IR35 developments: Stuart Barnes’ victory reversed following HMRC appeal

This latest article, in our series covering IR35 developments, considers the Upper Tribunal (UT) decision in HMRC v S & L Barnes Ltd. This case concerns the former English rugby union player Stuart Barnes, and focuses on how his commentary services were provided to Sky TV between April 2013 and April 2019 under contracts entered into by his personal services company.

The question in this case was whether the intermediaries legislation (referred to as IR35) applied to the engagements. IR35 refers to statutory provisions designed to ensure that individuals, who would be employees but for the interposition of an intermediary company, remain subject to income tax and national insurance contributions (NICs) as employees.

The legislation operates, firstly, by imposing a hypothetical contract between the worker (Mr Barnes) and the end-client (Sky TV). We then need to ascertain the terms of this hypothetical contract, usually by reference to the terms of the actual contract between the intermediary (S & L Barnes Limited) and end-client. We then determine whether the terms of the hypothetical contract is indicative of an employment or self-employment relationship. It is only where the contract is indicative of employment that IR35 applies to impose additional tax and NIC liabilities on the intermediary.

Case history

This UT hearing was an appeal by HMRC against the decision of the First-tier Tribunal (FTT) released in January 2023. The FTT had found in Mr Barnes’ favour, finding that the engagements did not fall within IR35.

Whilst the parties had agreed that the first two stages of the three-stage employment status test for tax purposes were met, the FTT sought to reach its own conclusions on these points. The FTT ultimately agreed that there was “mutuality of obligation” (broadly, Mr Barnes was required to accept work and Sky TV was required to provide work) and a “sufficient framework of control” (broadly, Sky TV exercised control over when, where and how Mr Barnes provided his services).

The FTT then needed to undertake an “overall analysis” of the engagement and determine whether it was one of employment as part of the third stage of the employment status test. In undertaking this analysis, the FTT listed various relevant factors which ultimately pointed towards the engagement being one of self-employment and concluded that the engagement was outside IR35. The FTT referred to the analysis being “anchored” on the terms of the hypothetical contract, whilst recognising that the contextual circumstances were also important.

Upper Tribunal decision

HMRC primarily, but not exclusively, challenged the FTT’s conclusions regarding the overall analysis as part of the third and final stage of the employment status test. It was ultimately this overall analysis that led the FTT to reach the conclusion that the engagement was one of self-employment and therefore outside IR35.

Whilst the FTT had noted that the analysis should be “anchored” on the terms of the hypothetical contract, the twelve relevant factors it had identified were in fact mostly focused on the contextual circumstances. There was also no indication or developed reasoning by the FTT which identified the terms favouring employment nor any indication why those terms were outweighed by terms favouring self-employment.

The UT therefore allowed HMRC’s appeal and set aside the FTT’s decision. The UT thereafter decided to remake the decision, and did so by identifying and weighing the contractual terms indicative of employment and self-employment against each other.

The UT ultimately concluded that the contract was indicative of employment, stating: “The long duration of the contract, the absence of a right of substitution, the right of first call for 228 days a year (as varied), the rights of exclusivity, the absence of financial risk and the overall length of the relationship with Sky are factors which in our opinion collectively outweigh the right of Mr Barnes to exploit his work product, his agreement regarding availability and the fact that he was in business on his own account outside his relationship with Sky.”

Moore Kingston Smith comment

The UT decision identifies specific issues with the reasoning of the FTT. Even though the FTT correctly set out the approaches and tests that needed to be applied, the UT nonetheless decided that it went astray in applying them. However, the remaking of the decision by the UT was relatively sparsely reasoned and it remains to be seen whether this case will be appealed further.

This decision reinforces the complexities associated with the intermediaries legislation. Whilst the third stage of the employment status test was also litigated recently in the case of Adrian Chiles, this case deals with quite different issues. It shows how just one aspect of the multiple stage IR35 analysis can give rise to a wide array of misinterpretations and issues.

The Labour Party published a policy paper before the general election which could potentially be the biggest reform of employment legislation for some time. Our employment law team commented on this proposal at the time. The new Labour government has, however, not indicated that they will make any changes to the intermediaries legislation or, indeed, make any wider changes to the employment status test for tax purposes.

We do not anticipate any impending changes in this area. This is unfortunate as it seems sensible to revisit the intermediaries legislation and wider employment tax regime as part, or following, the reform of employment law.

How we can help

Given the complexities in this area, as is repeatedly highlighted in each of our IR35 case commentaries, specialist advice is vital. Please contact our employment tax experts if you want to discuss IR35 further or explore how we can assist you.