Novasoft Limited v HMRC (2010)

Novasoft Limited v HMRC (2010)

The case of Novasoft Limited (“Novasoft”) was instrumental in determining that HMRC cannot rely on one or two fundamental indicators of IR35 to determine the employment status of an individual. It is essential for everything to be considered on balance in order to paint an accurate picture of self-employment. This further emphasises that the outcomes of cases are not easy to predict.

This case centred around the subject of whether Mr. Brajkovic could be determined as a disguised employee of his end client, Avecia Limited (“Avecia”), from the period 2000-2002.  Mr Brajokovic’s limited company, Novasoft, was contracting through the employment business, Lorien Holdings Limited (“Lorien”), and providing services to Avecia. Manchester Tax Tribunal found in favour of Mr Brajkovic who was deemed to be self-employed.

The tribunal created a hypothetical contract between Novasoft and Avecia with the primary purpose to determine whether under this said contract would have established Mr Brajkovic as an employee. More specifically, the tribunal wanted to determine whether mutuality of obligations and substitution would be present. The tribunal reached the conclusion that the theoretical contract would not have permitted substitution.

The tribunal confirmed that a missing substitution clause in a contract did not automatically point to an employment relationship. The view that the absence of a valid right to substitute would be detrimental for an Independent Contractor was therefore quashed by this decision.

This case highlights that the picture of a contractor’s employment status should be viewed as a whole. On balance, a missing substitution clause would not hinder the general view that the hypothetical contract was 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.”

The case of Novasoft Limited illustrates that employment status can only be assessed on a case by case basis. One rule does not fit all. Mr Brajkovic won his appeal as he was determined not to be part and parcel of Avecia’s business.