HMRC assault mutuality of obligation test in IR35 appeal

In a rare outcome for employment status appeals the Upper-tier Tax Tribunal (“UTT”) have overturned a successful IR35 defence, finding that the long-standing Talksport radio presenter Paul Hawksbee was a disguised employee of the station.

Not only is it rare for an appellate court to interfere with fact-sensitive employment status decisions of lower courts, it is almost unique in an IR35 context – the only other known instance being the Larkstar case which was remitted back to the original tribunal for re-hearing.

As noted in our report on the original case, an appeal was inevitable as the First-tier Tax Tribunal (“FTT”) judgment was a split decision between the two judges, narrowly succeeding by virtue of the deciding vote of the presiding Judge.

Background facts

A detailed analysis of the facts can be found in the above-mentioned report on the FTT judgment. However, in outline, Paul Hawksbee provided his services to Talksport via his company, Kickabout Productions Ltd (“KPL”) and presented the “Hawksbee and Jacobs” show for 18 years.  90% of KPL’s income in the period under appeal came from Talksport, and he didn’t present on the radio for anybody else.  HMRC considered the arrangements to constitute disguised employment, but of course longevity and exclusivity are not sufficient to constitute employment: HMRC needed to demonstrate that the core elements of an employment status contract were satisfied.

In this regard there was no doubt that Paul Hawksbee was obliged to undertake the work personally (there was no right of substitution) and the FTT held that although there was a light touch, there was sufficient control to at least satisfy the minimum requirements of an employment contract.  The battle arena was once again whether there were sufficient mutual obligations to support an employment relationship.

In the original appeal hearing the FTT held that there was no contractual obligation on Talksport to provide any shows to KPL, and this, weighing in the balance with other factors, was sufficient to point away from employment.

HMRC challenged this finding.

Analysis

As stated above, it is rare for the UTT or any appellate court to interfere with the outcome of an employment status judgment. This is because employment status decisions usually involve (at least partly) questions of fact, which only the original tribunal can determine, having heard all the evidence.  The exception is where the FTT make an error of law, or where the findings of fact are so obviously incorrect as to be perverse.  HMRC attacked the FTT’s position on mutuality of obligations (“MOO”) on both fronts.

In essence, HMRC argued that the FTT had mistakenly held that there was no MOO in the contracts  as Talksport were contractually obliged to offer KPL 222 shows per year. HMRC also tried to argue that the UTT had got the MOO test wrong in the Professional Game Match Officials (“PGMOL”) case and that it didn’t matter that an employer had no obligation to offer work.

This second argument is insightful. It underlines that HMRC are still smarting over the PGMOL case and that the widely reported HMRC application to the Court of Appeal in that case is highly likely, as HMRC seek to overturn a hugely unhelpful judgment against them on MOO.  Unfortunately for HMRC their arguments that PGMOL was wrongly decided were unlikely to get very far in the present case given the presiding Judge here, Mr Justice Zacaroli, had also presided over the PGMOL case.

In the event it was unnecessary for the UTT to go as far as revisiting the MOO test itself. The UTT revisited the contracts between Talksport and KPL and decided that they had been misinterpreted by the FTT.  On a correct reading of the contracts there was an obligation on Talksport to offer work, and therefore sufficient MOO to satisfy the employment status test.

Conclusion

As is so commonly the case in disputes like this, the quality of the drafting of contracts was under intense scrutiny.  Talksport’s contracts were seemingly drafted with the IR35 test in mind and, in the second version, considered in this appeal they had gone to the trouble of including an explicit clause stating that there was no obligation on Talksport to offer an ‘assignment’ to KPL.

However, this, in itself, was not sufficient. There was no lack of MOO clause in the first written agreement, the definition of an assignment was unclear (and reading it as meaning ‘any work at all’ contradicted other aspects of the contract), and the overall effect of the written agreement was to oblige Talksport to provide at least some work to KPL.

If the true agreement between Talksport and KPL was that Talksport did not wish to have any obligation to offer work, this ought to have been clearly and unambiguously recorded in the written contracts.  Clearly this was a finely balanced outcome, having been successful at the FTT, but ultimately the true contractual position was ambiguous enough to allow HMRC to pursue this appeal successfully.  It is also noteworthy that the first contract named Paul Hawksbee personally as opposed to KPL (although the tribunal accepted this was an administrative error).

This case underscores the need to invest time and adequate resources to put in place clear and well-drafted written contracts. This will avoid the unintended consequences of IR35 and disguised employment.  With the private sector IR35 reform looming and HMRC entrenched in their position on MOO, there are likely to be many disputes of this particular nature ahead.

With a reprieve until April 2021 there is time for engagers and consultancies to review – and if necessary, reframe – their contractual obligations to one another. The law is clearer now than it ever has been that a genuine agreement between parties to engage on self-employed terms excluding obligations to offer and/or accept work will defeat an IR35 challenge.  This must, however, be precisely and unambiguously recorded in any written agreement.