UK Court Of Appeal Publishes IR35 Judgement

Tax-News.com, London

25 January 2002

The UK Court of Appeal has published its judgement striking down the appeal of the Professional Contractors' Group against the Government's hated IR35 legislation.

Says the judgement: 'Provisions to counter tax and national insurance avoidance in the area of personal service provision, in particular the hiring of individuals through their own service companies so that they could exploit the fiscal advantages offered by a corporate structure, enacted in section 60 of and Schedule 12 to the Finance Act 2000, sections 75 and 76 of the Welfare Reform Pensions Act 1999, and the Social Security Contributions (Intermediaries) Regulations 2000, did not constitute either an unnotified state aid contrary to articles 87 and 88 of the EC Treaty, or an unlawful hindrance to free movement of workers, freedom of establishment and freedom to provide services, contrary to articles 39, 43 and 49 of the Treaty.'

In December, the Court of Appeal had dismissed the applicants' appeal against the dismissal of their application for judicial review, by which they had challenged the lawfulness of measures taken to counter tax and national insurance avoidance in the area of personal service provision.

In March 1999 the Inland Revenue published a press release designated IR 35 in relation to an announcement by the Chancellor of the Exchequer about changes to be introduced to counter tax and national insurance avoidance in the area of personal service provision, in particular the hiring of individuals through their own service companies so that they could exploit the fiscal advantages offered by a corporate structure.

The expression IR 35 had come to be used as a shorthand identification for the measures which were subsequently enacted in section 60 of and Schedule 12 to the Finance Act 2000, sections 75 and 76 of the Welfare Reform Pensions Act 1999, and the Social Security Contributions (Intermediaries) Regulations 2000.

The applicants had sought judicial review of the lawfulness of IR 35, claiming a declaration that it was incompatible with EC law as being:

• an unnotified state aid contrary to articles 87 and 88 of the EC Treaty; and
• an unlawful hindrance to free movement of workers, freedom of establishment and freedom to provide services, contrary to articles 39, 43 and 49 of the Treaty.

The judge dismissed the application, and the applicants appealed.

Lord Justice Robert Walker said that the essential question on the issue of state aid was what sort of "system" IR 35 was concerned with, and, following from that, what was the relevant comparison for the purposes of "an equal competitive footing".

The relevant system was not corporate taxation, and the relevant comparison was not between a service company whose activities were caught by IR 35 and a larger trading company, providing similar services, which was not caught. Whilst the tax provisions of IR 35 had to address the service company's liability to corporation tax, the aim of both the tax and national insurance provisions was to ensure that individuals who ought to pay tax and national insurance contributions as employees could not, by the assumption of a corporate structure, reduce and defer the liabilities imposed on employees by the United Kingdom's system of personal taxation.

Moreover, IR 35 could not be regarded as discriminatory, either in the ordinary sense or under what the judge had called dislocation. It did not provide a direct and demonstrable inhibition on the establishment of a business within the UK, or on the provision of services without establishment.

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