion

The PGMOL decision is expected to embolden HMRC in scrutinising the employment status of self-employed workers. With income tax and National Insurance contributions making up 55% of HMRC’s total tax revenue in 2023-24, this area will likely remain a key focus in the coming years. Businesses that engage self-employed workers should reassess their risk exposure and contractual arrangements in light of this ruling.

If you would like to discuss any of the issues raised in this article or seek advice on resolving tax employment status disputes, or advising on labour tax risks, please contact Matthew Sharp or Christopher Kientzler.