Stuart Barnes’ IR35 loss puts working practice evidence back in play

To the claims that the new IR35 is complex, I say first things first because the Stuart Barnes case shows that the old IR35 to still be so complicated that the framework introduced 24 years ago requires rethinking, writes Angela Ferguson, head of employment tax at PSTAX.

When was the Barnes UT case handed down, and what was it about?

The Upper Tribunal decision in Revenue and Customs Commissioners v S & L Barnes Ltd was released on August 28th 2024. 

The case centres on whether the Intermediaries legislation (IR35) applied to the “voice of rugby,” Mr Stuart Barnes, when providing his services to Sky TV Ltd via his personal service company, S & L Barnes Limited.

Mr Barnes won his appeal at the First-tier Tribunal, however, the UT found the FTT had erred in law and overturned the case, thereby bringing the £695,461.97 (exclusive of interest) back into assessment.

What grounds did HMRC appeal on?

HMRC brought the appeal on two grounds, being:

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 Ready Mixed Concrete test, by taking into account irrelevant factors and failing to take into account relevant factors.

Surely there is a need to rethink these complicated rules...

In this article exclusively for ContractorUK, I will focus on ground 1 -- which demonstrates how difficult and nuanced it is to construct the hypothetical contract. 

This just serves to show how complicated IR35 and employment status is, and how surely there is a need for a rethink on these rules.

So, to ground 1 of the appeal, which covers three factors of the hypothetical contract created by the FTT.

Three factors of the Barnes-Sky hypothetical contract

These three are:

1. Sky ‘shall have first call’, up to 228 days per annum, which would be inclusive of days being on air of around 90 to 120 days per annum.
2. The exercise of the ‘first call’ right by Sky would be subject to Mr Barnes’ availability in conjunction with his standing commitments to the newspaper columns, and in co-ordination with Mr Barnes’ coverage of high-profile matches of which Sky had no broadcasting rights,.
3. Such variations to the provision on ‘first call’ were expressly provided by clause 1.1 under the Key Terms in the First Contract: ‘The Services will be provided on the terms set out in this Agreement subject to any variations agreed by the Parties in writing and to any Associated Company as may be agreed between the parties from time to time.’.

HMRC’s position

For these factors, HMRC’s position was that there was no written variation to the contract for the right of ‘first call.’

And therefore, the FTT had no evidence relevant to whether there had been a variation of the contract. 

HMRC dismissed this and agreed with Mr Barnes representative, Mr Collins, that “the need for a variation of the Contracts to be in writing missed the point, because the terms of the hypothetical contract can include terms based on the circumstances and the conduct of the parties.”

What the Upper Tribunal decided (including on flashpoints)

UT judges Thomas Scott and Mark Baldwin referred to the remitted FTT case of Atholl House (the ‘Kaye Adams case’), and the need to construct the hypothetical contract by approaching it via a counterfactual exercise -- as opposed to by only the understanding of one of the parties. 

This means starting with the actual contract is safe because all parties agreed to it. 

The UT judges added that they disagreed with HMRC’s contention that the lack of a ‘flashpoint’ to evidence the modification in the hypothetical contract on which the precise terms of the actual contracts might not be featured, was an error by the FTT.

The judges added that the FTT was justified in making this finding, as ‘flashpoints’ are “helpful but no more than that”.

The importance of good evidence on working practices when constructing the hypothetical

Therefore, and although ‘the contractor’ in this case (Barnes) lost, it is important for contractors to remember that the construction of the hypothetical contract should begin with the actual agreed contracts, but that good evidence on actual working practices can provide opportunities to insert modifications in the hypothetical contract. 

Contractors should also remember to keep this evidence safe in case of a HMRC employer compliance visit, and since the introduction of that equally complex framework -- the Off-Payroll Working rules, to challenge the Status Determination Statement where they disagree with the outcome.