Where HMRC are failing with IR35

IR35

HMRC have lost a number of high-profile IR35 cases recently, and the commentary by various industry experts has been predictably scathing. Often these cases centre on Mutuality of Obligation (MOO), which is one of the key legal tests for employment.

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HMRC believe that Mutuality of Obligation exists in every contract, wherever “work or skill” is exchanged for “a wage or other remuneration”. If MOO exists in every contract, it does not need to be considered when looking at what type of contract exists.

For this reason, HMRC’s Check Employment Status for Tax (CEST) tool does not take MOO into account at all, which is why it often gives incorrect results, and why it’s been so heavily criticised.

The courts have clearly, categorically and repeatedly stated that this interpretation of MOO is not correct. MOO as a test for employment asks whether there is an obligation on the hirer to provide work, and whether there is a corresponding obligation on the worker to accept work when offered. For example:

James v Redcats (Brands): The case failed because there was no mutuality of obligation, as there was no guarantee of any volume of work, and the contractor was free to decline what work was offered.

MBF Design Services ltd vs HMRC:  MOO was said not to exist because the contract could be terminated upon giving little or no notice, and the contractor was sent home without pay during computer downtime, while employees were redeployed onto alternative tasks.

Jensal Software v HMRC: MOO was said not to exist because the contractor was engaged under separate, short contracts and there was no continuing obligation on the hirer to provide contracts, and the contractor could not demand further work.

Let’s take a closer look at two recent, high-profile cases, where MOO played an important part in the decision. HMRC lost both:

The Helen Fospero IR35 case

TV presenter Helen Fospero works for a number of different broadcasters, including the BBC, Sky and ITV, through her limited company Canal Street Productions Limited. HMRC contended that she was inside IR35 while working for ITV in tax years 2012/13 and 2013/14, and was therefore liable for £80,770.96 in unpaid tax and NICs.

Ms Fospero won the case, and Judge Ashley Greenbank gave the following reasons:

  • Control: while ITV had a right to control the performance, so far as there was any scope for control by ITV, Ms Fospero would often undertake several hours of preparation for an engagement. When, where and even if she undertook this work was not controlled by ITV or governed by the framework arrangements.
  • Mutuality of Obligation: Judge Greenbank found that there was no mutuality of work-related obligation, in that ITV was not required to offer additional work, and Ms Fospero was not required to accept additional work if offered.

The Richard Alcock IR35 case

IT contractor, Richard Alcock successfully appealed his IR35 case following a five-year investigation. The case concerned a number of engagements entered into by his limited company RALC consulting Ltd between 2010 and 2015.

The court found that Mr. Alcock was self-employed rather than employed for tax purposes because:

  • He could only bill for work he actually completed
  • He specifically could not bill for making himself available
  • Accepted the financial risk himself, and was not paid for 10 days in 2013 when a project was cancelled on short notice
  • There was no Mutuality of Obligation, as there was no obligation on the client to provide work

In the aftermath of this case, concern has been expressed that HMRC rejected an “Outside IR35” assessment made by their own CEST tool, that they continued to pursue the case when it was apparently clear that Mr. Alcock was outside IR35.

What contractors can learn from these cases:

Mutuality of Obligation (MOO) is very important

Mutuality of Obligation was important in both of these cases, which is by no means unusual. MOO is a key test of employment status, and as these cases illustrate, it’s very important that contractors understand it.

In this context, MOO is present in a contract when the client has an obligation to provide further work, and/or the contractor is obligated to accept further work when offered.  The clear presence of MOO in a contract makes it more likely that the contractor is inside IR35.

Avoid “ongoing” contracts

 Ideally, you should be contracted to complete specific work, and once that work is complete the contract should end. There should be no obligation on the client to extend or renew your contract, and you should be under no obligation to accept further contracts if offered. Open ended contracts, and long chains of extensions or renewals at the same client could make it harder to argue that you’re outside IR35.

Don’t allow yourself to be redeployed

If for any reason the work you’re contracted to complete cannot go ahead, for example due to IT issues, or because work has been delayed, you should not be redeployed to other tasks. Again, the client should not have an obligation to find you alternative work, and you should not be expected to accept alternative work when offered.

If you do agree to undertake additional work that isn’t covered by your contract, this will require a separate or amended contract with separate or amended terms. You should keep full records of the process as you negotiate and set up the new contract.

The phrase “… and any other duties as required” which often appears in employment contracts should not appear in your contract for services.

If you have any questions or if we can help in any way, please call our expert team on 01296 468 483 or email info@orangegenie.com.

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