A guide to assessing IR35 status, part 3: Mutuality of Obligation
Posted on 3rd September 2019 at 11:04
As part three of this five-part blog series about IR35 and how a contractor might be assessed to be inside or outside the scope for off-payroll working, we’re going to be looking at the mutuality of obligation.
We are obliged to inform you that it is so incredibly important that you’re up to date and fully compliant with off-payroll working rules to avoid investigation and potential penalties. HMRC released their Draft Legislation for IR35 Private Sector change from April 2020 in July, and we have been preparing for this for several months. We know that many of you are concerned about the changes and how they will affect you, but we are here to help.
It is now time to prepare for the changes and equip yourself with the information you need to communicate effectively with your clients to get your IR35 status confirmed. We hope that this blog series will hopefully go some way to help you.
Last week, we explored direction, supervision and control, and how to work it into a contract so that you have less risk of falling inside IR35. The week before that, we talked about the right of substitution. You can read part one here and part two here. This week, we will be looking at mutuality of obligation, what it means and how it can affect your IR35 status.
What is mutuality of obligation?
If a client is expected to provide a contractor with work on an ongoing basis, and the contractor has an obligation to accept and carry that work out, this can show the existence of mutuality of obligation, and may point to the existence of an employer-employee relationship.
If a contractor is not engaged to work on one specific project for a specific duration, or undertaking a variety of different roles while on an assignment, can also show a mutuality of obligation between contractor and client.
In an employer-employee relationship, an employer will ensure that their employees have a continuous supply of work. They will also expect the employees to carry out the work when they require it to be done. A self-employed person is different in the sense that they will do the work they are being contracted to do, and will finish without any expectation of further work. If a self-employed person is regularly given work by a client over a period of time, HMRC may decide that employee status has been created by default.
Mutuality of obligation is one of the three key determining factors surrounding IR35. HMRC is currently putting a lot of focus on non-mutuality of obligations during the contractual term in particular and, for that reason, it is important that a contractor’s right to end the contract before its official end date is outlined.
In the case of Nethermere (St Neots) Ltd v. Gardiner and Taverna…
In 1982, an employment tribunal heard a case between Nethermere (St Neots) Ltd v. Gardiner and Taverna Court in which the applicants (Gardiner and Taverna) worked in a clothing factory. They had both become pregnant at different times, and were permitted to work from home using sewing machines supplied by Nethermere Ltd. They were not formally obliged to accept work, and were paid according to the quantity of items of clothing they sewed.
Both women disputed Nethermere Ltd’s decision to refuse to give them entitlement to holiday pay, and so they took their case to tribunal to claim that they had been unfairly and constructively dismissed.
During the tribunal, Judge Tudor Evans J found that there was a contract of employment, applying the test of whether a mutuality of obligation existed between each woman and the employer.
The employer’s barrister argued that because each woman’s contract can only be a contract of employment if there is a continuing mutual obligation on each party to offer wages or work, the home workers were not employees and therefore were not under the protection of unfair dismissal rights. The employer appealed the case twice, and lost both times.
Interestingly, former UK Prime Minister Tony Blair was the barrister acting on behalf of the employers (who lost) – it was one of his last cases as a barrister before he went into politics full time.
What should be written in a contract to prove that there is no mutuality of obligation between a contractor and client?
Normally, a relationship between contractor and client will finish when a contractor finishes an assignment. If the client wishes to assign any further work, this would be covered by a new contract with the possibility of new pricing being applied by the contractor. If a mutuality of obligation does exist between a client and the contractor, HMRC could view this as an indication that the worker may not be self-employed.
If your contract does not currently outline this position, you may wish to consider adding the following wording should you choose to amend it:
The Client is under no obligation to offer further contracts or services to the Supplier nor is the Supplier under obligation to accept such contracts or services if offered. The Supplier is not obliged to make its services available except for the performance of its obligations under this Agreement. Both parties agree and intend that there be no mutuality of obligations either during or following the agreement, whatsoever.
Please note that you should always consult with your accountant or lawyer before you add or change any wording in any current or future working contracts.
Next steps: get your IR35 Private Sector: 5-Step Action Pack today!
To support you through these changes, we have put together an IR35 Private Sector: 5-Step Action Pack, which includes:
Full written IR35 Contract Review;
30-minute debrief call with Nicola to discuss the outcome of the IR35 Contract Review and its impact on you and your limited company;
Communications Pack including email and letter templates to send to your client to get your communications started, and in the event that you need to appeal;
30-minute call to discuss your very own action plan.
We are bundling all this together for our clients for just £297 +VAT.
Learn more in this free guide we've created for you, which you can download by clicking here.
Don't wait for your client to come to you.
Be proactive, take the initiative and get planning for April 2020!
Nicola J Sorrell
- Effective Accounting
Founder | Xero Champion | IR35 Expert
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