Mutuality of Obligation test thwarts HMRC

15th November, 2019

Mutuality of Obligation test thwarts HMRC

Case one

November has already seen two important IR35 decisions released by the First Tier Tax Tribunal which have not gone the way that HMRC anticipated.

The first saw IT Contractor, Richard Alcock, win his appeal after HMRC claimed he owed more than £200,000 for work performed through his Personal Services Company (PSC), RALC Consulting Ltd. 

RALC supplied Mr Alcock’s services to the DWP and Accenture however, HMRC claimed that if you were to construct a hypothetical contract between Mr Alcock and his end clients, they would be contracts of employment and therefore the arrangement was inside IR35.

Yet when the Judge examined the arrangements and applied the key tests of employment, particularly mutuality of obligation, he concluded that the taxpayer was not a “disguised employee” at all, concluding that HMRC’s assessments should be rescinded.  He was persuaded not only by the terms of the actual contracts but by the facts supporting what the contracts intended to convey. 

For instance, when the Universal Credit IT programme was suspended, RALC continued to supply Mr Alcock to the project even though he risked the programme not being resumed and RALC not being paid.  Indeed that did happen and RALC ended up not being paid for around 10 days of Mr Alcock’s work.

Case two

In the second case presenter Helen Fospero, working through her PSC ‘Canal Street Productions Ltd’, was accused of being a disguised employee for her work for ITV on such programmes as Lorraine and Daybreak.  The Judge, Ashley Greenbank, considered the contracts which set out the agreed terms of the engagement.  He had to evaluate whether under a hypothetical contract, directly between Ms Fospero and the end clients, she would be considered an employee. 

The Judge applied the key tests of supervision, direction and control together with mutuality of obligation.  Crucially, he decided that there was no mutuality of obligation, saying Ms Fospero was engaged on an assignment to assignment basis and ITV had no obligation to offer work and equally, the presenter had no obligation to accept it.

We have now seen a few IR35 cases which have considered the working practises of ‘performers’ and so far the outcome has been mixed.

CEST shortcomings

We understand that HMRC will appeal both of these decision to the Upper Tier Tribunal but in the meantime, with IR35 reforms set to kick in from April, these decisions leave contractors in a difficult place.  HMRC continue to insist that the CEST tool should be used for status determinations and can be relied on.

This stance is remarkable given that professionals know that it fails to take account of the mutuality of obligation – which is both the cases above, was a key factor that the Judges relied in reaching their findings.  It is also important to ensure that the contracts reflect what actually happens in practise and are not just worded to game the system. 

At WTT, our ability to assess contracts and working practises is far more accurate and thorough. Should you be concerned about IR35 reforms, your employment status, or the contracts you have in place or intent to put in place, please contact us for a free no obligation conversation to discuss.