IR35 and the ‘mutuality of obligation’

One of the key factors used to determine if a contract is subject to the IR35 rules is whether or not continuous work is offered by a client, and accepted by a contractor.

What is the Mutuality of Obligation?

A service company will typically expect to sign a contract to provide a fixed amount of work, invoice the client, and get paid for the work. They would not expect further work to be offered at the end of the contract.

If however, the client continually offers work to the contractor, and this is accepted, this is a strong indicator of ’employment’, and HMRC may take the view that the contractor’s working practices are more akin to those of an ’employee’, rather than those of someone truly in business on their own account.

Essentially, if there is an obligation to offer further work, and an obligation to accept such an offer, then a mutuality of obligation (MOO) exists between the parties to an agreement.

In the eyes of HMRC, a ‘rolling’ contract, or contracts which are continually renewed, could be seen as indicators of ’employee’ status.

Employment status experts would suggest specifically inserting a specific non-mutuality of obligation clause in a contract and ensuring that the contract terms are not open-ended, i.e. there should be a fixed end-date.

Mutuality of obligation is one of several key IR35 factors used to determine employment status and is considered to be one of the three most important determinants of employment status (along with ‘control’ and the ‘right to substitution’).

Further Information

Contractors should remember that it is the overall picture of your contract and working practices which will determine whether or not you will be caught by IR35, and you may want to seek professional advice before signing a contract.

You can read HMRC’s interpretation of ‘MOO’ in ESM0543.

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Last updated: 16th June 2019