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The Professional Contractors Group has announced it will carry its legal fight against the Government and its so-called stealth tax, IR35, to the Court of Appeal later this year.

In March 2001, the PCG brought a judicial review before the High Court on behalf of its 14,000 members, who are small, knowledge-based contracting businesses, mainly in IT and engineering.

The PCG argued that IR35, a measure which had been introduced by the Treasury in the Budget in March 1999, was illegal under European law as it was unfair state aid and created a barrier to free movement. The Group argued that the courts should strike it down.

PCG’s members decided to fund an appeal after the High Court ruling, which although highly critical of the Revenue’s action, found that IR35 was not contrary to European law.

Jane Akshar, Chairman of the PCG, said: “Our members decided to fund an appeal against the High Court decision because we believe we have a good case and we want to fight for our right to run small businesses. These people are hard working businessmen and women whose businesses are being damaged and in some cases destroyed because of unfair treatment by the Government. IR35 treats these entrepreneurs as if they are employees for tax and NI purposes and therefore prevents them from competing on a level playing field with their larger competitors.

“It is ironic that our members have to fund a legal action against a Government which professes to support small businesses to protect our right to run a small business.”

During the five day judicial review in the High Court in March the judge concurred with the PCG on every finding of fact including the key issues 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 and the Revenue's guidance was described as inappropriate, unclear, inflexible, inaccurate and unhelpful. The judge also made reference to the unnecessary emotive and 'colourful' language in the original press notice which set the tone for a hostile debate.

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 14,000 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 communication.

3/. The PCG brought the judicial review against the Government, claiming IR35 contravened 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:

- Certainty many of contractors will be taken out of 'certainty' and put into a position of 'uncertainty' as to whether their contractors fall within IR35

- Financial flexibility Unaffected companies have greater flexibility in arranging their financial affairs than those affected by IR35

- Competition there was real competition between small contracting companies and larger body shops

- Moving overseas 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.

- Employment rights 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.

- Restrictive - the application of IR35 should be less restrictive.

- Tax mitigation - 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'.

- Proportionality - if the objective was to prevent Friday-to-Monday, it's a sledgehammer to crack a nut.

- Incorporation - there was nothing critical in terms of people taking advantage of laws allowing them to incorporate.

- Implementation - the judge was critical of the manner in which the IR was going about implementation in practice

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