IR35 and the Mutuality of Obligation

The Register comments on an interesting case in which the Tax Tribunal has overturned a decision of HMRC and found that a designer working in the aircraft industry was not, in fact, a pseudo-employee but was operating as a separate business under a contract for services.

It is a particularly interesting case because the tribunal have gone to the nub of the issue which HMRC and the IR35 regulation seem to ignore; the “absence of the mutuality of obligation needed for a contract of employment to exist”.  Too often, the tax authorities (and employment rights law too) ignore this fact leading to the establishing of expensive and complex constructs and contracts aimed at minimising exposure to a law which has always appeared to me to be rooted in unfairness.

There is a confluence of powerful factors leading increasing numbers of individuals to establish themselves as sovereign professionals rather than being “traditional” employees: these include lifestyle preferences; generational preferences; younger people seeking greater freedom and control; older people seeking to keep their brains active and cash flowing whilst enjoying a  slower pace of life; large organisations seeking to become leaner and more agile; technology as an enabler.  As a greater proportion of the economy moves to a freelance model, collecting taxes will become more difficult (fewer, monolithic commercial organisations to act as tax-collectors through a PAYE scheme).  Government needs to recognise this, but to develop taxation which is enabling and encouraging of new models of economic activity rather than trying to force emergent models back into a recognised box.

The full ruling is available here.