|
Update No.15 - Tuesday 20 March 2001 afternoon
There was a discussion on timings – the judge was determined
to finish this afternoon. Plender said he had to leave at 4
to catch a plan at 6; the judge said he would allow him to make
any further submissions he wanted in writing by the end of Friday.
Plender said an important question was inequality of treatment
on grounds of residence or nationality. The judge talked about
geographical disparateness and fiscal cohesion and the extent
to which these can be used in justification (I’m now just assuming
readers have absorbed these terms, at least to the limited extent
that I have). The judge said that the Revenue could not just
rely on fiscal cohesion for IR35. Plender said that cohesion
could be a defence to discrimination. The judge said on the
facts of this case it could not be used as a sole defence to
anything relevant. If there is no discrimination (as the Revenue
submit) case law does not say cohesion is not available for
use in justification.
There was a general discussion in which Plender supported some
of his assertions from before lunch with case law citations.
Plender then cited an accountant’s advert from Contractor UK.
The advert was for people considering going abroad. The general
advice was not to do so using the contractor’s current limited
company. “Most” EU states prohibit “leasing of employees” –
what we call outsourcing or consulting – without licence, and
obtaining a licence was in most cases prohibitively expensive.
“Not every company is as flexible as the UK” – many did not
allow the creation of PSCs and in others such structures were
“looked through” for assessment of liability in regard to social
security contributions (cf. NICs). “Most other EU countries
have laws which are worse than IR35”. UK NIC rates were almost
the lowest in Europe, with only Ireland having lower rates.
Employer’s NICs, instead of being 12.2% as in the UK, were as
high as 35%. The strong conclusion was that a contractor should
leave his/her limited company behind.
Not stated but clearly implicit was that in reality UK-based
PSCs did not exist in Europe and this point militated strongly
against Barling’s arguments on Freedom of Movement.
Plender said that if Barling’s case was good, there would be
wide ramifications within Europe of the judgement. His (Plender’s)
aim was simply to establish equality between employees in fact
irrespective of the interposition of any intermediary. IR35
was not disproportionate as it only treated two people whose
circumstances were broadly the same in broadly the same way.
Plender then briefly addressed the question of DSS benefits.
Entitlement to all such was assessed against the deemed NIC
payment, with the exception of SMP. He felt he had made his
points on SMP yesterday.
Plender said that great caution should be exercised before
the judiciary branch acted per pro Parliament.
Plender then turned to Human Rights (I’m not sure why he bothered
– everyone’s just going through the motions on this one). He
addressed certainty. He accepted that the employed/self-employed
appraisal can be difficult in borderline cases. However it is
easy to overstate the uncertainty in these determinations: on
review, 0.3% of cases where the initial determination was employed
were in fact self-employed; and 1.4% of cases where the initial
determination was self-employed were employed. The judge said
this latter case was the more important.
The other HR point is freedom to enjoyment of property. Plender
stated that the test on this was de facto confiscation of property
“unless by a measure to counter tax avoidance”.
Plender finished by saying that this legislation has been approved
by Parliament (this may seem tautologous: he was emphasising
his earlier warning to the judge to exercise caution before
overturning primary legislation. IR35 is a measure aimed at
90,000 tax avoiders. Its effect was to treat two people whose
situations but for the interposition of an intermediary were
equivalent equivalently.
Plender apologised for having to leave. The judge said “well
you can pick up what happened from the internet”. If indeed
he is reading this I hope he will forgive all the errors – every
one of which is mine – and any crass misunderstandings of the
law, of which I am overwhelmingly ignorant. On the other side
he may well have been; but he is clearly a highly talented barrister
who has done the best for his clients, no matter how many times
the rug has been pulled from under his feet. He had an impossible
task with regard to trying to defend the fairness of IR35 –
the judge’s eight facts really are facts, and the fact he was
unable to dissuade the judge from these is no reflection on
his skill. However the case itself is on the legality of the
measure under certain technical points of European law, and
whatever the outcome may be, he has made his arguments cogently,
intelligently, forcefully, and with not a little wit.
Barling then stood up to commence his reply.
He started by addressing the possibility of referral to the
ECJ. He said that if the judge sided with Plender on any one
of three points, it would represent such a large exercise of
discretion.that a referral to the ECJ was required. The first
was the clear distinction Plender had drawn between Freedom
of Movement arguments with regard to workers, establishment
and services. The second was Barling’s view that case law clearly
dictated that there can be no justification under Freedom of
Movement by an anti-avoidance measure. Plender had asserted
that there could.
The judge expressed some reluctance to refer. He said Barling
doesn’t need A43 – A49 would do him just fine, and the Greek
case (see earlier updates) was helpful to him.
There was then some discussion on the merits and demerits of
referral. The judge identified three cases in which Barling
would like a referral:
- If it was held that A43 primarily required discrimination
on geographic disparity. Barling had no problem with “primarily”
but if instead it was “essentially” he wanted a referral.
- If it was held that the only people who could claim on
A49 were people who’d been established elsewhere and ordinarily
resident in the UK. If PCG failed on this as a matter of principle,
Barling wanted referral.
- If PCG win on obstacle (see earlier updates) and as a matter
of principle justification would fail unless anti-tax avoidance
was a justification, Barling wanted referral.
After some discussion, the judge said he was minded to disagree
with 1 and 2 but (reluctantly) agree with 3. Plender shared
the judge’s reluctance: he said even if there exist referable
questions in the present case on which the judge is unbinghamly
certain (this quasi-adjective arises from Lord Bingham who laid
down the criterion of “complete confidence” – so “unbinghamly
certain” means certain but without complete confidence) there
should be no referral. He said that this was an expedited hearing.
There was a need to end the uncertainty it generated before
April. Tens of thousands of people were waiting on the outcome.
Barling resumed his reply. There was some discussion on the
aims of IR35. Counsel and judge agreed that the aim of the legislation
is removing tax avoidance.
The judge said in the case of a 6-months-in, 6-months-out contractor,
that contractor would be able to reclaim the costs for training
etc from the 6-months-out money.
Barling then raised the Montgomery case from the Court of Appeal.
This was a “real” case not an “imaginary” one in which a typist
who had been with the client for 2.5 years was neither an employee
of the client nor the agent (who had deducted PAYE). This in
spite of the fact that she was under clear direction and control,
provided no equipment. The judge in that case had said that
“parliament needs to sort out this mess” (i.e. the mess of employed/self-employed
tests). There was quite some discussion about this case. Barling
said that IR35 was grafted on top of these confused rules; this
point went to State Aid (on uncertainty).
There was then a discussion about “imaginary” contracts in
regard to the employment status test of “an irreducible minimum
of MOO” (again for what I mean by MOO refer to earlier updates).
Barling contended that “the whole thing is a meaningless exercise”
with respect to MOO on an imaginary contract. “You can see why
the [status assessment] manual instructs [Hector to ignore MOO]
unless the taxpayer raises the matter”. (author’s note: one
clear outcome of this case, whatever the result, is that pretty
much every taxpayer will now raise MOO).
Barling then lost his way a little. He talked again to the
engagement-by-engagement assessment basis – apparently the Revenue
accept that someone can be in business on their own account
for six months of the year and not for the other six. The judge
repeated his view that the caught six months could be viewed
as “suspension” of self-employed status in much the same way
that an accountant does if s/he is seconded to a client for
a year.
The judge said that it was completely clear that if a contractor
has multiple concurrent clients they are “in the clear”.
The judge returned to the eight factual points – Plender had
asked that “80%” in point 3 (see yesterday’s updates) be replaced
by “two thirds”. He was relaxed about this but it really didn’t
matter. Barling wanted to add “provided they are small companies”
to number 1 – “Big Boys don’t do the same”.
The judge and Barling argued about this for about a quarter
of an hour. More heat than light was generated by their exchange.
Barling then said the 5% expenses allowance was “artificial”.
There was a very protracted discussion on the Frontier Economics
report: 50% of contractors “are” Charlotte – borderline cases
who will slip in and out of IR35. 76% of the income of those
contractors who assume themselves Gordons (caught) will be captured
by IR35. The judge said it followed that the other 24% was available
to the contractor to offset training expenses etc. against.
He said “should I really have a reaction to this?”. He said
outwith IR35 under the common law tests these people would be
employees anyway.
Readers will again note the implicit – though not explicit
this time – corollary to this statement with regard to employee
benefits.
Barling submitted a paper to the judge with regard to anomalies
under IR35. Since I have not had sight of this I cannot reproduce
its contents. The judge reiterated that Plender had until Friday
to respond and if he didn’t he would take Barling’s points as
uncontested.
Barling then raised the 5% material interest threshold in comparison
with the body shop. He said that the difference was that if
the small company paid a dividend it was to the person who had
earned the money; if the big company paid a dividend it was
to people who (by and large) had not. The only difference between
PSCs and Big Boys was that with a PSC dividends are generally
paid to the owner whereas with a Big Boy (sic) dividends are
generally paid to other parties.
The judge said “you are not being serious”. Chalk dust was
not mentioned.
Barling then turned to State Aid. There was a “visual aid”
in the form of a Venn diagram (I haven’t used those words in
juxtaposition since Maths ‘O’-level). This was intended to demonstrate
the existence of selectivity in a horizontal rather than a vertical
sector.
Since I couldn’t see the Venn diagram, I couldn’t follow the
ensuing ten minute discussion about “you need another box here”
and “your circle there”.
Barling said that the inevitable effect of IR35 was to favour
those who are in fact in competition and who are in fact not
disadvantaged. The judge said that irrespective of whether consideration
was of positive or negative State Aid, the key question was
“qui bonet” (who benefits) – the test was the same.
The Court Manager intervened to extract the young lady sat
at the front (I’m not sure what she’s called – or, other than
passing pieces of paper so that solicitors don’t have to get
up and walk two yards, and say “all rise” once in a while, what
they are for, exactly) since it was past her bedtime.
There were more discussions on specificity. Barling said that
the “contracting service sector” – which he defined as those
businesses caught by IR35 – was the targeted sector. The subsectors
where relief was sought were those subsectors in which there
was evidence of competition. The judge remarked that in the
absence of competition IR35 was at worst a “leg down”.
There was a long discussion in which Barling failed to take
the judge with him on these points.
Barling said if if was possible to identify two groups – one
favoured, one disfavoured – he was in business in respect of
State Aid. The judge agreed. Barling said that IR35 was plainly
not a general tax measure. Companies are taxed via Corporation
Tax and individuals via Income Tax. IR35 is a derogation (an
exception) and therefore clearly not general. The judge said
that it was not necessary to identify in advance who the particular
people are who benefit or disbenefit as long as they exist.
Barling said that in law the converse to a general measure
is a specific measure. Since it is a derogation, IR35 cannot
be a general measure, so it must be a specific one. He cited
case law involving a fairly complex derogation-related test.
He answered Plender’s “tongue-in-cheek” point about differential
corporation tax rates being, under Barling’s logic, a State
Aid to small companies prior to IR35. This was nonsense, said
Barling, because actual levels of across-the-board taxation
were “inherent in the system” (see earlier updates for the significance
of this wording).
Barling said that IR35 does not apply to all undertakings;
it therefore applies to “certain undertakings” (I’m going to
stop referring to previous updates now – perhaps I should have
done so some time ago!). IR35 could not be “general” as it was
a derogation and in “effect” it defines its own affected sector.
To save some time, Barling gave the judge some reading pointers.
The discussion then turned to Freedom of Movement.
Barling repeated his concern about Plender’s proposed differential
application of this doctrine on workers, establishment and services.
Barling said that he didn’t need to establish discrimination
(on the grounds of nationality) and he and the judge discussed
this contention without coming to a clear conclusion.
The judge said that Barling’s problem on Freedom of Movement
was that he said that just about anything can be an obstacle.
The judge and Barling then discussed several points that had
been in Barling’s original submission, many of which spoke to
this point. Barling said that the 38-32 split (see earlier –
oops, I’m not saying that any more) represented a significant
impediment. The judge and Barling agreed that the PCG case relied
on Freedom of Movement for workers and establishment, not services,
and our “significant impediment”. PCG hold that under Freedom
of Movement IR35 cannot be “justified” because it’s (trailed
as) an anti-avoidance measure.
There then followed discussion of a lot of points. The judge
and Barling were both clearly keen to hurry it up as it was
gone six. Barling refuted Plender’s assertion that discrimination
was needed for Freedom of Movement. Impediments were discussed.
Barling said – and the judge seemed to accept – that just because
90% of the case law was discrimination based didn’t mean that
the application of Freedom of Movement was limited to discrimination
cases; one would naturally expect these to form the predominance
of the cases as these were normally the most frequent and the
most unagreeable instances of restriction.
There was a brief discussion on Human Rights.
Barling sat down at something like twenty to seven. Everyone
thanked everyone else for staying late (it was that or another
day – which no-one wanted). Judgement was reserved and the judge
indicated that he hoped to be able to deliver a judgement some
time next week.
Naturally I have some personal reflections on the day and the
case as a whole: these will be available to PCG members only.
Simon Juden
|
