Contractors celebrating an important IR35 status victory in the Novasoft case are being warned that this “staggering” contractor win is likely to be overturned when, as expected, the case is appealed by HMRC.
At the possible end of an eight-year battle to prove he was outside IR35 during a 2002 contract, IT contractor Novak Brajkovic has won his appeal against HMRC’s Regulation 80 Income Tax and Section 8 National Insurance Contributions (NICs) notices to his contractor limited company, Novasoft Ltd.
But the basis for the ruling was inconsistent with previous rulings on IR35 status, which would leave contractor Brajkovic open to an appeal by HMRC.
This ruling flies in the face of previous rulings and all that we know about status cases. Oddly, this judge weighed the facts and came to a staggering conclusion. The majority of judges would not have come to the same conclusion and I would be amazed if the ruling was not overturned on appeal.
ContractorCalculator CEO and Editor in Chief Dave Chaplin says: “I’ve read the ruling several times and, based on ten years of following IR35 cases, I cannot see how the judge ruled in the contractor’s favour. I’ll be very surprised if HMRC does not appeal.”
Part and parcel or control?
The principles laid down in the Ready Mix Concrete case, which are behind 90% of status cases, require that all three of the following conditions of a hypothetical employment contract be met:
- There must be evidence of personal service and mutuality of obligation
- Sufficient control must exist to create a master-servant relationship
- There must be no other terms inconsistent with a contract of employment.
In his ruling, Tribunal Judge Peter Kempster systematically examined each of the employment/self-employment indicators. He found that the contractor was outside IR35 by virtue of his not being considered part and parcel of his client’s organisation.
However, as reported in an interview published on AccountingWeb, it was contractor Brajkovic’s view that, “…the outcome of his appeal probably came down to the control factor and what he thought was the absence of the mutual obligations that employees enjoyed.”
Overturned on appeal
Part and parcel is generally considered a minor status indicator and the ruling is unreliable. It could be overturned on appeal.
It’s not yet known whether HMRC will pursue the case further. But looking at all the comments made by the Judge as he systematically reviewed each status test, it is hard to escape the conclusion that the contractor should have been found inside IR35.
It does appear the case would be likely to go HMRC’s way at appeal: the ruling confirmed evidence suggesting that Brajkovic had no right of substitution; his contract included a control clause and was for personal service; and there was mutuality of obligation. But representing himself at the Tribunal, Brajkovic countered HMRC’s arguments with a raft of evidence pointing away from him being part and parcel.
Avoid HMRC’s contract review service
Brajkovic came into HMRC’s radar when he asked for a contract assessment from the then Inland Revenue’s advice service. At that time, in 2002, IR35 was relatively new and it may have seemed like a reasonable course of action. But in his interview with AccountingWeb, Brajkovic is quoted as now saying: “…I definitely would not use the HMRC advice service.”
Asking for a review is akin to waving a flag saying ‘please come and investigate me!’. “The contractor and HMRC disagreed about the status of the contract and within two months Brajkovic found himself under IR35 investigation. Then in 2005 he received a notice from HMRC demanding £49,000 in income tax and NICs.”
HMRC has 56 days to appeal the decision, which brings the deadline to 1st June 2010. For the contractor’s sake, I hope that HMRC will take no further action; but sadly I expect to see Novasoft in the news again over the summer.
If HMRC choose not to act that’s great news for Brajkovic, but will have little impact on other contractors’ IR35 cases that will still be determined by key precedents such as ‘Ready Mixed Concrete’.