A briefing on the Judicial Review of the IR35 legislation

This briefing explains the legal background to the challenge and sets out, in short, the evidence to be given by the Professional Contractors Group (PCG) and those it will call as witnesses at the Judicial Review due to be held in the Administrative Court from Tuesday 13th March to Thursday 15th March 2001.

The IR35 Legislation
The IR35 legislation was announced in an Inland Revenue press release on 9 March 1999. It is a package of reforms contained in the Finance Act 2000, the Welfare Reform & Pensions Act 1999 and the Regulations made under the latter Act. It concerns the assessment for Income Tax and National Insurance purposes of small companies providing contracting services.

Grounds of the PCG's Judicial Review
The PCG challenged the IR35 legislation on the basis that it is incompatible with EC law in the following ways:

1. It constitutes a prohibited state aid within the meaning of the EC Treaty and, as it has not been notified to and approved by the Commission, it may not be lawfully implemented by the UK Government;
2. It infringes articles of the EC Treaty by creating unjustified obstacles to: the free movement of workers, the right of establishment and the freedom to provide services within Community.

In addition, the PCG maintains that the legislation is in breach of the general principles of law and Human Rights provisions.

The Relief Sought
The PCG seeks a declaration that the IR35 legislation is incompatible with European Community law on the grounds set out above.

PCG Witnesses
The evidence on behalf of the PCG will be given by the following:

1. David Gareth Williams, Chairman of the Professional Contractor's Group;
2. Michael Damien Synnott;
3. Ruud Van Zundert;
4. Marc Fielding-Smith;
5. David Barker;
6. Dr Andrew Cox;
7. Eric Ahlers;
8. Ian Alexander Douglas Gilmer;
9. Jacques Schaap;
10. Marc Deveaux.

In addition, the application of the PCG is supported by two individual Applicants. Further, on behalf of the PCG and those Applicants, evidence will be given by two expert witnesses, Dr Leslie Willcocks and Dan Elliott of Frontier Economics.

The following lists, in brief, the contents of the evidence to be given by each of the PCG's witnesses.

THE EVIDENCE OF MR DAVID GARETH WILLIAMS
Mr Williams is the Chairman of the PCG and a graduate of St Catherine's College, Cambridge. He has been a contractor in the IT industry since 1996.

His evidence will explain:

1. How the independent contracting industry works;
2. The history of aims and memberships of the PCG;
3. The tax and National Insurance position which related to all small companies before the passing of the IR35 legislation;
4. The legislative history of IR35;
5. The failure of the Government to properly consult in connection with the legislation;
6. The Government's Regulatory Impact Assessment, which showed that up to 66,000 companies might close as a result of the IR35 legislation;
7. An explanation as to how the legislation works;
8. What impacts the legislation will have on the independent contracting sector;
9. The fact that the effect of IR35 will be 'to discriminate against small owner managed companies and benefit larger companies in the sector';
10. The purported justifications for IR35;
11. The fact that the legislation is disproportionate to its aims;
12. An identification that the IR35 legislation will result in an unlawful interference with property rights.

THE EVIDENCE OF MR MICHAEL DAMIEN SYNNOTT
Mr Synnott's evidence identifies that:

1. He is a Director of one of the Applicants;
2. He is of Irish nationality with an Engineering Degree from University College, Dublin;
3. He has been operating in the UK for three years having previously been an independent contractor for 11 years in Belgium;
4. As a result of IR35 he anticipates that his company will become far less competitive compared with his competitors, whether they be major companies or smaller service providers outside the scope of IR35;
5. He identifies that from his own knowledge of Irish independent contractors, many will find returning to Ireland to trade far more sensible than remaining in the United Kingdom.

EVIDENCE OF RUUD VAN ZUNDERT
Mr Zundert identifies that:

1. He is a Dutch national who has resided in the United Kingdom for some 16 years;
2. He has been an independent contractor since 1997;
3. He is currently trading in Germany and his contract may still be caught because he is trading from the United Kingdom through his United Kingdom based company;
4. When his contract terminates in Germany, he is likely to accept a contract in Holland, not by contracting through his UK based company, but by becoming a member of a Dutch company;
5. He has identified that throughout the time he has been a Director and shareholder in his own company in the United Kingdom, he has paid in total sums of tax and National Insurance to a greater amount than he did as an employee previously.

EVIDENCE OF MR MARC FIELDING-SMITH
Mr Fielding-Smith identifies that:

1. He is an IT professional and a British citizen;
2. He has been an IT contractor since 1996;
3. He is currently working in Germany and as a result of IR35 he will not return to the United Kingdom to trade.

EVIDENCE OF MR DAVID BARKER
Mr Barker says that:

1. He is a qualified Civil and Structural Engineer with a Degree from Bradford University, he works in the offshore oil industry;
2. In his career he has worked in many places around the world;
3. He is a Director of a company called DB Subsea Services Limited since April 2000;
4. As a result of IR35 he has now set up a new company in Southern Ireland and will intend to trade from Southern Ireland in the future;
5. He will give evidence to the fact that the offshore oil industry is an international one which can be used anywhere in the world and he will move wherever is necessary to ensure that he escapes the effect of IR35.

EVIDENCE OF DR ANDREW COX
Dr Cox identifies that:

1. He has an MA and PHd in physics from Oxford University and is an IT professional and a British citizen;
2. He has been an independent contractor since February 1998 and is currently working in Norway as a consultant employee of a UK based service provider;
3. He has no intention of returning to the United Kingdom for as long as IR35 restricts his ability to trade in a fair competitive manner with other companies.

EVIDENCE OF MR ERIC AHLERS
Mr Ahlers gives evidence that:

1. He is a Dutch national who has lived in the United Kingdom for many years and works in the IT sector;
2. He became an independent contractor to remain at a technical level to avoid the pressure being put on him to move into a management role;
3. If the contracts that he is currently working under are caught by IR35, he intends to relocate to trade either in the Netherlands or the United States of America. He does not wish to work as a permanent employee.

EVIDENCE OF MR IAN GILMER
Mr Gilmer gives evidence that:

1. He is an independent contractor in the IT industry and has a Higher National Diploma in Computing;
2. He has worked in Panama as a Project Manager and has currently returned to the United Kingdom;
3. He is considering leaving the IT industry and pursuing an alternative career because of the effects of IR35 on the development of his business.

EVIDENCE OF MR JACQUES SCHAAP
Mr Schaap's evidence is that:

1. He is a Belgian national although he was born and spent a significant part of his time in South Africa;
2. He is an independent contractor in the IT sector and has been since 1994;
3. He moved to the United Kingdom in 1996 and set up and traded as an independent contractor since then;
4. As a result of the uncertainty caused to him by IR35 he is considering a move to Holland or Belgium.

EVIDENCE OF MR MARC DEVEAUX
Mr Deveaux gives evidence that:

1. He was born in France and is both a French and UK citizen and that he is currently an independent contractor in New York;
2. He works as an IT consultant;
3. Before moving to the USA he was an IT contractor in the United Kingdom,
4. He left the United Kingdom because it was apparent to him that IR35 had the potential to destroy his business;
5. He gives evidence of the taxation regime in the USA.

EXPERT EVIDENCE: DR LESLIE WILLCOCKS
Dr Willcocks is a Fellow and University Lecturer in the Oxford Institute of Information Management at Templeton College and its Business School. He is a Professor in Information Systems at Erasmus University Rotterdam and Professorial Associate of the University of Melbourne. He is a 'Distinguished Visitor' at the Australian Graduate School of Management and Editor in Chief of the Journal of Information Technology. He has an international reputation for his work on Information Management, IT Evaluation and Information Systems Outsourcing.

His evidence covers:

1. The fact that all studies point to high and fast rising IT skill shortages in the UK and world-wide;
2. That by 2003 the IT skills shortage in the UK will rise to 300,000. This figure for Europe will be 1.7 million and within the USA, 1.2 million positions will be unfilled;
3. That IR35 will effectively knock a large number of small IT service businesses out of the market and increase the prices of those remaining;
4. He explains the reasons why client organisations pursue a range of sourcing strategies, outsourcing and insourcing of great importance;
5. He identifies that IR35 will take out a significant number of market players (up to 66,000) rendering the market less competitive and responsive;
6. He identifies that the impact of IR35 on small IT service business and contractors is wholly adverse and those likely to be affected by IR35 will be disproportionately disadvantaged against large contractors;
7. He identifies that free movement of IT skilled labour into the United Kingdom from other European and non-European countries will be inhibited and that there will be adverse, disproportionate effects on the development and growth of small IT service businesses;
8. He will provide estimates as to what will happen to the companies in the service sector in the IT market.