IT Contractors Fail In IR35 Legal Challenge But Celebrate New Guidelines

Jason Gorringe, Tax-news.com, London

03 April 2001

As expected, the High Court handed down its ruling yesterday on the IR35 tax law, with the judge, Mr Justice Burton, rejecting claims that the controversial tax regime, which applies this tax year for the first time, is incompatible with European free trade laws and the Human Rights Act. But it's not all bad news for the Professional Contractors Group (PCG), which brought the legal challenge, as the judge laid into the workings of IR35 and issued guidelines as to how it should be enforced.

IR35 is aimed at ending the tax advantages enjoyed by individuals who, but for the fact that they operate through companies, would be deemed to be directly employed by their clients. The intention is to re-classify them as employees who would lose advantages such as tax-deductible expenses. The government has repeatedly defended IR35, saying it is designed to weed out people avoiding paying tax and National Insurance contributions, but the tax rule, which affects around 100,000 consultants, mainly in the information technology arena, has been blamed for driving hundreds of IT specialists overseas, or even out of business.

Whilst the High Court ruling smacks of defeat for the PCG, which has campaigned so resolutely against IR35, the PCG responded to it with remarkable positivity. Mr Justice Burton did not allow the Inland Revenue to escape unscathed, much to the delight of the PCG. He said that the Inland Revenue's approach to IR35 had been confusing and in some respects "inflexible", and issued enforcement guidelines which will effectively force the tax collection agency to change its approach.

Immediately the verdict became known, the PCG issued a statement from its chairman, Gareth Williams, who 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.'

The PCG was refused leave to appeal, but can still seek leave from the Court of Appeal. It says the fate of tens of thousands of small knowledge-based contractors, particularly in the IT industry, depends on the view the courts take of their argument and how the Inland Revenue enforces the regime. Mr Justice Burton accepted that some contractors might leave the country because of IR35, which might also deter others from coming to the UK from abroad, but said the government had shown that IR35 was justified for the purposes of combating tax avoidance and increasing, or avoiding a fall in, tax revenue.

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