IR35: What is Mutuality of Obligation?

Mutuality of Obligation (MoO) is perhaps one of the most controversial topics related to IR35 legislation. In its simplest terms; MoO is concerned with the obligations each party has to the other. In the context of employment, this is the obligation of the end hirer to supply work and the obligation on the worker to accept it.

The controversy lies in the fact that MoO is not included as a determining factor in the CEST (HMRCs Check Employment Status for Tax) tool, and is not always explicit within a contract. It is a component that is observed in a relationship between the contractor and the end hirer with an implicit inclusion of a termination or notice period.

So, for those contractors seeking confirmation on their IR35 status, this tool cannot make a fully defined determination.

Below, we go in-depth about mutuality of obligation and what it could mean to both recruiters and contractors.

Mutuality of Obligation and IR35

It is important to understand that all contracts contain some ‘mutuality of obligation’, as all contracts involve delivering a service for payment. In relation to the IR35 status of a contract, we are concerned with the absence of specific obligations that would exist in an employer/employee relationship.

How can Mutuality of Obligation be displayed?

Mutuality of Obligation can be displayed in many ways. One of the most pertinent is a clause within the contract containing a notice period. Having a notice period demonstrates an obligation for the contractor to carry out a service for an agreed time, even if they wish to terminate the contract. This showcases the obligations, mutual in nature, to provide work as well as accept it, by both the end hirer and the contractor.

If the end hirer has an ongoing requirement that needs to be fulfilled for an undefined period, this is likely to be viewed as disguised employment. Having a clearly defined project with deliverables would lend weight to the argument that there is no mutual obligation to continue to provide or accept work. It will also highlight the fact that this is not a 'business as usual' role.

In short – to maintain a position outside IR35, the contractor does not want to be an ‘additional resource’ to the end hirer, but rather a ‘one-off resource’ to carry out a specified task.

How do I explain Mutuality of Obligation to a contractor?

If you’re speaking with a contractor who isn’t entirely clued-up on the intricacies of IR35, or they’re unsure of the grey area that is MoO – the below may help:

Multiple deciding factors

It is important to explain that there is no single deciding factor to determine ones IR35 status. HMRC will state that MoO is present in every contract – arguing that without a mutual obligation - a contract will not exist.

Reality of relationship

Close examination of specific clauses, terms, inclusions and exclusions alongside the real-life relationship between contractor and end hirer. The contract may outline what seems to be a clear-cut MoO, but in practice, it may differ. This all boils down to determining the reality of the relationship between the contractor and the end hirer. It is a good idea to collate all evidence to demonstrate an absence of MoO.

Seek specialist advice

A contractor should seek the advice of an IR35 specialist to help determine the IR35 status of the contract. MoO is a multi-faceted obstacle that many people struggle to decipher or draw a conclusion on. It is one of the three main factors considered in an IR35 review, and our in-house team can help your contractors in assessing their IR35 status.

Mutuality of Obligation Case Law

Some case law referencing MoO has been quite interesting. Through inspecting these cases, we can see that MoO is always a considered factor, and sometimes a deciding one. If you'd like to read more on this, we have covered MoO Case Law in more detail.

Preparation for Mutuality of Obligation

Making sure the MoO aspect of the contract is determined will not only assist the contractor in knowing their IR35 status (and why it has been deemed so) but also what specific obligations they’re expected to uphold for the end hirer.

This would be beneficial to the contractor in terms of compliance with HMRC, as well as establishing and maintaining a great relationship with the end hirer.