18 July 2018
HMRC have recently published a short paper on why the Check Employment Status for Tax (CEST) service does not take account of mutuality of obligations (MOO).
The paper was produced in response to questions raised at the IR35 Forum, which is a group including HMRC, taxpayer representatives and professional advisers formed to look at the way IR35 is administered.
The HMRC paper advances the argument that any contract cannot exist without mutuality of obligations. For instance, if I buy a newspaper from a shop, there is an implicit requirement for me to pay the shopkeeper if I want the newspaper and there is an implicit requirement of the shopkeeper to let me have the newspaper if I pay for it. So far, so good. The next stage in the argument is that the CEST online tool assumes that a contract exists, since its objective is to assess the employment status of a contract. Thus, there is no need for CEST to address MOO, as it has already been considered by the mere fact that there is a contract that needs to be assessed.
The decided cases on employment status in which MOO plays a prominent part have not sought to question whether or not there is a contract in place, but have tried to look at the terms of whatever contract was in existence. Why would the courts have spent much time and energy in examining a concept that was a given, if there was not any uncertainty? My understanding is that there are different types of MOO and MOO in the context of employment status goes beyond the MOO that’s inherent within a contract. For employment to be indicated there has to be an ongoing obligation for the work provider to offer work to the work doer and for the work doer to undertake the work offered. HMRC’s paper does not address this point.
In the paper HMRC cite the case of Arada v Windle & Another (2016) in which Lord Justice Underhill observed:
“An issue that arises in this case is the significance of mutuality of obligation in the employment contract. Every bilateral contract requires mutual obligations; they constitute the consideration from each party necessary to create the contract. Typically an employment contract will be for a fixed or indefinite duration, and one of the obligations will be to keep the relationship in place until it is lawfully severed, usually by termination on notice. But there are some circumstances where a worker works intermittently for the employer, perhaps as and when work is available. There is in principle no reason why the worker should not be employed under a contract of employment for each separate engagement, even if of short duration, as a number of authorities have confirmed: see the decisions of the Court of Appeal in Meechan v Secretary of State for Employment  IRLR 353 and Cornwall County Council v Prater  IRLR 362”.
I have no problem with the concept of an employment contract including an obligation to keep a relationship in place until it is ended. I also have no disagreement with the concept that a worker and an employer can engage in a series of short-term separate contracts, with each contract having the attributes of employment. The first concept seems to confirm the existence of the type of MOO that exists within an employment contract. The second concept does not displace that, it just puts forward the possibility of a series of short-term contracts, within each of which there may or may not be the type of MOO that is indicative of employment. What the second scenario does not do is say that the each of the separate engagements is under the same overarching contract of employment, but envisages a contract of employment for each engagement.
The paper glosses over the qualities of different types of MOO and argues that all MOO is as one, being inherent within any contract and therefore an essential pre-requisite without which CEST cannot be applied. If the existence of something is ignored, then it doesn’t exist, which is the kind of argument that the Ravenous Bugblatter Beast of Traal would have enjoyed, had it been on HMRC’s payroll.
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