Mutuality of Obligation

Key Tests

The pivotal role played by the Mutuality of Obligation (“MOO”) test when assessing the true nature of a contractual relationship between parties has once again been highlighted in the recent case of HMRC v Kickabout Productions Ltd[2020].

Mutuality of Obligation forms one of the key tests used in tribunals to assess whether a contractual engagement could hypothetically constitute a contract of employment. Where the obligation to provide a service is reciprocated by the other party’s obligation to offer them work, then MOO is deemed to exist. The other tests applied to evaluate the working relationship between the parties are supervision, direction and control. 

Conflicting viewpoints

In this case, Kickabout Productions Limited (KPL) was a Personal Services Company through which Mr Hawksbee, a radio presenter, provided his services to TalkSport.

HMRC had argued that application of the tests mentioned above, pointed to the existence of a contract of employment making the arrangement inside IR35 for the purposes of tax and therefore making Mr Hawksbee a ‘disguised employee’.

The First Tribunal (FT) had rejected HMRC’s argument. They reasoned that there was insufficient Mutuality of Obligation to support HMRC’s case, as the contract between the parties required Mr Hawksbee to present a minimum of 222 shows for TalkSport, but the station was not mutually obliged to provide KPL any work in return.

HMRC subsequently appealed to the Upper Tribunal (UT), which re-examined the contractual terms. This time the UT agreed with HMRC, pointing to TalkSport’s right under the contract to terminate or suspend the contract. This, the UT said, implied the radio station was obliged to provide KPL work, thereby fulfilling the MOO test. The UT were further satisfied that the other tests, such as control, were sufficiently met.

Contentious cases and inferences

This case illustrates firstly, how the interpretation of the rules surrounding IR35, especially the significance of Mutuality of Obligation, continues to be a strongly contentious issue. Initially, HMRC had sought to downplay the significance of MOO, relying more on the aspect of control, but it was specifically addressed by both the FT and the UTT.

Secondly, HMRC will almost certainly take a case to the higher tribunal where the first findings do not go its way and thirdly, contractors working through PSCs cannot take for granted that the agreements they enter with their clients directly or via an agent, will not be subject to scrutiny and leave them professionally and financially compromised.

In addition, although this case only focussed on two documents, the courts are also entitled to look at the actual working practices. This adds another layer of complexity. Even if an agreement between parties showed no evidence of MOO, the actions of either or both parties over a period may indicate the contrary. This would again lead to the tribunal finding a contractor to be a ‘disguised employee’ falling inside, not outside IR35, despite what is stated in the contract.

Numerous employment status cases are being heard in first tier employment tribunals affecting workers up and down the country. We referenced two similar cases back in November 2019 and more recently in May 2020, regarding the status of professional match officials. HMRC will continue scrutinising such arrangements, with the hope of convincing the courts that money is owed to the Treasury’s depleted coffers in the wake of the current pandemic.

Rebuilding in the wake of IR35 and Covid-19

It is not unreasonable for contractors, recruiters and companies to have seen the deferment of IR35 rules in the private sector (also as a result of the current crisis) as a welcome relief. In many respects it has been. However, when the Off-Payroll rules do come into force next year, HMRC will be increasingly motivated to challenge arrangements where the tests of employment could go in its favour.

It is more than likely that businesses looking to rebuild after this period will need greater flexibility when engaging their workforce. This rebuild will call for the expertise of PSC contractors across a range of industries. It will, therefore, require all parties within the supply chain to work more closely together in an effort to remain consistent in what they agree and what they actually do. Not being mindful of possible discrepancies will doubtless attract the attention of HMRC.

In order to protect against this, before the Off-Payroll rules take effect, procedures need to be put in place to ensure that matters regarding employment status issues are not just fully understood and addressed, but that the level of contractual knowledge, plus the ability to educate internal and external stakeholders, is provided by reputable experts. Cases will continue to be brought by HMRC in the meantime. Some cases may bring clarity; many will bring confusion. What everyone wants to avoid is being caught up in one.