Update No.13 - Monday 19 April 2001 afternoon

Plender started off by addressing questions of inconsistencies in Inspectors' opinions on contracts. He said that of 11,000 PCG members, Barling had only produced two instances of inconsistency. He gave "justifications" (see Thursday's report for details of one of these cases) for these. He emphasised that the Revenue inspectors did not exercise "discretion" but formed a "judgement" against objective criteria.

Plender said that Barling claimed that contractors were financially worse off: in fact the 5% allowance was "generous" and contractors under IR35 were "better off then employees". The judge raised the question of paying for training and Plender said that while employees get training provided for them, the fact that contractors don't is a consequence of the way they have chosen to set themselves up.

Plender then turned to SMP and said that SMP was not based on NICs but the money a woman actually received prior to giving birth. If contractors paid a realistic salary then the woman would get realistic SMP. The judge said isn't there a problem with a high deemed salary but a low actual salary: the SMP will be set at the value dictated by the low salary whereas tax and NICs will be due on the high salary.

Plender said (basically) tough, and in any event the SMP would come from the company. Plender said the Frontier Economics report generates more heat than light. Plender pointed out the difference between the 16.6% expenses on average allowed against corporation tax by the Revenue for PSCs and the 6.5% expenses out of those that would be allowable under Schedule E. He reiterated that IR35 only ever applied to people who would in any case be employees but for the interposition of an intermediary.

Plender said the Frontier report did not address the question of what the comparator in regard of competition should be. The real point of the dispute between him and Barling is what that comparator should be. Is a contractor a small company competing with large ones; or is a contractor a person competing with other people.

Plender asked the Court to accept for the sake of argument only the PCG's submission that the relevant competition is between small and large companies. Surely if you take the PCG's argument to its logical conclusion, prior to IR35 there was a State Aid on behalf of small companies due both to the differential in corporation tax rate and the fact that while a large company had to pay tax and NICs on salaries, the small company was free to distribute dividends instead. Plender said "if this is repeated in the media, I hope that the relative positions of my tongue and my cheek are taken into account".

Plender said that PCG evidence on competition merely showed that self-employed people sometimes work alongside employed people. He talked through some emails submitted in evidence by the PCG in this regard. He said (again) that the Frontier Economics report does not address what the proper comparator is: the questionnaire - which was in any case filled in by a self-selecting group from within a pressure group opposed to the contested legislation - in its questions presupposed the PCG's choice of comparator and did not seek to elucidate what the proper comparator should be.

Plender said in any event that IR35 does not confer any advantage on big companies against small companies in provision of dividends as a big company must itself pay the very allowances allowed for under IR35.

The judge said it was not for him to consider whether the antecedant tax regime favoured smaller companies over larger ones: what is for him to consider is, within the existing European jurisprudence, does IR35 reduce or address a pre-existing distortion. It may be relevant to say that IR35 is not distorting the market but redressing a distortion that exists. Is this part of Plender's submission? Plender said yes.

The judge said that as far as State Aid is concerned if Plender succeeds on generality then he doesn't need anything else.

Plender then said that a State Aid had to "favour certain undertakings in the production of certain goods". The judge must decide if IR35 has, not might have, the characteristics of an Aid. Plender said that in his early material Barling had seemed to argue that IR35 targetted the knowledge-based sector; but now it was common ground between the sides that it was the effect that should be examined.

There was a technical discussion about positive and negative State Aids which I shall not reproduce (because I don't have copies of the cases referred to - so I can't!).

Plender said there were no similar cases to this one as "no-one's had the ingenuity to argue that the effect of the application of a general rule can be a specific State Aid". The judge said the whole thing (on State Aid) seemed to hang on Plender's "persuasive" argument on specificity. Plender again cited "certain undertakings" and said that nothing in IR35 had that level of specificity. The judge said that Barling's argument was that there were specific effects favouring big companies in the knowledge-based sector. There was again a technical legal argument on specificity which due to absence of materials I am unable sensibly to reproduce.

The judge said that a measure expressed in general terms (does not mention a particular undertaking or sector) lacks the necessary specificity to be a State Aid. Clearly, to win on State Aid, Barling must convince him otherwise in his reply.

Plender then reiterated his point that in status assessments the Revenue does not exercise discretion but judgement.

There was then a discussion of some other cases. There was an Italian case where a measure favoured women over men in a number of sectors. In four such the workforce was predominantly female. This measure passed the specificity test as its effect (in the sense of it being an Aid) was in (four) clearly defined sector(s). This case is not relevant to IR35, Plender said, as IR35 was entirely general and did not, as the Italian law did, apply to certain sectors only. The effect of the Italian measure was to favour the four sectors: the effect of IR35 is to treat as employees those who "are" except for the interposition of an intermediary.

The Lunn Poly case, Plender argued, established that an anti-avoidance measure could not be held to be a negative State Aid disbenefitting (again - not sure that's a word, but that's what he said) those who had previously been avoiding tax.

Other cases were discussed: there could be no State Aid based on differences that were "inherent in the system" or "arise from the logic of the situation".

Plender said (again) that IR35 was a general measure. It does not favour "certain undertakings" or the "production of certain goods". It applies generally without regard to sector, undertaking or location. The PCG, Plender said, claim that IR35 applies specifically to the contracting industry. The facts don't bear this out.

Plender then addressed the distortion of competition. It had been Barling's contention that IR35 does "distort or threaten to distort" the market by favouring large companies. Plender's case is that it doesn't. There is no distinction between workers using intellect or tools. There is no distinction on the grounds of size.

Plender said that Barling had stated that up to 60,000 businesses will close as a result of IR35. The judge pointed out that this came from the RIA which is produced by the Government. Plender said that that was immaterial. The second RIA supercedes the first - it is not accepted by the Revenue that following the changes, IR35 has the same effects. The effects now are to make the measure "broadly tax and NIC neutral".

Plender said that Barling had said that the PMG had said that "some people may go abroad or not come to the UK" in consequence of IR35. The judge said "yes - and he was right". Plender was clearly unhappy at this (this was one of the judge's eight points this morning that he disagreed with). After much discussion Plender accepted that this was the case but he did not accept that it would be

"hundreds or thousands" of people. This ended Plender's discussion of State Aid. He will make his points on Freedom of Movement tomorrow morning and Barling will reply in the afternoon. The case is still on track to finish tomorrow.

In reading the above it is important to remember that while one barrister has the floor, it often seems to lay observers that that barrister is doing well; the converse obviously also applies. To repeat what I've said before: only the judge knows the scores on the doors and he's not telling until judgement is delivered.

Simon Juden