Update No.9 - Thursday AM update

The session started at 10.20 with questions raised from the reading that Plender had given the judge to do overnight. The judge said the reading list was a “shot across our bows”: a warning of the arguments likely to be encountered during Plender’s submission.

Plender will claim that IR35 is not a specfic but a general taxation measure. There was some discussion while the judge and Barling clarified our position on this assertion (see previous updates). The judge raised the point on intention and effect. Plender will claim that an important point especially for negative State Aid was that if the alleged Aid arose as part of general taxation measures, it could not be found objectionable.

Barling said that even if the measure was across the board, which we dispute (why aren’t corner shops caught). The judge said we may need to reinforce during redirect and Barling said he intended to, depending on what Plender said. The judge asked the relevance of the aim of IR35 and Barling said depending on which way it went it would potentially impact arguments about justification or proportionality under our Freedom of Movement claim.

Barling then submitted an amendment to the relief sought so that if we lose the JR, the judge has guidelines as to the matters on which a direction such as referred to yesterday might impinge. Barling and the judge both referred to this as a “consolation prize” that we didn’t really want. However in reality even if we lose the JR this statement with the force of a High Court judge behind it will put us a long way down the necessary track case-law-wise.

There was a brief discussion of the case where an employee leaves employment and starts a contracting company; the judge said that apparently there would be a presumption when that contractor had as their first client their previous employer of being caught under IR35. He said this was a “shame” and there should be no prejudice whatever in the assessment procedure just because the first client of the contractor had previously been an employee.

The judge said that having now read the expert evidence and the Revenue’s reply he could see the force behind Barling’s argument that whereas we had external independent expert evidence to support us, the Revenue were relying on assertions not supported by any evidence. He said that there was no expert counter-evidence to our position on competition.

There was another discussion of general as opposed to specific taxation measures. Even if IR35 is a general measure, this does not hinder our argument under Freedom of Movement as the fact that a policy is a general taxation policy cannot count as a “justification” (see previous updates for a definition of this) under Freedom of Movement (as opposed to “justification” under State Aid, where it can).

Barling said that as proved in the Italy case the effect not the intention is paramount and the effect is State Aid. There was yet another discussion around specificity and the distinction between positive and negative State Aid (IR35 is alleged by us to be a negative State Aid to us). Barling pointed at the Lunn Poly case to say that effectively there was no distinction under the doctrines relevant to this case.

Barling said that IR35 was explicitly stated as a tax avoidance measure, so it could not be part of general taxation. It was specifically (key word) counter to general corporate taxation. The judge nodded and said “very interesting”. The judge said when the alleged State Aid is negative it was harder to justify specificity.

The discussion then returned to the cases being cited in support of our position. The key case is the Greek case where a measure was held to be an obstacle under Freedom of Movement (see previous updates) even though it was “nicer” than IR35 in the sense that employment rights were included in the relevant Greek measure. The judge thought the Greek case was very strong for us. He was less convinced about some of the other supporting cases but said “it may well be that you don’t need them”. There was a general discussion involving a lot of cases for quite a while about each of the specific criteria under Freedom of Movement, which I am not going to summarise here.

Then the judge said that “it seems entirely possible” that caught by IR35 implies employment rights from the deemed employer. Barling questioned this citing the Paymaster General’s statement stating that this was explicitly not true. The judge said that someone caught by IR35 would have an extremely strong case for employment benefits from the deemed employer, and as he was not only a High Court Judge but also ran Employment Appeal Tribunals, he ought to know.

This is a Very Big Deal Indeed. Legally, it’s very significant (though not to the outcome of the JR); politically it could be massive.

The judge and Barling agreed that clients would not like this at all. The judge also said that a bodyshop could similarly in certain circumstances potentially claim employment rights from the end client.

The discussion returned to Freedom of Movement. Plender must prove that there exists an “overriding reason of public interest” why disguised employees must immediately pay tax and NICs. This overriding reason cannot be an economic reason. An example of such an overriding reason could be “maintenance of order and society” (sic).

There is a clear legal distinction between tax mitigation, tax avoidance measures and “we want more tax” measures. The judge said that setting up a corporate structure in accordance with the law is tax mitigation and not tax avoidance, excluding shams. The judge and Barling agreed that no-one was trying to defend sham corporate structures in this case. The judge said “I see nothing whatever to be critical of in terms of people taking advantage of laws allowing them to incorporate”.

To prove our case on Freedom of Movement, we need to establish that IR35 deters people from coming to the UK (as in our evidence); and that IR35 represents an “obstacle” (as in the Greek case). If we succeed in this the Revenue must argue justification.

The judge said if IR35 was a measure aimed at F2M then it was clearly evident that it was a “sledgehammer to crack a nut” and not at all proportionate. He doubted if Plender would claim IR35 was aimed at F2M. Barling replied “Well he won’t now!” and pointed out that Plender’s clients had persistently maintained that F2M was precisely the motivation for IR35.

He also said he was deeply unconvinced that the Revenue could be said to be going about implementation of IR35 in the right way in practice. Should we lose, he will have more to say on this.

There was a further deeply technical argument about proportionality: in the event that the Revenue can argue generality successfully, how would we prove IR35 was disproportionate then?

Barling raised several arguments: it hits too many people, the effect of uncertainty and assessment on a per-engagement basis was disproportionately onerous. The judge said that there was no proportionality home run in what Barling had said, in the case where the Revenue do prove generality of IR35. He said “There ought to be a reaction of ‘shock, horror’ and I’m not feeling that”. Barling said he doubted the Revenue would get that far but in the event it was relevant he would return to this argument in the redirect. The judge said he would have found a 1% shareholding threshold shocking but not 5%; however he accepted that a 50 or 100% shareholding might have been more appropriate.

Barling will finish within the first half hour of this afternoon’s session. Plender will start his reply; this will resume on Monday 19th March, on which day all parties agree that the case should end if possible.

It is absolutely critical that readers do not overreact to events above. The nuclear stuff is really good stuff; from reading the other events an impression may be gained that we’re ahead on points. I cannot overstress that this impression is to be avoided and certainly not promulgated. Our chances at the start were 50/50, they still are. Only the judge knows how well we’re doing. It’s going well and to plan, but please do not assume that we’re home and dry. We’re not even home and vigorously towelling ourselves off. In fact we’re not even home.

Plender’s submission will be crucial; that starts in about 30 minutes.