Referees score win over HMRC in £584,000 tax tribunal

Refereeing body's tax victory exposes the flaws in HMRC's IR35 tool, CEST

The body for football referees, PGMOL, has defeated HMRC in a tax tribunal carrying £584,000 - a result that raises question marks over the tax office’s grasp of employment status rules and its controversial Check Employment Status for Tax tool, CEST, which is also used to determine IR35 status.

In this Upper Tribunal, HMRC’s appeal was dismissed, with judge Mr Justice Zacaroli maintaining that a group of referees engaged by PGMOL from 2014 to 2016 were self-employed and should not be classed as employees of the association. As a result, the £584,874 HMRC was demanding in unpaid income tax and national insurance contributions will not need to be paid.

The absence of Mutuality of Obligation (MoO), which HMRC views as the obligation an employer has to provide paid work and the obligation an employee has to accept it, played a key role in the judge upholding the original verdict, made in 2018. 

That the referees could work when they wanted and could withdraw from a match if their work commitments changed at the last minute were two of the host of reasons that HMRC’s appeal was dismissed, with the court notes stating “there was “insufficient mutuality of obligation” to give rise to a relationship of employment.” 

While this wasn’t an IR35 case given the referees in question did not work via personal service companies, the fact that it hinged on MoO has cast further doubt over the reliability of CEST - the tool used to determine both employment status and IR35 status. 

CEST ignores MoO - the tool works off the basis that this crucial aspect of the IR35 legislation exists in every engagement. However, this isn’t the first nor will it likely be the last tax tribunal that demonstrates MoO’s absence, which begs the question - why is one of the three key IR35 tests missing from CEST? Why is HMRC encouraging hiring organisations to use the tool to determine a contractor’s IR35 status when its answers do not reflect IR35 case law and cannot stand up in court?

The tool’s flaws have been well-documented, with the recent House of Lords report into IR35 criticising the technology: “We conclude that HMRC is imposing a heavy burden on businesses by requiring them to determine status using a complex, fact-specific test. We agree with our witnesses that the support offered by HMRC in determining status—and the CEST tool in particular—falls well short of what is required.”

And while the Government has often been urged to make drastic changes to CEST so it takes MoO into account, HMRC’s latest high-profile tax defeat shows that it cannot and should not be trusted to determine IR35 status, nor the employment status of self-employed workers for that matter. 

With the Treasury reiterating in Parliament recently that IR35 reform in the private sector will be enforced on 6th April 2021 - and the Finance Bill will be amended in “due course” to include the reformed IR35 legislation - it’s clear from this case that the Government must address CEST’s failings before the rollout of next year’s changes.

How much attention the Government will pay to PGMOL’s tax win and the concerns held by the Lords over HMRC’s IR35 tool remains to be seen. Given the Treasury has regularly stated that it believes the tool is capable of delivering accurate information - if only for 85% of the engagements put through it - the chances seem very slim that CEST will be reliable by April 2021.

But businesses readying themselves to assess the IR35 status of contractors should take note that CEST isn’t mandatory - independent IR35 status reviews carried out by a trusted expert are better-placed to ensure IR35 compliance.

As rightly pointed out in the Lords report, third-party providers, “such as Qdos Contractor”, have a “higher reputation in the marketplace and have been proven to give more reliable results because they rely on case law.”

Qdos specialises in IR35 compliance. We conduct, on average, over 2000 IR35 status reviews every month and have handled more than 1,600 IR35 enquiries. We are currently working with more than 300 recruitment agencies and end-clients, helping them manage incoming changes to the IR35 legislation.