Court of Appeal gives guidance on mutuality of obligation for employment tax status

The Court of Appeal said that where referees are engaged by individual contract for each match, pursuant to an overarching contract, whether there is sufficient mutuality of obligation for the referees to be employees for tax purposes should be considered in relation to the contract for the particular engagement and not by reference to the overarching contract.

The fact that the overarching contract is not a contract of employment and there is no obligation under the overarching contract to offer work, or to do work if offered, does not mean that the single engagement cannot be a contract of employment. A single engagement can give rise to a contract of employment if work which has in fact been offered is in fact done for payment, the court said.

Chris Thomas, an employment tax expert at Pinsent Masons, the law firm behind Out-Law, said: “This is a disappointing decision for taxpayers because the Court of Appeal decision waters down the concept of mutuality of obligation where individual engagements are offered under an overarching contract”. 

“The case will be welcomed by HM Revenue & Customs (HMRC) as backing for the approach which it has consistently taken in relation to mutuality – i.e. that it will effectively be present in every case, hence its omission as a factor in the CEST tool. It will undoubtedly be a blow for businesses who engage labour on an ad hoc pattern, and who may have sought to rely on an absence of any obligation to provide or accept each engagement,” he said.

HMRC has said previously that its ‘check employment status for tax’ (CEST) online tool does not need to consider mutuality of obligation. Its view is that this will already have been established before the tool is used if work is provided and remuneration is paid.

The decision related to referees engaged to officiate at matches primarily in Leagues 1 and 2 of the Football League, but also in the Championship and the FA Cup, and by way of 'fourth official', in the Premier League. The individuals in question undertake refereeing duties in their spare time, typically alongside other full-time employment.

HMRC had attempted to recover income tax and employer National Insurance contributions (NICs) from Professional Game Match Officials Limited (PGMOL), the company set up to engage referees for Premier League, FA Cup and English Football League matches. HMRC argued that the referees were in employment relationships with PGMOL even though they did not have formal employment contracts.

Before the start of the football season, PGMOL approaches referees and appoints to its national group those who sign a code of practice. The referees do not enter into formal employment contracts with PGMOL but are paid match fees and expenses at an agreed rate by PGMOL. Referees are not guaranteed or obliged to accept match appointments, and can mark themselves as unavailable for work for any reason.

PGMOL argued that the arrangements with the referees did not constitute employment contracts because there was no mutuality of obligation as there was no legal obligation on PGMOL to provide work or on the referee to accept work offered.

The Court of Appeal said that the First-tier Tribunal and the Upper Tribunal were wrong to have decided that there was no contract of employment in respect of the individual engagements because either side could pull out of the engagement before a game, without any breach of contract or any sanction. The court said that the ability of either side to pull out before a game did not mean that there was insufficient mutuality of obligation. If there is a contract, the fact that its terms permit either side to terminate the contract before it is performed, without breaching it, is immaterial. The contract subsists with its mutual obligations unless and until it is terminated by one side or the other, the Court of Appeal said.

The First-tier Tribunal also decided that PGMOL had insufficient control over the actions of the referees for them to be employees. However, the Court of Appeal said the FTT had misdirected itself by considering whether PGMOL had a right to step in while the referee was actually officiating. In the context of work which was not susceptible of practical control since it required the exercise of the referee’s individual judgment, the court said the FTT should have considered whether the whole relationship between PGMOL and the referees including the terms of the overarching contract, amounted to a sufficient framework of control.

Court of Appeal judge Lady Justice Elizabeth Laing listed a number of features of the relationship between PGMOL and the referees which she said indicated control including PGMOL's power to promote and demote referees, some of the expectations in the code of practice and the referees’ agreement to abide by a fitness and training protocol and undergo annual fitness tests.

Each referee had a coach appointed to them who would discuss areas for improvement and targets with the referee and might make a written report after a match. Although a coach could not tell a referee what decisions to make on the pitch, the judge said that by giving advice afterwards, a coach could influence a referee's approach to decisions in later games.

The Court of Appeal referred the case back to the FTT for it to make rulings as to whether on the facts mutuality of obligation existed and whether PGMOL had sufficient control over the referees for them to be employees for tax purposes.

“Although the case has been referred back to the FTT for it to make findings on the precise facts, the Court of Appeal has given a strong steer that it is likely that the referees should be treated as employees,” Chris Thomas said.