IR35 seems to be in the headlines more than ever lately as HMRC attempt to crack down on contractors working in ‘disguised employment’. This is where HMRC deems the relationship between a contractor and client closer to that of an employee and employer.
If a HMRC inspector suspects mutuality of obligation in an IR35 case, a contractor in question could be made to repay all of the backdated tax they owe HMRC often running into tens of thousands of pounds if the taxman looks back over a number of years at their previous arrangements with clients and they find the same.
What is mutuality of obligation?
Mutuality of obligation is a key test used in both tax investigations and employment tribunals to determine a worker’s employment status.
It looks at the relationship between a contractor and their client to decide whether the relationship resembles that of an employee and their employer. If this is the case, this would likely put the worker in breach of IR35 legislation.
When a company is obliged to provide paid work and a contractor is obliged to then accept and complete the work, this is considered mutuality of obligation – making the relationship more like an employee and employer.
Genuine limited company contractors should never expect or receive mutuality of obligation. Self-employed workers are instead engaged on a contract for their services. That means they are paid to perform a specific task for a specific project and, when it is completed, their contract comes to an end.
Tests of employment
In most employment situations, an employee is paid regularly by their employer each week or month and, within the bounds of their job description, to carry out a number of tasks that go beyond their core role.
IR35 investigations aim to find those working under these conditions as a contractor. MOO is judged alongside HMRC’s two other main tests of employment which are:
This measures the amount of control the client has over what, when, where, and how work is carried out by the contractor. If HMRC believes the company has control over the contractor they will class them as an employer and employee.
Self-employed workers should not be personally required to carry out work themselves. When legitimately working for a client, contractors can send a substitute in their place. If the client only accepts the work to be performed personally by the worker then they are seen as acting as their employer.
Other tests of employment include whether the self-employed worker takes a financial risk by working for the company, whether they appear to be ‘part and parcel’ of their client’s organisation such as wearing their branded uniform, and whether they supply their own equipment or if the company provides this.
HMRC’s definition of mutuality of obligation
In HMRC’s Employment Status Manual they state that when determining employment status there:
“Must be an irreducible minimum of mutual obligation for there to be a contract of service. That irreducible minimum is:
- that the engager [client] must be obliged to pay a wage or other remuneration, and
- that the worker [contractor] must be obliged to provide his or her own work or skill.
However, the irreducible minimum could be present in either a contract of service or a contract for services and therefore, by itself, it will not determine the nature of a contract.”
What this means is that all contracts have some form of mutuality of obligation. Even in cases where a self-employed worker is not caught by IR35, their client is obliged to pay them for performing their service.
That is why IR35 cases are still surrounded by ambiguity and this leads to many of HMRC’s rulings being taken to an employment or tax tribunal for review.
MOO in action
Earlier this year, MOO became the main talking point in one particular employment case. In Hafal Ltd. v Miss Lane-Angell, a mental health care worker took her case to the tribunal when she believed she had been unfairly dismissed from her role.
Miss Lane-Angell had been suddenly removed from her rota and she was offered no further work following a ‘three strikes and you’re out policy’. Initially the employment tribunal allowed her claim however an Employment Appeal Tribunal later ruled Lane-Angell to have not been an actual employee of the company.
Because her contract clearly showed there was no minimum hours the company was required to offer and Lane-Angell only needed to provide services when she was available there was no mutuality of obligation between them.
The court ruled that Lane-Angell was not an employee and therefore unfair dismissal could not be claimed.
Let us help
If you are a contractor and are worried about how IR35 will affect your business, speak to your Sunny accountant today. If you are found to be in breach of this legislation, you could be forced to pay back all the tax you owe as well as penalties of up to 100% of your liabilities.
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