Judicial Review Of UK's Hated IR35 Begins Today

Jason Gorringe, Tax-News.com, London

13 March 2001

The UK's much hated IR35 legislation has its day in court today as a judicial review begins in London. Actually it will be three days in court, as a group of consultants argues through its lawyers that the legislation constitutes illegal state aid under European Union competition law.

By taxing personal service company consultants differently from those of big multinational consultancy firms, the Revenue is discriminating against small businesses, says the Professional Contractors' Group, which represents 12,000 consultants and won the right to the review in the autumn.

IR35 came into force last April, and was presented by the Government as a measure to counter tax-avoidance among consultants. Its aim was to correct a disparity between the taxation of employees and consultants who worked as de facto employees, by raising the average consultant's tax burden of 21 per cent to the employee rate of 35 per cent.

The Professional Contractors' Group will also challenge the new rules on the grounds that they hamper the free movement of workers in Europe - by imposing punitive taxes - and constitute a confiscation of property under the UK's new human rights law.

If IR35 stands, warns the PCG, the quality of IT services in the UK will suffer as consultants move abroad. Many are already said to have gone, but there are no firm figures.

Legal opinion about the case tends to the negative side. Quoted in the Financial Times, a European law specialist at Clifford Chance, Chris Bright, said: "This is a novel use of state aid rules to say the least. There are clearly differences between the way small businesses and big businesses are treated. But that doesn't mean it is discrimination."

Presumably with an eye to the hearing beginning today, the Labour Party has posted an article on its website explaining why it brought in the controversial regime.

"IR35 means that companies cannot employ people as contractors when they should be treating them as employees," says the article. "This does not penalise self-employed people. It simply means that people who would otherwise be employed do not lose entitlement to benefits such as paid holidays, pensions, sick leave, redundancy entitlement and payment of their national insurance contributions. It also means that companies have to compete on a level playing field, employing their staff on the appropriate basis.

That's not the way the consultants see it. But whatever the morality of the legislation, if they lose, the result will be higher costs for an estimated 90,000 freelance workers - and yet more tax for the Treasury.

.

Recommended

Write a comment