Stuart Barnes IR35 appeal highlights importance of ‘length of service’

Former Sky Sports rugby commentator Stuart Barnes is the latest celebrity to lose in their IR35 litigation after a tax tribunal ruled against him over a near £700,000 liability to HMRC. The case highlights the difficulties both individuals and businesses face when it comes to determining tax status. We’ll speak to a tax specialist about the case.

As City AM reports, Stuart Barnes is the former English rugby union player who became a freelance writer and television presenter in the mid-90s following his retirement. He went on to set up a personal service company through which he provided his services to a number of media organisations. HMRC claimed two contracts with broadcaster Sky fell within the IR35 rules, meaning he should be taxed as an employee rather than a freelancer. Back in 2022, Barnes appealed against HMRC’s decision to the First-Tier Tax Tribunal and was successful. HMRC then appealed that decision to the Upper Tribunal which has now found in its favour. The judgment reads:

“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 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.”

Contractor Weekly also reports on the case and quotes Dave Chaplin, CEO of IR35 Shield. He says the case “underscores the need for freelancers and their clients to ensure that their contracts and working practices accurately reflect the true nature of their relationship.” He goes on to emphasise “the importance of clear, well-drafted contracts and consistent working practices that align with the intended status of the engagement.”

So, let’s get a view on the case from one of our own tax specialists. Earlier Penny Simmons joined me by video link to discuss the case. So why is it an interesting one?” 

Penny Simmons: “I think it's an interesting one for a couple of reasons. It’s yet another case looking at employment status for tax purposes and, yes, it's, it’s in the context of IR35 and it's yet again a case where one court says one thing and another court further down the line disagrees and changes the decision. So, I think again it emphasizes the difficulty and the nuance that's involved in determining employment status for tax purposes and if the tribunals are disagreeing, then think how difficult it can be for businesses making those status determinations.”

Joe Glavina: “I see Dave Chaplin, CEO of IR35 Shield is quoted in the press, as he often is when these cases come along, saying the case shows the need for contracts and working practices to accurately reflect the true nature of their relationship. From the client’s side of things, I guess you’d agree with that?” 

Penny Simmons: “Yes, I mean Joe we've talked about this so many times now where I have said that you can’t make a contract fit from an IR35 perspective, it is really important that whatever's in the contract reflects the reality of the engagement of the contractor and the relationship between the business and the contractor. So when clients would come to me and say, well, can you IR35-proof this contract so that the contractor will be outside IR35 my standard response is the contract must reflect the reality of the engagement. So if the reality of the engagement is such that the individual would be an employee for tax purposes then it doesn't matter what you put in the contract. In that sense, contractual terms need to reflect the reality of the engagement and I think this is, again, another case that just reinforces that message.”

Joe Glavina: “When it comes to the tricky job of actually making the status determination, Penny, who within the client’s business would carry out that exercise? Do you ever get involved?”

Penny Simmons: “It really depends on businesses and how they're internally structured and their internal resources to make status determinations but we do often get involved in reviewing those status determinations and we have templates and tools to help us review how the contract and the reality of the engagement compare to the various factors that are used to determine employment status for tax purposes, and kind of what side of the line we think the engagement would fall on because it is a difficult line to draw. We talked about this before Joe, and there are cases and we've seen this with the Revenue’s CEST tool where it's unable to determine whether something is inside or outside IR35. It can be a difficult line to draw, and we will very much look at the engagement as a whole, look at the contract, look at the reality of the engagement, compare those, look at those factors in the context of the factors that we know the Revenue and the courts will consider when determining employment status for tax purposes and make a judgment call. I think that would, from my perspective, draw me on to what I found most interesting about this case is when we're talking about the factors that determine employment status for tax purposes. Joe, when we've had previous conversations, we often talk about control, mutuality, of obligation and substitution, which are all very important key factors that the courts, the Revenue, and therefore businesses should be using to determine whether contractors are employees for tax purposes. For me, what stands out in this case is that the court, the Upper Tribunal, looked at length of engagement and they actually talked about length of engagement as quite a significant factor in its decision that Stuart Barnes was an employee for tax purposes and I think that many decisions in the past haven't focused so much on length of engagement and I think the consequence of that is that businesses don't think about length of engagement as much and, for me, this case highlights that length of engagement is an important factor to consider when making status determinations and evaluating what side of the line a contractor falls on - should they be determined as an employee for tax purposes or not?”

Joe Glavina: “Is there a sliding scale of risk here, Penny? So the longer the contractor is engaged with you the higher the risk of them being an employee for tax purposes?”

Penny Simmons: “Absolutely, I think there's a sliding scale of risk and so yes, the longer they're engaged, the higher the risks are of being an employee for tax purposes. It's not a determining factor because, as we've seen with this case, and as we've seen with cases that have come before, you have to look at the circumstances in the round. So you may well have a very long engagement, but every other box, if you like, is ticked in the self-employment category and so it wouldn't be a determining factor indicating employment for tax purposes, but it is a sliding scale that the longer the engagement the higher the risk, but it's not necessarily determining.”

Joe Glavina: “This case was decided under the old rules but, of course, now the risk lies primarily with the hirer. Given we are often talking about huge sums of money, potentially, is it possible to shift that risk onto the contractor?”

Penny Simmons: “If we are talking about business engaging directly with a contractor. Now we know that lots of businesses do not engage directly with contractors, they actually engage through agencies and intermediaries. So again, it's not a straightforward question to answer because that set of circumstances aren't actually what we're seeing mostly in practice. Mostly in practice we're seeing agencies involved. In terms of shifting the tax liability, you can shift some. You could require the contractor to pay some of those tax liabilities. You certainly cannot require a contractor to pay employer’s NICs. That is not allowed so therefore, yes, if a determination was made that you're inside IR35 you might go to the contractor and ask for the tax that's now due under IR35 but not the employer's NICs, and at 13.8% that can be quite a significant cost. That's the first thing I'd say. The second thing I'd say is that, and again we've talked about this before in the context of IR35 risk management, that you may be able to get some of the tax back, be that from a contractor, be that from an agency or another intermediary in your supply chain, but you cannot protect against the reputational and legal risks with HMRC and the reality is that clients, businesses, engaging with contractors through personal services companies, whether directly or indirectly, are responsible now for applying the IR35 rules. The IR35 rules dictate, require, that they make those status determinations and that they take reasonable care in making those status determinations. Now that's a requirement on a business. They cannot just shift that to contractors. So yes, they may be able to recover some of the tax under an indemnity, and I say some of because, as I said, not employer’s NICs, absolutely not, but that will not protect them against reputational risks, the risk that the Revenue would open an investigation into IR35 and then change, for large businesses, their tax risk rating. It could have an impact on their tax risk rating. It could also have an impact on their relationship with HMRC, and it could also find its way into the press and have an adverse impact on its reputation. So there is reputational risk as well. So it's not just about pure numbers here.”

Joe Glavina: “Anything else, Penny?”

Penny Simmons: “The only other thing I would say, but it's probably a message that I've talked about before. IR35 and determining employment status for tax purposes is difficult. It can be very difficult to ascertain whether somebody is inside or outside IR35, whether they should be taxed as an employee or not, and these cases simply underline, again, how difficult it can be where the fact pattern is complex and different  courts, and certainly the Revenue, can make different decisions as to whether somebody should or shouldn't be an employee for tax purposes.”

That case is HMRC v S&L Barnes Limited and is a decision of the Upper Tier Tax Tribunal. We have put a link to it in the transcript of this programme.

Link to judgment: HMRC v S&L Barnes Limited