The recently published IR35 Forum Minutes of their last meeting of 28th February 2019 reveal that HMRC is going through the motions of trying to nail down an agreed interpretation of mutuality of obligation (MOO).
At that meeting, the department circulated a discussion paper on MOO but have invited forum members to add their comments by 7th June so that HMRC can produce a revised version before the next meeting scheduled for 11th July.
In constructing the document, HMRC looked at the Jensal Software Ltd case, in which I represented the contractor, as well as considering other major cases. However, HMRC doesn’t appear to have taken any notice of the judge’s comments in Jensal, as the paper confirms their longstanding and extremely narrow view that MOO’s significance extends only to determine whether a contract exists at all. 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”. 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. That is why CEST currently ignores MOO - because HMRC assumes it’s already present. MOO is a key test of employment status which is why it should not be allowed to be trivialised by HMRC and why it must be examined in more detail and a more sophisticated definition ascribed to it.
MOO according to Jensal
If HMRC purports to have examined the Jensal Software case as they say they have, then they have either failed to learn its lesson or blindly disregarded it to suit their own ends.
In the Jensal case, Judge Jennifer Dean took the view that although Ian Wells (director of Jensal) provided his services for payment, MOO did not of itself demonstrate a contract of service. The DWP paid Jensal a daily rate by reference to a daily work minimum of 7 ½ hours. However, the judge considered this no more than an expectation as to the hours that would be worked each week.
Each of Jensal’s contracts were for short durations and there was a break of approximately 2 weeks between the penultimate and final contracts which indicated there was no contractual obligation for the DWP (end client) to provide continuous work. Indeed, no further work was offered for a short period. It was also clear that the contractor’s engagement did not extend beyond the specific project for which Jensal were engaged and once the task was completed there was no role for Jensal to fulfil. Mr Wells (director of Jensal) was under no obligation to perform the work and Jensal terminated the final contract when a better offer presented itself.
This led Judge Dean to conclude:
“The essence of the relationship was that there was no continuing obligation on the part of the DWP to provide work; if it chose to abandon the project there was no contractual basis upon which Mr Wells could demand further work. I am satisfied that these factors point away from a contract of service.”
Judge Dean also made reference to the High Court’s comments in Usetech Ltd v Young :
“I would accept that it is an over-simplification to say that the obligation of the putative employer to remunerate the worker for services actually performed in itself always provides the kind of mutuality which is a touchstone of an employment relationship. Mutuality of some kind exists in every situation where someone provides a personal service for payment, but that cannot by itself automatically mean that the relationship is a contract of employment: it could perfectly well be a contract for freelance services.”
Relationship of loyalty
In the First-tier Tax Tribunal case of JLJ Services Ltd v HMRC , Judge Nolan introduced the concept of MOO evoking that sense of loyalty that exists in an employment relationship when he said:
“There is a feature in this case where the phrase “mutuality of undertakings” has some resonance. A touchstone of being an employee is the hope and expectation that there will be some relationship of faithfulness between employer and employee. In other words, the employer will generally endeavour to keep staff employed even when work is short. Contract workers will be dispensed with first. Employees will commonly have several “employee benefits”, and in particular pension rights. With short term engagements, none of this will be relevant with contract workers.”
In that same year, Marlen Ltd v HMRC  was heard at the tax tribunal, which demonstrated the very point that contractors are side-lined during downtime. JCB (end client) sent contractors home when computers were down and received no fee. Employees, on the other hand, remained in situ without their salary being affected. Such action demonstrated to the Tribunal that JCB did not consider itself under any obligation to provide work or pay even after an offer had been made and accepted.
Both parties terminated a contract early, Marlen’s termination being precipitated by a better offer. This was seen as being inconsistent with a relationship in which MOO was present.
Flying in the face of this, HMRC stated in their last published paper on MOO that the fact that a contract may be terminated does not affect MOO during the contract even if it may be terminated without notice. The fact that the duration of such a contract is uncertain is irrelevant to MOO, whilst the contract continues.
Given such intransigence, can we really expect HMRC to relax its interpretation of MOO? I do hope that forum members can persuade HMRC otherwise but, thus far, tribunal judges have been unsuccessful in this.