Helen Fospero was the second limited company contractor in under a week to win an IR35 appeal over the last month, following in the footsteps of RALC Consulting’s Richard Alcock. Both cases were for substantial amounts of money respectively – Fospero’s ‘owed’ tax was a total of £80,770.96, Alcock’s was £243,324.00. Both contractors also won thanks to mutuality of obligation, a status test that isn’t taken into consideration by HMRC’s Check Employment Status for Tax (CEST) tool.
A pattern has emerged, particularly with IR35 cases concerning TV and radio presenters, that highlights HMRC's lack of understanding of the legislation. While they’ve certainly won some cases, including that of Christa Ackroyd and a trio of BBC presenters - Joanna Gosling, David Eades, and Tim Willcox – the taxman has lost a remarkable number, including to Lorraine Kelly (for whom Helen Fospero acted as a substitute), Loose Women’s Kaye Adams, and TalkSPORT’s Paul Hawksbee. Plus with an increasing number of industry professionals insisting that CEST isn’t fit for purpose, it’s more important than ever to make sure that you’re prepared for IR35 come April 2020.
So why does HMRC keep losing IR35 cases? Or, more specifically, how does the taxman keep getting tripped up by mutuality of obligation?
What is mutuality of obligation?
As a contractor, are you expected to consistently provide your services? Are you free to decline work from your client? If there’s an ongoing obligation to provide or produce work from either side, that’s mutuality of obligation, otherwise known as MOO.
As an employee, you turn up to work, you’re paid each month and in return, you’re expected to complete tasks across a wide range of activities. A contractor’s role tends to be much more tightly defined; it’s restricted to specific tasks, usually linked to a particular project. And once it’s over, you move on. You might be offered a new contract, but you are certainly under no obligation to accept.
Being able to say no on both sides of the engagement is a signpost of a true contractor-client relationship. One of the biggest criticisms of the CEST tool is that it doesn't include mutuality of obligation. In fact, HMRC simply assumes that MOO is present in all contracts for services by default, which is not the case at all.
How does HMRC consider mutuality of obligation in an IR35 enquiry?
Andy Vessey ATT, Larsen Howie’s Head of Tax and ex-Qdos IR35 specialist, talks us through how HMRC considers mutuality of obligation in IR35 enquiries.
“HMRC doesn’t appear to have taken any notice of the judge’s comments in the cornerstone Jensal Software case, as the paper confirms their longstanding and extremely narrow view that MOO’s significance extends only to determine whether a contract exists at all," Vessey says. "To meet this test only the basic requirements of MOO are necessary, i.e:
- that the engager must be obliged to pay a wage or other remuneration; and
- that the worker must be obliged to provide their own work or skill.”
“This is known as the ‘irreducible minimum’," he continues. "Once these two elements have been established then that’s MOO dealt with and HMRC can go on to consider whether a contract is one of employment or self-employment. Couldn’t be any simpler, could it? Even by the Revenue’s own admission, these basic features are common to both types of contract.”
How mutuality of obligation can swing an IR35 appeal
Both Alcock and Fospero won their IR35 cases precisely because there was a lack of obligation from either party to produce or provide work. Andy Chamberlain, deputy director of policy at Association of Independent Professionals and the Self-Employed (IPSE), comments on the two cases.
"This is the second IR35 tribunal judgement that has come to light this week that HMRC has lost,” Chamberlain says. “That drives home the reality that IR35 legislation is so complex that even the UK's tax authority cannot understand it. And if HMRC cannot grasp its own legislation, how can it expect businesses across the UK to when it changes IR35 in the private sector next April?”
"The two cases this week – concerning an IT contractor and TV presenter Helen Fospero – both hinged on the absence of 'mutuality of obligation' in their engagements,” he continues. “This is critical because HMRC refuses to accept that there can ever be a contract where 'mutuality' is absent.”
Mutuality of obligation in RALC Contracting IR35 case
We’ve already covered the basics of the RALC Contracting Ltd v HMRC tribunal previously, but let’s take a deeper look at how mutuality of obligation helped to swing Richard Alcock’s case.
Chris Leslie says MOO played crucial part in Alcock tribunal win
Chris Leslie of Tax Networks Ltd, defence for RALC Contracting, commented on the important part MOO played in Alcock's tribunal win.
"His [Mr. Alcock’s] contract specifically states that he can only charge for any work completed," Leslie said. "And to top it off, in one instance they did cut the project short at a moment’s notice, and he was not paid. There is no question at all that he could charge just for making himself available, and neither was the client obliged to give him work or allocate work – the work has already been agreed upfront.”
He continued: "Since there was no minimum obligation to provide work and no ability to charge for just making himself available, it is clear that the key elements of mutuality, in the work/wage bargain sense, are missing, and therefore he cannot be considered an employee.”
Don't just rely on CEST says Matt Tyler
Matt Tyler, ex-Qdos IR35 specialist and current Larsen Howie IR35 Consultancy Manager, reflects on the important part MOO played in Alcock’s successful appeal.
“HMRC’s opinion on mutuality of obligation is that if you accept payment in exchange for labour then you are indicating employment. This is simply not the case, as has been demonstrated here and also in the Jensal Software case,” he continues. “In my eyes, the result only goes to show the value in having an IR35 review performed by an expert rather than relying on an automated system (particularly CEST) as such systems may well miss the nuance that an expert would pick up on.”
“I also find it interesting that Judge Jones found evidence provided by HMRC lacking as it was not signed off by the client. That helps show the importance of ensuring that any evidence gathered to support your status is, where possible, supported by the client as this will work in your favour.”
Mutuality of obligation in Canal Street Products IR35 case
Helen Fospero’s IR35 case marked the second time in a week that HMRC was defeated at tribunal, and for similar reasons to Alcock. You can read the full case here while we take a closer look at how, once again, HRMC were foiled by their own legislation.
Fospero case hung on MOO between her PSC and ITV
The case hung on how IR35 legislation applied to the arrangements between Fospero’s personal services company (PSC), Canal Street, and ITV. The tax years in dispute covered 2012 to 2014, when she was working primarily for ITV as a guest or news presenter on Daybreak and Lorraine. In making his ruling, tribunal judge Ashley Greenbank referred to three separate contracts, described as the framework agreements, which set out the working arrangements between Canal Street and ITV.
One such contract between Fospero and ITV outlined that ‘[they] anticipate requiring the services of the Individual for approximately 20 (twenty) News Presenter Appearances per annum or pro rata for any incomplete week or month or year of the Term.’ HMRC’s lawyer argued that the 20 days indicated a guarantee of specific work; however, Judge Greenbank rejected this, stating that “the reference to 20 days of anticipated work in the First Contract was nothing more than that. It expressed a hope and expectation that ITV would be in a position to offer work and that Canal Street would accept it.”
Judge Greenbank dismisses HMRC's inside-IR35 argument
Greenbank further stated that “there would be no mutuality of work-related obligation between the engagements: Ms Fospero would have no guarantee of work and would be under no obligation to perform work if it was offered.”
He dismissed HRMC’s argument on a mutuality of obligation basis, highlighting that “she would be engaged on an assignment by assignment basis. Those assignments would be very short term, many involving only a matter of hours in the studio, albeit some requiring several hours of preparation in advance. Notwithstanding these continuing contractual arrangements, in my view, the circumstances of Ms Fospero’s case justify the inference that she would be working as an independent contractor rather than an employee under the hypothetical contract.”
Does HMRC understand it's own IR35 legislation?
Ahead of HMRC doing any strategy analysis (or soul-searching), these recent defeats have raised questions in the mainstream media that tax and IR35 experts have been asking for some time now. Does HMRC understand how to apply the off-payroll rules? Why are they specifically targeting high-profile ‘tax-avoidance’? Instead of admitting fault with and amending IR35 and the CEST tool, the taxman instead continues to charge mulishly forward, leaving a trail of unnecessary stress and wasted public money in its wake.
While CEST may be recommended by HMRC as the go-to tool for IR35 status determinations, it’s important to remember that there are other options available that are just as valid – particularly after NHS Digital was fined £4.3m earlier this month for wrongful determinations that were entirely made through the CEST tool.
Reliable alternatives to CEST for IR35 determinations
There’s an argument to opt for a ‘manual’ contract review over an automatically generated determination; after all, no matter how thorough the questionnaire, the nuances of certain arrangements could be missed. A contract or working practices review carried out by an IR35 specialist may take longer to receive your determination from, but the results will be far more reliable. You also have direct access to the specialist that carried out the review, meaning that you can ask any questions you may have about the results and how they may affect you.
Larsen Howie offers a range of contract and working practices reviews – you can find out which option would be best for you here. We also offer IR35 investigation insurance with representation from our Head of Tax, ex-Qdos IR35 specialist Andy Vessey ATT, should it go to tribunal.
For any further information or advice, please call us on 01163 800 400 or drop us an email. Alternatively, take a look around our Knowledge Hub for more IR35 advice, industry news and contractor guides.