As the debate continues around IR35 and the off-payroll reforms, the key factors used to determine employment status are coming under close scrutiny.  Mutuality of Obligation or ‘MoO’ is one of three primary concepts, along with ‘control’ and ‘right of substitution’, which is used to determine if a contract falls inside or outside IR35. In this article, Umbrella Exchange explains the relevance of MoO and why differing interpretations of its meaning are causing issues for contractors.

What is Mutuality of Obligation?

In its simplest sense, mutuality of obligation refers to an employer’s obligation to provide and pay for work, and the employee’s obligation to personally carry out that work. Although an element of obligation can be said to exist whenever there is a contract for services in place, in the case of a genuine contractor, mutuality of obligation is limited. Not only is there no obligation for the client to provide further work to the contractor once the current project has ended, or for the contractor to accept it, this also applies while the contract is in progress. This is because the contractor completes one-off projects and each subsequent project, even if it is for the same client, will require a separate contract. Crucial to the concept of contracting, as opposed to that of employment, is the understanding that either party can terminate the contract at any time during the contract. This means that mutuality of obligation does not exist during the contract. Additionally, it means that when work is in short supply, or when outside factors prevent work from being carried out, a company can dispense with its contingent workforce without consequence, while retaining its permanent employees. 

Controversy over CEST (Check Employment Status for Tax) and the off-payroll reforms

Since the introduction of IR35 in April 2000, MoO has played an important role in tax tribunals (Marlen Ltd v HMRC 2011) in determining the difference between employees and independent workers. However, when HMRC introduced reforms to off-payroll working in April 2017, its employment status tool, CEST, failed to take MoO into account. When asked to explain this, HMRC relied on the assumption that MoO is automatically present in all contracts for services rendered, and therefore cannot be used to determine IR35. This simplistic interpretation of MoO not only contradicts the opinion of tax experts, who have found in favour on the defendant in 75% of recent cases, it fails to take into account the increasingly complex and varied working practices of Britain’s modern labour force. With the off-payroll reforms set to apply to the private sector in 2020, HMRC will need to address the current issues around CEST in order to avoid a negative impact on Britain’s independent workforce and therefore the UK’s economy.

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