UT/2023/000068 - [2024] UKUT 00262 (TCC)

In conclusion, we consider that the FTT made no error of law in taking into account Factors (4), (5), (6), (8), (9) and (12), but that it did err in law, for the reasons set out above, in taking into account at the Third RMC Stage Factors (1), (2), (3), (7), (10) and (11).

In determining whether this means that we must set aside the FTT’s decision on this issue, it is necessary to decide whether the errors of law were material. In this context, we agree with the Upper Tribunal in Morrisons (at [75)] that the relevant principles as to materiality are those set out in Degorce v HMRC [2017] EWCA Civ 1427 (“Degorce”). In that case, Henderson LJ said “ I find it difficult to envisage circumstances in which the Upper Tribunal could properly leave the decision of the FTT to stand, once it is satisfied that the error of law might (not would) have made a difference to that decision.” (Footnote: ⁶) Applying that approach, we have concluded that it might have made a difference to the FTT’s decision to allow the appeal if it had not taken into account Factors (1), (2), (3), (7), (10) and (11). Other than the statement in relation to Factor (7) that it was a “strong indicator” of non-employment status, we cannot determine the weight given by the FTT to the twelve factors, so we must conclude that the errors of law in relation to six of those factors might have made a difference to the FTT’s decision.

We therefore set aside the FTT’s decision. We discuss below the disposition of the appeal after we have discussed the second limb of Ground 2.

HMRC also assert under Ground 2 that in reaching its decision on the Third RMC Stage, the FTT erred in law by failing to take into account a number of important factors which were consistent with employment under the hypothetical contract. In particular, say HMRC, the FTT failed properly to take into account the following factors which point towards employment:

Mr Collins argued that the FTT did not fail to take into account any of these matters. He points to the statement at FTT[135] (emphasis added to original):

Mr Collins also relied on the FTT’s self-direction at FTT[130] referring to the need to weigh all the terms and address all relevant factors. He argued that the fact that the FTT italicised certain provisions of the Contracts showed that it understood the importance of those provisions. He emphasised that the FTT need not deal with every argument or spell out its reasoning in great detail.

Mr Stone characterised this aspect of Ground 2 in the same manner as Ground 1, namely as being a challenge that the FTT had erred in law by failing to take into account relevant factors, and the error was material to its decision.

In a broader sense the challenge raises the wider issue of how the FTT could and should approach the Third RMC Stage. In the many decisions reached on IR35, a wide variety of approaches have been adopted by the FTT and Upper Tribunal. In some cases, the approach has been to identify and discuss those factors pointing towards employment, those factors pointing away from employment and those factors which might be described as neutral, and then to either carry out a balancing exercise, or, in some instances, simply to state a conclusion. In other cases, the approach has been more impressionistic, identifying the “bigger picture” leading to a conclusion as to employment status. In several cases, the discussion of the Third RMC Stage has focussed on whether the individual was in business on their own account, and the relationship between services provided inside and outside the hypothetical contract.

Without wishing to lay down a prescriptive template, it may be helpful, given the divergent approaches which have been taken, to offer some general guidance as to how the Third RMC Stage should be approached.

We consider that the following principles can be discerned from the authorities in approaching the assessment of the Third RMC Stage in an IR35 case:

In its decision refusing permission to appeal, the FTT did not address HMRC’s argument that it had failed to take into account relevant factors consistent with employment.

There are a number of points which weigh against HMRC’s case under the second limb of Ground 2. First, the FTT correctly directed itself as to the proper approach, including the need to take all relevant factors into account, so we should be slow to conclude that it has not followed that self-direction. Second, Mr Collins meticulously took us through the FTT’s findings which preceded its discussion of the Third RMC Stage, and these included findings in relation to almost all of the issues identified by HMRC. Third, the FTT stated at FTT[135] that, in reaching its conclusion, it had had regard to “ the cumulative totality of the provisions in the hypothetical contract in the context of the parties’ conduct and intention”.

However, we have, with regret, concluded that in this case the FTT did not properly follow its self-direction to “weigh any terms which are contrary to a conclusion of employment against those terms, including mutuality of obligation and control, which favour a conclusion of employment” (FTT[130(1)]) and to keep in mind “the centrality of the contractual relationship in issue” with the focus remaining “anchored on the contract” (FTT[133]). As a result, it erred in law.

We have reached this conclusion for two reasons. First, the twelve factors which the FTT identified as “relevant” at FTT[134] mostly focus not on the terms of the hypothetical contract, but on the circumstances in which that contract operated in practice. That indicates a failure to keep the hypothetical contract at the centre of the enquiry. Second, more importantly, there is no indication or reasoning given by the FTT in its consideration of the Third RMC Stage to explain (1) what it considered to be the terms of the hypothetical contract which favoured a conclusion of employment or (2) why those terms were in its view outweighed by terms or circumstances to the contrary. In those circumstances, we do not consider that the FTT’s reference tothe cumulative totality of the provisions in the hypothetical contract in the context of the parties’ conduct and intention was adequate to address this deficiency.

We cannot say with any confidence that the FTT’s decision might not have been different but for this error, so it was in our opinion material. We therefore set aside the FTT’s decision under this limb, as well as the first limb, of Ground 2.

Since we have set aside the FTT’s decision, we must decide whether to remake it or remit it.

There is no challenge by HMRC to the FTT’s findings of primary fact, and their only challenge relevant to the FTT’s findings as to the terms of the hypothetical contract was pursuant to Ground 1, which we have dismissed. Therefore, we consider that we can and should remake the FTT’s decision. We do so on the assumptions that the FTT’s findings of fact, its findings as to the terms of the hypothetical contract and its conclusions regarding the mutuality and control tests, are undisturbed. It follows from our finding in relation to the first limb of Ground 2 that we also assume that of the twelve factors identified by the FTT at FTT[134], Factors (4), (5), (6), (8), (9) and (12), and only those factors, are in principle capable of pointing away from a relationship of employment under the hypothetical contract.

So, since mutuality and a sufficient framework of control are both present, the decision turns on the evaluation of the Third RMC Stage. We take into account the principles we have set out above regarding how that evaluation should be approached. We begin with the material terms of the hypothetical contract, as found by the FTT at FTT[111] and set out in the appendix to this decision.

We consider that the following terms of the hypothetical contract are the most significant terms which are more consistent with a relationship of employment:

We consider that the following terms of the hypothetical contract are the most significant terms which are more consistent with a relationship other than employment:

We consider that the other provisions of the hypothetical contract are broadly neutral, or not material, in terms of the status of the relationship under that contract.

HMRC argued that the extent of Sky’s control over Mr Barnes under the hypothetical contract was a material indicator of employment status. The FTT found that a sufficient framework of control existed, which is the correct test for the control limb of RMC, but on balance we are not persuaded that the extent of the control was a material indicator of employment. The type and nature of control over Mr Barnes was indeed broad, but in our opinion Sky’s rights in this respect were rights which it would have sought to impose on someone in the position of, and with the role of, Mr Barnes whether he was an employee or a contractor.

In terms of the circumstances relevant to the hypothetical contracts, we consider that the following were of relevance:

Drawing together these issues, and standing back to look at the picture created, we have concluded that the relationship under the hypothetical contract would have been one of employment.

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. The evaluation of all relevant admissible factors required at the Third RMC Stage leads us to conclude that the relationship would have been one of employment.

Finally, we asked the parties at the hearing for further written submissions, which were duly provided, on the question of whether, were we to set aside and remake the decision, we should take into account the fact that there was an express provision in the Contracts stating that (broadly) the intention of the parties was that Mr Barnes would not be an employee of Sky. The FTT did not in fact make any express finding as to whether a similar provision would have been included in the hypothetical contract, although it stated at FTT[135] that it had given no weight at the Third RMC Stage to the inclusion of such a provision in the Contracts. It is well established that such a provision is only likely to be relevant (and even then given limited weight) in a borderline case: Dragonfly Consultancy Ltd v HMRC [2008] EWHC 2113 at [54]-[55]. We have not found this to be a borderline case, so we have reached our decision without reference to such a clause, were it to have been present in the hypothetical contract.

HMRC’s appeal under Ground 2 is allowed, and we set aside the FTT’s decision and remake it to dismiss SLB’s appeal.

The contract would be for a fixed term of 4 years, extendable by another 2 years to coincide with the expiry of Sky’s rights to broadcast the European International Championship, and subject to further renewal by mutual agreement.

Mr Barnes would be contractually obliged to personally perform the ‘Services’ as the named Personnel under the Key Terms.

Mr Barnes had no right to provide a substitute when he was unable to provide the required services personally. Sky would choose and arrange for any substitute and would pay the substitute directly.

The Services to be provided by Mr Barnes would comprise:

Sky ‘shall have first call’ on Mr Barnes’ Services up to 228 days per annum, which would be inclusive of days being on air of around 90 to 120 days per annum.

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, (such as the coverage of the Six-Nations, British & Irish Lions, and World Cup matches would take priority over Sky’s fixtures).

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.’

Sky would have exclusive right of Mr Barnes’ services as a broadcaster within the UK. Mr Barnes would not be permitted to render his services to another broadcaster, or radio, and/or all media organisations without the prior written consent of the Head of Sky Sports. Such consent would not be unreasonably withheld, such as consent for Mr Barnes to broadcast during the World Cup season for a broadcaster outside the UK. In the event of any breach of Sky’s exclusive right to Mr Barnes’ services in this respect, Sky would be entitled to injunctive relief.

Sky would have the right to allocate Mr Barnes from the roster of commentators to cover a specific game to be broadcast by Sky Sports. To that extent, Sky had control over the location, the date, and which match Mr Barnes would cover, subject to any reasonable alternatives being suggested by Mr Barnes, whether it be location (such as not covering matches in Scotland in two consecutive weekends) or the interest of the match (such as switching to cover La Rochelle v Harlequins on Mr Barnes’ suggestion).

The contract would be terminable pursuant to clause 5, which would give Sky the right to terminate the contract ‘with immediate effect at any time’ if in Sky’s ‘reasonable opinion’ any of the stipulated conditions had obtained.

Sky would pay Mr Barnes the annual fee of £235,000 in 2013-14 with an increment of £10,000 per annum to £265,000 in 2016-17 as stated in the Key Terms, and thereafter the annual fee would remain at £265,000 for the two years to 31 May 2019. The fee would be payable in equal monthly instalments in arrears upon the rendering of an invoice by Mr Barnes.

The annual fee payable by Sky would be fixed in advance, and would not be calibrated to the actual number of days Mr Barnes would be on air for Sky.

In relation to programme content, Sky would expect Mr Barnes to adhere to the running order of the live match, and to work to the direction and instructions of the executive producer, whether it be for Sky Sports, Sky News, or for Sky Sports News. The content of the pre-match broadcast, and of the live commentary would be Mr Barnes’ sole responsibility, subject to prior clearance with the executive producer in relation to the themes to be covered.

As with the commentary for live matches, the content of any interviews given to Sky News, and Sky Sports News, or in relation to the Monday Column, and the Rugby Club, would be content solely created by Mr Barnes.

Mr Barnes would be subject to restrictions in relation to the handling of confidential information (clause 6) and non-solicitation (clause 7) and restrictions as to the provision of his Services outwith Sky as set out under the ‘non-compete’ undertakings at paragraph 4.2 of the NDA Schedule.

Mr Barnes would carry out his research, write his own script, and adhere to the Ofcom Guidelines in relation to the Services he would perform in presenting a Sky programme. In other aspects of the delivery of his Services, Mr Barnes was expected to work under the direction of Sky’s production manager in charge of the programme. Sky would have full editorial control over any programme and Mr Barnes would have to follow the reasonable requests of the executive producer, such as who to interview.

Sky would provide all necessary studio equipment during the live streaming of a sport event in which Mr Barnes provided his Services, including microphone and earpieces, and the necessary travel and accommodation bookings to enable location performance of the Services to take place. Sky would reimburse any reasonable expenses claimed by Mr Barnes, upon submission of receipts and if approved by Sky.

Mr Barnes would agree to assign to Sky all rights (intellectual property, copyright, etc) to enable Sky to have the exclusive rights in the commercial exploitation of his output emanating from presenting for Sky Sports.

Mr Barnes would have to seek permission from Sky before engaging in any new commercial activities. He would agree not to exploit his image rights in any manner, or to undertake any assignments from other broadcasters, or media outlets, that would cause a breach of the ‘non-compete’ restrictions pursuant to the Non-Disclosure Agreement.

Pursuant to clause 3.4, the Fixed Fee per annum would be agreed on the basis as to include a sum to satisfy Mr Barnes’ ‘paid holiday entitlement’ under the Working time Regulations 1998. Mr Barnes would have no contractual rights (over and above those rights granted by statute), to be paid for absences caused by sickness.