And HMRC's pursuit of tax revenue

In brief

HMRC has successfully challenged the tax treatment of independent contractors in two recent cases. The changing nature of case law and HMRC's drive to collect revenue and enforce the so-called IR35 rules means that more challenges in the future are likely. Following rule changes in April 2021, companies using the services of contractors engaged via their personal service companies (PSCs) need to determine the tax status of the contractors. If companies determine that the contractors would be employees if directly engaged, companies are now liable to apply PAYE and National Insurance. Companies engaging contractors, whether directly or via PSCs, should remain up to date with the latest cases and review their position regularly.

Key takeaways

HMRC continues to pursue cases relating to the tax treatment of personal service company contractors through the courts. The most recent case concerned a sports presenter for Sky. The First Tier Tribunal (FTT) determined that the individual fell within IR35 (i.e., effectively should have paid taxes as an employee), primarily because Sky had a material level of control due to a right of first call and editorial control. This is another example of HMRC's relative success against high profile individuals in the media sector. This case does relate to the pre-April 2021 position (i.e., where the contractor himself, rather than the client, was responsible for the relevant tax deductions), but the underlying principles are the same pre- and post-April 2021, so it is another indicator of cases that the FTT considers to be within IR35.

In another case, the Court of Appeal has remitted a decision back to the FTT concerning the tax status of football referees who were engaged directly as individuals. IR35 is not relevant to such contractors, but a similar test applies to determine whether they should be treated as employees for tax purposes. The Court found that there was mutuality of obligation when referees agreed to attend specific matches, even though they could decline to participate in a match once they had accepted it. It is now for the FTT to determine if there was a sufficient level of mutuality of obligation for referees to be taxed as employees.

In the public sector, where the rule change in respect of personal service company contractors happened earlier, HMRC has been pursuing public bodies that did not make the right determination about the status of contractors. This involved significant underpayment of taxes for the Department of Work and Pensions and the Home Office, along with penalties for the Home Office.

In light of these continuing HMRC challenges, companies engaging contractors should:

  1. Keep up to date with case law developments.
  2. Ensure that the practical reality reflects the contractual terms (and any CEST determination).
  3. Have processes in place to revist status determinations when things change, e.g., a contract is extended.


The majority of recent cases focus on contractors who engage via personal service companies (PSCs) and relate to the pre-April 2021 position. By way of reminder, before April 2021, it was for personal service company contractors engaged in the private sector to determine their own tax status. Since April 2021, this burden has shifted to the company which receives the services of the contractor. Similar rules have been in place in the public sector since 2017.

Recent case law has focussed on the following aspects of the test as to whether a contractor should be taxed as an employee or self-employed:

  • Control - Sky had first call on the contractor's service and Sky decided which events to cover. The FTT determined that this meant that Sky effectively controlled when the individual worked. In addition, even though the presenter had significant autonomy, the contractual provisions gave Sky editorial control and the ability to direct the presenter, which was sufficient for Sky to control how the work was performed.
  • Mutuality of obligation (payment terms) - The FTT determined that Sky was obliged to make monthly payments of a specific amount, regardless of the amount of work carried out by the contractor, and that this was sufficient to establish mutuality of obligation. This was not negated by the inclusion of a termination clause allowing Sky to terminate the contract at will. Similarly, in earlier cases, the uncertainty of whether a contract will be renewed or whether a contractor will be offered a new contract was not sufficient to negate mutuality in the current contract.
  • Mutuality of obligation (overarching agreement) - the referees had an overarching contract and then agreed to attend specific matches. The Court of Appeal held that this was sufficient mutuality of obligation for an individual match, even though the referees had the ability to decline the match without breaching their contract. It is uncertain whether this level of mutuality would be sufficient to tax the referees as an employee as this question has been referred back to the FTT.
  • Personal service - Sky had to agree to any substitute and Sky would pay any substitute, and so the FTT found that personal service was required, even if the substitute it suggested by the contractor.

Although HMRC indicated that it would work with companies during this tax year to ensure compliance, it is likely to seek to enforce the rules strongly in the future. Case law, particularly around substitution, mutulity of obligation and control is likely to develop as more cases make it to the tribunal/courts. Companies should ensure that they processes and status determinations are robust to withstand HMRC scrutiny.