Update No.12 - Monday 19th AM Update

The judge said he wanted to raise a number of matters from his homework over the weekend. It seemed to him that there were eight matters of “what might be called fact“which he felt should not be disputed but which would probably not impact at all on the outcome of the case. He listed them:

1. The effect and intent of IR35 was to eliminate avoidance of Tax and NICs
2. Many workers with personal service companies (PSCs hereafter) will me required to pay more to the Revenue, and earlier
3. Roughly 80% of PSCs are in the sector referred to in the relief sought
4. IR35 takes PSCs out of “certainty” and into the uncertainty inherent in passing or failing the employment (Sched. D/E) tests
5. With respect to contracts sought and services to be provided, there exists competition between affected and non-affected companies
6. Unaffected companies have greated flexibility in arranging their tax affairs
7. Some PSCs may no longer operate in the UK and others may choose not to come to the UK in consequence of IR35
8. IR35 may have effects on interstate trade

The judge said he expected Plender not to agree with some of these but in fact this was largely irrelevant as these matters would not be decisive in the case.

Plender said he agreed with 1, 2, 6, 7 with emphasis on “some”, 8 but only in the context of his view on the other points. He disagreed with 3, stating there was no correlation between the number of companies in the sector and affected workers; and with 4 and 5.

Barling agreed with all, with the caveat on number 1 that IR35 will only affect those with a 5% shareholding or more.

There was some discussion on standard form contracts. The judge said that plainly a contractor must be allowed to see an agent-client contract; Barling said that the commercial reality was that this doesn’t happen. The judge said that in fact PCG could seek input into a new “standard contract” that would take contractors outside IR35 and which could be applied industry-wide.

The Judge then turned to the expert evidence of Willcocks and the fact that affected intermediaries will pay 38% of generated turnover as opposed to the situation of an employee where in total the Revenue will receive 32% of generated turnover (taking corporation tax and employer’s taxes into account). Barling clarified this evidence for the judge.

The judge then clarified with Plender that under IR35 the following deductions are allowable:

1. Agency commission
2. 5%
3. Employer contributions to a pension scheme
4. Schedule E expenses including favourable travel allowances
5. NICs paid by the intermediary

The judge then turned to the Revenue guidelines on status evaluation. These guidelines, for tax inspectors, say (effectively) “do not consider MOO unless the contractor raises it”. The judge said this cannot be right: to be “employed” there must be an “irreducible minimum of MOO” under the House of Lords ruling alluded to on Thursday. Plender said that if the Revenue didn’t look at MOO this would normally be to the contractor’s advantage (sic). The judge disagreed(!!). The judge said that the status manual instructs inspectors not to refer to anything outside the written contract in the first instance. This contradicts primary evidence given by Plender and the IR35 statute. The judge said it may well be the case that a contractor has a standard contract but the reality is that s/he only turns up two days a week and has other concurrent clients. Plender said “well these are only guidelines”. He was clearly embarrassed at the situation he had been put in. Sarah Walker, who sat at the front of court, also blushed and looked embarrassed.

The judge then raised penalties, specifically the clause in the guidance notes which says that assessments for be penalties would be lenient if errors were due to a misunderstanding of the rules due to their newness. This implied a time limit for this leniency. He cited Charlotte and said that if in three years a Charlotte-type situation was interpreted by the contractor with no malice aforethought as not caught but Hector eventually decided it was caught, surely leniency was also due as the rules are inherently uncertain. Plender said he would return to this but his personal understanding of the note was that it was intended to give reassurance.

The judge then asked why the attitude to PSCs had changed between the first RIA and the second. The first says

1. It is thought that most [caught businesses] will wind up
2. [33-66,000] companies [will close]

The second says

1. PSCs will have more choices…companies that would have wound up can continue
2. under the original proposal companies may well continue – the implication being that the 33-66,000 companies will continue though caught.

The judge asked what prompted the change from “PSCs will die and good riddance” to “PSCs may continue and good luck to them”. Plender said he would deal with this point later.

The judge asked again what “broadly tax and NIC neutral” meant – certainly IR35 is not cost neutral. Plender said he would return to this point but the 5% allowance was “generous” (sic).

There was then a protracted discussion on the judges point number 5 (about competition in fact). Plender referred to the different world views: the PCGs, small company vs big company; and the Revenue’s, contractor against employee. The judge said that the plain reality was that competition between small and big companies does exist as the PCG say. However this will not impact the outcome of the case.

Plender said if a client came to him rather than Freshfields (big international law firm) the reality of the competition was between him and an individual partner of Freshfields. The judge said no – the competition was clearly between Plender and Freshfields. Plender made a show of trying to argue against this, but his heart wasn’t in it.

Plender then returned to his skeleton. He cited some of the fiscal advantages of having a PSC:

1. . Ability to pay dividends instead of salar
2. Ability to delay payments from the company and avoid higher rate tax
3. Ability to split shares with a spouse, utilising both sets of tax allowances
4. Ability to retain money in the company and benefit from capital appreciation
5. Expenses

Plender repeated his mantra: IR35 is only going to affect people (sic) who would be classed as employees were it not for the interposition of an intermediary.

The judge said that the evidence showed that the target is not just people who would clearly be employees. He wasn’t sure if he wanted or needed to get into an argument about how many people would be hit. If as seems likely there aren’t many F2Ms, Plender may in the appropriate circumstances run into trouble on proportionality. However if Plender says “I’m after getting rid of this PSC system completely” the F2M is irrelevant and the Revenue are OK on proportionality.

Plender nodded and said that anyone caught by IR35 would be someone Parliament intended to catch. While IR35 does engender a degree of uncertainty, so does all legislation, especially when new. There was a difference between him and Barling on the degree of uncertainty.

The judge referred to his fact number 4 and said that though he believed this to be true, it doesn’t get Barling anywhere.

There was a discussion about mitigation vs avoidance vs evasion. With some relief, everyone accepted that the only meaningful distinction is between avoidance (legal) and evasion (not). Plender said that no one was claiming that PCG members or PSC owners in general were evaders; and if any were, IR35 is not required as existing anti-evasion legislation would apply.

Plender then rehearsed some matters that will be familiar to many readers: hourly rates, direction and control, sound management and the like. He said that the last few years had seen a sharp increase in the use of PSCs to avoid tax. He referred to John Birt who as DG of the BBC had expenses of £4,000 for his wardrobe, theatre tickets and entertainment. He cited accountants that advertised for “Australafrokiwis” (sic – in the advert, not Plender’s word) to help them avoid tax. He cited some press stories from the FT, TES and Mail among others. He cited Virgin Formations who would, for example set up pizza delivery drivers with PSCs to stop pizza companies having to give them benefits and removing the requirement to pay NMW.

The judge said but the PSC must pay the driver NMW so surely this is specious.

Plender said yes, probably.

Something that occurred to me: the PCG case is supported by independent external credible expert evidence. The Revenue case is currently being supported by quotes from tabloids!

Plender then talked about composites again; and the common equation exemplified by some of the PCG’s affidavits between an individual and their PSC. Phrases such as “I paid myself…”, “…my income…”, “..I pay into my pension” proved this (he said).

He addressed the ICAEW and cited a letter from an accountant, which said PSCs were all a sham (author’s note: again, the tax faculty of the most highly regarded professional organisation for accountancy in the UK, against one letter in a magazine from one accountant).

Plender said in the last tax year IR35 would have caught 90,000 businesses to the tune of £350m. The judge ripped this to shreds: where did these figures come from? Plender explained the methodology and the judge said “but several crucial questions involving, for example, existence of other concurrent clients, whole business picture etc are not addressed by the questionnaire. How is assessment possible”.

Plender could not answer this point.

There was some discussion on the 21-35% figures; the PCG figures show a 27-35% split however all sides agreed to pursue this was pointless: the fact is that a differential exists and in law that’s all that matters.

Plender asserted that contrary to Williams’ evidence IR35 was not introduced in response to lobbying from EDS and other large multinational bodyshoppers. The judge pointed out the phrase (something like – I didn’t get this verbatim) “EDS first alerted the Government [to PCSs]” in the article from Williams’ evidence and said that this didn’t rule this out but it certainly didn’t prove it and no such assumption would be made by him (author’s note: not, frankly, that it would be relevant to the outcome of the case if it were).

There was some terminological discussion around Plender’s assertion that people genuinely in business would not be “affected” by IR35. All sides agreed that “captured” was a better word as certainly those PSCs not caught were affected to the degree they had to obtain appropriate legal and accountancy advice and spend time and energy worrying about IR35, even though they were outside it.

Plender asserted that IR35 is not industry-specific. Barling’s case for specificity in the knowledge-based sector depended on guidance notes only. There was some discussion about T&Cs; in contracts, the conclusion of which that if a client had veto on subsitution it did not mean “employed” but equally was not a pointer to SE.

Plender then said “no-one is deemed to be an employee – what is deemed is a payment”. The judge said it should be clear to all, though not relevant to the merits of either case, that if someone fails employment tests (i.e. is “employed”) for IR35 purposes the strong likelihood is that they will also be “employed” for all other purposes, including employee benefits.

Plender said that Barling’s case only looked at part of the legislation: it was important to take all parts in the context of the legislation as a whole. The judge said that it was reasonable that Barling would only talk to the points relevant to his case, but Plender’s point was taken.

The judge then asked where the 5% material interest figure came from. Plender talked to it but was again confused between the 5% shareholding and the 5% figure for allowances. He acknowledged this confusion(!). Plender said it was a matter of common sense that as a company grew, so individual shareholdings in it would diminish in size.

Plender has addressed the intention and form of IR35. This afternoon he will address the effects and State Aid; tomorrow he will address Freedom of Movement. The case is on track to finish tomorrow.

Simon Juden