On 28 August 2024, HMRC won its appeal at the Upper Tribunal (“UT”), overturning the First-Tier Tribunal’s (“FTT”) decision from January in the IR35 case involving Stuart Barnes, the former rugby player and Sky Sports pundit [HMRC v S & L Barnes Limited [2024] UKUT 00262 (TCC)] (the “Stuart Barnes case”).
The case centred around whether or not the contract of S&L Barnes Ltd (Stuart’s personal services company) with Sky should be treated as a disguised employment of Stuart under the IR35 rules or, whether if Stuart had contracted with Sky directly, he would have been treated as working as part of his own business. S&L Barnes Ltd lost this appeal in the UT, leaving the company with a £695,000 tax bill.
Background
Stuart Barnes was a rugby union player in the 1980s and 1990s. On retirement, he began working as a freelance writer and television presenter via S&L Barnes Ltd. S & L Barnes Limited, his Personal Service Company, also provided Stuart’s services to several media organisations. Barnes came to be known as the “voice of rugby” after retiring from the sport in 1994.
HMRC reviewed the S&L Barnes contract with Sky from 6 April 2013 to 5 April 2019 and assessed it to be a disguised ‘Contract of service’ for Stuart under the IR35 rules, making the company subject to Pay As You Earn (PAYE) and National Insurance Contributions (NICs). It is important to note that at the time Barnes was providing his services through his personal services company to Sky he also carried out other assignments. He had, and still has, a rugby column for The Times and The Sunday Times. Further, and as Sky did not have the rights to the World Cup, Barnes worked for non-Sky broadcasters for this event. He also provided consultancy services leveraging off his expertise.
The relevant IR35 rules which govern this period are set out in section 49 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA), which is a trigger for the applicability of IR35. The purpose of section 49 ITEPA is to look through the intermediary to see if there is a disguised employment. If the rules apply, then there will be a PAYE and NICs liability. Generally, from 6 April 2021, the PAYE and NICs liability is to be assessed on the person which pays the fees to the intermediary company, unless the intermediary company’s client is a small company. However, under the IR35 rules for the period in question (2013 to 2019), the PAYE and NICs liability was to be assessed on the personal services company, if IR35 applies. This is why Mr. Barnes’s personal services company was a party to the litigation.
For the purposes of determining whether or not a contract falls under section 49 ITEPA 2003, a three-stage test needs to be applied, which is:
- Stage 1: Find the terms of the actual contractual arrangements and the relevant circumstances in which the individual worked.
- Stage 2: Ascertain the terms of the “hypothetical contract” under which the worker would have been retained by the client if the worker had engaged directly with the client.
- Stage 3: Consider whether the hypothetical contract would be a contract of employment or a contract for services.
In determining the terms of the hypothetical contract while regard should be had to the actual contract between the intermediary and the client, this is not an exclusive test and regard should be given to all relevant circumstances.
Once the terms of the hypothetical contract have been established as per the three-stage test, the next step is to establish whether there is a contract of employment. The courts have reached a consensus here and that Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497 (the “RMC case”) contained the correct test for determining employment status.
Mckenna J in RMC Case held that three conditions (“RMC Test”) need to be fulfilled to establish that a contract of employment exists. These three conditions are:
- Mutuality of obligation – The obligation on the employer to provide work and the obligation on the employee to accept that work. This is a necessary feature of the relationship between an employer and an employee. For a contract of employment to exist, the employer must be obliged to pay and the employee must be obliged to do the work.
- Control – The expectation from a genuine self-employed person is that they have been engaged for their specific skill set and experience, meaning supervision, direction, and control should not be present.
- Third stage – The other provisions of the contract are consistent with its being a contract of employment.
Given its vagueness, there have been some historic difficulties with interpreting the ‘third stage’.
Grounds of appeal
In the Stuart Barnes case, HMRC’s appeal was based on two grounds:
Ground 1
The FTT erred in its construction of the hypothetical contract concerning Sky’s right of first call over Mr Barnes and purported variations to the contract.
HMRC argued the FTT assumed a key term in both Sky contracts giving it first call on Mr Barnes’ time had been varied so he could deal with his standing commitments to the newspaper columns he worked on. There was no evidence presented to the FTT to support this variation. Sky had not in practice needed to exercise this right that implied a change. This made the FTT’s decision irrational.
The UT disagreed on the basis that Mr Barnes had given oral evidence that he always gave priority to his newspaper columns at certain times of the sporting calendar, so there was sufficient evidence for the FTT decision even if that decision was flawed. Accordingly, the appeal under Ground 1 was dismissed.
Ground 2
The FTT erred in its interpretation and/or application of the third stage of the RMC Test, including by taking into account irrelevant factors and failing to take into account relevant factors.
It was agreed between the parties that the hypothetical contract met the first two limbs of the RMC Test. At issue therefore was whether the third limb of the RMC Test had been met.
The FTT had concluded that the third limb of the RMC Test had not been met. It focused on Stuart Barnes’ other activities, the point that he was retained as a specialist and the fact that only circa 60% of the company’s earnings were derived from his Sky work.
Regrettably for S&L Barnes Limited, the UT took the view that the FTT had misapplied the third limb of the RMC Test. It took the view that there was too much focus on the circumstances in which the contracted operated in practice and not on the terms of the contract. The UT also concluded that the FTT failed to explain which terms acted for or against employment status and the UT felt this was bound to have influenced the decision. The UT confirmed that in considering the third stage, no single factor is decisive. It is “about painting a picture from an accumulation of detail and then standing back to make an informed qualitative assessment”. It is not merely a tick-box exercise.
The FTT’s decision under Ground 2 was set aside.
UT remakes the decision
At this stage in the proceedings, the UT could have remitted the matter back to the FTT for it to be reheard. However, with the consent of S&L Barnes Limited and of Stuart Barnes, the UT activated its power to remake the decision.
The UT acknowledged that Stuart Barnes was in “business on his own account” in relation to his non-Sky activities. However, just because an individual is self-employed in relation to some engagements, it does not automatically follow that this treatment tracks through to the individual’s other engagements. It concluded that the hypothetical contract would have been one of employment if Mr. Barnes had been engaged personally for the following reasons:
- The hypothetical contract would be for a fixed term of 4 years, extendable by another 2 years, and subject to further renewal by mutual agreement. The hypothetical contract was terminable by Sky with immediate effect at any time, but only if in Sky’s “reasonable opinion”, any of certain specific conditions in the contract applied.
- Mr Barnes was contractually obliged to perform the services personally and had no right to provide a substitute.
- Sky had a right of first call on Mr Barnes’ services for up to 228 days per annum, varied by the arrangements regarding availability.
- Sky had the exclusive right to Mr Barnes’ services as a broadcaster within the UK. Mr Barnes could not provide his services to another broadcaster, radio or media organisation without Sky’s written consent, not to be unreasonably withheld. Additionally, Mr Barnes would have to seek permission from Sky before engaging in any ‘new’ commercial activities.
- The annual fee payable to Mr Barnes (between £235,000 and £265,000) was payable in monthly instalments. It was fixed in advance and not calibrated to the actual number of days Mr Barnes would be on air for Sky. When Mr Barnes was providing his services on a live Sky event, Sky provided all necessary studio equipment and related travel and accommodation bookings. Mr Barnes was therefore subject to very limited financial risk in the performance of the services under the hypothetical contract.
The FTT’s findings on the terms of the hypothetical contract and its conclusions on mutuality and control were undisturbed.
Things to note
Recently, there seems to be a growing trend of the UT disagreeing with FTT decisions in IR35 cases. We’ve repeatedly seen in IR35 cases that contractual provisions are central to determining employment status for tax purposes. The following points stand out from the UT’s decision in the Stuart Barnes case:
- If an engagement is for a long period, it points towards an employment relationship.
- A genuine right of substitution is a factor that points away from an employment relationship.
- The ability to control when a person works and for who else a person can work for is important.
- Structuring a reward package so that it has the flavour of a salary points towards an employment relationship.
It is worth noting that while from the Stuart Barnes case it can be concluded that the six-year period of the engagements between the S&L Barnes Ltd and Sky was a factor which pointed to the hypothetical contract being a contract of employment, the opposite is not necessarily true. In Mainpay, [Mainpay v HMRC [2024] UKUT 0023], individuals signed up to a framework agreement and were retained for short engagements under it. Each of these short engagements was held to be a contract of employment.
The Stuart Barnes Case emphasises the importance of clear contracts that reflect consistent working practices that align with the intended status of the engagement. A structured approach, with factors to be categorised as pointing towards employment, away from employment, or neutral is what was adopted and suggested by the UT in this decision.