[2010] UKFTT  150 (TC)

TC00456

Appeal number TC/2009/10828

Income tax and NIC – Intermediaries legislation - IR35 – appeal allowed 

FIRST-TIER TRIBUNAL

TAX 

	NOVASOFT LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

				TRIBUNAL: 	Tribunal Judge Peter Kempster
						Mr Stuart Martin

Sitting in public in Manchester on 8 & 9 December 2009

Mr Novak Brajkovic (Director) for the Appellant

Mr Alan Hall (HMRC) for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	This appeal concerned the applicability of the intermediaries legislation – commonly referred to as the IR35 legislation – to the affairs of the Appellant (“Novasoft”) during the tax years in dispute. 
Assessments and appeals
2.	On 13 June 2005 the Respondents (“HMRC”) served on Novasoft formal notices under Regulation 80 of the Income Tax (Pay As You Earn) Regulations 2003 and formal decisions under section 8 of the Social Security (Transfer of Functions etc) Act 1999, covering the period 6 April 2000 to 13 December 2002.  6 April 2000 was the commencement of the operation of the IR35 legislation (described below).
3.	On 27 June 2005 Novasoft’s representatives appealed against all the items described in paragraph 2 above.  Further grounds of appeal were later added and there was case management of the proceedings by both the former General Commissioners and this Tribunal before the appeals were listed for hearing.
4.	Mr Hall for HMRC confirmed that, because of the manner of operation of the IR35 legislation, this Tribunal was being asked to make a decision in principle on the appeals.  Unless the appeals were all allowed in full then it would be necessary for actual figures to be agreed between the parties or brought back to the Tribunal for further consideration.
5.	Mr Hall confirmed that, if successful, HMRC would seek to recover interest as well as the PAYE and NIC, but would not seek to impose any penalty.
Background and contracts
6.	Novasoft was incorporated in February 1997 and is owned 75% by Mr Novak Brajkovic (“Mr Brajkovic”) and 25% by Mr Brajkovic’s wife.  During the period covered by the maters in dispute in this appeal Mr Brajkovic was the sole director of Novasoft.  Mr Brajkovic is an IT analyst and programmer.
7.	Novasoft provided the services of Mr Brajkovic to Post Office IT (March 1997 to June 1997) and to Halifax Building Society (June 1997 to July 1998).  
8.	In July 1998 Novasoft entered into a contract (“the Lower Contact”) with Lorien Holdings Limited (“Lorien”) (an unconnected company).  This contract was extended on several occasions up to December 2002.  The business of Lorien was to act as an agency providing IT contractors to companies engaged in IT projects. 
9.	The Lower Contract named Zeneca Specialities as “Client” and gave the site location as Blackley.  The Lower Contract stated “[Novasoft] hereby agrees to provide the services to Lorien’s client as set out in the Schedule below and agrees to provide the personnel shown in the Schedule to work on the client’s premises as mentioned below under the client’s supervision.”  The Schedule named Mr Brajkovic; gave his position as “contract analyst programmer”; gave the initial contact period as 4 August 1998 to 29 January 1999; standard hours as 36 per week; and standard rate as £34.00 per hour.  Appended to the contract were “general terms and conditions”, which included the following:
(1)	Clause 6 required 28 days notice of termination by Lorien, with four exceptions.  First, under clause 6 “Lorien shall be entitled to terminate this agreement by 7 days notice in the event that Lorien’s client shall default in payment or be in arrears of Lorien’s charges”.  Secondly, under clause 11 “In the event of Lorien’s client proving to Lorien’s satisfaction that the services of [Novasoft] provided hereunder are unsatisfactory during the term of this contract then Lorien reserves the right to terminate this agreement forthwith without any compensation whatsoever.”  Thirdly, clause 14 allowed Lorien to terminate after failure to remedy a notified breach within seven days.  Lastly, also under clause 14, Lorien could terminate in the event that Novasoft contracted direct with the client.
(2)	Clause 8 stated “The personnel shown in the schedule hereto shall be the only persons whose services may be supplied by [Novasoft] to the client otherwise [sic] agreed by Lorien in writing.”  Clause 12 stated “[Novasoft] and personnel supplied hereunder shall be under the direct supervision of Lorien’s client and shall perform their duties hereunder subject to the client’s reasonable requests.”
(3)	Clause 20 stated “For the duration of this agreement [Novasoft] hereby agrees that the personnel supplied hereunder shall not undertake any other work of a similar nature except with the express consent in writing of Lorien.”  Clause 10 was a covenant by Novasoft not to contract direct with the client for six months after the expiry of the contract.  
(4)	Clauses 15 & 17 made provision for payment 4-weekly against invoices “supported by timesheets for the invoice period and duly signed and authorised by the client.”  
10.	In October 1998 Lorien (or strictly, Lorien Resourcing Solutions) entered into a contact (“the Upper Contract”) with Zeneca Limited.  Zeneca Specialities was a division of Zeneca Limited.  The Upper Contract recited that “[Lorien] has developed certain expertise in the provision of IT contractors and is in the business of providing such expertise.  Zeneca desires to obtain the expertise of [Lorien] and apply it to Zeneca businesses.  [Lorien] has agreed to provide to Zeneca the Services as described in this agreement and Zeneca has agreed to appoint [Lorien] as a supplier of the said Services.”  The Services were defined as meaning “the services relating to the provision of Contractors by [Lorien] in accordance with the provisions of this agreement.”  Contractor was defined as meaning “a person engaged by [Lorien] and supplied or likely to be supplied to Zeneca to perform contractor services subject to a contract.”  Clause 22.2 allowed Zeneca to terminate the Upper Contract for any reason on one month’s written notice.  
11.	On 8 July 1998 Mr Brajkovic commenced working at Zeneca on IT projects which are described later in this decision notice.  As Mr Brajkovic commenced working before the date of the Upper Contract it may be that there was an earlier contract that was superseded or else the parties to the Upper Contract delayed in formalising their arrangements; the Tribunal took it that the Upper Contract correctly reflected the arrangements at the relevant times.  
12.	Mr Brajkovic had been interviewed by Mr Black (who gave evidence at the hearing).  Mr Brajkovic worked on three IT projects being undertaken by Avecia, primarily a chemical compounds and formulations application called HENRE6.  
13.	In June 1999 Avecia Limited was spun out of Zeneca and it was common ground that for the purposes of the IR35 legislation (see below as to terminology) the “client” was Avecia Limited (“Avecia”). 
14.	During the early years of operation of the IR35 legislation there was a procedure whereby a taxpayer could seek the views of HMRC as to whether the IR35 legislation might apply to its circumstances.  Novasoft did that in January 2002.  HMRC undertook various enquiries including interviews of managers at Avecia.  The parties could not agree the position and this led eventually to the issue of the assessments described in paragraph 2 above.
The IR35 Legislation
15.	The legislative background and approach may be given by quoting a passage from the judgment of Henderson J in Dragonfly Consultancy Ltd v Revenue and Customs Commissioners [2008] STC 3030 (at 3053 onwards).
“[8] The background to the IR35 legislation (so called because that was the number of the Inland Revenue press release in March 1999 which heralded its introduction) is fully set out in the judgment of Robert Walker LJ (as he then was) in R (on the application of Professional Contractors Group) v IRC [2002] STC 165. At [51] of his judgment, with which Auld and Dyson LJJ agreed, he described the aim of both the tax and the NIC provisions as being:
'[51] … to ensure that individuals who ought to pay tax and NIC as employees cannot, by the assumption of a corporate structure, reduce and defer the liabilities imposed on employees by the United Kingdom's system of personal taxation …'
[9] The method adopted by the legislation to achieve this aim, broadly stated, is to tax an individual worker [in the present appeal, Mr Brajkovic] whose services are provided to a client [in the present appeal, Avecia] through an intermediary [in the present appeal, Novasoft] on the same basis as would apply if the worker were performing those services as an employee, provided that (in terms of the income tax test set out in para 1(1) of Sch 12 to the Finance Act 2000):
'… (c) the circumstances are such that, if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client.' 
In other words, the legislation enacts a statutory hypothesis and asks one to suppose that the services in question were provided under a contract made directly between the client … and the worker …. If that hypothetical contract would be regarded for income tax purposes as a contract of employment (or service), the legislation will apply. Conversely, if the hypothetical contract would not be so regarded, the legislation will not apply.
[10] It is important to notice that the effect of the statutory hypothesis is not automatically to transform all workers whose services are supplied through a service company into deemed Sch E taxpayers. On the contrary, as Robert Walker LJ stressed in his judgment in R (on the application of Professional Contractors Group) v IRC [2002] STC 165 at [12]:
'[12] … The legislation does not strike at every self-employed individual who chooses to offer his services through a corporate vehicle. Indeed it does not apply to such an individual at all, unless his self-employed status is near the borderline and so open to question or debate. The whole of the IR35 regime is restricted to a situation in which the worker, if directly contracted by and to the client “would be regarded for income tax purposes as an employee of the client”. That question has to be determined on the ordinary principles established by case law …'
[11] For NIC purposes, the statutory hypothesis is framed in slightly different language. Regulation 6(1) of the Social Security Contributions (Intermediaries) Regulations 2000, SI 2000/727 ('the 2000 Regulations') says that they apply where the services of the worker are supplied 'under arrangements involving an intermediary', and:
'… (c) the circumstances are such that, had the arrangements taken the form of a contract between the worker and the client, the worker would be regarded for the purposes of Parts I to V of the Contributions and Benefits Act as employed in employed earner's employment by the client.'
[12] The nature of the exercise which the court has to perform under reg 6(1) was helpfully described by Hart J in Synaptek Ltd v Young (Inspector of Taxes [2003] STC 543, in a passage which merits quotation in full. It is helpful not only for Hart J's analysis of the statutory language, but also for his rejection of the submission made by counsel for the taxpayer that the question was necessarily one of law because it involved the characterisation of a hypothetical contract. Hart J said (see [2003] STC 543 at [11] …):
'[11] I do not accept that submission. The inquiry which reg 6(1) directs is in the first instance an essentially factual one. It involves identifying, first, what are the “arrangements involving an intermediary” under which the services are performed, and, secondly, what are the “circumstances” in the context of which the arrangements have been made and the services performed. The legal hypothesis which then has to be made is that the arrangements had taken the form of a contract between the worker and the client. To the extent that “the arrangements” are in the particular case to be found only in contractual documentation, it may be true to say that the interpretation of that documentation is a question of law. Even in that case, however, the findings of the fact-finding tribunal will be determinative of the factual matrix in which the interpretative process has to take place, and influential to a greater or lesser degree in enabling the essential character of the arrangements to be identified. Where, on the other hand, the arrangements cannot be located solely in contractual documentation, their identification and characterisation is properly to be described as a matter of fact for the fact-finding tribunal. The fact that the tribunal is then asked to hypothesise a contract comprising those arrangements directly between the worker and the client does not, by itself, convert the latter question from being a question of mixed fact and law into a pure question of law.   …”
16.	The Tribunal finds, indeed it was not contested by the Appellant, that the statutory requirements (above) as to the arrangements involving an intermediary under which the services are performed are satisfied.
17.	So the approach to be taken by this Tribunal is to hypothesise a notional contract between the worker (Mr Brajkovic) and the client (Avecia), and then to consider whether under that notional contract the worker would have been an employee of the client.  That should be done by applying normal principles of contract and employment law – the IR35 legislation provides no special code in that regard.   
Whether a (notional) contract of employment exists
18.	This is, of course, a question often posed to the tribunals and courts, and from the very considerable body of case law on the topic this Tribunal draws the following principles – all of which were endorsed by both parties to the present appeal.
19.	In Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497 MacKenna J stated (at 515):
“A contract of service exists if these three conditions are fulfilled. (i) The servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master. (ii) He agrees, expressly or impliedly, that in the performance of that service, he will be subject to the other's control in a sufficient degree to make that other master. (iii) The other provisions of the contract are consistent with its being a contract of service.”
20.	In Market Investigations Ltd v Minister of Social Security [1969] 2 QB 173 Cooke J stated (at 184–185):
“… the fundamental test to be applied is this: "Is the person who has engaged himself to perform these services performing them as a person in business on his own account?" If the answer to that question is "yes," then the contract is a contract for services. If the answer is "no," then the contract is a contract of service. No exhaustive list has been compiled and perhaps no exhaustive list can be compiled of the considerations which are relevant in determining that question, nor can strict rules be laid down as to the relative weight which the various considerations should carry in particular cases. The most that can be said is that control will no doubt always have to be considered, although it can no longer be regarded as the sole determining factor; and that factors which may be of importance are such matters as whether the man performing the services provides his own equipment, whether he hires his own helpers, what degree of financial risk he takes, what degree of responsibility for investment and management he has, and whether and how far he has an opportunity of profiting from sound management in the performance of his task.”
21.	In Hall v Lorimer [1992] STC 599 Mummery J stated (at 612) (in a passage approved on appeal by Nolan LJ - [1994] STC 23 at 29):
“In order to decide whether a person carries on business on his own account it is necessary to consider many different aspects of that person's work activity. This is not a mechanical exercise of running through items on a check list to see whether they are present in, or absent from, a given situation. 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. As Vinelott J said in Walls v Sinnett (Inspector of Taxes) [1986] STC 236 at 245: "It is, in my judgment, impossible in a field where a very large number of factors have to be weighed to gain any real assistance by looking at the facts of another case and comparing them one by one to see what facts are common, what are different and what particular weight was given by another tribunal to the common facts. The facts as a whole must be looked at, and a factor which may be compelling in one case in the light of the facts of that case may not be compelling in the context of another case.””
22.	Mr Hall in his skeleton argument proposed the following list of factors for consideration, and we agree these are the relevant factors:
(1)	Extent and degree of control exercised by the client over the worker.
(2)	The worker’s right to engage helpers or substitutes.
(3)	Mutuality of obligations between the worker and the client.
(4)	Financial risk of the worker.
(5)	Provision of equipment.
(6)	Basis of payment of the worker.
(7)	Personal factors
(8)	The existence of employee rights.
(9)	Termination of the contract.
(10)	Whether the worker was part and parcel of the client’s organisation.
(11)	Exclusive services.
(12)	Mutual intention.
We bear in mind the admonishment of Mummery J not to treat this as a checklist to run through mechanically.  Instead they are the factors that go towards painting the picture whose overall effect must be evaluated. 

The hearing
23.	The Tribunal took evidence as follows.  For the Appellant: Mr 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.  For HMRC: Mr Steve Black, a former IT team leader at Avecia, adopted a witness statement dated 26 August 2009 and gave sworn oral evidence; and Ms Jill Dugdale, a former IT manager at Avecia, adopted a witness statement dated 24 September 2009 and gave sworn oral evidence.  The Tribunal considered both witnesses to be credible and reliable, with good recollection of the events within their personal knowledge.
Consideration of the various factors
24.	We arrange the submissions made, evidence taken and our findings under the various factors set out in paragraph 22 above.
Extent and degree of control exercised by the client over the worker.
25.	The Tribunal notes that in Ready Mixed Concrete (cited above) MacKenna J stated (at 515):
“Control includes the power of deciding the thing to be done, the way in which it shall be done, the means to be employed in doing it, the time when and the place where it shall be done. All these aspects of control must be considered in deciding whether the right exists in a sufficient degree to make one party the master and the other his servant. The right need not be unrestricted.”
26.	In a letter to HMRC dated 30 June 2003 Ms Dugdale replied to a set of standard questions used by HMRC in IR35 enquiries, and wrote:
“The contract with Mr Brajkovic was based on a 36 hour week.  Core hours of 10.00 – 16.00 are mandatory.  Start/end times flexible from 7.00 – 10.00 & 16.00 – 19.00.  Manual timesheets were completed at start and end of day to track start/end times and hours worked on a daily basis.  It is possible to collate up to + or – 10 hours in any given month.”
On this last point, there was a system of flexitime that allowed carry forward or back between months of up to 10 hours.  The letter continues:
“Mr Brajkovic would have been expected to work a 5 day week, hours within the time periods described [above].  Permission would have been required if Mr Brajkovic wanted to vary start/end times within the core hours or outside the earliest start time/latest end time.  Mr Brajkovic would make a request to his manager for leave.  If sick, a phone call to manager would be expected.  Mr Brajkovic was not paid by Avecia for leave or sickness.”
“Mr Brajkovic was expected to follow the team standards and procedures. … Mr Brajkovic would work on projects as and when allocated to him, which were appropriate to his skills.”
27.	Mr Brajkovic for Novasoft submitted:
(1)	Mr Brajkovic was working on specified projects and he was not obliged to comply with any requests to assist outside those projects.  He would try to accommodate reasonable requests, if possible, out of courtesy, but there was no obligation.  In order that the IT programming was intelligible to persons outside the immediate project team (for example, for later correction or updating) all work was performed according to industry-wide Microsoft standards governing naming conventions and formatting.  Beyond that, Mr Brajkovic was expected to use his specialist skills and Avecia exercised no control over how he implemented his skill and knowledge to arrive at the delivered solutions.
(2)	Mr Brajkovic preferred to start work early rather than work late, and also to take time off for recreational activities with his young family or in relation to his sporting interests.  He arrived at Avecia’s premises no later than 8 am and left no later than 4 pm, sometimes significantly earlier.  Avecia’s employees were expected to work set hours.  Mr Brajkovic completed agency timesheets; these were a budgetary and accounting device, to record the number of hours worked.  Mr Brajkovic estimated that his average hours were around 36 per week, compared to 40 for employees of Avecia.  Mr Brajkovic usually took 8 to 12 weeks vacation each year, which was an attraction of working freelance and was not available to employees of Avecia.  Although Mr Brajkovic would inform Avecia of any intended absences, that was a matter of courtesy and there was no requirement for authorisation.  
(3)	In cross-examination Ms Dugdale had noted that the hours recorded in some weeks towards the end of the contract were less than the 36 hours per week that she had recollected in her letter to HMRC.  Although complete records were no longer available, that was a consistent picture of the work pattern throughout the assignment – there was flexibility that would not be available to an employee.
(4)	All Mr Brajkovic’s work on the Avecia projects was undertaken at Avecia’s premises.  This was because of security issues and to facilitate access to IT infrastructure, servers and corporate databases.  Access was governed by Avecia’s business operation and building access hours.
28.	Mr Hall for HMRC submitted :
(1)	For a professional person a light-touch manner of control was sufficient.  Members of the Avecia IT team could not do whatever they wanted.
(2)	Clause 12 of the Lower Contract stated that Novasoft would be under the direct supervision of Avecia.
(3)	Mr Brajkovic was allocated tasks by Mr Black which would be executed to set standards and protocols at the direction of Avecia – those templates and protocols were prepared by Mr Black and his colleagues and preceded (but were later superseded by) the Microsoft standards. Mr Black had confirmed that team members had to comply with the Avecia standards he had promulgated.  Tasks had to be performed within deadlines and budgets set by Avecia.  That work was checked and reviewed by colleagues in the team.  
(4)	While HMRC accepted that Mr Brajkovic could work flexible hours, that was open to employees as well to a certain extent.  A review of remittance advices provided by Novasoft (these did not cover the entire period under consideration) and the accounts of the company indicated that the billings reflected hours worked by Mr Brajkovic broadly equivalent to the contractual hours of Avecia employees.  That accorded with Ms Dugdale’s answers to HMRC’s questions.  Ms Dugdale had also said that she did not recall Mr Brajkovic having a lot of time off work.
(5)	Mr Black’s evidence was that he expected to be asked in advance about holiday absence, and that he would refuse if it was inconvenient to the project.
29.	The Tribunal notes that in Morren v Swinton and Pendlebury Borough Council [1965] 2 All ER 349 Lord Parker CJ stated(at 351):  
“The cases have over and over again stressed the importance of the factor of superintendence and control, but that it is not the determining test is quite clear. In Cassidy v Minister of Health, Somervell LJ referred to this matter, and instanced, as did Denning LJ in the later case of Stevenson, Jordan & Harrison v MacDonald & Evans, that clearly superintendence and control cannot be the decisive test when one is dealing with a professional man, or a man of some particular skill and experience. Instances of that have been given in the form of the master of a ship, an engine driver, a professional architect or, as in this case, a consulting engineer. In such cases there can be no question of the employer telling him how to do work; therefore, the absence of control and direction in that sense can be of little, if any, use as a test.”
30.	We conclude that the notional contract between Avecia and Mr Brajkovic would have required Mr Brajkovic to undertake his work in accordance with standards and protocols necessary to make the project work-product fit for purpose and maintainable in the future by other IT experts; also to commit sufficient time to that work in order for deadlines and budgets to be met; also to ensure any significant absences fitted with the staffing of the projects overall.  Otherwise, the notional contract would not have been prescriptive as to exact hours of attendance, or the exact manner in which Mr Brajkovic implemented the skilled tasks assigned to him.  
The worker’s right to engage helpers or substitutes.
31.	Clause 8 of the Lower Contract (quoted at paragraph 9 above) provides that only Mr Brajkovic may be provided and no substitution is allowed.
32.	Both Mr Black and Ms Dugdale were clear in their evidence that Avecia expected Mr Brajkovic to perform the work personally; had Mr Brajkovic nominated a substitute then that person could not have gained access to the department because of security issues, and would not have been allowed to work on the project software because his/her technical competence had not been established by the project leader and manager.
33.	The Tribunal notes that in Ready Mixed Concrete (cited above) MacKenna J stated (at 515):
“The servant must be obliged to provide his own work and skill. Freedom to do a job either by one's own hands or by another's is inconsistent with a contract of service, though a limited or occasional power of delegation may not be …”
Although a right of substitution would generally be inconsistent with a contract of employment, its absence does not point definitely to such a contract.  
34.	We conclude that the notional contract between Avecia and Mr Brajkovic would not have permitted substitution.
Mutuality of obligations between the worker and the client.
35.	Mr Hall for HMRC submitted that the irreducible minimum of mutuality of obligation was clearly satisfied.  HMRC accepted that there was no obligation on Lorien to offer further work on expiry of the contract – nor on Novasoft to accept it – but while the contract was in place mutual obligations did exist.
36.	Mr Brajkovic for Novasoft submitted that the formal expiry date of the contract was 27 December 2002 but it was terminated on 13 December 2002 with no offer or expectation of any rights in respect of the final fortnight.  There was no right or expectation to be offered any contracts on future phases of the projects.  Avecia did subsequently ask if Mr Brajkovic was available but that was declined.  After the end of the contact Novasoft did not secure another assignment for three months.
37.	Both Mr Black and Ms Dugdale were clear in their evidence, and Mr Brajkovic confirmed, that if there had been an unexpected incident that prevented work on the project (for example, a total power outage) then Mr Brajkovic would have been expected not to include the down-time on his worksheets – so Novasoft would not have received any fees for that down-time.
38.	The Tribunal notes that in Usetech Ltd v Young [2004] STC 1671 Park J stated (at 1699):
“[57]  … If there is a relationship between a putative employer and employee, but it is one under which the 'employer' can offer work from time to time on a casual basis, without any obligation to offer the work and without payment for periods when no work is being done, the cases appear to me to establish that there cannot be one continuing contract of employment over the whole period of the relationship, including periods when no work was being done. There may be an 'umbrella contract' in force throughout the whole period, but the umbrella contract is not a single continuing contract of employment. …
[58]  That leaves open the possibility that each separate engagement within such an umbrella contract might itself be a free-standing contract of employment …
[59]  However that may be for a case where the argument is that there has been a succession of separate contracts of employment, this case is not really of that nature. In contrast to a case like Market Investigations (or so it seems to me), the facts lend themselves readily to the conclusion that, if Mr Hood [the worker] had been working for ABB [the client] under a direct contract, it would have been a contract of employment. The engagement lasted for 17 months. Viewed realistically there was nothing casual about it. On Mr Hood's own evidence he worked for an average of 58 hours a week. The Special Commissioner found that 'he was, as a rule, expected to work the “core” hours from 8am to 5pm' (para 26 of the decision).
[60]  I would accept that it is an over-simplification to say that the obligation of the putative employer to remunerate the worker for services actually performed in itself always provides the kind of mutuality which is a touchstone of an employment relationship. Mutuality of some kind exists in every situation where someone provides a personal service for payment, but that cannot by itself automatically mean that the relationship is a contract of employment: it could perfectly well be a contract for free lance services.  …”
39.	We conclude that the notional contract between Avecia and Mr Brajkovic would have established mutuality of obligations during the term of the contract but, for the reason put forward by Park J in Usetech, consider that that is appropriate to a self-employment contract as well as one of employment.
Financial risk of the worker.
40.	The Tribunal notes that in Hall v Lorimer in the Court of Appeal [1994] STC 23 Nolan LJ stated (at 29):
“… the risk of bad debts and outstanding invoices is certainly not one which is normally associated with employment.”  
But, as Mr Hall for HMRC pointed out to us, in that case the longest engagement was 10 days – usually they were only for one or two days – and the taxpayer had an average of 120 to 150 engagements each year spread among some 20 producers, all of which had to be invoiced and collected.  
41.	The evidence of both Mr Black and Ms Dugdale was that if some of Mr Brajkovic’s work had been unsatisfactory then the time spent by Mr Brajkovic in correcting that work would have been remunerated, so that Novasoft would have received fees for that extra work.  Mr Brajkovic stated that there had not been any such occasions (this was confirmed by Mr Black) but if there had then he would have felt professionally obliged to remedy matters without putting the time on his timesheet, even if Avecia would have been willing to pay.  
42.	Mr Brajkovic for Novasoft submitted that the contract could be terminated immediately by Lorien in certain circumstances without compensation.  Novasoft bore the risk of late payment or non-payment of invoices by Lorien.  Novasoft incurred costs of training, printing of materials and stationery, hardware upgrades, library of IT manuals.  Novasoft was required to carry professional indemnity insurance.  
43.	Mr Hall for HMRC challenged Mr Brajkovic’s assertion that Novasoft incurred training costs; Mr Brajkovic stated that much training in the IT world was provided free by software companies, but still required absence from paid assignments and so represented an economic cost.  Mr Hall submitted that the arrangements with Avecia did not permit  Novasoft to win extra profit by working harder.
44.	We conclude that the notional contract between Avecia and Mr Brajkovic would have given Mr Brajkovic a risk of non-payment by Avecia (see also paragraphs 48-50 below concerning manner of payment) but do not see that as a helpful distinction between a contract of service or one for services in the circumstances of this notional contract.  
Provision of equipment.
45.	Mr Brajkovic for Novasoft submitted that there was no requirement or expectation that Mr Brajkovic (or Novasoft) should provide any IT equipment in connection with the Avecia projects.  The IT systems were those of Avecia and (as Mr Black confirmed in his evidence) there would be security concerns about permitting outside hardware being connected to the Avecia IT system.  Mr Brajkovic was provided with IT equipment (for use outside Avecia) by Novasoft.  
46.	Mr Hall for HMRC submitted that Avecia provided to Mr Brajkovic all the necessary hardware and software in connection with the projects on which he worked.  There was also the provision of office accommodation and canteen facilities (both stipulated in clause 4 of the Upper Contract) and car parking.  HMRC accepted that in the context of the facts of the present appeal, this was unlikely to be an important factor.     
47.	We conclude that the notional contract between Avecia and Mr Brajkovic would not have required Mr Brajkovic to provide any IT equipment or software of his own – and indeed may have required him to use only that provided by Avecia, because of security concerns.  It would have been an implied term that Mr Brajkovic would have access to the buildings to the extent necessary to perform his work.
Basis of payment of the worker.
48.	Mr Brajkovic for Novasoft submitted that Novasoft was paid an hourly rate for Mr Brajkovic’s services that was negotiated between Lorien and Novasoft.  That hourly rate was different from that paid by Avecia to its employees.  It was also different from that charged by Lorien to Avecia.  Novasoft invoiced Lorien and charged VAT on its invoices, and payment was made by Lorien to Novasoft.  The amounts varied form month-to-month, which contrasted with the receipt of a regular monthly amount of salary expected by an employee.  
49.	Mr Hall for HMRC submitted that payment by reference to project milestones might indicate self-employment. Payment by the hour might be more typical of employment – but he accepted that many professional advisers operate on the basis of an hourly charge-out rate.
50.	We conclude that the notional contract between Avecia and Mr Brajkovic would have provided for an hourly rate of compensation, and would have required proper invoices to be delivered periodically.
Personal factors
51.	The Tribunal notes that in Hall v Lorimer in the Court of Appeal (cited above) Nolan LJ stated (at 30):
“A self-employed author working from home or an actor or a singer may earn his living without any of the normal trappings of a business. For my part I would suggest there is much to be said in these cases for bearing in mind the traditional contrast between a servant and an independent contractor. The extent to which the individual is dependent on or independent of a particular paymaster for the financial exploitation of his talents may well be significant.”
52.	Mr Brajkovic for Novasoft submitted that the total length of the contract with Avecia was four and a half years.  Mr Brajkovic’s previous assignments had involved long travelling (120 and 80 miles round trips) and so as Avecia was only a few miles away it suited him to accept extensions of the assignment there.  
53.	Mr Hall for HMRC submitted that Mr Brajkovic had effectively worked full-time for Avecia from August 1998 until December 2002.  HMRC accepted that a self-employed businessman may work exclusively for one client because it is commercially advantageous to do so, but Mr Brajkovic did not present an image of a businessman offering his services to the marketplace; rather, of someone comfortable working for the same client on terms equivalent to employment.  
54.	We conclude that the notional contract between Avecia and Mr Brajkovic would not have contained any provisions specifically relevant to this factor.
The existence of employee rights.
55.	Mr Brajkovic for Novasoft submitted that he was not provided by Avecia with any of the types of benefits commonly enjoyed by employees:
(1)	He had no entitlement to holiday pay.
(2)	He had no entitlement to sick pay.  He had no requirement to produce to Avecia “sick notes” in support of any absence due to illness.
(3)	He had no entitlement to participate in any corporate pension scheme.  
(4)	He had no entitlement to the bonuses or profit-related pay arrangements that were operated by Avecia.  
(5)	He had no entitlement to paternity leave.
(6)	He had no entitlement to redundancy compensation. 
56.	Mr Hall for HMRC submitted that this was a consequence of Mr Brajkovic’s choosing -or being required – to work through a service company.  He did enjoy these rights but by virtue of his employment by Novasoft, his own company, which had responsibility for these matters.
57.	We conclude that the notional contract between Avecia and Mr Brajkovic would not have provided for any of these benefits.  We do not consider it appropriate to “read across” into the notional contract between Avecia and Mr Brajkovic any features which were confined to the actual contract between Novasoft and Mr Brajkovic, which was twice removed from the notional contract – being the other side of both the Upper Contract and the Lower Contract.
Termination of the contract.
58.	Mr Brajkovic for Novasoft submitted that the contract could be terminated immediately by Avecia in certain circumstances, without compensation.  In contrast, Avecia employees, depending on grade, would be given a minimum of three months notice of termination. 
59.	Mr Hall for HMRC submitted that a typical self-employment contract came to an end on completion of the work for which the contractor was engaged, whereas an employment contract usually contained provision for termination by one party or the other.  Both the Upper Contract and the Lower Contract broadly permitted termination on one month’s notice.  That was similar to a normal contract of employment and so was an indicator of employment status.
60.	We conclude that the notional contract between Avecia and Mr Brajkovic would have provided for it to be terminable by either party on reasonable stated notice (say, one month) or immediately in the event of breach.
Whether the worker was part and parcel of the client’s organisation.
61.	Mr Brajkovic for Novasoft submitted:
(1)	Avecia employees underwent a half to full day induction programme on first joining the company – Mr Brajkovic had no such induction. 
(2)	He did not attend the mandatory annual staff away-days.
(3)	He was not part of Avecia’s staff training programme.  
(4)	His security pass was a contractor’s pass of a different design to that used by staff, and had an expiry date.
(5)	He was not permitted to use the staff car park, even when ample spaces were available.
(6)	He was excluded from Avecia’s personal accident insurance cover.
(7)	Although he was given an Avecia email address, that was because there was no access to external email on the Avecia IT system.
62.	Mr Hall for HMRC submitted that Mr Brajkovic was embedded in the Avecia organisation.  Mr Brajkovic reported to Mr Black informally on a daily basis and more formally each week.  Mr Brajkovic was a part of the Avecia IT project team structure for over four years.  Clause 12 of the Lower Contract states “[Zeneca] has also agreed to provide the same facilities in terms of restaurant, canteen, car parks and other amenities as may be made available to [Zeneca’s] own staff of a similar standing.”
63.	We conclude that the notional contract between Avecia and Mr Brajkovic would not have provided for any of the points listed above by Mr Brajkovic.  Avecia saw no reason to provide them to Mr Brajkovic while he was at their premises, and Mr Brajkovic saw no reason to demand or negotiate for them.  
Exclusive services.
64.	Mr Brajkovic for Novasoft submitted that he was free to undertake work for parties other than Avecia, subject to (a) a confidentiality undertaking that was normal practice in the IT industry, and (b) the agreement of Lorien.  Mr Brajkovic did undertake another paid assignment at his time, being setting up a website for a music band.  
65.	Mr Hall for HMRC submitted that a single master is indicative of an employment.  
66.	We conclude that the notional contract between Avecia and Mr Brajkovic would have provided for Mr Brajkovic’s services to be provided as required on the projects without competing demands – or at least, taking precedence over any competing demands – for his time; but would not have prohibited him from other assignments that did not conflict with Avecia’s business interests.
Mutual intention.
67.	Mr Brajkovic for Novasoft submitted:
(1)	There was no contract directly between Mr Brajkovic and Avecia.  There was nothing in the documentation involving Novasoft, Lorien and Avecia to suggest that Mr Brajkovic was an employee of Avecia.  The parties had seen no need to state that there was no employment because it was obvious that there was none.
(2)	Novasoft paid a salary to Mr Brajkovic and accounted for PAYE and NIC thereon.  Mr Brajkovic did have an employer, and it was Novasoft.  Avecia could never be considered to be Mr Brajkovic’s employer.
68.	Mr Hall for HMRC submitted that although HMRC accepted that the actual contracts were not intended to create an employment, minimal weight should be attached to that in considering the terms of the notional contract.
69.	The Tribunal notes that in Dragonfly (cited above) Henderson J stated (at 3069):
“I would not, however, go so far as counsel for HMRC who submitted that, as a matter of law, the hypothetical contract required by the IR35 legislation must be constructed without any reference to the stated intentions of the parties. If the actual contractual arrangements between the parties do include statements of intention, they should in my view be taken into account, and in a suitable case there may be material which would justify the inclusion of such a statement in the hypothetical contract. Even then, however, the weight to be attached to such a hypothetical statement would in my view normally be minimal, although I do not rule out the possibility that there may be borderline cases where it could be of real assistance.”
70.	We conclude that the notional contract between Avecia and Mr Brajkovic would not have provided for any statement of intention.

Other submissions
71.	Mr Brajkovic emphasised that the engagement of Novasoft by Avecia (via Lorien) commenced 21 months prior to the introduction of the IR35 legislation; HMRC had accepted until April 2000 that the arrangements were a contract for services performed by Novasoft for Avecia, and that relationship did not change on 1 April 2000.  While the Tribunal accepts that as factually correct, the point of the IR35 legislation is to change (from April 2000) the tax implications of such arrangements if the notional worker-client contract is one of employment; there is no “grandfathering” of pre-April 2000 contacts.
72.	Mr Brajkovic submitted that he was aware of other IT consultants in a similar if not identical situation to himself who had been scrutinised by HMRC, including the same officers who had dealt with the affairs of Novasoft, and received confirmation that the IR35 legislation was not applicable to their arrangements.  Mr Brajkovic acknowledged that each case must be considered on its own particular facts, and the Tribunal, while noting Mr Brajkovic’s comments, has confined itself to the arrangements between the persons involved in the matters leading to the appeals before this Tribunal.  
73.	In correspondence between the parties prior to the hearing there had been reference to a possible “disguised employment” between Mr Brajkovic and one of the companies – however this was not pursued at the hearing.  
74.	Although not a formal submission Mr Hall drew to our attention – and Mr Black confirmed in his evidence – that Novasoft’s previous representatives (who were no longer acting at the time of the hearing) had attempted in June 2009 to persuade Avecia to “clarify” a statement of arrangements made by Avecia to HMRC some five years earlier, with over eight pages of proposed changes.  Mr Black told us that he felt the document was attempting to rewrite the outcome of a meeting held five years previously; that he considered parts of it were factually incorrect; that he felt uncomfortable with what he took to be a threatening tone; and that on the advice of the legal department of his group holding company he declined to participate.  We were unable to question the former representatives on this matter and we have not drawn any inferences to the detriment of Novasoft.
Conclusions on the notional contract
75.	We now bring together our conclusions on the factors which would have determined the contents of the notional contract between Avecia and Mr Brajkovic.  As we have stated above, the notional contact:
(1)	would have required Mr Brajkovic to undertake his work in accordance with standards and protocols necessary to make the project work-product fit for purpose and maintainable in the future by other IT experts; also to commit sufficient time to that work in order for deadlines and budgets to be met; also to ensure any significant absences fitted with the staffing of the projects overall.  Otherwise, the notional contract would not have been prescriptive as to exact hours of attendance, or the exact manner in which Mr Brajkovic implemented the skilled tasks assigned to him.  
(2)	would not have permitted substitution.
(3)	would have established mutuality of obligations during the term of the contract but, for the reason put forward by Park J in Usetech, we consider that that is appropriate to a self-employment contract as well as one of employment.
(4)	would have given Mr Brajkovic a risk of non-payment by Avecia but we do not see that as a helpful distinction between a contract of service or one for services in the circumstances of this notional contract.  
(5)	would not have required Mr Brajkovic to provide any IT equipment or software of his own – and indeed may have required him to use only that provided by Avecia, because of security concerns.  It would have been an implied term that Mr Brajkovic would have access to the buildings to the extent necessary to perform his work.
(6)	would have provided for an hourly rate of compensation, and would have required proper invoices to be delivered periodically.
(7)	would not have provided for any typical employee benefits or statutory protections.  
(8)	would have provided for it to be terminable by either party on reasonable stated notice (say, one month) or immediately in the event of breach.
(9)	would not have provided for any of the points listed in paragraph 61 above that might indicate that Mr Brajkovic was “part and parcel” of Avecia’s organisation.  
(10)	would have provided for Mr Brajkovic’s services to be provided as required on the projects without competing demands – or at least, taking precedence over any competing demands – for his time; but would not have prohibited him from other assignments that did not conflict with Avecia’s business interests.
(11)	would not have provided for any statement of intention.  However, for the reasons outlined by Henderson J in Dragonfly, we attach little importance to that outcome.
76.	We reiterate the words of Mummery J in Hall v Lorimer:  
“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.”
77.	In Synaptek Hart J stated (at 553): “Deciding, in a borderline case, whether a particular contract is a contract of service or a contract for services is notoriously difficult.”
78.	We consider that the overall picture painted is one of a contract of self-employment.
79.	An “individual detail” in the picture is that, as we have found, Mr Brajkovic would not have been permitted to supply a substitute to perform the work.  That could be an important detail - and was given some emphasis in both Usetech and Dragonfly – but 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.

Decision
80.	The appeals are allowed in full.

Right of appeal to Upper Tribunal

81.	Section 11 of the Tribunals, Courts and Enforcement Act 2007 provides that any party to a case has a right of appeal to the Upper Tribunal on any point of law arising from a decision of the First-tier Tribunal. The right may be exercised only with permission which may be given by the First-tier Tribunal or the Upper Tribunal.  Rule 39(2) of The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 SI 2009/273 provides that a person seeking permission to appeal must make a written application to the Tribunal for permission to appeal, which application must be received by the Tribunal no later then 56 days after the date that the Tribunal sends full written reasons for the Decision.  Rule 39(5) provides that an application for permission to appeal must identify the decision of the Tribunal to which it relates, identify the alleged error or errors in the decision, and state the result the party making the application is seeking.
82.	This document contains the full written reasons for the Decision.

TRIBUNAL JUDGE

RELEASE DATE: 6 April 2010