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IR35 and Mutuality of Obligation

Towards the end of last year HMRC lost two IR35 cases in the First Tier Tribunal (RALC Consulting Ltd and Canal Street Productions) which hinged on the issue of mutuality of obligation. Since then, HMRC has updated its Check Employment Status for Tax (CEST) tool – the online tool used to check employed or self-employed status for tax purposes – with a new version which still assumes mutuality of obligation in all cases, despite hopes that it would more accurately reflect the law and outcome of recent tax tribunals. With this in mind, and because IR35 is on everyone’s agenda ahead of changes being introduced in April, we are taking a timely look at the issue and the latest guidance for employers.

That said, on 7 January 2020, the government let it be known that it will be reviewing the IR35 legislation again (to be concluded by mid-February), as promised by Sajid Javid in November 2019, but for now ….

What is mutuality of obligation?

Mutuality of obligation is one of the determining factors for IR35 status. Effectively, it is all about understanding who controls the work being undertaken by a contractor and whether there was an obligation for the employer to offer work and for the worker to accept that work.

In the case of RALC Consulting Ltd v HMRC,  Richard Alcock was an IT contractor who worked through his limited company RALC Consulting Ltd. He was engaged by his former employer as a contractor. HMRC argued that by continuing to work for a former employer, he was in fact continuing his employment and was not self-employed.

The tribunal ruled that because there was no expectation that his former employer would provide him with regular daily work, he was not classed as an employee. Mr Alcock confirmed that he was only paid for work he had undertaken and even lost out on income when a project was cut short by his former employer. The First Tier Tribunal decided that there was no obligation on the part of the company to provide work which meant Mr Alcock was not an employee and HMRC therefore lost the case, although has indicated that it intends to appeal.

Another tribunal case, Canal Street Productions v HMRC, found that even where a mutuality of obligation exists, interpretation may have an implication on the tax consequences.  In this situation, Helen Fospero was contracted as a television presenter by ITV through her limited company Canal Street Productions Limited. ITV had anticipated that there would be a minimum number of days’ work offered to Ms Fospero, although this was not guaranteed. The tribunal decided that Ms Fospero was under no obligation to accept work from ITV either and was therefore not an employee.


From April, subject to the government review, it will be employers who are responsible for determining the employment status of the contractors they hire. The cases above have been between HMRC and the contractor, whereas new rules may lead to more cases in which HMRC takes action against the companies using these contractors.

HMRC’s CEST tool is designed to help with this task of determining employment status, which has been recently updated. The original version of CEST was used by Mr Alcock to consider his status and it identified him as self-employed for tax purposes. HMRC tried to have the CEST evidence excluded from the case because it believed the wrong information had been entered, making it unreliable. The updated version of the tool still assumes mutuality of obligation in all cases. It had been expected that the updated tool would provide clarity on the issue of mutuality of obligation , particularly in the light of recent tax tribunals which have highlighted the issue.

HMRC’s own guidance states: The significance of mutuality of obligation is that it determines whether there is a contract in existence at all. Without mutuality of obligation there can be no contract of any kind.

There is no doubt that mutuality of obligation will continue to be a critical area for tribunals, particularly when IR35 changes come into effect in April. Employers should make sure they are categorising their off-payroll workers now and putting in place systems and processes that will ensure compliance through regular review of contractors and agreements.