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What Does HMRC's Latest Tribunal Defeat Mean for IR35 Reform?

IR35

Following hot on the heels of the House of Lords damning review of the delayed Off Payroll IR35 reform, HMRC have yet again failed to persuade the judges that their interpretation of Mutuality of Obligation (MOO) is correct.

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An appeal judgment, with major ramifications for contractors and IR35, has been made in the Upper Tribunal. In the ruling, on May 6th 2020, HMRC failed in its appeal against a 2018 first-tier tribunal that found that football referees engaged by Professional Game Match Officials Limited (PGMOL) were not employed by the organisation, and as a result that PGMOL does not owe £583,874 in additional tax and National Insurance Contributions.

The First Tier Tribunal Ruling

Before the First Tier Tribunal, PGMOL contended there was no contract at all between it and the National Group referees. The First Tier Tribunal dismissed that contention, concluding that there was both an overarching annual contract between PGMOL and each of the National Group referees  had a series of separate contracts between PGMOL and each National Group referee in relation to each specific match for which that referee was engaged.

However, the FTT disagreed with HMRC’s contention that one or both of the overarching contract and each individual contract was a contract of employment, concluding there was no mutuality of obligation outside individual engagements and on that basis the overarching contract was not a contract of employment; they went on to say that there was insufficiency of mutuality of obligation and insufficiency of control in the individual contracts.

The Upper Tribunal agrees

HMRC appealed the ruling, meaning the case was heard by the Upper Tribunal. Once again the case centred on MOO, and Mr Justice Zacaroli dismissed HMRC’s suggestion that the mere existence of a contract is enough to satisfy MOO, concluding:

“We do not accept that a contract which provides merely that a worker will be paid for such work as he or she performs contains the necessary mutuality of obligation to render it a contract of service: the worker is not under an obligation to do any work and the counterparty is not under an obligation either to make any work available or to provide any form of valuable consideration in lieu of work being available.”

An HMRC spokesperson has confirmed their intention to continue their appeal in the Court of Appeal.

HMRC habitually get MOO wrong

Amongst IR35 experts there has been a long-held belief that HMRC do not fully understand their own employment status rules.

HMRC have consistently presented the idea that MOO exists purely as a result of a contractual relationship and time and time again the courts have rejected this interpretation. We reported, last year, on a number of cases HMRC lost through their own view of MOO and the PGMOL case has further weakened their case.

How does this affect the reform of IR35?

The private sector reform of IR35 is due to take place in April 2021, despite the Lords review describing IR35 as “riddled with problems, unfairness and unintended consequences” and calling for wholesale reform of the legislation itself. So where does this case now leave us?

MOO is one of three important tests for IR35 status, and for HMRC to consistently interpret it incorrectly is potentially disastrous. It is to be hoped that they will now accept the courts’ interpretation and amend their approach and their guidance to reflect this. Otherwise they will continue to waste taxpayers’ money with doomed tribunal cases.

HRMC’s CEST Tool 

Many end clients used HMRC’s own CEST tool to assess the IR35 status of their workers, only to find that the tool omitted to ask any questions with regards to MOO and consequentially misclassified workers as “employed for tax purposes”.

This latest defeat has once again confirmed that HMRC’s interpretation of the legislation is incorrect, and must inevitably lead to the question as to whether CEST is fit for purpose as we begin to see end clients prepare for the April 2021 changes.

Surely now, HMRC must concede that their view of MOO is flawed, that their own tool provides misleading assessments and that now is the time to take a look again at their Off-payroll proposals?

If you have any questions, or if we can help in any way, please call our expert team on 01296 468483 or email info@orangegenie.com.

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