The recent judgment of the Upper Tribunal (UT) reversed Stuart Barnes’ IR35 victory after HMRC appealed the decision of the First Tier Tribunal (FTT). 

The case follows the dispute between HMRC and a retired rugby union player, Stuart Barnes, who provided journalistic services to Sky through his personal service company, S&L Barnes Limited (SLB). HMRC contended that, applying IR35, SLB should have treated that income as employment income of Mr Barnes, operated PAYE on it and charged it to National Insurance contributions, because the relationship between Mr Barnes and Sky would have been an employment relationship if it had not been for the interposition of SLB between them.

In its judgment, the UT focused on the actual and hypothetical contracts that existed between the parties. They recognised that mutuality of obligation and the right of control are necessary prerequisites to a working relationship being one of employment, however, concluded that their presence alone (i.e. without consideration of other factors) is not sufficient to determine employment status. The Court therefore considered the “third stage” of the Ready Mixed Concrete v Minister of Pensions and National Insurance test (the “Third RMC Stage”), and provided the following useful commentary.

1. It is not the activities of the engagement (i.e. the services) that matter but the capacity in which, and the conditions under which, they are performed.
2. A fixed fee paid in equal instalments is a salary-like payment which is consistent with employment status.
3. The opportunity for an individual to profit from efficiently managing their time does not necessarily point away or towards employment.
4. Exclusive rights and the requirement to seek consent to engage in new commercial activities are indicative of an employment relationship.
5. A consultant conducting business on their own account (particularly where there is financial dependence on doing so) is indicative of self-employment.
6. A fixed term contract can still create a mutuality of obligation between parties (per Kickabout v HMRC even a two-year term would be sufficient).
7. If a contract allows the client to call upon the services of a worker for a certain number of days, the fact they do not do so in practice is not relevant – a mutuality of obligation nonetheless exists between the parties.
8. A long relationship (here, 20 years) is indicative of an employment relationship.

We provide a more detailed summary of the case below.

Constructing a hypothetical contract

When assessing employment status in IR35 cases, the starting point is to ascertain the terms of the hypothetical contract between the parties. The UT set out factors to take into account when constructing a hypothetical contract, with reference to the guidance in HMRC v Atholl House Productions.

The Barnes judgment stressed the importance of considering the circumstances in which the services are provided. The Court emphasised that while the subjective intentions of the parties with regards to the meaning of the contract are not determinative in construing the terms of the actual contract, such factors can form part of the circumstances of the engagement and therefore should be considered when constructing the hypothetical contract. 

However, it is not correct to construct the hypothetical contract simply by looking at one party’s understanding of the terms of the actual contracts. Instead, it should be considered what the terms of the contract would have been if the client, Sky, had contracted directly with Mr Barnes. The judgment says that when looking at the arrangements it is helpful to understand what would have happened in situations of disagreement (or, as the UT put it, “flashpoints”) between the parties.

“Third RMC Stage”

Once the terms of the hypothetical contract have been determined, the next stage of the analysis is to establish whether the hypothetical contract would have been a contract of employment. This requires consideration of three conditions: mutuality of obligation, control, and the “Third RMC Stage”. 

The “Third RMC Stage” involves an overall assessment of the contract and the circumstances in which it was entered into. In Atholl House, the Court of Appeal pointed out that RMC and the line of cases that followed took “multifactorial” approaches which generally recognise that mutuality of obligation and the right of control are necessary prerequisites to a working relationship being one of employment. 

While mutuality and control were not contested in this case, the UT found that the existence of these factors is not sufficient to automatically determine that a relationship is one of employment. In reaching its decision, the FTT had identified 12 relevant factors which led to the conclusion that the hypothetical contract was not one of employment. 

It is in relation to these 12 factors, HMRC argued in their second ground of appeal, that the FTT made an error of law in applying the “Third RMC Stage”. The UT agreed with HMRC’s second ground of appeal and provided the following commentary.

• The comparative distinction of the role that Mr Barnes performed as a commentator for Sky (rather than a presenter) was not relevant and did not mean that the hypothetical contract was less likely to be one of employment. The UT reaffirmed the position in Atholl House that it is not the activities of the engagement (i.e. the services) that matter but the capacity in which, and the conditions under which, they are performed.
• The annual fee paid to Mr Barnes was a fixed fee paid in equal instalments which was consistent with employment status as opposed to the FTT’s conclusion that the payment did not resemble a salary as the contract did not stipulate a minimum number of days of service. 
• The FTT’s finding that Mr Barnes would be regularly interviewed by Sky Sports News and that it is unusual for an employer to interview their employee was not based on specific evidence and did not point towards or away from employment status. 
• The fact that Mr Barnes had an opportunity to profit from efficiently managing his time did not necessarily point away or towards employment status.
• Reputational risk that could have arisen for Mr Barnes every time he appeared on air for Sky applies to every presenter, whether they are employed or self-employed (BBL v HMRC). This factor therefore is not an indication that Mr Barnes was self-employed. 

However, it is worth noting that the UT accepted the FTT’s analysis that the fact that the material Mr Barnes used to provide his services to Sky remained his intellectual property and there was no demarcation in his work for Sky broadcast and newspaper columns, pointed to self-employment. 

The judgment

The UT decided that the FTT’s error of law in considering the above mentioned factors could have resulted in a different outcome. The court therefore set aside the FTT’s decision and remade it, concluding that the following factors were indicative of employment:

• the hypothetical contract would be for a fixed term of four years (extendable by two years). As noted in Kickabout v HMRC, many employees would regard a two-year engagement as providing significant security;
• there was no right of substitution and Mr Barnes had to personally provide his services;
• Sky had a right of first call on Mr Barnes’ services for up to 228 days per annum – considered as close to being a full time role. The fact that he was not called upon by Sky to provide services for this number of days was not relevant as they had the right to do so;
• Sky had exclusivity on Mr Barnes’ services as a broadcaster within the UK. Mr Barnes was required to obtain prior consent to engage in new commercial activities; and
• Mr Barnes’ annual fee was payable in monthly instalments regardless of the actual days of airtime. Necessary equipment was provided to Mr Barnes, alongside related travel and accommodation booking. As a result, Mr Barnes had very little financial risk. 

The Court also considered circumstances relevant to the hypothetical contract:

• Mr Barnes was in business on his own account outside of his role with Sky, which was a relevant factor at the "Third RMC Stage";
• Mr Barnes worked for Sky for over 20 years up to the period under appeal, and such a long relationship was consistent with a relationship of employment; and
• Mr Barnes' income from Sky averaged approximately only 60% of his total income over the period. As the remaining 40% of his income represented a substantial amount, the financial dependence factor did not point away or towards employment status. 

On balance, the UT concluded that the relationship under the hypothetical contract was one of employment. Mr Barnes was therefore within the scope of the IR35 rules and PAYE and National Insurance contributions should have been withheld by SLB from his Sky income and paid to HMRC.

Conclusion

The S&L Barnes Ltd case is a very useful decision on the application of the test at the “Third RMC stage”, as it considers in detail not only the factors that commonly arise in borderline cases that are not obviously either employment relationships or self-employment relationships, but also the correct approach to the overall assessment of those factors. It should be required reading for the FTT to which the Supreme Court’s decision in HMRC v Professional Game Match Officials Ltd is remitted.

Factors considered by the FTT