HMRC has won its appeal at the Upper Tribunal, overturning the First-Tier Tribunal's decision in the IR35 case involving Stuart Barnes, the former rugby player and Sky Sports pundit. The Upper Tribunal found an error of law in the First-Tier Tribunal's decision, allowing it to remake the decision and concluding that Barnes' engagement with Sky Sports was deemed employment for tax purposes.
Commenting on the case, Dave Chaplin, CEO of IR35 Shield, who attended the full two-day hearing, says: "This ruling now means that none of the cases involving individuals providing services to Sky TV have succeeded at the tax tribunal.
"The Sky boilerplate contracts used by all these individuals contained considerable onerous provisions, particularly around control, which did not necessarily reflect the level of control exercised in reality. However, as we've seen repeatedly in IR35 cases, contractual provisions are central when determining employment status for tax purposes.
"This case underscores the need for freelancers and their clients to ensure that their contracts and working practices accurately reflect the true nature of their relationship."
Grounds of appeal
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.
- 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.
Decision
The Upper Tribunal dismissed HMRC's appeal on Ground 1. They found that the FTT's decision regarding Sky's right of first call and the variations to the contract was reasonably available based on the evidence presented.
However, the Upper Tribunal allowed HMRC's appeal on Ground 2. They concluded that the FTT had erred in its approach to the third stage of the Ready Mixed Concrete test. The tribunal found that the FTT took into account irrelevant factors and failed to properly consider relevant factors in determining Barnes' employment status.
Specifically, the Upper Tribunal identified six of the twelve factors considered by the FTT as irrelevant or not indicative of non-employment status. These included the distinction between presenter and commentator roles, the nature of Barnes' punditry work, and the reputational risk he faced.
The Upper Tribunal also found that the FTT failed to consider the hypothetical contract terms favouring employment status adequately. These included the long duration of the contract, the absence of substitution rights, and Sky's right of first call for a significant portion of the year.
Given these errors, the Upper Tribunal set aside the FTT's decision and remade it. In their reassessment, they concluded that the relationship under the hypothetical contract would have been one of employment.
Key points in the decision
The Upper Tribunal emphasized the importance of focusing on the terms of the hypothetical contract and weighing all relevant factors in determining employment status, guiding how tribunals should approach the Ready Mixed Concrete test in future cases.
The tribunal suggested a structured approach, recommending that factors be categorized as pointing towards employment, away from employment, or neutral. This approach aims to ensure a comprehensive assessment of all relevant aspects.
Notably, the decision reinforced the principles laid down in the Court of Appeal decision in Atholl House, that the contract's terms should be the starting point for analysis. The Upper Tribunal noted that while circumstances and conduct are relevant, the focus should remain "anchored on the contract in issue."
The judgment also repeats the ruling of Atholl House, indicating that mutuality of obligation and control, while necessary preconditions, must still be considered at the third stage because their extent or degree can influence the overall assessment of employment status.
Finally, the Upper Tribunal emphasized that no single factor is decisive in determining employment status.
Chaplin says: "The guidance provided is nothing new, but merely restating the principles laid down by the Court of Appeal in Atholl House, and garnered from observations in other recent Upper-Tier cases where errors in law have been found in the process of evaluating status."
What can we learn from the Stuart Barnes Case?
Chaplin provides some lessons from the many Sky-based cases:
"The primary lesson is that if you are still trying to defend a Sky TV case based on the boilerplate contract everyone else had, and Sky isn't going to show up as a witness at FTT, then give up and settle – your prospects of success are dire.
"Sky cases presented unique challenges under the old IR35 legislation. Individuals often faced onerous contracts and had to discharge the burden of proof years later in tax tribunals, often without crucial client witness evidence.
Chaplin says the situation under the new rules is starkly different: "Under the new off-payroll working rules, clients defending status determinations are in a vastly stronger position. They should have properly drafted contracts in place and can provide evidence of the working relationship.
"HMRC's cannot disregard legally binding contracts that accurately reflect non-employment relationships, nor dismiss corroborated facts. And, it's unlikely a firm will shy away from giving evidence at its own tax tribunal appeal.
"Ultimately, the S&L Barnes case underscores what we already know - the importance of clear, well-drafted contracts and consistent working practices that align with the intended status of the engagement."