What does the Supreme Court ruling on PGMOL mean for future IR35 cases?

By Andy Chamberlain, Director of Policy at IPSE - the Association of Independent Professionals and the Self-Employed

The Supreme Court issued a long awaited ruling on Monday (16.9.2024) that we thought might make it easier to decide when an individual is and isn’t self-employed for tax purposes. In some ways, we did get more clarity, but it wasn’t quite what we hoped for and the ruling will make it harder to argue that any particular engagement is ‘outside’ of IR35 in future. It feels as if the net, which has undoubtedly been tightening around self-employment in recent years, just got a little tighter.

What was the case about?

PGMOL (Professional Game Match Officials Limited) supply referees to professional football matches in England. Many of the referees are employed by PGMOL, but some offer their services to PGMOL on a self-employed basis; it’s these ones that have been at the heart of a dispute with the taxman.

HMRC said the referees should be treated as employed for tax purposes. PGMOL said they were self-employed so employment taxes were not due. A six year court dispute ensued, not quite culminating in Monday’s ruling at the highest court in the land. It hasn’t ‘quite culminated because, believe it or not, the Supreme Court sent the case back down to the First-tier Tax Tribunal to have another go at it, but not before it issued it’s own interpretation of some key points of law that must be considered in cases like this.

Mutuality of Obligation

According to case law (and in particular the seminal Ready Mixed Concrete case from 1968), in order for a contract of employment to exist there must be ‘mutual obligations’ between the worker and the hirer. Quite what this means in practice has been subject to much debate. HMRC has for many years argued that in any contract there are mutual obligations (e.g. I do this work, you pay me to do it – the so called ‘wage/work bargain’). It is for this reason that HMRC does not include any questions on mutuality in its Check Employment Status for Tax (CEST) tool. That argument was challenged during this case, with the lower courts directly opposing HMRC’s view; but the Supreme Court, and the Court of Appeal before it, ultimately sided with the tax collectors.

It is now going to be much harder, and probably futile, to argue that IR35 doesn’t apply due to a lack of mutual obligations. Barristers and others who are cleverer than me may argue differently – and there is talk in the judgement of the need to consider ‘the nature and extent of the mutual obligations’ (which by the way is still an issue for the CEST tool), but no well advised hirers will provide a contractor with an ‘outside IR35’ determination solely on the basis that there are a lack of mutual obligations in the contract.

Control

The other factor considered by the Supreme Court was ‘control’ – specifically, did PGMOL have a sufficient degree of control over the work being done by the referees? PGMOL had argued they didn’t because once the referees were on the pitch they made their own decisions. (Incidentally, and for those that follow football, VAR wasn’t in place at the time in question – if it were, it’s interesting to consider whether it might have affected PGMOL’s position on this.)

The Court did not support PGMOL’s argument here, instead finding that a sufficient framework of control existed, evidenced by PGMOL’s ability to effectively sanction the referees after each match, and by terms imposed on the referees relating to their conduct.

The problem this interpretation poses is that it is quite broad, meaning that it’s going to be that much harder to argue in future cases that any client doesn’t have a ‘sufficient framework of control’ over the contractor, consultant or freelancer. The ruling explicitly states “the bar to the existence of control need not be set at an unduly high level”.

One interpretation of the control test has been that because highly skilled contractors operate autonomously, more or less free from interference by the client while they are working, they must be self-employed because the client doesn’t exercise control. This ruling pushes back on that interpretation quite forcefully. It doesn’t mean that ‘control’ won’t continue to be an important consideration, but it will make it harder to rely on for those seeking to prove their self-employed status.

The third stage and why it’s of primary importance

All is not necessarily lost for those seeking to stay outside IR35. When considering status, the aforementioned Ready Mixed Concrete case sets out a three stage test that must be applied to establish that an engagement should be taxed as an employment.

• Firstly, are there mutual obligations between the parties? If there was doubt about this before, there is less so now – the answer is probably ‘yes, there are’ unless, and this is very important, there is a strong right to send a substitute in the contract
• Secondly, does the client have control over the work that’s being done? It’s now harder to argue the absence of control
• Thirdly, are there other factors – including the extent of the mutual obligations and control, and whether the worker is ‘in business on their own account’ – that suggest the contract is not one of employment?

In order for IR35 to apply, all three tests must be met. The Supreme Court ruling has effectively tightened up the first and second stages, making them more difficult to use in an IR35 defence. But the Supreme Court did not consider the third stage in the case, instead bouncing it back down to the First Tier to do so separately.

The third stage has been thought of as somewhat secondary to stages one and two, but perhaps that will change in future rulings where the minimum mutuality and control thresholds will be quickly established and more time spent on other factors. Being ‘in business’ has been central to some recent rulings, and it could become more so in the future.

But the Supreme Court’s lack of consideration of these other factors leaves us very much in the same place we were before – scratching our heads and wondering how on earth we can establish with any certainty that a particular engagement is one of genuine self-employment.

Time for a statutory test of self-employment?

Confused? You are not alone. Employment status and the case law that governs it is complicated. This complexity is only added to when courts offer a verdict just on specific aspects of the appeal and not the case as a whole, as has happened here, and previously in similar tax cases.

For PGMOL, the merry-go-round continues, and while for everyone else this ruling sets out some important principles that clarify some aspects of the rules, we still don’t have the kind of rules that can be easily explained around the dinner table or, more importantly, to HR teams that have to consider them.

At IPSE, we believe the time has come for a complete rethink of our employment status rules. We also believe that we should create a positive test for self-employment, rather than, as we have now, only a test for employment. It’s as if self-employment doesn’t exist within the rules we have now – there is only employment and not-employment, leading to a presumption of self-employment. (There is, of course, also worker status in employment law – but in tax law, it’s just employment and not-employment.)

The need to establish a clear self-employed category, which can be evidenced and proved, is all the more urgent now that the government has committed to introducing a ‘single status of worker that will apply to all but the genuinely self-employed’. It begs the question – who are the genuinely self-employed?

There is a chance that the government will want to, perhaps need to, consider this question too. We will be pushing them to do so. The PGMOL case has taken six years to move through the courts and it’s still not finished. It relates to work that took place ten years ago. Is this really the best we can do? Shouldn’t businesses and individuals have more certainty? And wouldn’t it be wonderful, not just for tax, but to prevent the exploitation of low income workers that should be clearly identifiable as falsely self-employed, if we could determine status without recourse to complex legal jargon? For that, we need a clear set of rules that we can all rely on.

For more information on how to determine your self-employed tax status, I’ll be joined by Markel’s Danny Batey to discuss the implications of this landmark ruling and to run through the key status tests.