Don’t forget Mutuality of Obligation

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Mutuality of Obligation (MOO) seems to be the black sheep of the three key status tests. It’s ambiguity and HMRC’s attempt to diminish its importance, leads many to question whether it’s worth consideration at all. However, MOO remains a key aspect of a contract of employment and should therefore still exist as an important status test in determining IR35 status.


Mutuality of obligation (MOO) seems to be the black sheep of the three key status tests. It’s ambiguity and HMRC’s attempt to dimish its importance, leads many to question whether it’s worth consideration at all.  However, MOO remains a keys aspect of a contract of employment


HMRC’s attempt to diminish its importance is demonstrated in their Employment Status Manual 0543, where the test is reduced to the following:

·        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

Such broad requirements could be a feature of any contract; both self-employed and employed, so on its own, the features above would not be too helpful in determining IR35 status – but this simply means that it’s necessary to delve a little deeper into the MOO argument.


In the First Tier Tax Tribunal IR35 case of JLJ Services Ltd v HMRC (2011), whilst MOO was not a conclusive pointer, Judge Nowlan provided a useful definition of ‘mutual undertakings’ stating that:


“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 Synaptek v Young (HMRC) (2003), a High Court IR35case, the judge made an extremely important distinction between MOO after the contract and MOO during the contract. The case set out the importance of considering mutuality of obligation during the agreement. For example, there being no obligation for the services to be provided for the entire duration of the contract, as well as there being no continuing obligation once the contract has ended.


In another IR35 (First Tier Tax Tribunal) case, Marlen Ltd v HMRC (2011), Mr Hughes, the contractor, provided engineering, design and drafting services to JCB.  There were often issues with the computers servers and unlike JCB’s employees, contractors were sent home and would not be paid for the time away from providing the services. This helped to demonstrate that JCB did not consider itself to be under any obligation to the contractor to provide work or pay. This understanding was clearly reciprocated by the contractor, when he terminated the contract early when offered another contract. This helped the tribunal to conclude with little difficulty that there was no existence of MOO.


MOO should therefore be addressed, not only once the contract has ended but also, and more importantly, during the contract. If there is a clear lack of mutuality of obligation during the contract, particularly as set out in the Marlen case, there will be a strong case for HMRC conceding that no MOO exists. Whilst the test is rarely conclusive by itself, combined with the other key status tests such as Control and Right of Substitution, a lack of MOO is still a very useful ally.


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