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Inside story: The Novasoft IR35 appeal

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12th May 2010
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IT contractor Novak Brajkovic tells us how he fought HMRC and won his IR35 appeal.

Novak Brajkovic can trace the origins of the eight-year fight to win his IR35 appeal back to a tax training seminar.
Through his company Novasoft, the self-employed web programmer had been working for Zeneca since 1998 as a specialist web programmer (note: the company subsequently changed its name to Avecia). The IR35 regulations came into effect in April 2000. When Novak started preparing his 2000-01 tax return in January 2002, his brother Nick – a practising accountant who also acted as Novasoft’s company secretary – agreed that he didn’t think the contract was caught by IR35 but suggested checking the contract terms with HMRC’s advice service.

“I’d been on a tax course when IR35 was quite new and they recommended running it by the Revenue,” explains Nick Brajkovic.

“He was very naive and said it should just be a quick process,” says Novak. “A couple of years of correspondence followed between me and the inspector, with them saying I was caught by IR35 and me denying it by quoting case law. My brother told me not to be frightened of the inspector. He tried to keep me calm and said it was just the inspector’s interpretation of his rules and authorities and not to be bullied or scared.”

During this period, Novak found David Smith’s book IR35 Defence Strategies very useful for constructing his arguments and pointing him at the relevant legal authorities. He also took heart that one of his co-workers who was employed on an identical contract had been through a similar process and been found to be outside IR35.

The £49,000 notice
But his hopes were dashed in late 2005 when he received notices from HMRC demanding just under £50,000 in income tax and National Insurance due. “I thought I had not argued the points correctly. That’s when I contacted Qdos,” he says.

Qdos had successfully advised Brajkovic’s co-contractor, so he turned to them for advice. But the fellow worker had taken out insurance through the Professional Contractors Group (PCG). Brajkovic had to pursue his appeal on his own behalf.

Because of the tax he’d already paid through Self Assessment he estimates he would have had to pay around £23,000 to settle at that point. Involving Qdos upped the stakes because he would have to pay their fees himself.

“I don’t really want to talk about them. It’s great if you’re insured, but they’re people who are just billing time. They argued the various cases and appeals that had been allowed were very similar to mine, but the inspector wasn’t having it,” says Brajkovic.

As the Commissioner’s decision notes, Qdos’ involvement proved to be counterproductive. At one point the advisers sought to clarify Avecia’s 2004 statement on the terms of the arrangement. The company declined because it felt Qdos suggested changes were factually incorrect and attempted to rewrite what had been decided. Avecia also objected to the “threatening tone” adopted by the advisers.

With the case heading towards the tribunal, Brajkovic got an estimate from Qdos last June that its costs would be somewhere between £7,500 and £10,000. If he lost the appeal he would have to pay the back tax and the Qdos bill on top of that, so Brajkovic dispensed with their services. Once he’d parted ways, he received a long email outlining the advisers’ view of the case, which they felt was pretty weak.

He also showed the contract to Dave Smith, then with Accountax. “It was pre-IR35, so he felt the case was weak, because the contract hadn’t changed and it mentioned me by name. That worried me,” says Brajkovic.

He had reached the “point of no return”, but his brother suggested Novak conduct the case himself. Nick would attend the hearing and offer moral support, but says that his brother did 95% of the work.

Key points of the Novasoft case
Smith’s book provided a template for Novasoft’s skeleton argument and Novak Brajkovic says he constructed the case “like a scientific report at school” by consulting the legislation and seeking out precedents supporting his contention that his contract did not fall within the disguised employment principles that underpinned IR35.

His argument, which is reflected in the judge's report, detailed when he started with Zeneca/Avecia, his daily rate and differences between his contract terms and those of employees. He cited his different working hours, his lack of entitlement to training, holiday, sick pay and personal accident insurance. He had a different security pass and was not entitled to use the staff car park. “Nothing’s trivial – everything should be included,” says Novak. “They may be minor points, but all add up to the balance of probability.”

In his view, the outcome of his appeal probably came down to the control factor and what he thought was the  way mutuality could exist within a self-employment contract. While his name on the contract undermined the principle of substitution – where a self-employed contractor would be entitled to bring in someone else to carry out the work – he thought the specific circumstances of the case were in his favour.

The day of the hearing
By the time of the two-day December 2009 hearing, Brajkovic had memorised all the classic self-employment cases such as Ready Mixed Concrete and Datagate Services. He also had five bound bundles of authorities and references, as suggested by Smith: two for the judges, one for HMRC, one for himself and one spare. He’d had to find a local printer to do the work and even had to buy his own legal binders on eBay. The HMRC were surprisingly helpful by giving him a copy of the case documentation and correspondence. “Unlike me, they do it all the time and it saved me the time and repro costs,” he says.

One of the opposition team was less helpful when he pointed out that tribunal judge Peter Kempster’s helper had been involved in the unsuccessful Dragonfly IR35 appeal in January 2008. “They may have been trying to scare me, but maybe I was reading too much into it,” says Brajkovic.

As the commissioners reported, his decision to represent himself gave him one advantage: “Brajkovic gave no formal evidence but made his submissions as advocate.  The Tribunal considered that satisfactory but noted that it denied Mr Hall the opportunity to cross-examine formally for HMRC.”

As things turned out, HMRC’s own witnesses probably turned the appeal in his favour. Steve Black and Jill Dugdale, his former managers at Avecia, presented statements and appeared at the hearing. Nick Brajkovic comments: “Their evidence was devastating to HMRC. If they had not been called, I think the outcome would have been very close.”

Novak continues: “The inspector tried to impress judge that he knew how software projects were developed and looked like he was getting onto dodgy ground when he told the judge how to make a point. With my project manager Steve, it appeared that they were clutching at straws by drawing parallels with a plumber, who needs to inspect a radiator on site. But because of the security passes and the nature of the project, there was nowhere else I could do the work.”

When IT manager Jill Dugdale was questioned, she outlined the terms of the Novasoft contract and confirmed that they needed someone experienced in developing systems for the web – which is why they gave the contract to Novasoft.

In Brajkovic’s view, the evidence of his project manager went 85% in his favour; and the supervising manager’s testimony was around 65% favourable. “I’m always cautiously pessimistic and wouldn’t tempt fate, but at the tribunal the judge seemed to be going my way.”

The decision
As the judge’s decision explains, the Novasoft case was “borderline” but more of the factors worked in the appellant’s favour than HMRC’s. On the point of control, the judge determined that the notional contract (in which the contractor’s terms would be assessed as though he were providing the services to the client directly) would not have been prescriptive as to exact hours of attendance, or the exact manner in which Brajkovic carried out the tasks assigned to him.  

While the contract was in place mutual obligations did exist, the contractor had no right or expectation to be offered any future contracts, the judge decided.

In paragraph 78 of his decision, the judge concluded: “We consider that the overall picture painted is one of a contract of self-employment.” While Brajkovic would not have been permitted to supply a substitute to perform the work, “in the particular situation of Novasoft and taking the picture as a whole that detail does not disturb the overall impression we have formed of the notional contract,” he added.

Brajkovic admits that he was “lucky” to get a judge who took a broad view of his contract and the balance of probabilities surrounding his engagement rather than picking up a key point such as substitution on which to decide the case. Although it was not mentioned in his decision, during the hearing the judge took note of the exclusion clause in Novasoft’s contract with the employment agency that prevented Brajkovic from working for Avecia for six months if he left the agency.

“That was a point away from mutuality,” says Brajkovic. “When I left, inside I was feeling definitely got it.”

It took four months before he found out the result at the beginning of April. At the hearing one of the inspectors told his brother HMRC was unlikely to appeal the result if it lost, but he won’t be absolutely sure until the 56-day appeals period is over on 1 June. “I’ll believe it when that day has passed,” he says.

Asked after his eight-year, £9,000 struggle whether he would have done anything differently, Novak Brajkovic replies: “I should have joined the PCG. It costs £150, but is worth it for the peace of mind. And I definitely would not use the HMRC advice service.”

With hindsight he admits it might have been better to end the case sooner and at one point had asked his advisers to approach HMRC about a settlement without prejudice. “But I wasn’t going to put my hands up and say OK. For me it was mainly the principle. The fact that my co-contractor was cleared stuck in my throat. Each case turns on its facts, but there should be a consistency of approach.”

Less than a fortnight after he first heard of his appeal victory, Brajkovic learned that Tory shadow minister Mark Prisk had committed the party to a review of small company taxation and IR35. “I had a bittersweet reaction. For me it was just a huge relief knowing that the appeal and all the anxiety that went with it was over. Hopefully nobody will have to go through this again and this will be one case that works in favour of [IR35] being dropped. Maybe I’m dreaming, but it’s not something you’d wish on anyone.”

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