A recent case concerning football referees provides some useful guidance as to when individuals on part-time contracts may be seen as employees for tax purposes.
While the distinction between an employee and a self-employed contractor for tax purposes will sometimes be quite clear-cut, on other occasions it can be difficult to find the dividing line between these two classifications. Establishing this distinction is crucial, however, as it governs liability for tax and National Insurance.
In determining whether an individual is an employee or self-employed, the tax tribunals and courts will consider a range of factors, including:
- The level of control that the “employer” has over the individual – if the individual has more autonomy as to how and when they provide their services, it will be more likely that they are self-employed. If the individual can provide a substitute to do the work in their place, then that may suggest that the “employer” does not have a sufficient level of control, though it is not necessarily fatal to an employment contract being established.
- Mutuality of obligation – if the parties are required to provide and do work respectively, then it is more likely that there is an employment contract.
Professional Game Match Officials Limited (PGMOL) train and provide referees for professional football matches in England and Wales. Some referees work part-time only and are offered matches via an online system, usually with less than a week’s notice. Referees can refuse to take on a match, though an explanation for this would ordinarily be expected.
A referee accepting a match forms a contract between the referee and PGMOL, under which the referee agrees to officiate the game and submit a match report, and PGMOL agree to pay the referee a match fee. Both parties can withdraw after a referee accepts a match appointment but before the match is played, without any sanction or penalty – however, PGMOL may discipline a referee who fails to comply with match day procedures, including by removing them from the bank of referees to whom matches are offered.
In the view of HMRC, this was sufficient to form an employment contract, making PGMOL liable to deduct tax and make National Insurance contributions for the part-time referees. PGMOL disputed this and, after multiple appeals, the case eventually reached the Supreme Court.
In determining whether mutuality of obligation exists, the Supreme Court considered that a distinction must first be drawn between umbrella contracts, which govern continuous employment, and individual contracts governing single engagements, as in this case. For an umbrella contract, mutuality of obligation will only exist if the obligations on each party to provide and perform work respectively are continuous. However, for individual contracts, it is not necessary for such obligations to exist before or after the term of each individual contract. The fact that mutuality of obligation existed for the duration of each individual contract – meaning from the time that a referee accepted the match appointment until the submission of their match report – was sufficient. The fact that either party could withdraw from the contract without any penalty did not invalidate this mutuality of obligation – for as long as the contract was in place, the parties had mutual obligations to each other.
The Supreme Court also held that the level of control required for an employment relationship was not so high as to require that the employer be able to interfere in every aspect of the employee performing their duties. Rather, what was required was a “sufficient framework of control” in respect of each individual contract. In the view of the Supreme Court, the contractual obligations on the referee in the lead up to, during, and after the match, coupled with PGMOL’s right to impose sanctions on referees, meant that such a framework of control existed.
However, the Supreme Court were also keen to flag that mutuality of obligation and control are not the only factors to be considered when assessing whether there is an employment relationship for tax purposes – all terms of the contractual relationship and the surrounding circumstances of the parties must also be taken into account. As such, the Supreme Court remitted the case to the First Tier Tribunal to decide whether, taking those additional factors into account, the individual contracts were employment contracts for tax purposes.
This case highlights the risks involved with engaging self-employed individuals, such as consultants or contractors, from a tax perspective. Arrangements that appear to be distinct from employment on their face may, in fact, leave your business with liability for tax and National Insurance contributions. Consultancy agreements must be drafted with great care to avoid falling into this trap – as the Supreme Court have made clear, all of the terms of an agreement will be relevant in determining whether an employment contract exists.
If you would like employment law advice on establishing a consultancy arrangement or drafting a consultancy agreement, please do get in touch at [email protected]
