The Commissioners for HMRC v RALC Consulting Limited

For the intermediaries legislation, the tribunal must first construct the contract that the worker and end client would have made directly, having regard to all contractual arrangements and relevant circumstances. It must then apply the employment-status test to that hypothetical contract as a whole.

Mutuality of obligation is an element of that test, not a separate threshold requiring obligations beyond those arising during an individual engagement. Work offered, personally performed and paid for may satisfy that element. The absence of guaranteed future work, a minimum-hours guarantee, or an unexercised right to terminate does not by itself negate mutuality.

HMRC appealed from a First-tier Tribunal decision of 3 March 2020 allowing RALC Consulting Ltd's appeal against assessments to income tax and national insurance contributions under the intermediaries legislation.

RALC was the personal service company of an IT consultant whose services were supplied through agencies to Accenture and the Department for Work and Pensions. The First-tier Tribunal held that the postulated direct contracts between the consultant and the end clients would have been contracts for services.

The central issues were whether the First-tier Tribunal had correctly constructed the hypothetical contracts required by section 49 of the Income Tax (Earnings and Pensions) Act 2003, and whether it had applied the law on mutuality of obligation correctly.

1. Appeal allowed. The First-tier Tribunal made material errors of law. Its decision was set aside and the appeal was remitted to a differently constituted First-tier Tribunal.

2. The statutory question requires a counterfactual exercise. The tribunal must determine what terms the worker and end client would have agreed had they contracted directly. The actual contracts are a safe starting point, but the exercise is not a simple transposition of their terms. It must take account of all relevant circumstances, including every contract in an agency chain and, where useful, the parties' position in hypothetical flashpoint situations.

3. The First-tier Tribunal had instead applied particular limbs of the employment-status test mainly to the actual upper- and lower-level contracts. It reached conclusions about mutuality and control before determining coherent terms for the hypothetical contracts. It therefore failed to apply the status test to the hypothetical contracts as a whole.

4. Mutuality of obligation is not a free-standing test which decides employment status. During an individual engagement, obligations to perform work offered and to pay for it can satisfy the first limb of the Ready Mixed Concrete test. A lack of obligations to offer or accept future work, no guaranteed minimum hours, and a right to terminate which has not been exercised do not themselves negate that mutuality.

5. The First-tier Tribunal wrongly treated those matters as showing insufficient mutuality and allowed that conclusion effectively to decide the appeal. The Upper Tribunal did not decide the remaining grounds or whether the consultant would ultimately be an employee. The issue must be determined afresh on properly constructed hypothetical contracts.

• Upper Tribunal (Tax and Chancery Chamber): HMRC's appeal was allowed. The First-tier Tribunal decision was set aside and the matter remitted for rehearing by a new panel.
• First-tier Tribunal: On 3 March 2020, it allowed RALC's appeal against income tax and national insurance contributions determinations under the intermediaries legislation.