Mutuality of Obligation refers to the obligation of the employer to provide work and pay for it. This is combined by the obligation of the employee to personally undertake the work.
This is typical of most employer/employee relationships where the employee is paid on a regular basis (usually monthly) and is asked to perform a variety of tasks that can go beyond their core role within an organsiation.
Mutuality of Obligation, or MOO, is one of the key IR35 tests of employment used by a tax tribunal or court to establish whether a contractor is working as a disguised employee and is therefore subject to IR35 legislation.
If a contractor is found to be working inside IR35 as part of a HMRC investigation, the contractor could be likely to face a steep bill for both income tax and National Insurance Contributions (NIC). There could also be interest added to the bill as well as penalties.
Genuine limited company contractors who operate outside of IR35 should neither expect nor receive Mutuality of Obligation. A contractor’s limited company should be engaged on a contract for services basis to perform a specific task or project.
Once the task or project is completed, the contractor is free to move on to a new client or can be offered a new contract by the existing client.
Umbrella Contractors are not affected by Mutuality of Obligation, because they are employees of the umbrella company, so are not affected by IR35.
The move to Umbrellas was a popular choice when IR35 was rolled out to the public sector in 2017 and is thought to be the favoured option for the private sector rollout in April 2020.
MOO is only one factor used to determine employment and whether IR35 applies to a contract. Each case investigated is judged on its own merits and what could be a significant point in one case may not be the same in another.
This level of uncertainty means it is best practice for contractors to ensure their contracts are reviewed by an expert, so any amendments that need applying can be identified and corrected.
For information about Contract Reviews, please contact 0333 321 1403
HMRC’s definition of Mutuality of Obligation can be found online at https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm0543