A Supreme Court judgement on the employment status of football referees and a number of changes to the IR35 rules (and umbrella companies) have been announced by HMRC.
Summary of IR35 rules
IR35 is an anti-avoidance measure that targets “disguised employment,” where individuals are engaged indirectly by end clients as if they were employees but operate through a personal service company (PSC) or other intermediary, so as to reduce overall tax costs.
Where an individual contractor is deemed to be inside IR35, the income is subject to PAYE tax and National Insurance, on the same/similar footing to an actual employee.
The responsibility for determining IR35 status depends on the size of the hiring company (for non-public sector organisations).
Who determines the deemed employment status under IR35 – "Small" company classification and a (welcome) change in goal posts
For "Medium and Large Companies", it is the end client that is responsible for assessing IR35 status. However, if the company is "small" then it is the individual contractor working with small businesses that remains responsible for determining their own deemed employment status. This assumes that such a business is not a public sector organisation since the size tests are irrelevant for such organisations.
As of 6 April 2025, the definition of what is a "small" company/business for the purposes of IR35 has changed (following the change to the Companies Act 2006), with an increase to the financial thresholds. HMRC's Manual at paragraph ESM10006A has been updated accordingly.
This change will result in more businesses now qualifying as small (where they were previously classed as medium-sized) thus shifting IR35 responsibility (and any potential tax exposure) back to contractors and their personal services company/intermediary.
The updated criteria are:
- Turnover: Up to £15 million (previously £10.2 million)
- Balance sheet total: Up to £7.5 million (previously £5.1 million)
- Number of employees: 50 or fewer (this is unchanged)
If an end client was close to the original thresholds and was classed as medium-sized, then it is worth them reconsidering their position and application of the IR35 rules accordingly.
It should be remembered that in a corporate group structure, if the parent company or another group company is medium or large for these purposes, then all other companies in the group will need to operate IR35 as if they were also medium or large.
Employment Status – the CEST tool
According to HMRC, as of 30 April 2025, "The check employment status for tax tool has been amended to simplify the language. We have removed information for some customers where special rules apply and covered this within the tool itself. Useful links have also been included for related guidance."
The CEST tool has historically been criticised for being a rather blunt instrument, so if HMRC are to be believed, any simplification and user-friendly guidance would arguably be welcome (albeit at the risk of doing myself out of a job). However, I always advise that CEST should be used with some caution, since the questions asked and the responses elicited can be nuanced.
The facts of any particular contractor engagement will need to be known together with the contractual terms the parties are to sign up to. In many cases, there is a disconnect between the reality, the legality and the expectations of the parties. As an example, unbeknownst to the HR professional, Finance officer or procurement team member undertaking the CEST determination, the actual contract will stipulate that no substitute will be accepted by the client, when they have completed a CEST based on acceptance of a substitute.
Time will tell whether these new updates by HMRC will place greater emphasis on certain criteria (such as substitution and personal service, control, financial risk, business on own account etc) when determining employment status.
Employment Status - HMRC v Professional Game Match Officials Ltd
Determining an individual's employment status for tax purposes is critical for applying various tax regimes including IR35 and for correctly operating PAYE and payments under the construction industry scheme (CIS).
However, there is no statutory test to determine employment status for tax purposes so one has to apply tests established and refined by case law (hence the complexity of CEST!) and also look at the reality of the relationship (the facts).
In very simple terms, those tests revolve around there being mutuality of obligation (i.e. the individual provides their work/skill for remuneration with the 'employer' promising to pay and vice versa), a sufficient element of control over the individual in carrying out their work/skill and the other provisions of the contract consistent with it being a contract of employment.
The Supreme Court endorsed the approach that it was necessary to look at all relevant factors (both in contract and the circumstances, and whether or not consistent with employment) rather than focusing unduly on the issues of mutuality of obligation and control when determining as a matter of overall assessment, whether an employment relationship existed.
The case itself involved the employment tax status of part time football referees.
It was also noted in the case that although mutuality of obligation and there being a sufficient degree of control are prerequisites to there being an employment relationship, the extent of that control remains a relevant factor in the overall determination.
As the questions in the CEST tool allude to, this is a multi-factorial assessment and it will thus be important to understand those factors and how relevant they are to a particular engagement. Any CEST response is only as good as the information (and importantly, its accuracy) inputted.
Given HMRC’s active compliance measures and continued efforts to litigate on all things IR35, ensuring accurate classification and keeping thorough documentation is essential for both businesses and contractors to avoid penalties and disputes.
Recruitment agencies and umbrella companies
The same sentiment will also apply to those recruitment businesses that use umbrella companies. This is because from April 2026, the responsibility for accounting for PAYE for workers engaged through umbrella companies will be moved from the umbrella company to the recruitment agency.
Also a note of caution to end clients - where there is no recruitment agency in a labour supply chain, this responsibility will sit with the end client, so labour supply chain due diligence will remain key, not only for IR35 purposes but also for these new rules.
The draft legislation is awaited but is likely to be similar to the existing agency worker tax provisions. The crack down on the use of umbrella companies that avoid and evade tax has been building for some time and follows the 2023 consultation on their use (or misuse, as HMRC has seen it in certain cases).
With these changes, recruitment agencies will need to tread with greater caution when engaging with umbrella companies. This may result in some recruitment businesses taking payroll solutions in-house or moving to more established and reputable operators in the umbrella market who are transparent in their payment arrangements and can demonstrate tax compliance and good governance.
The government is also working to bring umbrella companies within the scope of the Employment Rights Bill, so it is not just tax compliance that is being targeted.
If you have any queries on IR35, umbrellas or employment status then please do get in touch. Anything football related can be saved for the pub.
