THE ROAD TO THE COURT OF APPEAL

Background to the Judicial Review

The Professional Contractors Group brought 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 provided the tax rules relating to the provision of services through an intermediary, better known as IR35.

A judicial review is the legal procedure where the courts ensure that public bodies such as local authorities, Ministers, Departments of State, regulatory bodies and, to some extent Parliament, operate within the law when making decisions. It deals with the process and the legality of the decisions of public bodies. A judicial review does not examine the 'good' or 'bad' of a measure or consider if a Minister or Department of State might have acted differently - the court will only concern itself with the lawfulness of that measure.

Although the UK Parliament has a right to introduce laws, it must ensure that they do not contravene European legislation. If UK laws are contrary to European measures, the European law will prevail and the UK law can be struck down by the courts by way of a judicial review.

The members of the PCG decided to fund a legal challenge in the form of a judicial review to ask the courts to declare that IR35 was incompatible with European Law and 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.

The permission hearing The PCG's first 'outing' to the courts in this matter was in October 2000, when the Inland Revenue tried to prevent the PCG from bringing the case before the courts, by disputing that there was a case to answer.

PCG had to take the unusual step of appearing at a permission hearing in the High Court and demonstrate that there was a valid case. After the hearing, the Revenue's arguments were rejected by the judge on all three counts and permission was granted for the full hearing.

PCG Press Notice: 10/00 - October 10, 2000
PCG Wins First Stage of Legal Battle Against IR35

The full High Court hearing

The judicial review was held in the High Court in March 2001 before Mr Justice Burton. There were a number of disputed facts surrounding the case and the PCG presented weighty evidence to prove their case.

The daily accounts of the case are archived here:
www.pcgroup.org.uk/judicialreview/archive.html

During the five days hearing, Mr Justice Burton indicated agreement with the PCG on several evidential points. When he gave the judgement on April 2, 2001, it was clear that he had found in the PCG's favour on most of the key findings of fact which the Revenue had disputed. However, he then did not take the next step to find in the PCG's favour on the points of law. Consequently, IR35 was judged to be legal and not contrary to European law.

He concurred with the PCG on findings of fact including the key issues 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 and the Revenue's guidance was described as inappropriate, unclear, inflexible, inaccurate and unhelpful. The judge also made reference to the unnecessary emotive and 'colourful' language in the original Inland Revenue press notice which set the tone for a hostile debate.

See PCG press notices:
08/01 PCG takes Government to High Court - 9 March 2001.
10/01 High Court issues clear guidelines in PCG's judicial review - 2 April, 2001

Permission to Appeal to the Court of Appeal

In April, 2001, the PCG sought and was granted 'leave to appeal' to the Court of Appeal to appeal the High Court's ruling. It decided to continue its case that IR35 was illegal under European law on the grounds of 'illegal provision of state aid' and 'freedom of movement'. Given the positive findings on fact from the High Court, the PCG believes that there are important issues of law which need to be considered further and which could result in IR35 being declared illegal.

Press Notice 12/01:
28 August 2001 PCG Announces Legal Appeal Against Government

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/Freedom of Movement

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.

Court of Appeal

The appeal will take place in the Court of Appeal, The Aldwych, London WC2 from December 4- 6, 2001. The hearing which is scheduled for three days will revolve around points of law. It is not expected that new evidence will be presented, nor will the courts seek to re-examine the facts as previously established by Mr Justice Burton.

The Court of Appeal has the power to overturn the original judgement and strike down IR35 as contrary to EU law. It could dismiss the appeal. Or, a third possible outcome, is that the Court will refer the matter to the European Court of Justice (ECJ) for a ruling on the disputed points of EU law.

The PCG is running an 'open-house' office in the Cheshire Cheese, 5 Little Essex Street, London WC2 for the duration of hearing (December 4-6, 2001 - from early 'til late). Journalists and any interested parties are invited to come to 'The Cheese' and meet the some of PCG's members and directors.

PCG press notice: 16/01 -
November 27, 2001 Small Businesses Take Government to Court of Appeal

The Cheshire Cheese:
www.thecheshirecheese.com/

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 Dr 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.