For contractors, ensuring compliance with IR35 is vital. Failure to do so could ultimately lead to investigation by HMRC, significant penalties, tax and NI bills and interest, all of which could put a contractor in serious financial difficulty.
IR35 was introduced to enable HMRC to identify those contractors that are actually operating as ‘disguised employees’. Following changes in April 2017, IR35 status is no longer determined by contractors themselves but by those with whom they are contracting (i.e. client or recruitment agency). Currently, this only applies to contractors working within the public sector, but it is possible that the Autumn Budget 2018 will announce the extension of the legislation into the private sector.
The key to remaining compliant with IR35 is to thoroughly understand the stages of identification for determining your status. Mutuality of obligation (MOO) is one of three key factors to defining status, but one that many contractors still struggle to understand the concept of, below we explore the definition of MOO.
Mutuality of obligation
For a company working with a contractor, if a contract states that the business is obliged to provide paid work for a contractor, and the contractor is obliged to accept and carry out the work, then there is evidence of mutuality of obligation.
In contrast, for contractors genuinely operating outside of IR35 legislation, they would focus on one specific project or perform a particular task as outlined with the initial contract, which would run for a set period of time. Once this period has passed the contractor would move onto another contract with a new client, or be offered an entirely new project by the current client. There should be no expectation of further work once the contract is complete.
A government paper published earlier this year discussed the fact that MOO is not explicitly looked at within its Check Employment Status for Tax (CEST) tool. Due to this, we would highly recommend that contractors ensure that their contract clearly shows a lack of mutuality of obligation between contractor and client.
Still unsure if your contract shows mutuality of obligation? Have your contract reviewed by one of our experts here at Exchequer Solutions today.