The High Court today criticised the Inland Revenue's tests for the stealth tax IR35 and laid down new guidance to make them more relevant to the knowledge-based sector.
The decision followed a judicial review brought by the Professional Contractors Group on behalf of its 13,000 members who operate their own small businesses, mainly in the IT and engineering sector, and whose companies were under threat because they were being wrongly classed as 'disguised employees'.
The PCG has argued for 18 months that the tests the Revenue used to assess the status of these companies were inappropriate to the modern operating practices of the knowledge-based sector and belonged to a bygone era.
PCG Chairman Gareth Williams said: "IR35 has been a catalogue of disasters from the very beginning. The most unfair aspect of it was that we had to pass a set of tests which had no relevance to our working practices.
"The High Court has been the first authoritative body to listen to our concerns and has confirmed that we were right. The Revenue got it wrong and as a result has damaged many small businesses, some of which have closed down and some have moved abroad.
"The Court has fortunately intervened to restrict further damage with a much more relevant set of guidelines which prove that IR35 was unfair, unworkable and created an uncertain climate. For example, the judgement was highly critical of the Revenue's 'inflexible stance' regarding blanket advice that standard agency contracts would be caught and he ruled that some of the uncertainty could be removed by the drafting, agreement and approval of a series of acceptable standard forms. He also found that the Revenue has been incorrect in assuming that mutuality of obligation was not a relevant issue, and he was critical of the Revenue's 'too inflexible approach' to the right of substitution. "
On every finding of fact the judge concurred with the PCG including the key issue that contractors are in competition with larger consultancies and that IR35 would distort the marketplace. He was also critical of the Revenue's selective use of the employment tests to assess whether a small business fell inside or outside of IR35. In his binding judgement, he described the Revenue's guidance as inappropriate, unclear, inflexible, inaccurate and unhelpful. He also made reference to the unnecessary emotive and 'colourful' language in the original press notice which set the tone for a hostile debate.
However, this judgement comes only days before the end of the tax year when these small businesses will have to make decisions based on Revenue guidance which has now been shown to be inaccurate and misleading. The PCG has renewed its offer to meet with Ministers or officials at any time to assist with this transition to the new guidelines with the minimum of disruption to all parties.
The PCG, representing 13,000 members mainly in the IT and engineering community, began a legal challenge to judicially review the Government's action in introducing IR35 after the Treasury and Revenue refused to engage in any constructive debate with the Group's members.
IR35 was announced in a press notice after the March 1999 Budget. It treats
small businesses in the knowledge-based sector as 'disguised employees' for
tax and NI purposes, thereby preventing them from operating on similar terms
to their larger competitors.
Notes to editors
1. The Professional Contractors Group was formed in May 1999 to lobby
against the Government's IR35 proposals. It is a non-party political group
and its patrons are cross-bench peer, Lord Weatherill, former Speaker of the
House of Commons; and industry guru Sir John Harvey-Jones. Since its
formation it has evolved into the representative body for independent
contractors from many disciplines including IT and engineering on many
issues affecting the knowledge-based sector. It is the fastest growing trade
association in the country and now has more than 13,000 members.
2. The PCG's aim is to work for proper recognition of independent
contractors as a genuine and valuable sector of the economy, generating
wealth and employment, providing industry with a flexible workforce. The
Internet has been the primary resource, providing fast, effective
3. The PCG brought the judicial review against the Government, claiming IR35 contravenued European legislation.
4. During the actual judicial review hearing in March, the Court indicated it agreed with a number of PCG's points which had previously been contested by the Revenue. They included:
many of contractors will be taken out of 'certainty' and put into a position of 'uncertainty' as to whether their contractors fall within IR35
Unaffected companies have greater flexibility in arranging their financial affairs than those affected by IR35
there was real competition between small contracting companies and larger body shops
Some contractors will move overseas or others will be deterred from coming to the UK
Multiple clients -
seeking work opportunities from multiple clients would put a company outside IR35.
there was a strong case for employment rights for those caught under IR35.
the employment rights issue could extend to employees of bodyshops selling them into clients.
Freedom of movement
- the freedom of movement issue is potentially an easier hurdle to cross - doesn't depend on sector or competition.
Evidence of competition
- fairly convinced of a competition element in IT and asked for additional evidence of other sectors. Engineering evidence was provided to demonstrate the point.
Same contract different opinion
- the example of one contract which received a 'yes' and a 'no' from different IR offices. It took 4-5 months to get a decision (28 day limit) and the 'inside IR35' was an obvious cut and paste job which showed that the assessor hadn't read the content.
- the application of IR35 should be less restrictive.
the different between tax mitigation (ie making arrangements in accordance with tax regime after you've set up a business for other reasons) and tax avoidance (ie setting up a business/arranging your affairs in order to maximise tax benefits). Nothing wrong with setting up companies and using them to mitigate tax.
Emotive language in press release
- there was criticism of the use of emotive language, such as 'disguised employee' in the original IR35 press release which the judge described as 'wholly regrettable and unnecessary'
Friday to Monday
- there should be no prejudice in the assessment procedure because the first client of the contractor had previously been an employer.
Expert competition evidence
- judge indicated that he could see the force of argument when supported by our expert evidence, and that the IR were relying on assertions not supported by evidence.
Freedom of Movement
- IR must show that there is an overriding reason of public interest - which cannot be an 'economic one'.
- if the objective was to prevent Friday-to-Monday, it's a sledgehammer to crack a nut.
- there was nothing critical in terms of people taking advantage of laws allowing them to incorporate.
- the judge was critical of the manner in which the IR was going about implementation in practice
For further information or to arrange interviews,
PCG's press officer: Susie Hughes 020 7462 7955 or 07703 486276 or 02380
Additional phone numbers for use for media enquiries Monday April 2 only are:
07715 609152 and 07711 941908.
See also PCG's website: www.pcgroup.org.uk
PCG's judicial review news site: www.ir35update.co.uk
April 2, 2001
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