Despite the somewhat intimidating term, mutuality of obligation (MoO) is a fairly straightforward concept. MoO exists in conventional employment and is normally absent when working outside IR35, meaning the presence of MoO is a bad thing for consultants and contractors.
To explain mutuality of obligation, let’s consider it in the context of a typical employer/employee relationship.
If you’re an employee you get paid regularly by your employee, weekly or monthly. As part of this deal, you’re making yourself available to work on a broad range of tasks as your employer sees fit (within reason). Similarly, if your employer doesn’t have any work for you, they are normally still obliged to pay you (we’ll put zero-hours contracts to one side). You get paid for being at your employer’s disposal, and this continues until your employment ends. And that’s mutuality of obligation: your employer is obliged to pay you (even if they have no work), and you’re obliged to undertake any work you’re given (within reason).
Mutuality of obligation outside IR35
When you’re working outside IR35, this mutuality of obligation should not exist.
You are not paid simply for being at your client’s disposal, instead you are paid to deliver a specific piece of work. Your contract ends the moment the work is complete, or if the client cancels the project you’re working on. At this point, there should be no obligation for your client to provide you with any more work. If the client does offer you any more work beyond that in your original contract, there should be no obligation for you to accept it.
In practice, this means that you should be engaged by clients to work on specific deliverables outlined in a contract, rather than just being a bum on a seat. You should agree which work you’ll do, and just work on that. You should only be paid for the work that you do, and if you’re unable to work, for whatever reason, you should not get paid.
If a project is shelved or cancelled part-way through, your contract should end. If your client would like engage you on an alternative project, a new contract needs to be issued.
HMRC’s (misguided) view of mutuality of obligation
HMRC’s view of MoO is very controversial. That’s because HMRC believes it always exists in all contracts and relationships between workers and clients. This has the effect of unfairly edging everyone closer to being inside IR35. The law and judges disagree with HMRC’s view.
That’s why, if you use HMRC’s IR35 status assessment tool (CEST), it doesn’t ask you any questions about MoO. HMRC simply presume it exists, greatly increasing your chance of being deemed inside IR35 when using CEST. That’s great news for HMRC to drive up tax revenues, but for anyone who values the fair application of our laws it’s a stomach-churning approach, and for those incorrectly deemed to be inside IR35 it’s unfairly burdensome – they are being over-taxed.
It sounds remarkable that HMRC is misinterpreting the law to the detriment of the taxpayer. But it’s the chilling reality of the situation. Remember, the ultimate arbiter of tax laws are our courts and judges, and HMRC has lost case after case, after case when it comes to MoO. When ruling against HMRC, judges have described HMRC’s approach to MoO as an “over-simplification”, and importantly that “the mere offer and acceptance of a piece of work do not amount to mutuality of obligation” – yet HMRC act in a position that contradicts case law. Despite these consistent defeats, HMRC has failed to update CEST and continue to deliver unreliable determinations which are stacked in the favour of HMRC driving up tax revenues. This is why we recommend that all clients and consultants/contractors steer clear of CEST and instead seek a professional view based on case law.
How to overcome mutuality of obligation
For more tips on how to overcome mutuality of obligation when outside IR35, check out our video.