IR35: SUMMARY OF THE LEGAL CHALLENGE

Background to the judicial review
The PCG is bringing a legal challenge in the form of a judicial review against the provisions of the Welfare Reform and Pensions Act 1999 and the Finance Act 2000, which provide the tax rules relating to the provision of services through an intermediary. PCG is asking the courts to declare that IR35 is incompatible with European Law and hence unenforceable because:

• IR35 is an illegal provision of state aid to larger competitors;
• IR35 is in breach of the fundamental EC right - known as the right of establishment;
• IR35 is in breach of the fundamental right protected by the European Convention on Human Rights in that it amounts to a confiscation of property contrary to Article 1, Protocol 1 of the Convention. With effect from October 2 2000, it is a breach of the Human Rights Act 1998.

Unusually, the Inland Revenue tried to prevent the PCG from bringing the case, by disputing that there was a case to answer. At the permission hearing in October 2000, the Revenue's arguments were rejected by the judge on all three counts and permission was granted for the full hearing.

Illegal Provision of State Aid
The EC Treaty prohibits state aid, which is granted by Member States or through state resources; and which distorts competition by favouring certain undertakings; and affects trade between Members' States. Differential tax rates affecting a specific sector have been held to constitute an illegal state aid.

PCG's case is that IR35 is a state aid, which will distort competition by taxing small knowledge based contractors in a materially harsher way than their competitors. As a result, many independent contractors will cease to trade. Given the nature of the IT industry it is inevitable that inter state trade will be affected.

Breach of the Right of Establishment
The EC Treaty provides that a Member State ('the host state') must not impose restrictions on the freedom of a national of another Member State to establish himself in the host state. Neither may the Member State restrict the provisions of services in 'the host state' from an establishment in another Member State.

PCG's evidence shows that IR35 discourages EU (non-UK) knowledge based contractors from trading in the UK because of the lack of certainty as to the tax to which they will be subject or the substantial tax disadvantages that they will incur. IT contractors (both UK and non-UK nationals) have provided evidence, which shows they have or may cease trading in the UK as a direct result of IR35. Two of these contractors are joint applicants in this case.

PCG's evidence shows that the legislation cannot be objectively justified and is disproportionate to its stated aims.

De Facto Confiscation of Property
The Human Rights Act, which came into force on October 2, 2000 requires UK laws to comply with the provisions of the European Convention on Human Rights. IR35 represents a de facto confiscation of property because it prevents a legally constituted limited company from operating as such, allowing its expenses against tax and making a legitimate profit, and therefore prevents its shareholders from enjoying the benefits of owning the company.

Evidence
In support of their application and, in addition to the evidence described above, PCG has provided cogent evidence of the effects of IR35 on their large and wide-ranging membership supported by detailed economic evidence.

Representation
Counsel for PCG are Mr Gerald Barling QC and Miss Kelyn Bacon both of Brick Court Chambers. They are instructed by Tony Askham, head of litigation at Bond Pearce, Solicitors. Counsel for the Inland Revenue are Mr Richard Plender QC of 20 Essex Street Chambers and Mr Rabinger Singh from Matrix Chambers. They are instructed by the Solicitor for the Inland Revenue.