A document published last week by HMRC, confirming that its Check Employment Status for Tax (CEST) tool does not consider Mutuality of Obligation (MoO) when making IR35 tax status determinations, has come under fire from industry experts.

MoO describes an employer’s obligation to pay for work provided and a parallel obligation for a worker to undertake that work. Tax tribunals use it as one of the foundational tests to ascertain whether a contracting professional is within IR35.

But, the Revenue’s acknowledgement last week in a paper for the IR35 working group, the IR35 Forum, has sparked criticisms from experts. HMRC contends that MoO can be presumed to be present as a precondition for any contract between an employer and worker to exist. But, industry experts disagree with this presupposition.

The founder and CEO of online contractor support service, ContractorCalculator, Dave Chaplin, described the document as “garbled nonsense” that “entirely misconstrues the law.” He urged the Revenue to concede that the CEST tool had proven a “complete failure” – an admission, he said, that would trigger 750,000 demands from affected contractors to have their tax status re-evaluated.

He went on to emphasise that placing a complicated employment status test at the centre of the tax system has not worked for the full 18 years that IR35 has been on the statute book. HMRC, he said, has shown that it does not comprehend the law, as evidenced by its consistent losses in IR35 court cases. Asking how such an organisation could hope to educate 5.7 million private sector firms to do something it cannot get right itself, Chaplin added: “The whole off-payroll saga is descending into a farce.”

Julia Kermode, CEO of Umbrella Company trade association, the Freelancer and Contractor Services Association (FCSA), doubted that many of her fellow stakeholders on the IR35 Forum would endorse HMRC’s stance. She continued: “FCSA responded to HMRC’s draft MoO paper very clearly stating that we do not agree with their view, and that we believe MoO is a serious omission from their CEST tool. Quite simply, MoO is an essential element of IR35 status, as borne out in recent cases, and until HMRC’s position is revised, their CEST tool is fundamentally flawed by ignoring case law. Any roll-out of IR35 reform to the private sector is unthinkable until this is resolved.”

Seb Maley, CEO of contractor tax advice service, Qdos Contractor, said that not only was HMRC wrong to presume that MoO exists in every contract, it also needed to improve its assessment of other vital considerations, including control and personal service.

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