Contractors’ Questions: Is Mutuality no longer relevant for IR35?
Contractor’s Question: The HMRC IR35 tool – CEST - still does not make any reference to Mutuality of Obligation, despite recent suggestions it will be looked at. Is this omission in CEST a failing or does MOO no longer apply?
Expert’s Answer: In our opinion, the lack of Mutuality of Obligation (MOO) in HMRC’s CEST tool is a failing.
HMRC continues to give little weight in an investigation to MOO and continues to present the view that MOO exists simply because there is an offer and acceptance of work. This is too simplistic and goes against case law established as far back as 1966 and the Ready Mix Concrete employment law case, where there have been three overriding principles that need to be present in order to prove an employment relationship, and MOO is one of those.
Case law has continued to demonstrate the importance of MOO when determining employment status. In the IR35 tribunal case of JLJ Services Ltd v HMRC (2011), the judge stated: “A touchstone of being an employee is the hope and expectation that there will be some relationship of faithfulness between employer and employee. In other words, the employer will generally endeavour to keep staff employed when work is short. Contract workers will be dispensed with first.”
In the same year, the case of Marlen v HMRC (2011) demonstrated an absence of MOO in situations where the contractors were sent home without pay when not providing their services.
Tribunals and courts continue to refer to the importance of MOO in their decisions. In October 2018, an employment tribunal judge found that the CEST tool was unreliable and gave an incorrect decision when considering MOO.
In the case, contractor Tony Elbourn was engaged by agency Qualserve Consulting Ltd to complete a contract for their client, the Met Office. Under the public sector off-payroll rules, the Met Office were responsible for assessing Mr. Elbourn’s IR35 status and after CEST returned a clear verdict that IR35 applied, Mr. Elbourn was treated as “employed for tax purposes”. Mr. Elbourn was actually appealing to the tribunal to have unfair deductions from his salary repaid, however he lost the case as the tribunal judge found that Mr. Elbourn was actually self-employed. This gives a clear indication from a presiding judge that CEST is not fit for purpose. Despite losing his case Mr, Elbourn still came out on top, as having been found to be self-employed, all PAYE and NIC that had been deducted by his agency is now repayable.
In our view, HMRC cannot have failed to have heard the criticism of their CEST tool and its lack of consideration of MOO. A guidance note issued by the Treasury, post-Budget 2018, indicates that HMRC is continuing to work with stakeholders to address their consultation comments, and that they will “identify improvements to CEST”. It has yet to be seen if this means that the Revenue will include MOO.
In the meantime, contractors should look to gather evidence supporting the lack of MOO in their relationships with end-clients.
Indications of a lack of MOO throughout the contract could include:
- a right for the client to terminate the contract should the contractor’s services no longer be required
- a right to terminate the contract early (especially if no notice period is required)
- a clear end-date to demonstrate that the contract is not for the continuous supply of services
- if there are periods of shut down within the end client’s organisation, the contractor will be forced to take time off without pay and sometimes little notice.
The expert was Helen Christopher, operations director of contractor accountancy firm Orange Genie.