The industry has long held the opinion that HMRC have wrongly excluded one of the key status tests from its Check of Employment Status for Tax (CEST) tool, ever since the tool for checking IR35 status was first released.
It is widely recognised that Mutuality of Obligation (MOO) is a key factor in determining employment status, however it seems that HMRC do not share this opinion despite case law supporting the fact that MOO is relevant in determining IR35.
In the IR35 Forum minutes dated 11th December 2017, forum members grilled HMRC on the CEST’s failure to address MOO. In the forum minutes, HMRC did provide a brief explanation regarding the absence of MOO within the CEST tool by stating that:
“It is assumed that a person using CEST will have already established MOO, which is necessary for a contract to exist, otherwise there would be no need to be using CEST to determine the status of the existing or hypothetical contract.”
Although HMRC were required to provide ‘a considered response’ by the end of January 2018, the response paper has only recently been published and disappointingly, fails to offer any more explanation than they stated during the Forum meeting in December.
HMRC already assume that MOO is in existence simply by entering into a contract. If CEST does need to be used, MOO will already exist in accordance with HMRC’s simplistic view. Their narrow opinion means that MOO will exist in any contract whatsoever and therefore would serve no purpose in determining employment status, but this is not the view held in Tribunal decisions, as laid out in case law.
According to HMRC, “the fact that a contract may be terminated does not affect mutuality of obligation during the contract, even if it may be terminated without notice…Where work is provided and remuneration is paid, we will assume that there is mutuality of obligation.”
In the recent Tribunal case of Armitage technical design services limited v HMRC, on the point of MOO the Judge stated that:
“HMRC’s case is that where one party agrees to work for the other in return for payment then this satisfies mutuality of obligation between the two parties. That would be true of every contract both employment and for service, otherwise the contract would not exist at all. The mere offer and acceptance of a piece of work does not amount to mutuality of obligations in the context of employment status.”
In the Tribunal case of lensal software ltd v hmrc, heard in October last year, the Judge stated in her findings that:
“On the particular facts of this case I take the view that although Mr Wells provided his service for payment, the mutuality of obligation does not of itself demonstrate a contract of services…there was a period during which one contract ended and the DWP was under no obligation to continue to offer a further contract. No further work was offered for a short period. Moreover Mr Wells was under no obligation to perform the work and in relation to the final contract Mr Wells terminated the final contract when a better offer presented itself.”
A lack of Mutuality of Obligation has been an important factor in much earlier Tribunal decisions, particularly Synaptek v Young (2003), Marlen Ltd v HMRC (2011), and Brian Turnbull v HMRC (May 2011) to name but a few. In the Employment Appeal Tribunal case of Propertycare v Gover (2004), Judge Peter Clark stated that:
“the cases, starting with Ready Mixed Concrete show that mutuality is more than a simple obligation on the employer to pay for work and the employee to do the work.”
As indicated above, there is much evidence which suggests that HMRC’s explanation is not one which will necessarily be shared by the Tax Tribunals, and if HMRC are going to ignore such evidence they should be prepared to lose many more IR35 appeals, and IR35 experts will continue to challenge their unsatisfactory explanation.
For HMRC it seems that this has been nothing more than a case of dotting the ‘i’s and crossing the ‘t’s.