Key Learnings from PGMOL v HMRC as interpreted by the Supreme Court

In recent times, there have been findings from various courts that have impacted on the way that the off payroll (IR35) rules can be interpreted. This summary tries to capture their importance to interim managers and interim executives, adding to the resources available to IIM members.

Although the Supreme Court rulings give some guidance, they do not clarify all aspects from the PGMOL (Professional Game Match Officials Limited) case and have thrown it back to the First Tier Tribunal for further interpretation.

Why is the Supreme Court judgment in PGMOL important then?

The Court has clarified the following:

1. The tripartite test in Ready Mixed Concrete is good law. (McKenna J in Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497) [see end of article for the key quote from McKenna]
2. The bar for the Mutuality Of Obligation and Control (supervision, direction or control) tests (elements 1 and 2 in Ready Mixed Concrete) applying has been set, concerningly, at a low level.
3. The third multifactorial element of Ready Mixed Concrete takes on great significance in answering questions of employment status (for tax purposes). This is because, in applying this third element, you can have regard to the strength or otherwise of the Mutuality Of Obligation or Control in weighing up the different factors.
4. When read in conjunction with the Court of Appeal’s judgment in Atholl House [2022] EWCA Civ 501, the courts provide definitive guidance as to the tests to be used in determining employment status for tax purposes at least.

The Supreme Court has therefore confirmed HMRC’s view as set out in its guidance manuals, that when ‘money for work‘ occurs there must be mutuality of obligation (MOO).

The Check Employment Status for Tax (CEST) tool provided by HMRC to determine  tax status makes MOO an integrated, explicit assumption. In this sense, HMRC have been consistent.

HMRC has said for a long time it will stand behind the CEST results, so long as the test has been taken ‘fairly’.

Many freelancers have argued MOO requires a much greater commitment between the parties than money for work, presumably on the basis that any commercial agreement or contract has this minimum characteristic. This historically is the view that people who are in business on their own account are operating a business to business transaction.

The Supreme Court appears to have come down on the side of HMRC’s view regarding MOO, BUT there remains more interpretation it would seem, as we note below

The control point is very relevant for the hire of specialist interim managers or very senior interim executives. In these cases, it has been argued that their skillset and experience means that they are not under the control of their client. By emphasising that control exists in the Ready Mixed Concrete sense and applying this to PGMOL, where control is maintained to be exercised in some but not all areas, the Court has weakened this argument significantly.

The Supreme Court has not clarified the following:

1. There had been no discussion of the third Ready Mixed Concrete test in the lower courts and referred the matter back to the FTT.

In Ready Mixed Concrete, the three criteria are generally referred to as Mutuality Of Obligation, Control and the ‘third stage’. In PGMOL, the Supreme Court and the lower courts have been considering mutuality of obligation and control only.

One of the points to keep in mind is the thinking for many years that each point, although addressed individually, must be considered in the round; and it is this third point that holds the key to further interpretation in the light of the Supreme Court’s clarifications in points 1 and 2. The Court reached its view on MOO, at least in part, as the quality of the mutuality would be considered in the round in determining if the third stage of the Ready Mixed Concrete test was met.

In another long running case, Atholl House [2022] EWCA Civ 501, the Court of Appeal did address the third test approach. They made it clear that this is a multi-factorial test that must account for both the contract terms and pertinent matters which sit outside the contract.

So, having taken a view on MOO and Control (tests 1 and 2), you are required to complete the process and turn to the third stage. Interestingly, the Supreme Court said in its PGMOL ruling that was not the end of matters. Commenting and reinforcing the Court of Appeal’s judgment in Atholl House, they said: “It is not the case that once the pre-conditions of mutuality of obligation and control are satisfied, they drop out of the picture as relevant factors”.

This affirms MOO and Control continue to be relevant as part of the third stage assessment as to whether it has been met. The Supreme Court elaborated further that if MOO and Control tests were only just met, these low levels would be relevant factors to consider at Ready Mixed Concrete test 3 in determining if there is an employment contract for tax purposes.

So, in conclusion, the PGMOL case continues and the outcome from the First Tier Tribunal re-run to determine ‘test 3’ will be followed avidly by the c.4.1 million self-employed and particularly those interim managers and executives who are in business on their own account.

Ready Mixed Concrete: The Key Judgement Process

McKenna J said in 1968:

“I must now consider what is meant by a contract of employment. A contract of employment exists if these three conditions are fulfilled —

1. The servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master;
2. He agrees, expressly or impliedly, that in the performance of that service he will be subject to the other’s control in a sufficient degree to make that other master, and;
3. The other provisions of the contract are consistent with its being a contract of employment”.