Demystifying mutuality of obligation
Mutuality of obligation (MOO) is a fundamental aspect of a contract of employment and therefore should rank as an important status test in deciding whether or not a contract falls inside or outside of IR35. HMRC, however, are loathe to discuss the issue and have reduced this factor to a very basic definition as set out in their Employment Status Manual 0543:
– the engager must be obliged to pay a wage or other remuneration; and
– the worker must be obliged to provide his or her own work or skill
These very basic requirements, however, are present in both a contract of service (employment) and a contract for services (self-employment) and, on their own, will not determine the nature of a contract. We, therefore, have to look beyond this and advance the MOO argument.
In the First Tier Tax Tribunal IR35 case of JLJ Services Ltd v HMRC (2011), while MOO was not a major point of issue, Judge Nowlan provided a useful definition of ‘mutual undertakings’ when he said:
“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 even when work is short. Contract workers will be dispensed with first…With short-term engagements, none of this will be relevant with contract workers.”
In the High Court IR35 case of Synaptek v Young (HMRC)(2003), the judge distinguished between MOO post contract and MOO during the contractual term. For HMRC to concede an absence of MOO and therefore point towards a self-employed contract, mutuality should not be present while the contract is in progress in addition to there being no obligation to offer and accept work once the contract is finished. This was demonstrated in another IR35 case, Marlen Ltd v HMRC (2011), which was heard before the First Tier Tax Tribunal. Mr Hughes (contractor) provided engineering, design and drafting services to JCB. There were some occasions when the computer servers broke down, and the contractors were sent home, without pay, whereas JCB employees remained in place and were remunerated. This showed that JCB did not consider itself under any obligation to provide work or pay even after an offer had been made and accepted. Marlen terminated the contract early when a better off came along, further confirming that both parties understood that the contract could be terminated at any time and without consequence. The Tribunal, therefore, had no hesitation in concluding that the relationship between contractor and end client was one in which MOO was not present.
It is therefore important to address MOO on all levels, i.e., not only should there be a lack of mutual obligations once the work has been completed but also, and more significantly, while the work is being undertaken. If this is a reality, then a contractor is on very strong ground to force HMRC to accept the MOO issue.
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