The origins of Mutuality of Obligations as a determining feature of employment status were established early on, before the introduction of IR35. The test featured in many employment tribunal cases, such as; Nethermere (St Neots) v Gardiner and Taverna, Carmichael v National Power Plc, as well as the case of Ready Mixed Concrete (South East) Ltd. V. Minister of Pensions and National Insurance (which is heavily cited for IR35 cases) to name but a few.
Despite its age in the field of employment status, it remains one of the most misunderstood and misused tests for determining IR35.
HMRC’s guidance on Mutuality of Obligation, contained within its own Employment Status Manual (ESM0500), states that;
“The significance of mutuality of obligation is that it determines whether there is a contract in existence at all. Without mutuality of obligation there can be no contract of any kind.
Only when the basic requirements for mutuality of obligation have been identified is it possible to then consider whether the contract is a contract of employment or a contract for Services (self-employment).
The basic requirements as to the mutual obligations necessary to determine whether there is a contract in existence at all are:
These basic requirements 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.”
HMRC considers MOO with little weight in an investigation. In recent IR35 enquiries we have defended, HMRC have taken the opinion that there will be an existence of MOO where there is simply an offer and acceptance of work.
The test is also absent from HMRC’s Check Employment Status for Tax (CEST) tool which HMRC have developed to assist public sector bodies determine the employment status of its contractors for the IR35 reform which was implemented within the public sector in April 2017, for which HMRC have been heavily criticised.
HMRC have stated that the tool had been designed to exclude Mutuality of Obligations because it is already assumed to exist simply because the CEST tool is being used, i.e. there is a contract in place.
This view is simplistic and is not supported by IR35 case law.
Case law has been inconsistent in defining what mutuality of obligations means, which has led to much of the confusion surrounding the test, ultimately diminishing its importance in an investigation by HMRC. This is largely because a lot of the case law, particularly that relied upon by HMRC, includes employment law cases despite there currently being a disparity between determining employment status for tax and determining status for employment rights.
The Judge in the employment case of Nethermere (St Neots) Ltd v Gardiner and Taverna (which found the applicants to be employees), referring to the words of MacKenna J in the case of Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance (ESM7030), stated;
“There must be a wage or other remuneration. Otherwise there will be no consideration, and without consideration no contract of any kind. The servant must be obliged to provide his own work and skill.”
There must, in my judgment, be an irreducible minimum of obligation on each side to create a contract of service. I doubt if it can be reduced any lower than in the sentences I have just quoted. “
Whilst the above is true, it would be true for both a contract of employment, and a contract for services. Therefore, for determining IR35 status, the test of mutuality of obligations is required to delve deeper than the “irreducible minimum”.
Therefore, 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.
This was demonstrated in a more recent IR35 Tribunal case of JLJ Services Ltd v HMRC (2011), where Judge Howard Nowlan stated:
“There is a feature in this case where the phrase “mutuality of undertakings” has some resonance. 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.”
This is also supported in the IR35 cases of Synaptek v Young (2003), and Marlen v HMRC (2011) which demonstrated an absence of MOO in situations where the contractors were sent home without pay when not providing their services.
Case law therefore certainly does demonstrate the importance of the Mutuality of Obligations test and how it can be helpful in highlighting the differences between employment and self-employment. Despite that, there are limitations to the Mutuality of Obligations argument and we would not advocate attempting to persuade a Tribunal of self-employed status solely based on this test. Combined with other factors such as control and personal service/right of substitution, it certainly can be a contributing factor and is one which a Tax Tribunal will recognise.
Indications of a lack of MOO throughout the contract could include:
where an engagement is for a specific piece of work, or a specified period of time, there is unlikely to be scope for dismissal by period of notice. This will be particularly relevant in cases where the contract is for a short duration.
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