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HMRC’s defeat in mutuality of obligation IR35 case

13 August 2020

With the off-payroll (IR35) rules changing from April 2021 for medium and large sized businesses, there is more interest than ever in the outcome of the numerous IR35 cases making their way through the courts.

Recent high-profile cases have seen HMRC achieve varying degrees of success in arguing that the individual was in fact an employee rather than a self-employed worker. Lorraine Kelly successfully argued that she was self-employed and relied on the fact that ITV had very little control on how she presented her show. In contrast, television presenter Christa Ackroyd was unsuccessful and the Upper Tribunal agreed with HMRC that the BBC controlled how she presented her programme.

Recent IR35 cases

While the two cases above focussed largely on the question of who controlled the work undertaken, the most recent cases of Richard Alcock and Helen Fospero considered the concept of mutuality of obligation; whether there was an obligation for the employer to offer work and whether the worker is obliged to accept that work. 

Richard Alcock is an IT contractor who worked through his limited company RALC Consulting Ltd and entered into a series of contracts with his former employer. HMRC argued that continuing to work for a former employer indicated a continuation of his employed work. However, the Tribunal sided with Mr Alcock and agreed that the contract with his former employer did not create the expectation that he would be given work every day, as is the case with employment.

In addition, Mr Alcock was able to prove that he was only paid for the work undertaken and on one occasion was not paid when the former employer cut short a project. There was clearly no obligation to provide work and so Mr Alcock was not an employee.

In the second case, Helen Fospero was engaged as a television presenter by ITV through her limited company Canal Street Productions Limited. The Tribunal considered mutuality of obligation and concluded that although ITV had anticipated being able to offer Ms Fospero a minimum number of days work this was not a guarantee of work. There was also no obligation for Ms Fospero to accept work and she was therefore not an employee.

Both these rulings were at the First-Tier Tribunal and it is understood that HMRC intends to appeal the Alcock decision.

CEST and mutuality of obligation

Determining employment status will become increasingly important when the off-payroll working legislation takes effect from April 2020 as it will be the responsibility of the end client, and not the intermediary, for reviewing the status of each worker.

HMRC has provided an online tool (CEST) to help determine whether a worker should be classed as a deemed employee. However, mutuality of obligation is not currently considered in CEST and although HMRC has indicated that an improved version will be published before the end of 2019, there is no guarantee that mutuality of obligation will be added to the next version.

Mr Alcock used the CEST tool to consider his status and it concluded he was self-employed (even without considering the question of mutuality of obligation). HMRC then sought (unsuccessfully) to have this CEST evidence omitted from the case on the basis they disagreed with the information entered in it and, therefore, the result could not be relied upon. However, HMRC did not elaborate on which of the CEST questions it felt were answered incorrectly by Mr Alcock – which gives the impression that HMRC may choose to ignore any CEST conclusions in future, if the outcome does not support its argument. 

These latest cases provide an important reminder that businesses must consider all relevant factors and that CEST should not be solely relied upon to reach a conclusion.

Off-payroll policy

Following the introduction of the IR35 rules for the public sector in 2017, some organisations applied a blanket status policy approach to all contractors and it is expected that some businesses will follow a similar simplified approach from April 2020. However, every business has an obligation to review each worker’s status on a case-by-case basis and the worker has a right to challenge a status determination if he or she does not agree with it. For example, CEST must be used with care as HMRC’s guarantee to stand by the CEST tool rulings carries a strong caveat that it will not apply where incorrect information is entered (ie for rubbish in rubbish out usage).

Equally, businesses may reach a different status conclusion from CEST based on their own risk procedures. This may be correct, but it is important to remember that an end client must be able to demonstrate that reasonable care has been taken in making a status determination and document that process so that they can prove it to all parties (including HMRC) should the need arise.

For help and advice please get in touch with your usual BDO contact or one of our Employment Tax specialists.

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