UT (Tax & Chancery) UT-2024-000044 - [2025] UKUT 00094 (TCC)

It is right to note that the FTT did not expressly cite the guidance of the Upper Tribunal in Atholl House UT. However, that is not by itself an error of law. The question is whether in the approach that it did adopt, the FTT erred in law. We are satisfied it did not for the reasons submitted by Mr Stone.

The process of creating a hypothetical contract involved the FTT conducting a “counterfactual exercise” – if Mr Thompson and Sky had concluded a contract directly between themselves, what would its terms have been: Atholl House UTat [56].

The FTT was entitled to rely on the fact that Mr Thompson negotiated the terms of the actual contracts in his position as sole director of the Appellant. In that role, he agreed to enter into the actual contracts. The negotiation of the hypothetical contract would have been between the same people, just this time with Mr Thompson negotiating on his own behalf rather than on behalf of the Appellant. The FTT was entitled to find that the terms negotiated between the parties would not have been substantially different. This was a case involving a three-party chain (i.e. the individual, his PSC and the client) so the actual contracts represent “a safe starting point”, per Atholl House UT at [56], for constructing the hypothetical contract.

The relevance of Mr Thompson entering into the Schedule directly with Sky is that he thereby agreed personally to “comply with the terms of the Main Agreement and all directions and requests given by or on behalf of BSkyB or its nominees” (clause 3.1). That was support for the finding that if he had negotiated a direct contract with Sky, he would have been content to enter into the same terms as are found in the actual contracts.

Hence, the FTT was entitled to conclude, at [59], “As such, there is no reason to believe that a direct negotiation between Mr Thompson and Sky would have resulted in substantially different terms, still less terms diametrically opposed to those in the Contract as regards Sky’s ability to require performance”. The same point was put in different terms at [62], “... both Sky and Mr Thompson were in fact agreeable to those terms and so there is no reason why they would not be agreeable to them in the event of a direct agreement between them by way of the hypothetical contract.”

The FTT was entitled at [59] to reject the Appellant’s submission that the hypothetical contract would have included a term that Mr Thompson would have the right to refuse any request by Sky to provide the services.

This is for the three reasons Mr Stone gave. First, it is not what the actual contracts provided. A particular term within the actual contract “will often be a strong indication that the term should be found in the hypothetical contract as well”: Atholl House UTat [8(4)].

Second, a contractual right for Mr Thompson to refuse Sky’s request to work would have been a term that makes no commercial sense – it is very unlikely that Sky would not have agreed to pay over £150,000 a year to Mr Thompson if he had the right to turn down any or all requests to work.

Third, it was not how the parties operated the contracts in practice – the FTT found that Mr Condron (of Sky) agreed to accommodate Mr Thompson’s rare non-attendances on the show and both he and Mr Thompson treated notification of absence as a matter of respect rather than a matter of agreement- see [10]:

“Although Mr Thompson stated in his witness statement that he was of the view that he did not need permission from Sky to miss a programme, in practice he would always give Sky notice when he was unavailable in order to ensure that Sky could obtain a replacement…If Mr Thompson was not able to attend for any particular week, Mr Thompson would tell Mr Condron in advance out of respect, who would agree. This did not happen often as Mr Thompson would holiday out of season and enjoyed being on the programme so much that he did not want to miss it…”

This finding was also reflected in the Decision at [60] as set out below. There was nothing inconsistent in the FTT’s findings at [10] and its rationale at [60].

Mr Firth criticises the FTT for not having regard to Mr Thompson’s understanding of the terms of the actual contracts. However, that was not a material error of law. We do not agree with Mr Firth’s submissions that the construction of the hypothetical contract must or “will” always take into account the subjective views of the parties or that the subjective views will always be relevant. It will depend on the facts of the case before the FTT – just because they are relevant in one case does not mean they will always be.

The Upper Tribunal in Atholl House UTsaid, at [8(4)] that matters such as the subjective view of the parties cannot be regarded as “necessarilyirrelevant” to determining the terms of the hypothetical contract and “can appropriately be taken into account”. What will be appropriate will vary between cases depending on many factors and may include, the extent to which any subjective view was taken as to any particular term in the actual contract, the significance of the actual contractual terms in issue and the extent of the difference between what the terms provided and what they were understood to provide or how they were performed.

Even if the subjective views and performance of the parties were required to be taken into account when constructing the hypothetical contract, the FTT made no error of law.

The Upper Tribunal in Atholl House UT warned of the dangers of focussing too heavily on the parties’ “imperfect, and sometimes incorrect, understanding of the terms of the Written Agreement”, at [55]. In this case, the only witness for Sky, Mr Condron, had no understanding of the terms of the actual contract as set out in the written agreement. His understanding was not imperfect, it was absent. Furthermore, there was no evidence that Mr Condron was a person who would or could have properly represented Sky in any contractual negotiation or agreement – he was simply the producer of Soccer Saturday. What is accepted by the parties is that terms of the actual contracts agreed between Sky and the Appellant were standard terms that applied to all similar agreements for providing the services of on-screen commentators, presenters, interviewers or guests.

Therefore, the FTT, in this case was entitled to and gave sufficient reasons at [60] for not deviating from the terms of the actual contracts based upon the parties’ performance or understanding of the contracts in the way invited by the Appellant when constructing the hypothetical contracts:

“60.

We do not accept that the evidence of the informal arrangements for Mr Thompson’s appearances on Sky affect the position. In practice, Mr Condron agreed to accommodate Mr Thompson’s rare non-attendances. Both Mr Thompson and Mr Condron treated this as Mr Thompson notifying Mr Condron in advance out of respect rather than requiring agreement. Nevertheless, as set out above, the contractual rights and obligations in the actual contracts did not give Mr Thompson the right of refusal and did not require mutual agreement. The pragmatic and consensual approach taken to non-attendance does not detract from those contractual rights and there is no suggestion that there was any agreement that those contractual rights did not apply or were varied. Indeed, Mr Condron’s evidence was that he did not consider the terms of the Contract. Given that Sky did not provide for a right of refusal for Mr Thompson or mutual agreement in the 2013 Contract and the 2015 Contract and given that Mr Thompson himself agreed to the terms of the 2013 Contract and the 2015 Contract by virtue of the Schedule, it is reasonable to assume (and we find) that no such terms would be provided for in a hypothetical contract between Mr Thompson and Sky.”

It was therefore not inappropriate, nor a material error, for the FTT not to take into account Mr Thompson’s understanding of the terms of the actual contracts when the FTT explicitly found at [60] that IC, the only witness from Sky, did not have any understanding of the terms: “Indeed, Mr Condron’s evidence was that he did not consider the terms of the Contract.” Thus, the FTT could not have formed any realistic view of the parties’ subjective views of the actual contracts (and hence what they might have agreed hypothetically based upon this) on the evidence before it. It made a finding that the only witness for Sky had no knowledge of, and hence could not understand, the terms of the actual contract.

We reject Mr Firth’s submission that there was procedural unfairness in Mr Thompson not being cross-examined on his subjective understanding of the actual contracts, and hence what might have been agreed in a direct hypothetical negotiation. The FTT found that Mr Thompson agreed for the Appellant to enter into the contracts and agreed the terms of the Schedule thereto personally. The FTT was therefore entitled to find that this was powerful evidence when constructing the hypothetical contract and that there was no good reason to deviate from it.

The burden was on Mr Thompson to prove otherwise and he did not give any explicit evidence in writing that he did not understand or agree the actual terms of the contract on behalf of the Appellant and he would have negotiated diametrically opposed terms in any hypothetical negotiation with Sky that would require HMRC challenging his evidence in cross examination. There was no error in the FTT not having regard to Mr Thompson’s subjective understanding of the actual terms of the contract, as opposed to his evidence on how they were performed in practice.

Further, the FTT made no findings, and there was no evidence, that the performance of the actual contracts contradicted their written terms and the “flashpoints” never arose because of the harmonious conduct of the agreements. The FTT was entitled to find that the informal working arrangement provided no evidence of the testing of the rights under the actual contracts which might inform a different approach to the hypothetical contracts. It was entitled to take into account that there was no reliable evidence as to the rights/obligations under the hypothetical contracts being any different to those under the actual contracts. The FTT hence gave sufficient reasons for importing the terms of the actual contracts into the hypothetical.

There was no error of law in the FTT’s approach to constructing the hypothetical contract in this regard.