Mutuality of obligation -- explained, even if we are still all waiting on PGMOL at the Supreme Court

On June 26th 2023 the case of Professional Games Match Officials Ltd v. HMRC appeared in the Supreme Court, but one year on and the court has still not published its judgment, writes tax lawyer Rebecca Seeley Harris, founder of ReLegal Consulting.

The PGMOL ruling we’re all waiting on

The judgment, in part, is going to be centred on mutuality of obligations (MOO). But before it is released, we can use this time to refresh ourselves on the current position on MOO.

There are many misunderstandings where MOO is concerned and I am constantly reading that ‘HMRC’s CEST tool doesn’t include MOO,’ and that ‘isn’t consistent with current case law.’ As mutuality is an important part of establishing employment status, it is crucial to understand the current position.

The History of Mutuality

The are a few precedent cases that have discussed mutuality in various forms but, probably the most important historically are the well-known case of Ready Mixed Concrete and Carmicheal v. National Power PLC.

In the Carmicheal case in the House of Lords, two power station guides were trying to prove that there were obligations outside of the times when they were working. The reason for this was that they needed to string together the times when they were working in order to establish an umbrella or overarching contract. If they could establish an overarching contract of employment they would be able to claim full employment rights.

The Carmichael case, however, was concerning employment rights and therein lies the problem. The House of Lords were not looking at the time when the guides were actually working. When it comes to a case involving tax, however, the courts will always be looking at a time when the contractor is working. If the contractor is working, there will be mutual obligations simply by virtue of there being a contract.

In Carmichael, the Industrial Tribunal, as it was then, stated that the case, “founders on the rock of absence of mutuality,” and the House of Lords agreed.

The tribunal held that: “the documents did no more than provide a framework for a series of successive ad hoc contracts of service or for services which the parties might subsequently make. The parties incurred no obligation to provide or accept but at best assumed moral obligations of loyalty”.

‘MOO-less CEST’

In 2020, HMRC published a paper for the IR35 Forum on its interpretation of mutuality of obligations.

In this paper it addressed the issue of whether MOO is omitted from CEST. In HMRC’s opinion, CEST does not explicitly look at MOO because it is designed to determine whether a contract will be one of employment or self-employment. In using CEST, it is assumed that a contract is in existence and it follows then that if a contract is in existence, there will be mutual obligations.

The crux of the matter in a case concerning tax, in my opinion, is not whether MOO exists but, whether the mutual obligations are one of employment or self-employment. That is the point.

The case law shows that MOO can be established and present but, that does not necessarily mean that it is a contract of employment. Incidentally, Control can also be present but, it does not necessarily mean that it is a contract of employment. What the current case law shows is that employment status is established by looking at the third stage of the RMC test. Mutuality of obligations are a part of establishing status but, no more than that.

PGMOL at the Court of Appeal

The most recent and authoritative case on MOO is the 2021 Court of Appeal judgment of Lady Justice Elizabeth Laing DBE in HMRC v. Professional Game Match Officials Limited.

This was not a case involving IR35 of Off-payroll Working (OPW) but, to determine whether the football referees are employed or self-employed. Regardless, it is currently the precedent case on MOO and the PGMOL CA judgment has recently been preferred by the Upper Tribunal in the IR35 case of HMRC v. RALC Consulting Ltd.

Mutuality: Two different scenarios, plus three further propositions

In PGMOL at the Court of Appeal, LJ Laing stressed the need to distinguish in any review of the case law between two different scenarios:

1. Cases where there is a need to show continuity of employment – and so that an employment relationship exists at times in between the times at which the worker is actually working on an engagement; and

2. Those where continuity of employment is not in issue and it is only necessary to show that the individual engagements involve an employment relationship, such as in tax cases including PGMOL.

Three further propositions have also been established:

i. The question whether a single engagement gives rise to a contract of employment is not resolved by a decision that the overarching contract does not give rise to a contract of employment.

ii. In particular, the fact that there is no obligation under the overarching contract to offer, or to do, work - if offered - (or that there are clauses expressly negativing such obligations) does not decide that the single engagement cannot be a contract of employment. The nature of each contract is a distinct question.

iii. A single engagement can give rise to a contract of employment if work which has in fact been offered is in fact done for payment.

Continuing obligations

There is very often a clause in ‘IR35 friendly’ contracts which states something along the lines of ‘There is no obligation on the worker to accept any further work offered and no obligation on the hirer to provide it.’ This is very often cited as the meaning of mutuality of obligations. For years, contractors have relied on the fact that there are no ‘continuing obligations’ in the contract.

In my opinion, there is no basis in law for this argument.

This point was considered in the Court of Appeal in Cornwall County Council v. Prater [2006] EWCA Civ 102. This was an employment rights case and specifically dealt with this issue. The point is not what happens outside of the contract in terms of there being no ‘on-going duty’ but, what happens during it. That also applies to whether a contract can be terminated at will or at short notice. It matters not whether there is such a clause because, again, the important point is what happens during the contract before it is terminated, for whatever reason.

Contract of service or for services?

Ultimately, it needs to be understood that mutuality of obligations can be present in an individual contract BUT, that does not necessarily mean that it is a contract of employment.

The next step is to establish what type of contract it is. That will then determine whether the contractor is employed or self-employed for tax purposes.

Along with much of the contractor industry and its advisers, I wait with bated breath for the publication of the Supreme Court judgment and for the next instalment of MOO.