Update No.14 - Tuesday 20 March 2001 morning
Plender started by answering some of the judge's questions
from yesterday. The reason for the "change of attitude"
(judge's words from yesterday) between the two RIAs was
that the first IR35 imposed the burden of collection of
tax and NICs on the client, which it was felt would make
the outsourcing of services to PSCs commercially untenable;
the second IR35 merely made operating as a PSC broadly fiscally
neutral so this commercial pressure no longer applied.
He then discussed the 90,000 figure (companies "captured"
by IR35) and reiterated the methodology used in its calculation.
The judge said that since not all those affected would be
captured, did this imply a figure of, say, 120,000 affected
businesses of which 90,000 would be captured. Although these
were clearly arbitrary figures plucked from the air by the
judge Plender gratefully accepted them as representing his
position.
Plender then tried to assert that the assessment manual
inconsistencies picked up by the judge yesterday didn't
look so bad if the statements were "taken in the full context
of the manual as a whole". The judge wasn't convinced (and
if he was honest neither was Plender).
There was then Yet Another Discussion on the competition
comparator. Plender returned to his example of himself "in
competition with" Freshfields (see yesterday's reports).
The judge still wasn't buying his argument. The judge cited
a Charlotte who was half in and half out of IR35. Clearly
IR35 would affect her and apply an upward pressure on her
rates, so she could afford to remain in business on her
own terms. It was not necessary for competition to be present
between small and large companies every single time work
was sought; it was sufficient that small and large companies
compete from time to time. This was clearly the case; but
this is a matter of fact and not law so it doesn't necessarily
impact the outcome of the case. Plender didn't press his
point. The judge remarked that if the Revenue don't kill
the PCG State Aid argument on specificity, the Charlotte
example was clear distortion of competition within the meaning
of the State Aid doctrine.
Plender then turned to Freedom of Movement.
There were three distinct freedoms to consider: the freedom
of movement of workers, establishment and services. The
freedom of movement of workers (Article 39) includes the
right to accept an offer of employment "actually made" within
any Member State (of the EU), the right to move freely through
Member States for this purpose; the right to stay in Member
States according to the provisions laid down by that state;
and the right to remain in the Member State after the employment
is finished. There is case law extending these rights to
include a right of freedom of movement to seek employment.
"Employment" does include "engagment"; but the applicability
of this article to the current case was questionable. Plender's
submission was that the best Barling could do was argue
that it applied to the exceptional case of, say, a 5-person
company operating across state boundaries. Plender said
that Barling submitted that IR35 is not discriminatory in
the sense of this article, nor does it place obstacles on
movement with regard to employee-style workers.
Article 43 concerns establishment: the right to be self-employed
subject to Member States' law; a prohibition on the restriction
of establishment; the right to establish subject to conditions
laid down in Member States for their own nationals. There
was a brief discussion in which the judge and Plender agreed
that A43 was probably not relevant to this case but it was
no particular skin off Barling's nose if it wasn't. Article
49 concerns services: the right of someone established in
one Member State to supply services in all Member States.
Plender contended that it was unlikely that such a person
would be caught by IR35; there would be "some but not many".
An ECJ case provided that the rights under this article
extended to include the right to receive services. The judge
and
Plender discussed A39 and agreed it was intended to apply
to workers or employees, not independent contractors (in
the sense of a PSC). Plender cited the case of patent supervision
in Germany. There was a German law saying that someone could
only supervise patents in Germany if they took certain exams;
so, for example, a London-based patent expert could not
provide service over the internet to a German client unless
they first went to Germany and passed the relevant exams.
This was a case where Freedom of Movement had been unlawfully
restricted. The point Plender made was that this rule was
a prohibition; IR35 is not. Plender contended that a relevant
restriction must deprive the provision of services of all
practical effectiveness.
The judge said in this case actually there was no prevention:
the law in question simply made it harder (as you had to
pass the exams - which the judge felt "could not be too
onerous"!). However the impediment in this case was clearly
much more severe than simply "you must pay more tax".
Plender then addressed Freedom of Movement (hereafter
FoM) for workers. He said Barling's case on this point related
to access to market. There was some discussion on the existence
of an ancillary right not to be taxed too heavily (sic)
but the judge concluded that he couldn't see how Barling
would get in on A39 (with Plender's agreement - obviously).
He said he would take "some persuading" to change his mind
on this. Barling rose briefly to state that he was not at
all alleging discrimination on the grounds of nationality;
the discrimination he was addressing was between businesses.
Doubtless Barling will speak further to this point in his
reply.
Plender turned to Establishment. He said normally FoM on
establishment is in the context of discrimination, but not
exclusively. He said that establishment may involve other
freedoms but such freedoms would normally result in subjection
to local rules. The judge characterised this as "Local Rules
OK". Plender said (and cited case law to support his notion)
that a rule which on the face of it was non-discriminatory
needed to have a "disparate" impact to fall foul of FoM
rule on establishment. For example, he cited a case with
a disparity between those living in Belgium and those seeking
to establish themselves in Belgium. He said that this is
entirely different from the alleged disparity between small
and large companies with respect to IR35. The application
of FoM in this context necessarily involved "trans-frontier"
situations with geographically disparate application, and
not situations where one Member State had less favourable
tax laws. Plender said that there were no established cases
of this kind of FoM which did not have this trans-frontier
element.
The judge said and Plender agreed that he had strayed in
his discussion from establishment to services.
There was a discussion on justification: in this case Plender
would cite "fiscal cohesion" - the taxation of employees
as employees (for a discussion of what justification means
in the context of this case, please see previous updates).
Plender said that not only did there not exist any case
where there was an obstacle which was non-discriminatory
and had no trans-frontier effects with regard to a fiscal
provision but there was expert authority (cited) saying
there couldn't be.
There was some discussion of the St Desmos case which
the judge said was Barling's strongest case (this is the
Greek tourist guide case - see earlier reports for more
detail). Plender agreed that on establishment, "local rules
OK" applies but on services where a local rule is (as in
this case) unreasonable it may not. Plender said that the
St Desmos case involved a law which was a clear prevention.
IR35 is not a prevention in this sense so the case was not
applicable.
The judge discussed this case in the light of the patent
law case and IR35. The patent law case was not prevention,
as St Desmos was; it was however a hindrance, but far more
draconian than IR35.
Plender said for FoM to apply, the contractor must be established
abroad but ordinarily resident in the UK (i.e. in UK for
>186 days in a tax year); and IR35 must be substantially
different from the local law where the contractor is established.
There was another hypothetical case where FoM could apply
where the contractor is established in the UK and "prevented"
from providing services overseas by IR35. The judge said
he'd just thrown Barling a lifebelt; Plender said yes and
now I'm going to puncture it. There is nothing in IR35 which
has disparate bearing on the provision of services between
the UK and another Member State. So FoM can't be proved
in this latter case.
Plender reiterated that St Desmos involved a law that
was a prohibition. IR35 isn't. The judge said it wasn't
a restriction on the degree of disagreeability but an outright
ban and Plender agreed. There was some technical discussion
of other cases which I shall not reproduce here.
There was then a discussion on the difference between justification
for State Aid and FoM (see earlier updates for an explanation
of what this means). Plender said that Barling's assertion
that an anti-avoidance measure could not be justified because
it is such" under FoM was founded on a case in which there
had been discrimination. He therefore questioned the applicability
of that case to this one.
Once State Aid is proved, the National Court cannot in
any case decide justification: that's for the European Commission.
There was some discussion on timings. Plender has a plane
to catch and must leave court at 4; however the judge is
insistent on finishing the case today. He indicated that
he will reserve judgement and possibly deliver it next week,
other matters allowing. The judge will hear any application
for anyone else from the Revenue side to speak during Barling's
reply in Plender's absence (and will allow it).
Simon Juden
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