HMRC in big Mutuality win over PGMOL, vindicating it on CEST

Mutuality of Obligation is off-limits to limited company contractors as a way to beat IR35, under HMRC v PGMOL at the Supreme Court.

Published yesterday following a hearing in June 2023, the SC’s ruling vindicates HMRC relating to a ‘MoO’ argument which it first tabled in 2018.

HMRC then said in a paper (and it maintained in front of the SC) that a limited company merely agreeing to work from an outfit is enough to establish mutual obligations.  

‘Mutuality is necessary for a contract to exist’

That is why HMRC’s IR35 status testing tool CEST doesn’t look at Mutuality, as MoO is simply “necessary for a contract to exist.”

HMRC made this assertion in its MoO paper six years ago, triggering an outcry from many IR35 advisers, but the final court of appeal in the UK has now upheld HMRC’s stance.

IPSE, the UK’s trade body for contracting, is shocked at the ruling.

And not just shocked at the technical loss for Professional Game Match Officials Ltd (the company which provides referees to league football matches and FA Cup fixtures), but at its wider implications for contracting, too.

‘Merely by agreeing to do some work establishes mutual obligations’

“HMRC argued that merely by agreeing to do some work for another party, the referees and PGMOL had established mutual obligations, which is a key indicator of employment,” says IPSE’s Andy Chamberlain.

Policy director at the Association of Independent Professionals and the Self-Employed, Mr Chamberlain continued: “The Supreme Court backed this argument, meaning it will now be much harder to prove that there are not mutual obligations in any work arrangement.

“[So] this ruling makes it even harder to be self-employed in the UK.

“The Supreme Court has effectively blocked one of the avenues for freelancers to prove that they are legitimately working for themselves.”

‘Control, substitution, and in-business are the future outside IR35 battlegrounds’

John Chaplin, of accounting and business advisory BDO says that while not a surprise, the SC finding in favour of HMRC is “likely to be used by HMRC to quash any ‘lack of mutuality’ arguments in future status cases.”

“In practice, this means that control, personal service and, to a lesser extent, being in business in your own right, will be the battlegrounds of the future,” the BDO employment tax partner told ContractorUK.

“Taxpayers are unlikely to win many mutuality arguments with HMRC -- for the time being at least.”

‘PGMOL Ltd exercised control over general conduct’

But Mutuality wasn’t the only aspect of the referees’ engagements between 2014 and 2016 which the SC was asked to rule on.

In 2021, the Court of Appeal said due to mistakes by two prior courts before its own look at PGMOL V HMRC, ‘control’ should be assessed too.

“At the Supreme Court, now the fourth court to get involved, it’s been ruled that although the referees operated independently during the matches, PGMOL exercised enough control over their general conduct, including imposing penalties and providing coaching and assessments,” says Bauer & Cottrell (B&C).

The status advisory added yesterday to ContractorUK: “This satisfied the test with a sufficient framework of control, even though direct supervision [of the referees] wasn't feasible during matches.”

‘Supreme Court ruling against referees’ body blows the final whistle on MoO and Control’

Angela Ferguson, of tax and consulting firm PSTAX, says the Supreme Court’s ruling against the referees’ body “blows the final whistle” on MoO and Control.

“For control purposes, not being able to intervene directly during the match, misunderstood the test,” Ferguson, the firm’s head of employment taxes said last night in a statement to ContractorUK.

“And what [was held as] important is that for each separate contact, there needs to be a sufficient framework of control.

“The employer [in this case PGMOL], is not required to have a contractual right to intervene in every aspect of the performance by the employee. And sanctions applied after the event would be sufficient.”

‘Unanimously dismissed PGMOL’s appeal’

Taking to LinkedIn following the judgment being handed down in HMRC’s favour, Ryan Dawson of Kingsbridge quoted what he implied was the ruling’s nub.

Reproducing a summary statement handed to the press, Dawson, Kingsbridge’s IR35 manager, posted: “The Supreme Court unanimously dismisses PGMOL’s appeal, holding that the minimum requirements of mutuality of obligation and control necessary for a contract of employment between the National Group referees and PGMOL were satisfied in relation to the individual contracts.”

But “critically,” the SC’s Lord Richards was clear that while MoO and control were found to exist, “these elements alone are not determinative of the referees’ employment status.”

‘PGMOL case to be reheard by the FTT’

“And so Lord Richards remitted the case to be re-heard by the FTT, where they will consider these findings in light of the overall relationship,” continued B&C director Charlie Hemsworth. 

“Lord Richards states that courts tend to focus too heavily on these tests in isolation.

“[The Supreme Court judge] emphasised the importance of considering the whole picture when deciding status…an approach which the FTT has been directed to apply in its rehearing.”

The case of PGMOL v HMRC still not being decided -- in terms of the referees’ IR35 status, beggars belief to tax lawyer Rebecca Seeley Harris.

‘Damp squib’

“I am very disappointed that the case has been remitted back to the First-Tier Tribunal,” the lawyer began yesterday morning in a statement to ContractorUK.

“After 15 months of waiting for the judgment, it was simply a damp squib.

“So, the merry-go-round continues; still no certainty. What if the new FTT errs again? Do we go back up the court appeal process? Where does it end?!.”

Founder of off-payroll advisory ReLegal Consulting, Seeley Harris says that as a professional adviser, the to-ing and fro-ing from court to court “makes it hard to give businesses any certainty”.

‘In a spin’

“With the ever-moving case law, changing year-on-year, [it’s no wonder businesses, those engaging Personal Service Companies, and PSCs themselves] are all in a spin.

“The PGMOL case has now been remitted back to the FTT to decide whether, in light of all the relevant circumstances, the guidance in ‘Atholl House CA,’ and the guidance from the Supreme Court, the individual contracts were contracts of employment.”

Hemsworth is more supportive of PGMOL heading back to the FTT, even though it means its £584,000 tax bill remains in the air (despite control and MoO now both set in HMRC’s favour).

‘Consider the whole picture’

“Lord Richards emphasising the need to consider the whole picture [to accurately determine IR35 status] reinforces the key point we always stress,” B&C’s director says.

“And that’s this -- status determinations must take into account the broader circumstances, not just individual elements like MoO or control.

“That said, I would now expect the FTT to find that the referees were indeed employees. But this will be based on the totality of the circumstances, not just Mutality of Obligation and Control.”

‘Expect updates to CEST’

To the status advisory'S clients, Hemsworth said the advice is going to be ‘Expect updates to CEST.’

She explained: “Remember, we are all still awaiting phase two of the CEST updates, and these were likely intentionally delayed by HMRC until the outcome of ‘PGMOL.’

“While precedent now confirms that CEST correctly assumes MoO is present when a contract exists, we could potentially see some HMRC updates to the questions around Control.

“The Supreme Court’s detailed discussion on control -- particularly their view that control doesn’t require real-time intervention but can exist through broader frameworks -- may lead to refinements in how control is evaluated by CEST.”

‘Engagers now need to work even harder when engaging outside IR35 contractors’

For now however, PGMOL losing to HMRC at the Supreme Court means end-clients with outside IR35 contractors have their work cut out.

Ahead of his exclusive analysis for ContractorUK of what the private sector can learn from the public sector’s mistakes on OPW compliance, most recently highlighted by HS2, BDO’s Mr Chaplin elaborated on his assessment:

“Most engagers seeking to hire self-employed workers [will now] need to work even harder to show that there is either no control of the worker or no personal service.

“Unless, that is; they want to get into the minutia of the secondary [IR35 status] tests. Both [are] difficult concepts to overcome.”