The weaknesses in HMRC’s case that Mutuality of Obligation (MoO) can be assumed to be present in all contracts have been anatomised by Kate Hardy, Consultancy Manager at Qdos Contractor, the tax advisory service for contracting professionals.
HMRC was forced to publish a clarification of their position on MoO after members of the IR35 Forum grilled them at the 11 December meeting. The minutes of the meeting, compiled by HMRC, include reference to the Revenue’s assumption that any contractor assessed using the Check Employment Status for Tax (CEST) tool will have already established MoO, as it is necessary for the existence of any contract.
Forum members asked officials to provide a ‘considered response’ by the end of January this year, but have only just released their response paper, six months later. Industry experts greeted the paper with a chorus of condemnation for its failure to offer any further explanation to the unsatisfactory one given in December.
Essentially, HMRC assumes that if CEST is used, MoO must already exist and does not need to be tested for, a belief that holds that it must exist in any contract whatsoever. As HMRC says: “Where work is provided and remuneration is paid, we will assume that there is mutuality of obligation.”
This contradicts recent tribunal decisions, which have observed case law to arrive at their conclusions. The judge presiding over the recent Armitage Technical Design Services v HMRC tribunal hearing said that the offer and subsequent acceptance of a work assignment: “does not amount to mutuality of obligations in the content of employment status.”
In October 2017, the judge presiding over the Jensal Software v HMRC hearing was clear that MoO does not amount to a contract of services. She pointed to a period during which one contract came to an end – the Department of Work and Pensions, which had engaged Mr Wells (the contractor owner of the personal service company), had no obligation to offer another contract, and, no more work was offered for a brief interval. She also emphasised that Mr Wells was not obliged to undertake the work offered and terminated the final contract when he came across a better offer.
Hardy concludes: “there is much evidence which suggests that HMRC’s explanation is not one which will necessarily be shared by the Tax Tribunals, and if HMRC are going to ignore such evidence they should be prepared to lose many more IR35 appeals, and IR35 experts like Qdos will continue to challenge their unsatisfactory explanation.”