IT contractor wins borderline IR35 case

14 May 2010

On Friday 7th of May, IT contractor Novak Brajkovic, Director of Novasoft won his appeal against the tax department's interpretation of his service contract at HMRC Commissioners. Novasoft has originally sort to clarify Mr. Brajkovic's IR35 status using HMRC's IR35 assistance service in January 2002. The parties had failed to find agreement resulting in HRMC serving formal notices in 2005. This sends a clear message to contractors that they should think twice before consulting with HMRC regarding their IR35 status and would be better to seek expert 3rd party advice in the first instance.

The case was examined by applying normal principles of contract and employment law using a 'very considerable body of case law on the topic'. 12 determining factors were used to decide on whether Mr. Brajkovic was genuinely in business in his own right or a ‘disguised employee'.

The case was described by the tribunal as being ‘borderline' and there were probably more factors pointing towards employment than self-employment. No single factor was independently conclusive in either party's favour. However, the Tribunal kept in mind the admonishment in a previous case not to treat this as a checklist to run through mechanically. Instead these factors were used to paint a picture whose overall effect was evaluated. The decision was reached in Mr. Brajkovic's favour.

Case details:

Between August 1998 and December 2002, Brajkovic worked as a self-employed computer analyst/programmer with Avecia in a deal arranged through the agency Lorien.

After Novasoft used the HMRC's IR35 assistance service to check if IR35 applied to its situation, HMRC made further enquiries - including interviewing Avecia managers. HMRC served formal notices on Novasoft in 2005 based on its determination that Brajkovic was effectively a "disguised employee".

HMRC held that "Brajkovic did not present an image of a businessman offering his services to the marketplace; rather, of someone comfortable working for the same client on terms equivalent to employment." The Novasoft case eventually ended up in front of the Commissioners with the decision coming over 8 years after he had originally sought clarification from HMRC.

Brajkovic gave no formal evidence at the hearing in December 2009, but acted as his own advocate.  Doing so denied HMRC's representative the opportunity to cross-examine him.

The following factors were evaluated with the intent to paint an overall picture of the notional contract that would exist if Brajkovic were a direct employee. The tribunal's assessment is summarised below each factor:

(1) Extent and degree of control exercised by the client over the worker.

The notional Contract would have required Mr Brajkovic to undertake his work in accordance with standards and protocols necessary to make the project work-product fit for purpose and maintainable in the future by other IT experts but would not have been prescriptive as to exact hours of attendance, or the exact manner in which Mr Brajkovic implemented the skilled tasks assigned to him.

(2) The worker's right to engage helpers or substitutes.

Substitution would not have been allowed.

(3) Mutuality of obligations between the worker and the client.

The notional contract would have established mutuality of obligations.

(4) Financial risk of the worker.

Mr Brajkovic had a risk of non-payment.

(5) Provision of equipment.

Mr Brajkovic was not required to provide any of his own equipment or software.

(6) Basis of payment of the worker.

The notional contract would have provided for an hourly rate of compensation, and would have required proper invoices.

(7) Personal factors

(8) The existence of employee rights.

No typical employee benefits or statutory protections were included.

(9) Termination of the contract.

The notional contract would have provided for it to be terminable by either party on reasonable stated notice.

(10) Whether the worker was part and parcel of the client's organisation.

The contract would not have provided for any of the points that might indicate this.

(11) Exclusive services.

The contract would have provided for Mr Brajkovic's services to be provided as required on the projects without competing demands.

(12) Mutual intention.

The contract would not have provided for any statement of intention.

The Novasoft decision highlights the complexity of the IR35 regime for contractors, HMRC and the commissioners and judges who have to delve into the minutae of contractors' working arrangements to make their decisions.