Novasoft Limited v HMRC (2010)

Manchester Tax Tribunal  handed down its judgement in the case of Novasoft Limited v. HMRC, deciding in favour of the self employed Mr. Brajkovic.

Ironically, it was Mr. Brajkovic himself that asked HMRC's IR35 Customer Service Unit to provide an opinion on his company's contract. This, however, proved to be costly for Mr. Brajkovic and was to form the basis of this drawn out enquiry and determination of his employment status.

Novasoft Limited (“Novasoft”) began contracting to the end client Avecia Limited (“Avecia”), via the employment business, Lorien Holdings Limited (“Lorien”) in July 1998. In management of this relationship, Novasoft entered into a contract with Lorien, who in turn entered into a corresponding contract with Avecia for the services of Novasoft.

The issue for the Tribunal was whether or not Mr. Brajkovic should be considered an employee of Avecia during the period 2000-2002.

The Tribunal decided that it was necessary to create a theoretical contract between Novasoft and Avecia and to then consider whether under the theoretical contract Mr Brajkovic would have been an employee of Avecia.

In doing this, the Tribunal looked at a number of factors such as whether substitution was permitted or whether there existed a mutuality of obligations between the parties. It was the Tribunal’s approach to the right of substitution that was of particular interest after concluding that the notional contract between Avecia and Mr Brajkovic would not have permitted such a right.

Paint an overall picture, then stand back and view it.

In the main, when a contract for services does not contain a valid right of substitution this would usually be seen by most as that fatal blow for the contractor in determining their independence from the end client. In this case however, the Tribunal stated that although a right of substitution would generally be inconsistent with a contract of employment; its absence does not point definitely to such a contract.

The Tribunal felt that in the particular situation of Novasoft and taking the picture as a whole, that the detail concerning substitution did not disturb the overall impression they formed of the theoretical contract, i.e. one of self-employment.

Of further interest was the Tribunal’s reference to the words of Mummery J in the case of Hall v Lorimer (1992): 
“The object of the exercise is to paint a picture from the accumulation of detail. The overall effect can only be appreciated by standing back from the detailed picture which has been painted, by viewing it from a distance and by making an informed, considered, qualitative appreciation of the whole.

It is a matter of evaluation of the overall effect of the detail, which is not necessarily the same as the sum total of the individual details. Not all details are of equal weight or importance in any given situation. The details may also vary in importance from one situation to another. The process involves painting a picture in each individual case.”

This means that it is important to paint a picture of self-employment from the accumulation of detail in each individual case as opposed to relying on one or two employment status indicators.

Mr Brajkovic, on behalf of Novasoft Limited, won his appeal on the fact that he was not part and parcel of Avecia's organisation. This illustrates that each case depends on its own facts and that the outcome in any individual case is very difficult to predict.

Let’s just hope that more Tribunal’s will be aligned to looking at the facts of each case and the overall picture, instead of just cherry picking one or two bad points from a list of employment status indicators and relying on them to decide cases.

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