A High Court judge this morning rejected the claim of the
Professional Contractors Group (PCG) that the IR35 tax on
independent consultants in the UK is incompatible with the Human
Rights Act and European free trade laws.
However, the judge was critical of the Inland Revenue's tests
for the tax and laid down new guidance to make them more relevant
to the knowledge-based sector.
The decision followed a judicial review brought by the PCG on
behalf of its 13,000 members who operate their own small
businesses, mainly in the IT and engineering sector.
IR35 treats small businesses in the knowledge-based sector as
“disguised employees” for tax and NI purposes, thereby preventing
them, argues the PCG, from operating on similar terms to their
larger competitors.
Claiming success, 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."
However, the judge stopped short of overturning the
legislation.
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 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.
The PCG points out that this judgment 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.
