Novak Brajkovic provided IT analysis and programming services to Zeneca Specialities, later Avecia Ltd, through his company Novasoft Ltd.
He spent more than four years working on IT projects at the client’s Blackley site. The contractual paperwork named him personally, required the work to be carried out under the client’s supervision and contained no right of substitution.
There was nevertheless considerably more to the working relationship. Brajkovic had freedom over his hours and holidays, received none of Avecia’s employee benefits and was kept outside a number of arrangements which applied to permanent staff.
HMRC argued that the engagement fell within IR35. Novasoft successfully appealed, with the First-tier Tribunal finding that the hypothetical contract between Brajkovic and Avecia would have been a contract for services.
IT work for Zeneca and Avecia
Novasoft was incorporated in February 1997. Brajkovic owned 75% of the company, his wife held the remaining 25%, and he was its sole director during the period reviewed by HMRC.
Brajkovic was an IT analyst and programmer. Before the Avecia work, Novasoft had supplied his services to Post Office IT and Halifax Building Society.
In July 1998, Novasoft entered into a contract with IT agency Lorien Holdings Ltd to supply Brajkovic to Zeneca Specialities.
The initial schedule described him as a “contract analyst programmer”, with standard hours of 36 per week.
Zeneca’s relevant business later became Avecia Ltd, which was treated as the client for IR35 purposes.
Brajkovic worked on three IT projects, mainly a chemical compounds and formulations application. The arrangement was extended several times and continued until December 2002.
HMRC’s PAYE and National Insurance decisions covered the period from 6 April 2000, when IR35 came into force, until 13 December 2002.
Freedom over working hours
The contractual documentation referred to a standard 36-hour week and included wording placing Novasoft’s personnel under the client’s direct supervision.
The working arrangements were less rigid.
Brajkovic generally arrived early and usually left by 4pm, sometimes considerably earlier. His average working week was around 36 hours, compared with approximately 40 hours for Avecia employees.
He also took substantially more time away from the site than employees.
Brajkovic took substantially more holiday than Avecia employees. He informed Avecia when he intended to be away, but the tribunal accepted that this was a matter of courtesy rather than a request for permission.
The evidence also showed weeks towards the end of the engagement when his recorded hours were below the 36 hours referred to in Avecia’s earlier correspondence with HMRC.
The tribunal found that the hypothetical contract would require Brajkovic to devote enough time to the projects to meet deadlines and budgets, and to fit significant absences around the wider project team.
It would not, however, have prescribed his exact hours of attendance.
Control over the IT work
Avecia allocated work to Brajkovic and expected it to be completed within project deadlines and budgets.
The programming also had to follow technical standards and protocols so that other IT specialists could understand and maintain the work later.
Brajkovic’s work was reviewed by other members of the project team.
Those requirements gave Avecia a degree of control, but Brajkovic was an experienced programmer and was left to apply his own specialist skills when producing the required solutions.
The tribunal found that the hypothetical contract would not have dictated the exact manner in which Brajkovic carried out his skilled work.
This was important because HMRC relied partly on the contractual wording which referred to direct supervision.
The tribunal instead constructed the relationship from the contractual documents and the evidence of how the work was carried out.
Read more about control and IR35.
No right of substitution
Novasoft did not have a right to send someone else in Brajkovic’s place.
The agency contract named him personally and expressly prevented substitution.
The evidence from Avecia was also clear. A replacement could not simply have arrived at the site and started work because access was restricted and the project managers would first have needed to establish the person’s technical competence.
The tribunal therefore found that the hypothetical contract would have required Brajkovic to provide the services personally.
That finding supported HMRC’s position, but it did not decide the appeal.
A right of substitution is normally inconsistent with an obligation to provide personal service. The reverse does not follow: requiring personal service does not by itself establish an employment relationship.
That distinction was important in Novasoft because other parts of the working arrangements pointed in the opposite direction.
See our guide to substitution and IR35.
Mutuality during each contract
HMRC argued that the minimum mutual obligations required for employment existed while each contract was in force.
The tribunal agreed that there was mutuality during those periods.
There was no obligation on Lorien or Avecia to offer Novasoft another contract when an existing one expired, and no obligation on Novasoft to accept further work.
The final contract was due to run until 27 December 2002 but ended on 13 December. Brajkovic had no entitlement arising from the final two weeks and no expectation of being offered work on later stages of the project.
Avecia subsequently asked whether he was available for further work, which he declined.
The tribunal also heard that if an unexpected event such as a complete power failure prevented work, Brajkovic would not record the downtime and Novasoft would not be paid for it.
The tribunal accepted that mutual obligations existed while an engagement was running, but did not regard that finding as incompatible with self-employment.
The decision referred to Usetech Ltd v Young, where the court had also considered the distinction between the obligations needed for a contract to exist and those indicating an employment relationship.
See our guide to mutuality of obligation.
Working at Avecia’s premises
All of Brajkovic’s work on the Avecia projects was carried out at the client’s site.
He also used Avecia’s hardware, software and IT infrastructure.
There were practical reasons for both arrangements. The work required access to Avecia’s servers and corporate databases, while security rules made it inappropriate for outside hardware to be connected to the company’s systems.
HMRC itself accepted that the provision of equipment was unlikely to carry much weight on these facts.
Novasoft supplied Brajkovic with IT equipment for his work away from the Avecia site, but the equipment needed for these particular projects came from the client.
The tribunal found that the hypothetical contract might actually have required Brajkovic to use Avecia’s systems because of the security restrictions.
Different treatment from employees
Brajkovic spent several years working within Avecia’s IT project team, and HMRC argued that this showed he had become embedded in the organisation.
There were substantial differences between his position and that of Avecia employees.
He did not go through the normal employee induction programme and was not included in the company’s staff training arrangements.
He did not attend mandatory employee away-days.
His security pass identified him as a contractor and had an expiry date. He was also excluded from Avecia’s personal accident insurance and was not permitted to use the staff car park.
Although Brajkovic had an Avecia email address, the tribunal heard that this was because external email could not be accessed through the company’s IT system.
The tribunal did not find the features which would have made Brajkovic part and parcel of Avecia’s organisation.
No employee benefits
Brajkovic had no entitlement from Avecia to holiday pay or sick pay.
He had no access to its pension scheme, bonuses or profit-related pay, and no rights to paternity leave or redundancy compensation.
HMRC argued that this was simply the result of Brajkovic working through his own company, which provided any employment rights he had.
The tribunal rejected the idea that benefits arising under Brajkovic’s separate relationship with Novasoft should be imported into the hypothetical contract with Avecia.
The hypothetical relationship therefore contained none of the employee benefits or protections which Avecia provided to its own staff.
Financial risk
Novasoft faced the risk of late payment or non-payment by Lorien and incurred business costs including training, stationery, hardware upgrades and IT reference materials.
The company also maintained professional indemnity insurance.
Brajkovic argued that training carried a cost even where software companies provided courses without charging a fee, because time spent training meant time away from paid assignments.
The tribunal accepted that the hypothetical arrangement would expose him to a risk of non-payment.
It did not regard that point as particularly helpful in distinguishing employment from self-employment on these facts.
Other work
Most of Brajkovic’s working time during these years was devoted to Avecia.
He was nevertheless able to carry out other work, subject to confidentiality requirements and restrictions in the agency contract.
During the Avecia engagement he completed a separate paid assignment setting up a website for a music band.
The tribunal found that the hypothetical contract would have required the Avecia projects to take priority over competing demands for his time.
It would not have prohibited other assignments which did not conflict with Avecia’s business interests.
Why Novasoft won
The tribunal brought the individual findings together before deciding whether the hypothetical contract amounted to employment.
Some factors supported HMRC. Brajkovic had to provide the services personally, there were mutual obligations while each engagement was running, and he worked on the client’s premises using its equipment.
He was also paid according to the hours worked.
Other parts of the relationship looked quite different from employment. Brajkovic controlled much of his working pattern, took lengthy periods of holiday without requiring permission and retained professional autonomy over how he performed his specialist work.
He received none of Avecia’s employee benefits and was kept outside its induction, staff training and other employee arrangements.
The site and equipment requirements were readily explained by the nature and security of the IT work.
After considering the accumulated evidence, the tribunal found that the hypothetical contract between Brajkovic and Avecia was a contract for services rather than a contract of employment.
Novasoft’s appeals were allowed in full.
The approach followed Hall v Lorimer, where the Court of Appeal stressed the need to assess employment status from the overall picture rather than count individual factors.
Novasoft can also be compared with Dragonfly Consultancy Ltd v HMRC, where the wider contractual and working arrangements produced an inside-IR35 result.
Judgment
The First-tier Tribunal released its decision on 6 April 2010.
Novasoft Ltd v Revenue & Customs [2010] UKFTT 150 (TC), TC00456.
The case was heard by Tribunal Judge Peter Kempster and Stuart Martin.
Read the full Novasoft decision on BAILII.