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IR35 Testing

Latest EAT ruling reinforces that HMRC erred in law with CEST tool

A ruling at an Employment Appeals Tribunal (EAT) has overturned an earlier decision that an individual was an employee of a charity, in a judgment which hinged on a lack of sufficient mutuality of obligation (MOO).

Welsh mental health charity, Hafal, won its appeal against Miss Karen Lane-Angell’s deemed employment status after the honourable Mr Justice Choudry concluded that the working arrangement demonstrated no obligation to provide or accept work.

In reinforcing the significance of MOO, the ruling incontrovertibly proves that HMRC erred in law when they chose to purposely omit the key employment status test from its Check Employment Status for Tax (CEST) tool. The timing of the ruling is particularly calamitous for HMRC, which is expected to publish its legal reasons supporting its decision to ignore MOO within the next month.

“This once again reaffirms the fundamental importance of assessing MOO to see if an employment relationship exists – which is something that HMRC has erroneously omitted from CEST,” comments ContractorCalculator CEO Dave Chaplin.

“Here we have someone who provided personal service and who was subject to heavy control and supervision, yet was still not considered to be an employee, because there was insufficient MOO present.”

Hafal Ltd v Lane-Angell: EAT background

In March 2013, Lane-Angell began a paid engagement with Hafal. There were no guaranteed hours, though she was required to email her availability to the charity in advance to assist them in preparing a suitable rota.

Though Lane-Angell wasn’t always required to provide her services during her periods of availability, she was effectively on-call, and would be paid an hourly rate for time spent working when called upon.

From May 2015, Hafal requested that Lane-Angell commit to a minimum of 10 shifts per month. However, in January 2016, Lane-Angell was told that she would not receive any further work.

According to Hafal, this was due to the fact that she had breached its ‘three-strikes rule’ by failing to respond to multiple calls during periods where she had indicated her availability.

Ruling overturned due to lack of MOO

The original tribunal determined that Hafal had demonstrated an intention to require a degree of obligation from Lane-Angell by requesting availability for a minimum number of shifts per month, a decision which was critical to the original outcome.

However, Justice Choudry dismissed this, highlighting that any obligation only commenced in individual instances where Lane-Angell would indicate her availability, adding: “The Tribunal erred in finding that there was any obligation in between the rotas.”

Lane-Angell’s argument that MOO was implied by Hafal’s ‘three-strikes rule’ was also disregarded on the same basis, as Justice Choudry endeavoured to distinguish between the expectation of work and MOO: “It is a trite observation that an expectation that the Claimant would provide work is not the same as an obligation to do so”.

What does the ruling mean for HMRC and CEST?

“If anyone has any difficulty in understanding the concept of MOO, then this is the case to read,” comments Kate Cottrell, expert advisor on IR35 and employment status matters. “This case makes clear that deciding status concerns not just the written terms, but also the reality of the relationship.

“The key message from this case is that there may be an expectation to offer and provide work, but this does not create an obligation to do so. In essence, it is not possible to decide status by assuming that MOO is present at the point of considering or entering into a contract.”

The ruling aside, the fact that an EAT almost exclusively considered MOO reinforces its importance when considering employment status, as well as the magnitude of HMRC’s error in omitting MOO from CEST.

“The taxman purposely omitted MOO from CEST and encouraged all public sector bodies to make status assessments using this flawed tool; purporting it to correspond with the law. As this case has shown, that can’t possibly be true,” notes Chaplin.

“HMRC has demonstrated that it is only interested in collecting the maximum amount of tax, not the right amount of tax. It has ignored the law, abused its powers and destroyed the livelihoods of many contingent workers.” Chaplin concludes: “The Off-Payroll private sector consultation should be terminated with immediate effect, and an inquiry launched into HMRC’s actions.”

Published: 27 June 2018

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