HMRC outflanks Barnes

This is the latest tax case involving Sky TV Limited’s (‘Sky’) celebrity presenters/commentators and, so far, HMRC has won all of its cases. However, it’s important to remember that all of these cases have been under the Intermediaries Legislation (commonly referred to as IR35) Chapter 8 Income Tax (Earnings and Pensions) Act (‘ITEPA’) and the Social Security Contributions (Intermediaries) Regulations 2000 – SI 2000/727, consequently the liabilities will be met by Mr Barnes’s Personal Service Company (’PSC’) and not Sky.

The IR35 legislation asks the parties to consider whether, if the work undertaken by the worker (Mr Barnes in this case) had been provided directly to the engager (Sky) and not through the intermediary, would that work be under a deemed employment contract or not.

Background

Mr Barnes was engaged by Sky Sports as a Rugby pundit under two separate contracts via his PSC, S&L Barnes Limited (‘SLB’) for a period between 2013 (1^st June 2013 to 31^st May 2017) and 2019 (1^st June 2017 to 31^st May 2019).

During these periods he had other revenue streams with the Sky income representing between 57.3% to 61.5% of his total income, but this dropped to 33.4% during the 2019-2020 tax year, due to Sky reducing its rugby coverage.

HMRC contended that his contracts fell within the IR35 legislation because the working relationship between the two parties was one of employment. This meant that Mr Barnes was a deemed employee of Sky; consequently, his income from Sky should be treated as employment income and processed via payroll and subject to the appropriate Pay As You Earn (‘PAYE’) Income tax and NIC deductions. HMRC duly raised assessments for Income tax and NIC debt of £695,461.97 (£481,364.20 in PAYE Income tax and £214,097.77 in NIC) for the relevant periods excluding interest and penalties.

SLB appealed against the determinations via the First Tier Tribunal (‘the FTT’) and the Judged ruled in its favour, in a decision released on 20 January 2023. HMRC appealed against the decision.

The matter went to the Upper Tribunal (Tax and Chancery Chamber) (‘UTT’) based on two grounds of appeal by HMRC.

• The FTT erred in its construction of the hypothetical contract, concerning Sky’s right of the first call over Mr Barnes and purported variations to the contract; and
• The FTT erred in its interpretation and/or of the third stage of the Ready Mix Concrete (South East) v Ministry of Pensions and National Insurance [1968] 2QB497 (‘RMC’) test, including by considering irrelevant factors and failing to consider relevant factors.

RMC tests

These tests established that, in order for there to be a contract of service (employed), certain conditions must be met:

• The worker has to be subject to a right of control. If there is no right of control of any kind then you will not have a contract of service. However, there is a caveat that, although a right of control is an important factor in determining employment status, it is not necessarily a determining factor;
• Personal service must be given. However, the court did make the important point that a limited right of delegation was not inconsistent with a contract of service; and
• the other factors present are consistent with a contract of service. Factors such as ownership of significant assets, financial risk and the opportunity to profit are not consistent with a contract of service.

The three criteria are generally referred to as mutuality of obligation, control and third RMC stage. There was no dispute at FTT’s decision that there was mutuality and a sufficient framework of control.

UTT’s decision [HMRC v S & L Barnes (2024) UKUT 0262 (TCC) on 28 of August 2024

The UTT dismissed HMRC’s first ground of appeal, finding that FTT’s decision regarding the variation of terms relating to Sky’s right of first call, was correct. However, HMRC won its appeal on the second ground because the Judge ruled that the FTT had incorrectly approached the third stage of the RMC tests, and which factors it considered relevant to go into the mix for the full evaluation.

The judgement is interesting because the judges took the view that FTT based too much emphasis on Mr Barnes being a business in his own account (although he had other revenue streams and was a brand, this was considered neutral by UTT), and should instead have taken a more multi-factorial evaluation. The factors which weighed more heavily in the contracts being employment contracts were:

• The length of the contract.
• Length of his relationship with Sky – Mr Barnes worked for Sky for 20 years consistent with employment relationship.
• Payment of fixed fee.
• Mr Barnes did not have a right of substitute.
• Sky had exclusive right to call on his services for 228 days a year (as varied).
• Degree of control.
• Financial risks.

Although the writer agrees with the Judge’s assessment, the decision was contrary to recent rulings in Lorraine Kelly and Kaye Adam’s case, where being in business in their own account was the decisive factor.

It may also be that Sky contracts have notoriously contained onerous provisions, such as those around control which was not necessarily a true reflection of the working practice. However, as the recent Kaye Adam’s case has demonstrated, the contract is central to the IR35 enquiry.

This case would normally have been referred back to the FTT to reconsider its decision, but in this case both parties agreed that, should it be proved that the FTT erred in law, then the UTT should remake the decision.

The UTT decision concluded that in their opinion, the relationship under the hypothetical contract would have been one of employment.

Mr Barnes has the option to appeal the decision by taking the case to the Court of Appeal. However, six years, financial and mental costs may have taken its toll.

What should companies do?

The case demonstrates the importance of:

• Well-constructed contracts reflecting contract for services arrangement (self-employed) if that is the intention of both parties;
• Having robust employment status processes, controls and governance with reviews should the working circumstances change during the engagement;
• Considering all the facts, standing back, looking at the full picture before making a decision on the employment status of the worker;
• Documenting all decisions with the reasons on how those decisions were arrived at;
• Providing adequate training for all stakeholders in the recruitment and processing of off payroll workers; and
• Keeping up to date with the ever evolving employment status case law.

Please contact the haysmacintyre Employment taxes team should you have any questions on this case or any other IR35/employment status queries.