UK Tribunal Rules on Employment Status Under IR35 in PD & MJ Limited v HMRC Case

Citation: [2024] UKFTT 38 (TC)
Judgment on

Introduction

In the case of PD & MJ Limited v The Commissioners for HMRC, the UK First-tier Tribunal (Tax Chamber) provided a decision focused on the applicability of the Income Tax (Earnings and Pensions) Act 2003, sections 48-61, and the Social Security Contributions (Intermediaries) Regulations 2000, often referred to collectively as the Intermediaries Legislation or commonly known as IR35. This ruling centered around whether the relationship between Mr. Phil Thompson and Sky UK Limited rendered Mr. Thompson an employee under a ‘hypothetical contract’ for tax purposes.

Key Facts

Mr. Phil Thompson, through his sole directorship within the appellant company PD & MJ Limited, entered into contractual relations with Sky to provide his services as a football pundit. While the direct contractual relationship existed between PD & MJ Limited and Sky, HMRC argued that, were the services supplied directly by Mr. Thompson to Sky, they would represent an employment relationship, thus bringing the arrangements within the scope of IR35 and subjecting the income to PAYE and NIC assessments.

The Tribunal was tasked to decide principally whether Mr. Thompson would have been considered an employee of Sky if a direct contract was in place, as opposed to the arrangement involving the intermediary, PD & MJ Limited.

The Tribunal applied a structured three-stage test to ascertain whether the arrangements fell within IR35:

  1. Identification of the actual contractual arrangements: This initial step involves a thorough examination of the existing contracts, clarifying terms that might be ambiguous, and considering implied terms necessary for business efficacy.

  2. Ascertaining the terms of the ‘hypothetical contract’: The Tribunal considered what the terms would be if a direct contract was substituted for the arrangements involving the intermediary.

  3. Assessment of the hypothetical contract against the criteria for an employment contract: The Tribunal relied on the pioneering case of Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance to establish whether the hypothetical contract would be considered employment using the following criteria:

    • Mutuality of obligation between the worker and the employer.
    • A sufficient degree of control exerted by the employer over the worker.
    • Other provisions of the contract consistent with it being a contract of service (employment).

The Tribunal also referenced relevant cases such as Atholl House Productions Ltd, Usetech Ltd v Young, and S&L Barnes Limited, in their analysis, drawing on these precedents for the interpretation of contracts and the application of IR35.

Outcomes

The Tribunal found that:

  • There was mutuality of obligation in the hypothetical contract.
  • Sky had sufficient control over when and where Mr. Thompson’s services were provided and the scope of services, in addition to control over what could be perceived as “employee-like” restrictions such as non-compete clauses.
  • The nature of Mr. Thompson’s role, fee structure, and reputation risk did not detract from an employment relationship under the hypothetical contract.

Ultimately, these findings led to the conclusion that if a direct contract had been in place, it would have been one of employment for tax purposes. Thus, the arrangements fell within the IR35 legislation.

Conclusion

The case of PD & MJ Limited v The Commissioners for HMRC illustrates the detailed and multi-layered analysis required under IR35 legislation to determine employment status for tax purposes. Key to the decision was the structured approach in evaluating actual contractual provisions, determining what a hypothetical contract would entail, and assessing control, mutuality of obligation, and consistency of other contract provisions with employment.

The Tribunal’s decision underscores the importance for both intermediaries and clients to carefully consider the true nature of their working arrangements, particularly whether those arrangements, if stripped of the intermediary entity, would constitute employment.

This case acts as a guiding precedent, reinforcing the legal principles and approach necessary to navigate the complexities of IR35 and provides valuable insight for legal professionals advising on matters of employment status within the context of tax law.