What Phil Thompson’s £300,000 IR35 loss means for contractors

Ex-Liverpool footballer and manager Phil Thompson appealed to the Upper Tier Tribunal against the decision handed down in December 2023 by the First Tier Tax Tribunal, which held that Thompson’s personal service company, PD & MJ Ltd, was operating within IR35.

Readers of ContractorUK will be familiar with the facts of this case from the FTT decision, as no new facts were introduced in this appeal, and I do not intend to reproduce them here, writes David Harmer, a director at Markel Tax.

As a reminder, though, the UT hears appeals on points of law; it is not a tribunal of fact. This means that appeals must be made on matters of law and legal principle -- it does not simply re-hear the case.

What four grounds did Phil Thompson appeal his IR35 case on?

Thompson appealed on four legal grounds, arguing that the FTT had effectively made errors in law on the following:

1. Its interpretation of the actual contract between PD & MJ Ltd and Sky;
2. Its identification of the terms of the hypothetical contract;
3. Its decision as to the necessary framework of control, and;
4. Its application of the “third stage” of employment test.

Ground 1 (interpretation of the actual contract between PD &MJ and Sky)

This ground went to the wording of the clauses in the written contracts.

One of the main focuses was on the FTT’s conclusion of “ad hoc as and when required”. 

‘As required versus ‘by mutual agreement’

It was challenged by Thompson that this did not mean, as the FTT stated, “as required by Sky”.

At the UT, it was argued that this should be interpreted as “by mutual agreement” and that Thompson had the right to reject any offer of specific works.

‘All directions…will be complied with’

The second main focus was on the wording: “All directions and requests given by BSkyB or its nominees will be complied with”. 

It was argued by the appellant’s legal team that this clause did not apply to Thompson when providing his opinion or commentary live on air.

These submissions were rejected by the UT.

It found the FTT had made no error in law in determining that the express terms did oblige Thompson to perform services when required, and he was subject to Sky’s right of direction/control.

Ground 2 (identification of the terms of the hypothetical contract)

The thrust of this challenge included that the FTT did not draw up all the terms applicable to the hypothetical contract correctly. 

Challenge was made that the FTT did not cite guidance laid down in Atholl House (the ‘Kay Adams IR35 case’) and that Thompson’s verbal evidence was not given sufficient weight, nor was cross-examination utilised to clarify.

The UT rejected this challenge.

Failure to cite guidance from any specific case does not by default make a judgment unsound.

It was determined by UT judges Rupert Jones and Phyllis Ramshaw that the FTT were entitled to conclude the facts as they did.

Ground three (decision on the necessary framework of control)

The argument raised here was that had the FTT not made the errors raised in grounds 1 and 2 (above), it would not have concluded that there was a sufficient framework of control in place.

As the UT had already rejected the initial two grounds of appeal, this point of appeal also failed.

Ground four (application of the ‘third stage’ of employment test)

This “third stage” appeal comes from reference to the label given in the Stuart Barnes IR35 case, and is the third stage test identified in the Ready Mixed Concrete case. In short, it’s whether all other factors of the contract are consistent or inconsistent with employment. 

This often leads to analysis of ‘in business’ factors to determine whether the engagement showcases independent ‘self-employed’ features, or whether it is more akin to employment.

The challenge was made by Thompson and his legal team that the FTT was wrong to conclude the factors it identified were consistent with employment.

And in particular, that the individual skill of Thompson, his preparatory works and freedom to exploit other opportunities, should have been considered as factors which point away from employment.

The UT held that no errors were made by the FTT in its findings, as it was entitled to conclude the provisions it identified were consistent with a contract of employment.

What should contractors learn from this convincing IR35 win for HMRC?

This case doesn’t provide any ‘game changers’ to the law on IR35, and while extremely disappointing for Thompson, we can’t see anything particularly controversial in this decision. 

It is for this reason that the judgment against Thompson (and rather emphatic it is in HMRC’s favour) provides sound use for contractors going forward.

In short, you already know the score! 

The hat-trick of IR35 factors

Personal service, Mutuality of Obligations and Control are the bedrock of IR35 status; once those have been determined, one must then consider if other factors are consistent or inconsistent with employment.

The main reason this IR35 appeal failed is not for lack of trying, nor because the arguments were particularly poor. Rather, Thompson’s IR35 case was doomed by its written contracts.

IR35: When you become the underdog and HMRC the favourite

For fear of sounding like a broken record, contract is king and clarity of wording is essential. 

Where you are fighting against a poorly worded contract which contains obligations for personal performance and grants the client a right of control over the services, you become the underdog and HMRC are favourite to win. 

You would need to evidence the exceptional to sideline the written terms and rely solely on the working practices. 

The written terms in this case were simply just not good enough to demonstrate an outside IR35 position. And the additional facts identified at the UT did not go the distance to shatter that original written agreement.

Final thought: no room on IR35 status for ambiguity

As we have stated many times, contracts must be carefully drafted -- there can be no room for ambiguity in the written terminology when it comes to IR35 status. Otherwise, you too could end up with an own goal of some significant cost; almost £300,000 in the case of a now-defeated ex-footballer Mr Thompson.