Mutuality of Obligation or MoO is a feature of employment law that relates to contractual agreements. In the simplest sense, it refers to the obligation of an employer to provide work and pay for it, together with the obligation of the employee to personally do the work. Since the introduction of IR35 in April 2000, MoO has become an important factor in determining the employment status of workers, alongside rights of control and substitution. This has led to closer scrutiny of MoO as its ultimate definition is sought through various case tribunals. Contracting Wise takes a look at the on-going discussion surrounding MoO and its main points to date.
CEST and the lack of Mutuality of Obligation
Much of the recent controversy has stemmed from the decision by HMRC to leave out a specific reference to MoO in its check employment status tool, CEST. When asked to account for this, HMRC’s reasoning was that, where a contract of employment exists that meets the basic requirements of payment supplied for services rendered, then mutuality of obligation automatically exists. Since these basic requirements could be said to apply to both a contract of service (employment) and a contract for services (self-employed), this means that MoO can’t be used to differentiate between the two for the purposes of IR35 application.
However, HMRC’s decision to side-line MoO contradicts many of the recent tax tribunals where MoO has played an important role in determining the outcome. The assumption that MoO is present in all contracts, simply by virtue of a contract existing, fails to take into account the range of engagements undertaken by contractors as society moves further away from conventional working patterns.
Expectation vs Obligation in determining IR35
Until case law evolves a clearer definition of MoO, recent IR35 tribunals have relied upon the expectations, rather than the legal obligations, that are implicit in the idea of employment to differentiate between employees and independent workers. For example, although an element of mutual obligation exists where there is a contract in place, in order for the contractor to be found outside IR35, MoO should not be present while the contract is in progress, in addition to there being no obligation to offer or accept work once the contract has ended. This rests on the idea that a key touchstone of employment is the expectation that, when work is in short supply, the employer will endeavour to keep their employed staff, while workers on temporary contracts will be let go first.
This was demonstrated in the First Tier Tax tribunal case of Marlen Ltd v HMRC (2011), where the contractors were sent home by JCB without pay when not providing their services. This clearly demonstrated that JCB did not consider itself under any obligation to provide work, even after an offer had been made and accepted. Furthermore, Marlen Ltd ended their contract early in order to accept a better offer, further confirming that both parties understood that the contract could be terminated at any time and without consequence.
HMRC’s refusal to accept that not all working relationships will encompass mutuality of obligation will continue to result in costly and time-consuming tribunals until HMRC expand their understanding of today’s working environment.
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