How fundamental is mutuality of obligation (MOO) in establishing the existence of a contract of service under IR35?
Mutuality of obligation (MOO), as we know it, is one of the fundamental status factors required to be present in order to establish the existence of a contract of service as set out by McKenna J in the case of Ready Mixed Concrete (South East) v Minister of Pensions and National Insurance  2QB 497 at p515. With regards to IR35 it remains, to date, a consideration when establishing the correct application of the legislation and the construction of the hypothetical contract between an individual and their end client. However, just how fundamental is it compared to the other crucial status factors of control and personal service?
In the eyes of HMRC, it seems not as important when their Check Employment Status Tool (CEST) omits vital questions surrounding this particular test. It poses the question: how can HMRC police the legislation accurately and fairly when the very tool they have created doesn’t cover all the fundamental status tests? Is it because they don’t see this as important compared to other factors? Not likely considering mutuality of obligations is heavily focused upon when going through the fact finding stages of an HMRC IR35 enquiry.
Over the years, case law has certainly developed and evolved somewhat. However, it is important to refer to the seminal cases handed down from senior courts over the years that set precedent on status matters, stemming from the case previously mentioned Ready Mixed Concrete. This case confirmed that in order for a contract of service to exist the following three conditions must be satisfied:
- The individual is obliged to provide the services personally;
- The individual is subject to control by the engager as to how he provides the services; and,
- There must exist an obligation on the engager to provide work and an obligation on the individual to undertake the work.
This demonstrates that mutuality of obligations should be as important as the rest when considering employment status, with focus being on the relevant contractual terms and also reality of the working arrangements.
Having said that, from personal experience of defending status and IR35 cases, mutuality of obligations should not be relied upon in isolation as a silver bullet defence strategy to support self-employment. This is due to the differing opinions as to what mutuality of obligations actually means To highlight the point, HMRC’s own status manual ESM0543 states:
“The basic requirements as to the mutual obligations necessary to determine whether there is a contract in existence at all are:
- that the engager must be obliged to pay a wage or other remuneration, and
- that the worker must be obliged to provide his or her own work or skill.”
However, the manual then continues to state that ‘these basic requirements could be present in either a contract of service or a contract for services and, on their own, will not determine the nature of a contract’. This implies that other factors will need to be considered.
Cases such as PGMOL vs HMRC, which was recently heard before the Court of Appeal and subsequently passed back to the First Tier Tribunal for a re-hearing, has brought mutuality of obligation back to the fore. We can only hope that this particular case eventually provides some much-needed clarity on this grey area moving forward.
Seeing the test being more recently considered demonstrates how important it is and why it should play a significant part in establishing the correct application of employment status.
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