A tax appeal brought by S & L Barnes Limited v HMRC [2023] UKFTT 42 (TC) ("SLB"), involving rugby expert Stuart Barnes, has been upheld by the First-tier tax tribunal ("FTT") by Judge Heidi Poon. Mr Barnes was a top-level rugby union player throughout the 1980s and early 1990s, then leveraged his expertise to become a published writer for various newspapers and magazines. He also offered commentator, co-commentator, and punditry services for a range of global sports broadcasters.
The periods under appeal focused on whether the Intermediaries Legislation (Chapter 8 ITEPA 2003), commonly referred to as "IR35", applied to contracts between 6 April 2013 and 5 April 2019 when British Sky Broadcasting Limited ("Sky") engaged Mr Barnes as a co-commentator. IR35, and its more recent incarnation under Off-payroll (Chapter 10 ITEPA 2003), is legislation designed to tax engagements where workers provide their services via limited companies in instances where they are "deemed employees."
Before this decision, there had been three other appeals involving individuals providing services at Sky, all dismissed. So, what's different this time, and what can we learn?
Same judge, same contracts, different answer
Observers of IR35 tribunal cases may have spotted that the same judge in SLB had previously dismissed a similar Sky-related appeal on 18 October 2021 in Little Piece Of Paradise Ltd v Revenue & Customs [2021] UKFTT 369 ("LPPL"). The two other Sky-related appeals were dismissed on 10 March 2022 - McCann Media Limited v Revenue & Customs [2022] UKFTT 104 (TC) ("MML"), and 16 June 2022 – Alan Parry Productions Limited v Revenue & Customs [2022] UKFTT 194 (TC) "(APPL").
Common to all four cases were the almost identical contractual terms, as Judge Poon observed when contrasting the two cases she heard: "The framework agreements examined in LPPL adopted the same format and contained substantive terms practically identical to the contracts entered into between SLB and Sky in the present appeal." [83].
So, why the different appeal results? Having observed all the hearings for the previous Sky cases and having watched every other IR35-related appeal hearing since late 2019, I make three main observations:
- The Sky cases are extremely fact-sensitive,
- The judges appear to be adopting slightly different approaches when applying the legislation, and
- The Court of Appeal decision in HMRC v Atholl House Productions Ltd [2022] EWCA Civ 501 ("Atholl House") on 26 April 2022 has been impactful.
It is highly relevant that two of the four cases were heard before the Atholl House decision.
Freelancers at Sky TV
The freelancers at Sky often worked very differently. For example, Dave Clark in LPPL was the regular presenter of Darts. In contrast, Stuart Barnes was a professional co-commentator and pundit who provided his services sporadically to Sky on a retainer basis. In APPL, Alan Parry was a commentator who provided his services more regularly, like Neil McCann in MML – although Neil was a pundit.
These various roles and working patterns are quite different. It would be absurd to suggest Alan Parry would provide services as a football pundit because he's not been a professional footballer. Neither would Parry be a presenter – that's also not what he does. Another critical distinction is that Sky appeared to create a talent pool of specific expertise and then mutually managed a roster with them which suited both parties. Some did more work than others.
But what did the contracts state?
The Sky TV contracts
We know these Sky TV contracts are standard form (MML [52]), with the key terms for Services stating: "The Company shall provide the services of the Personnel as a commentator, interviewer and/or other participant in the making of any editorial, programme and/or video whether in vision or audio and/or whether in studio or on location, live or recorded on an ad hoc as and when required basis." [Emphasis added]
We also know that in Clause 4 of the contract, from the SLB case, the individual (or Company) would need "to comply with all directions and requests given by [Sky]". [Emphasis added]
Using a literalist approach to contractual interpretation, one could argue that these clauses mean Sky had the contractual right to make the Company (the individual) do any role they wanted, at any time they "required" of them, and rigidly follow any instructions directed to them. But that would not align with the facts in many of the cases. Often, the evidence suggests that each individual was hired, via their limited company, to fulfil a specific pre-agreed role on a mutually agreed case-by-case basis for a pre-agreed location/venue if and only if they were available. The individuals were then paid annual retainers and expected to do some work; if they didn't, they could be terminated without cause.
Construing the arrangements is a complex area of IR35, involving both contractual interpretation and subsequent contractual construction. Judges wrestle with this area and, in my view, might be adopting slightly different approaches.
A warning: in situations where contracts are not tightly drafted, it can be the difference between closing a case early or finding oneself heading towards a costly tax tribunal with no guarantee of success. In the world of "Off-payroll," I refer to status determinations based on loose drafting of contracts as "unsafe" – because they will inevitably require a trip to the tribunal to defend.
Applying the IR35/Off-payroll legislation
The correct way to apply either version of the legislation is to follow the three stages in HMRC v Kickabout Productions Ltd [2022] EWCA Civ 502, [2022] STC 876 ("KPL") at [7]):
- Find the terms of the actual contractual arrangements and the relevant circumstances within which the individual worked.
- Ascertain the terms of the hypothetical contract postulated by s.49(1)(c)(i) ITEPA and the counterpart legislation as applicable for NICs.
- Consider whether the hypothetical contract would be a contract of employment.
This process requires the judge to carefully understand all the facts, construe the original contracts against the contextual backdrop of those facts, and then construct a hypothetical contract. At that point, they then need to apply the common law tests for status, outlined in Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497 ("RMC"). To say this is not easy is an understatement. If stages 1 and 2 go wrong, it can materially infect the final decision in stage 3.
Once we reach stage 3, we are on slightly safer ground – the correct way to apply the status test set out in RMC was resolved by the Court of Appeal decision in Atholl House in April 2022. To summarise, HMRC had wrongly been taking a narrow approach since the 14 October 2011 decision in Weightwatchers & Ors v HMRC [2011] UKUT 433 (TCC). Atholl House corrected this and other misconceptions HMRC had whilst clarifying that an IR35 status determination using RMC must be a multi-factorial determination taking into account all the "circumstances" and not merely confined solely to the terms of the contract.
What's particularly interesting in the recent case for SLB, compared to others, is the approach taken to the construction of the hypothetical contract at stage 2.
How much violence?
The building of the hypothetical contract is a careful exercise in contractual interpretation and construction. The topic was wrestled with in the Upper-tier hearing of Atholl House by Judge Morris, whose decision published on 18 February 2021, indicated that "…this is not simply an exercise in pure "transposition" of terms from the actual contract into the hypothetical contract" and that "It may often be appropriate…to construe the actual contractual arrangements (using the usual canons of construction) whilst considering at the same time how these arrangements would work when determining the content of the hypothetical contract."
But, Morris also provided a warning [8(4)]: "This should not be taken as a suggestion that the terms of the actual contract can be disregarded by the simple expedient of focusing solely on parties' beliefs, or the way they actually performed the contract. If, applying ordinary principles of contractual interpretation, the actual contracts are found to have a particular term, that will often be a strong indication that the term should be found in the hypothetical contract as well."
Later in the decision, Morris says [53], "Inevitably, as we described in paragraph 8 above, the constructing of the hypothetical agreement involves doing violence to the terms of the Written Agreement and considering it in the light of the agreement that subsisted between Ms Adams and the Company."
When Atholl House was heard at the Court of Appeal, further attention was paid to the correct construction of the hypothetical contract, which specifically ruled out, in tax cases, the use of a purposiveness approach based on Autoclenz Ltd v Belcher & Ors [2011] UKSC 41. In the summary of the decision, Lord Justice Arnold stated that "In a case like the present, the issue is one of interpretation of a written contract (or, to be more precise, a hypothetical contract derived from a written contract with the alteration of the identity of one of the contracting parties)."
Looking at SBL, the "construction battle" occurred in [95]: "I discern that it is the respondents' [HMRC] position that the hypothetical contract should map closely to the terms of the actual contract, while the appellant's position would seem to suggest that the Tribunal should bring in circumstantial factors outwith the terms of the actual contract in the process of constructing the hypothetical contract."
The hypothetical contract wasn't created by simply renaming the parties, but "…in line with this guidance, the terms of the Contracts in the present case are a question of fact, based on my finding that the terms of agreement between the parties are to be gathered partly from documents, and partly from their conduct" [106] and based on "…tacit understanding[s] between the parties as to the practical aspects of the outworking of the contractual terms." [105]
In the SBL case, it could be argued by HMRC that the level of departure from the original contracts was an error in law. In Rainy Sky SA & Orsd v Kookmin Bank [2011] UKSC 50 the Supreme Court stated [13]: "where the parties have used unambiguous language, the court must apply it." Other standard canons of interpretation indicate that unexercised rights are still valid rights and that the parties' subjective intentions are irrelevant to the terms agreed. Either way, the approach is a departure from a more literal interpretation, which uses facts to illuminate ambiguous terms.
In my view, the level of violence to the original agreement may have been unwarranted. Still, one powerful factor was that Barnes was found to be in business on his own account.
The power of being in business on own account
The Atholl House appeal has brought the concept of being in business on one's own account to the front line of tax status cases. HMRC had sought to argue in Atholl House that engagements should be considered in isolation, but that was rejected [124]: "If the person providing the services is known to carry on a business, profession or vocation on their own account as a self-employed person, it would in my judgment be myopic to ignore it, when considering whether or not the parties intended to create a relationship of employment." In his summary, Lord Justice Arnold stated [170], "It follows that a factual circumstance known to both parties at the date of the contract (such as, for example, the fact that the person providing the work has an established career as a freelance) should be taken into account."
We know from Atholl House that being in business is not some trump card that always displaces any consideration of being a "deemed employee". Instead, any engagement needs to be considered in the context of the person's business to see if it is part of that or separate employment.
In SBL, HMRC Counsel sought to downplay Mr Barnes being in business on his own account, with ambitious arguments. None of them was compelling, including a somewhat surprising argument [86[6)] which claimed: "Mr Barnes' working arrangements were materially similar to those of his co-commentator, Miles Harrison, who was an employee of Sky at all material times." – even Judge Poon pointed out [124(1)], that Harrison was a presenter, and not a co-commentator or pundit, and concluded [128] that "Nor do I find it at all a sound or relevant basis to found Mr Barnes' contractual relationship with Sky by mapping onto how Mr Harrison had been contracted by Sky; each case turns on its own facts."
When concluding, Judge Heidi Poon stated that Mr Barnes was in business on his own account, and regarded the cumulative totality of the provisions in the hypothetical contract in the context of the parties' conduct and intention, that the relevant contracts would not have been contracts of employment for the duration of the relevant period.
Are cracks already appearing in Off-payroll?
From my purview, the principles laid down in Atholl House may be causing HMRC some considerable challenges. We are yet to understand their interpretation of Atholl House because their Employment Status Manual has not been materially updated since the case decision nine months ago.
One pressing concern is HMRC's Check Employment Status for Tax (CEST) tool. Whilst HMRC are planning usability enhancements, the underlying decision engine has not changed since October 2019 – it still aligns with HMRC's outdated interpretations of status case law which the Court of Appeal dismissed. We are back in "unsafe determinations" territory again.
Another question is how HMRC plan to deal with the outstanding IR35 compliance checks based on IR35 Opinion letters issued before the Atholl House decision. Those opinions were based on the old law and must be revisited.
Will HMRC try to appeal SBL?
Will HMRC try to appeal SBL? Even if they were permitted to appeal, I think they would be unsuccessful. Barnes was clearly in business on his own account, and the tacit agreements between the parties were one of working together largely by mutual understanding. So, why bother appealing? Whilst HMRC is grappling with the clarified case law, it may be sensible to let SBL rest and direct taxpayers' money towards resources that can help firms get the new rules right - many of them are still struggling.
This is item was first published by Taxation Magazine on 30th January 2023
