Following an earlier consultation on off payroll working in the public sector, HMRC introduced CEST as an online tool to help contractors determine their employment status. CEST does not include specific mutuality of obligation as a determinant of whether or not someone is an employee or within IR35, an approach which has been criticised by ICAEW and others.

ICAEW says that the instructions on gov.uk for the use of CEST do not explain that the user should have already checked that specific mutuality of obligation exists before using the tool, and suggests that most will not.

HMRC has now published its reasoning in a paper on mutuality of obligation. This states that ‘where work is provided and remuneration is paid we will assume that there is mutuality of obligation and that a contract exists.’

It notes: ‘For the avoidance of doubt, the CEST online tool assumes that a contract exists or is being considered. We do not anticipate the tool being used outside of these circumstances.’

In a blog on the topic, ICAEW stated: ‘At best HMRC’s statements on MOO are confused and we do not think HMRC’s statement will end the controversy.’

In June, ICAEW tax faculty wrote to the financial secretary to the Treasury, warning that ‘CEST is designed for public sector contracts with the result that is not suitable for use in the private sector. Even though HMRC has undertaken to be bound by CEST decisions, we are concerned that as currently designed it does not command public confidence and needs further work.’

The letter made particular reference to mutuality of obligation, as being a concept CEST does not consider.

The consultation on off payroll working in the private sector is due to close on 10 August, and would see the same tools as apply to public sector contractors used in the private sector.

David Redfern, founder of DSR Tax Claims, argued that the statement issued by HMRC has not provided clarification for UK contractors working within the public sector and will prove to be unworkable if HMRC intends to roll out IR35 to contractors working within the private sector.

Mutuality of obligation centres on the assumption that an obligation exists for work to be provided in exchange for pay. Redfern disagrees that this mutuality exists in all cases of contractor employment, stating that ‘HMRC has a limited view of the multiplicity of engagement that contractors can take within the employment sector, even when just looking at public sector contractors, as the range of recent tribunal cases has seen.

‘As we as a society move away from conventional working patterns, traditional assumptions about contracting roles are no longer always valid - HMRC's stubborn insistence that all contracts must contain mutuality of obligation is out of step with reality.’

Should the changes in IR35 rules be rolled out to the private sector, Redfern says the assumption inherent in HMRC's CEST tool will be further tested.

‘With the breadth and variety of working practises within the private sector, HMRC's refusal to accept that not all working relationships will encompass this idea of mutuality will ensure that even more contractors will end up seeking clarification through the tribunal process, unless HMRC expand their awareness of how contactors work in today's working environment,’ he said.

HMRC position paper on mutuality of obligation is here.

Report by Pat Sweet