With our employment tax team inundated with queries on IR35 following the introduction of the new public sector rules, we haven’t really had chance to take stock and reflect on the introduction of the new employment status service (ESS) tool which, as a replacement for the old employment status indicator tool, is a significant change in its own right.

One glaring omission from the factors being considered by the new ESS tool is ‘mutuality of obligations’ (MOO) – a major factor for employment status since the Ready Mix Concrete case outlined the core status factors way back in 1968.

With the above in mind, it seems strange that HMRC would ignore such a fundamental factor when building the ESS tool. The reason for its omission may reveal itself by looking at HMRC’s employment status guidance. In the guidance, they summarise its view of MOO in the context of the Larkstar case, saying “the obligation to offer work outside the terms of the contracts, which is irrelevant to the question of whether there is mutual obligations during an engagement”.

HMRC also quote the case of Cornwall County Council v Prater in support of their view. In summing up this case, the judge commented “…nor does it make any difference to the legal position that, after the end of each engagement, the Council was under no obligation to offer her another teaching engagement or that she was under no obligation to accept one. The important point is that, once a contract was entered into and while that contract continued, she was under an obligation to teach the pupil and the Council was under an obligation to pay her for teaching the pupil made available to her by the Council under the contract. That was all that was legally necessary to support the finding that each individual teaching engagement was a contract of service [employment relationship]”.

Personally, I don’t agree with this view; it goes against decisions in a number of other status cases which were decided on the basis of the need to mutuality to be ‘ongoing mutuality’ rather than simply mutuality within the existing contract to create an employment relationship.

The problem for advisors and HMRC alike is that there is no consistency in the tribunal decisions which rely on MOO as the balancing factor.

I believe the case of JLJ Services best summarises where we currently are with MOO and why I don’t like to rely on MOO alone in defending a client’s employment status position.

The judge in JLJ Services, referring to the MOO factor said, “…there is considerable case law in relation to this test, progressively indicating that the test is of diminished importance, or that it is indeed nearly meaningless. Some case law relates to the situation of ‘umbrella contracts’ between separate periods of admitted employment, and it is far from clear to us that the ‘mutuality of undertaking’ test is of much assistance to us in this case”.

For me, the point made by the judge in JLJ Services provides a reason as to why HMRC has not considered MOO when building the ESS tool. The inconsistency in the courts application of MOO has led to a position where its importance is diminished.

Added to this, and picking up on my earlier comments that I wouldn’t like to rely on MOO to defend my client, the same is true of HMRC. Inconsistency works both ways, and HMRC are equally as unsure of taking employment status cases where it is relying on MOO alone.

If we look at the role and significance placed on MOO by both sides in more recent employment status cases, neither party are looking to argue their case based on MOO, and this supports the judge’s view in JLJ Services.

In my opinion, MOO remains a significant factor when reviewing employment status, but HMRC’s current view of MOO, whilst misguided, cannot be ignored and I wouldn’t want to take a case to tribunal where I’m relying on MOO alone to defend my client.

Employment status is and, in the absence of a statutory employment status test, remains about looking at the whole engagement (both the contract and the working practices) and all relevant considerations – including mutuality of obligations need to be considered to arrive at a employment status position.

AEF/JH_17_8

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