Off-payroll working rules: IR35 and mutuality of obligation 

Andy Hamman, Director, Employment Tax
Ahead of the changes to the IR35 rules from April 2021, it is important to consider how the traditional employment status indicator of ‘mutuality of obligation’ impacts on whether the IR35 rules will apply or not.

Currently the changes mean that where a contractor is engaged via an intermediary by a medium or large-sized organisation, and the services provided are more in the nature of an employed rather than self-employed engagement, then income tax and National Insurance Contributions (NIC) should be deducted under PAYE from payments made to the intermediary.

There is no statutory test for employment/self-employment and so the indicators of employment are determined by case law. This has led to different tests being afforded different “weight” and most recently a number of tribunal cases have highlighted the importance of ‘Mutuality of Obligation’.

What is Mutuality of Obligation (MOO)?

HMRC consider that MOO exists where:

  • the engager is obliged to pay the worker; and
  • the worker is obliged to provide their own work or skill.

HMRC’s position is that these basic requirements for MOO are necessary for a contract to exist but they state in the HMRC Employment Status Manual that these “could be present in either a contract of service or a contract for services and, on their own, will not determine the nature of a contract”.

Therefore, MOO was not included by HMRC in either the previous or current version of the Check Employment Status for Tax (CEST) tool (HMRC’s online employment status indicator).  In July 2018, HMRC released a paper explaining why and its approach when considering IR35 cases. Their key point was that CEST did not explicitly look at MOO as it was designed to determine whether a contract is one of employment/self-employment; it was assumed that a person using CEST will have already established MOO as it is necessary for a contract to exist in the first place. In summary, HMRC’s view was that MOO was largely irrelevant for determining whether a contract was one of employment or self-employment.

Professional advisors have disputed this view considering that where the engager is obliged to offer work to the worker and the worker is obliged to do that work, this is an indication that the contract would be one of employment. If they are not, this is a strong indication that the worker is self-employed (or outside IR35 if the services are provided via an intermediary).

How does the tax tribunal view MOO?

HMRC have lost two more recent first tier tribunal (FTT) IR35 cases. One involved ITV presenter Helen Fospero and her personal service company (PSC) Canal Street Productions Limited. The other, Richard Alcock and his PSC, RALC Consulting Ltd (which as an interesting aside had been providing services to Accenture and the Department for Work and Pensions for work on the development of the universal credit system).

The interesting feature common to both cases was that the FTT placed great weight on MOO.  In each case the FTT found that the workers were genuinely self-employed and that IR35 therefore did not apply.

The question addressed in both cases was whether the circumstances were such that, if the individual’s services had been provided under a contract directly between themselves and the engagers, the individuals would each be regarded for income tax purposes as an employee.

Reference was made to the essential elements of an employment contract as set out by McKenna J in Ready Mixed Concrete (South East) Limited v Minister of Pensions and National Insurance [1968] 2 QB 497. That test requires: (i) MOO in relation to the obligations to perform work; (ii) a requisite degree of control by the putative employer; and (iii) that the other provisions of the contract are not inconsistent with a contract of employment.

Judge Ashley Greenbank in Canal Street held that “there is insufficient MOO to establish a contract of employment in the present case” commenting that “the lack of MOO outside the individual engagements was usually indicative of self-employment” and confirming that while control is an important factor it is not determinative alone as the other features of the relationship must also be considered.

In RALC Consulting FTT stated that “the fact that Mr Alcock was engaged under a series of contracts and at the end of each one there was no obligation to offer further work outside of those contracts is not a relevant consideration”. Further, “the mere fact that someone is engaged on a succession of short contracts is not in itself a factor which can usefully be considered in isolation and it must be considered alongside the more general question of whether the worker was in business on their own account”. FTT found that there was no MOO within each contract. Therefore, when examining MOO, the FTT concentrates on the availability of work during the course of the contract rather than the offer of further work upon its completion.

What does this mean?

Therefore, despite its absence from CEST, MOO should not be assumed in determining status for IR35 purposes. For there to be a contract of employment, there must be MOO at least within the engagement (i.e. is there certainty of work and an obligation to perform it rather than just an intention to do so) and this on its own is not determinative but must be considered alongside the other features of the relationship in determining whether it is one of employment.

This was first published in Accountancy Daily in January 2020.

Contact us

Andy Hamman
Andy Hamman
Director, Employment Tax