In IR35

The omission of Mutuality of Obligations (MOO) from HMRC’s CEST tool contributes significantly to its inaccuracy, the leading tax consultancy for contracting professionals, Qdos Contractor, has claimed.

Kate Hardy, Consultancy Manager at Qdos Contractor, argues that HMRC’s decision to attach little weight to MOO in IR35 assessments was an error of judgement. MOO was, as a result, excluded as a consideration in the CEST tool.

The Revenue’s take is that MOO merely confirms that a contract exists and does not specify what kind of contract it is (i.e. a contract of employment or a contract for services). According to HMRC’s Employment Status Manual, MOO simply describes a minimum of obligation on both sides of the employer-worker relation to create a contract: an engager must be obliged to pay a wage or other remuneration, while a worker is mutually obliged to provide work or skills.

But according to Hardy, this interpretation is too simplistic and is not supported by IR35 case law, which is both complex and inconsistent in defining the precise meaning of mutuality of obligations. The chief reason for this is that much of this body of law, especially that relied upon by the Revenue, revolves around employment law cases even though there is a clear discrepancy between evaluating employment status for tax purposes and for employment rights.

Citing the IR35 Tribunal case of JLJ Services Ltd v HMRC (2011), Hardy raises a crucial point that delves deeper than the minimalist interpretation of MOO:

“… although an element of MOO exists where there is a contract in place, if there is an absence of mutuality of obligations during the agreement, e.g. no obligation for the engager to continue to keep offering work and no obligation for the contractor to keep accepting work, whilst the contract is ongoing, then this is indeed a pointer towards genuine self-employment.”

She also cites the IR35 cases of Synaptek v Young (2003) and Marlen v HMRC (2011), both of which demonstrated an absence of mutuality of obligations. In both instances, the contracting workers involved were sent home without pay when not providing their services.

MOO is likely to be absent throughout the contract in each of the following:

  • Where there is a right to terminate the contract early (especially when no notice period is specified).
  • Where the client is able to end a contract if a contractor’s services are no longer needed.
  • Where contractors must take time off without pay and with little notice in the event of a client’s organisation having a period of shutdown.

In omitting MOO case law from its assessment criteria, CEST determinations are liable to be seriously flawed.

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