Preparing for IR35: The Importance of MOO

29th September, 2020
Preparing for IR35 - The Importance of MOO

‘Mutuality of Obligation’ (MOO) is one of the three key tests used to determine IR35 status. Along with ‘Right of Substitution’ and ‘Supervision, Direction and Control,’ MOO is the most frequently referenced status tests in tribunal cases. This means that contractors should have a basic understanding of the test in order to ensure that it is properly worded in their contract, and observed in their daily working practice. We continue our preparing for IR35 series with a closer look at MOO.

In a straightforward sense, MOO 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. This situation is typical of most employer-employee relationships. Therefore genuine limited company contractors should neither expect nor receive such mutuality of obligation. A contractor’s limited company should be engaged on a ‘contract for services’ basis to perform a specific task for a specific project.

Additionally, MOO should not be present while the contract is in progress. This means that the client has no obligation to pay the contractor when there is no work available, or when a problem prevents work from being carried out. 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.

Controversially, MOO is omitted from the government’s online assessment tool, CEST. HMRC’s reasoning is that, where a contract of employment exists that meets an ‘irreducible minimum’ of payment supplied for services rendered, then mutuality of obligation automatically exists. Since this basic requirement could be said to apply to both a contract of service (employment) and a contract for services (self-employed), MOO can’t be used to differentiate between the two for the purposes of IR35 application.

Despite this omission from CEST, MOO continues to play an important part in tax tribunals since modern terms of employment can be broad ranging in nature. Most recently it was key factor in the defeat of Kickabout Productions Ltd Vs HMRC at an upper-tier tribunal case. While there was a contractual provision that stated that Talksport were not obliged “assign Services” to KPL and KPL was not “obliged to accept the assignment of Services”, the UT found this to be inconsistent with KPL’s obligation to provide a minimum of 222 days of work under the same contracts.

The case highlights the importance of including MOO within the contract, and for the clause not to be compromised by a contradictory statement. However, the ruling, which overturned the initial verdict of the first tier tribunal, shows how complex and arbitrary interpreting employment law can be. It’s advisable to engage the services of a professional to undertake a contract review, and if in doubt, a PAYE umbrella company can eliminate the IR35 risk.

This content has been supplied by IR35 Guru

Contractors and businesses are now advised to use the remaining time until April 2021 to prepare for the changes ahead. If you’re looking for more information on IR35 our free comprehensive guide gives you a clear overview of the legislation to date. ContractingWISE has a range of options to help you keep your contracting career on track. To talk to a member of our team, call: 0203 642 8679

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