MOO – HMRC ignores crucial factor in IR35 test tool

HMRC has provoked the contracting community further by admitting that its online employment status tool (CEST) does not account for the Mutuality of Obligation (MOO), which is often cited as a key factor in IR35 case law.

What is CEST?

The CEST tool (Check for Employment Status for Tax) was created by HMRC to help determine whether or not a specific contract to supply services is likely to be caught by the IR35 rules or not. This online questionnaire was hurriedly rolled out to assist clients and others to determine the employment status of contractors following the implementation of the public sector ‘off-payroll’ rules from April 2017 onwards.

The tool has been universally condemned for its inaccuracy – including, significantly, the tool’s omission of Mutuality of Obligation (MOO) from its algorithm.

What is Mutuality of Obligation?

In a contract for services between a worker and client, if there is an obligation by the client to provide future contract work, and an obligation by the contractor to accept this offer of work, then a so-called mutuality of obligation exists between the two parties.

For someone truly ‘in business on their own account’, they might expect to be hired by a client to complete a specific task, with no further work being offered following the expiration of the initial contract.

MOO has been interpreted in different ways since IR35 first became law in 2000. As a result of the different ways in which HMRC and outside experts interpret case law, employment status specialists tend to focus more on demonstrating that non-mutuality exists in a contractor for services, rather than trying to show that mutuality of obligation does not exist. As there is no fixed legal definition of MOO, current IR35 cases cite precedents which have built up over time.

What is HMRC’s stance on MOO?

According to a paper published last week, purportedly on behalf of the IR35 Forum, HMRC states:

“CEST does not explicitly look at MOO, it is designed to determine whether an existing or future contract will be one of employment or self-employment. It is assumed that a person using CEST will have already established MOO, which is necessary for a contract to exist, otherwise, there would be no need to be using CEST to determine the status of the existing or hypothetical contract.”

Why is this a problem?

HMRC’s position ignores case law. MOO, alongside substitution and control, has been frequently cited as one of the key factors in determining employment status.

Seb Maley, CEO of Qdos Contractor told us: “That CEST assumes MOO exists in each and every working arrangement is not only wrong but casts doubt over the 750,000 or so answers the tool has so far provided.”

“The definition of MOO is limited at best, and until this changes, HMRC will claim that it doesn’t set a legal precedent. In addition to this, tribunal cases increasingly tend to be decided on control and personal service. That said, the assumption that MOO exists does counter case law which raises questions over CEST’s ability to make accurate decisions.”

We asked Maley what businesses can do to counteract HMRC’s stance on MOO: “Engagers must remember that CEST is not mandatory, and given its well-documented flaws, it remains to be seen as to how many of its answers would stand up in court. Businesses are able to carry out independent assessments, something we’d advise given CEST’s failings.”

HMRC stance not shared by IR35 Forum members

Another issue raised by HMRC’s statement is that the paper implies that this stance has been agreed by the IR35 Forum as a whole – a wide group of individuals who represent various organisations concerned with IR35. This is clearly not the case.

On this point, Julia Kermode, Chief Executive of FCSA said: “FCSA responded to HMRC’s draft MOO paper very clearly stating that we do not agree with their view and that we believe MOO is a serious omission from their CEST tool.”

Find out more in our new article on CEST – and its flaws.

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