Employment Status – Tax Tribunal rejects HMRC’s arguments in IR35 caseThursday, May 20th, 2010
In a notable decision given on 6 April 2010, the First Tier Tax Tribunal has allowed an appeal, in the case Novasoft Limited v Revenue & Customs, by a one-man IT limited company against HMRC’s claim that a long-term contract should be viewed as employment.
Where a company supplies services of a worker to a client is such a way that, if the worker’s contract had instead been with the client, the client would have been required to treat the worker as an employee, the statutory “IR35” rules require the company to pay PAYE tax and NICs on the payments made under the contract between the company and the client. The IR35 rules are controversial due to the difficulty is determining a worker’s employment status in any particular case.
Novasoft Ltd is a company owned by Mr Novak Brajkovic and his wife. He is the sole director and Novasoft supplied his services as an IT analyst and programmer to Avecia Ltd, the client for a period of over four years. In 2005, HMRC assessed Novasoft for PAYE and NICs under the IR35 rules on the basis that the relationship between Mr. Brajkovic and Avecia had effectively been one of employment. Mr. Brajkovic disagreed and his appeal against the assessment was heard by the First Tier Tribunal.
In a disputed employment status situation, the tribunal is required to consider all of the terms and conditions of the working relationship and put them together into a “notional” contract. Then, using the established “picture painting” principle from the Hall v Lorimer decision, the tribunal has to consider whether the notional contract has the overall appearance of employment or self-employment.
In this particular case, HMRC proposed, and it was accepted, that the following factors were significant in this decision:
- extent and degree of control exercised by the client over the worker
- the worker’s right to engage helpers or substitutes
- mutuality of obligations between the worker and the client
- financial risk of the worker
- provision of equipment
- basis of payment of the worker
- personal factors
- the existence of employee rights
- termination of the contract
- whether the worker was part and parcel of the client’s organisation
- exclusive services
- mutual intention.
Readers interested in the arguments and counter-arguments should read the tribunal’s decision in detail. Each of the twelve factors listed above is considered separately. Suffice to say that, in almost every respect, the tribunal disagreed with HMRC’s view of the working relationship – a rather disturbing situation in view of the ongoing complaints about the operation of the IR35 rules. The only significant factor in the tribunal’s “notional contract” was that Mr. Brajkovik had to perform the work personally and could not provide a substitute – an accepted indication of employment. However, looking at the “picture” overall, the tribunal did not think that that outweighed the other factors that indicated self-employment.
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