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Update No.19 - HIGH COURT ISSUES CLEARER GUIDELINES
IN PCG'S JUDICIAL REVIEW
The High Court today criticised the Inland Revenue's tests
for the stealth tax IR35 and laid down new guidance to make
them more relevant to the knowledge-based sector.
The decision followed a judicial
review brought by the Professional Contractors Group on behalf
of its 13,000 members who operate their own small businesses,
mainly in the IT and engineering sector, and whose companies
were under threat because they were being wrongly classed as
'disguised employees'.
The PCG has argued for 18 months
that the tests the Revenue used to assess the status of these
companies were inappropriate to the modern operating practices
of the knowledge-based sector and belonged to a bygone era.
PCG Chairman Gareth Williams
said: "IR35 has been a catalogue of disasters from the very
beginning. The most unfair aspect of it was that we had to pass
a set of tests which had no relevance to our working practices.
"The High Court has been the
first authoritative body to listen to our concerns and has confirmed
that we were right. The Revenue got it wrong and as a result
has damaged many small businesses, some of which have closed
down and some have moved abroad.
"The Court has fortunately intervened
to restrict further damage with a much more relevant set of
guidelines which prove that IR35 was unfair, unworkable and
created an uncertain climate. For example, the judgement was
highly critical of the Revenue's 'inflexible stance' regarding
blanket advice that standard agency contracts would be caught
and he ruled that some of the uncertainty could be removed by
the drafting, agreement and approval of a series of acceptable
standard forms. He also found that the Revenue has been incorrect
in assuming that mutuality of obligation was not a relevant
issue, and he was critical of the Revenue's 'too inflexible
approach' to the right of substitution. "
On every finding of fact the
judge concurred with the PCG including the key issue that contractors
are in competition with larger consultancies and that IR35 would
distort the marketplace. He was also critical of the Revenue's
selective use of the employment tests to assess whether a small
business fell inside or outside of IR35. In his binding judgement,
he described the Revenue's guidance as inappropriate, unclear,
inflexible, inaccurate and unhelpful. He also made reference
to the unnecessary emotive and 'colourful' language in the original
press notice which set the tone for a hostile debate.
However, this judgement comes
only days before the end of the tax year when these small businesses
will have to make decisions based on Revenue guidance which
has now been shown to be inaccurate and misleading.
The PCG has renewed its offer
to meet with Ministers or officials at any time to assist with
this transition to the new guidelines with the minimum of disruption
to all parties. The PCG, representing 13,000 members mainly
in the IT and engineering community, began a legal challenge
to judicially review the Government's action in introducing
IR35 after the Treasury and Revenue refused to engage in any
constructive debate with the Group's members.
IR35 was announced in a press
notice after the March 1999 Budget. It treats small businesses
in the knowledge-based sector as 'disguised employees' for tax
and NI purposes, thereby preventing them from operating on similar
terms to their larger competitors.
Background;
- The Professional Contractors Group was formed in May 1999
to lobby against the Government's IR35 proposals. It is a
non-party political group and its patrons are cross-bench
peer, Lord Weatherill, former Speaker of the House of Commons;
and industry guru Sir John Harvey-Jones. Since its formation
it has evolved into the representative body for independent
contractors from many disciplines including IT and engineering
on many issues affecting the knowledge-based sector. It is
the fastest growing trade association in the country and now
has more than 13,000 members.
- The PCG's aim is to work for proper recognition of independent
contractors as a genuine and valuable sector of the economy,
generating wealth and employment, providing industry with
a flexible workforce. The Internet has been the primary resource,
providing fast, effective communication.
- The PCG brought the judicial review against the Government,
claiming IR35 contravenued European legislation.
- During the actual judicial review hearing in March, the
Court indicated it agreed with a number of PCG's points which
had previously been contested by the Revenue. They included:
- Certainty many of contractors will be taken out
of 'certainty' and put into a position of 'uncertainty'
as to whether their contractors fall within IR35
- Financial flexibility Unaffected companies have
greater flexibility in arranging their financial affairs
than those affected by IR35
- Competition there was real competition between
small contracting companies and larger body shops
- Moving overseas Some contractors will move overseas
or others will be deterred from coming to the UK
- Multiple clients - seeking work opportunities
from multiple clients would put a company outside IR35.
- Employment rights there was a strong case for
employment rights for those caught under IR35. the employment
rights issue could extend to employees of bodyshops selling
them into clients.
- Freedom of movement - the freedom of movement
issue is potentially an easier hurdle to cross - doesn't
depend on sector or competition.
- Evidence of competition - fairly convinced of
a competition element in IT and asked for additional evidence
of other sectors. Engineering evidence was provided to
demonstrate the point.
- Same contract different opinion - the example
of one contract which received a 'yes' and a 'no' from
different IR offices. It took 4-5 months to get a decision
(28 day limit) and the 'inside IR35' was an obvious cut
and paste job which showed that the assessor hadn't read
the content.
- Restrictive - the application of IR35 should
be less restrictive.
- Tax mitigation the different between tax mitigation
(ie making arrangements in accordance with tax regime
after you've set up a business for other reasons) and
tax avoidance (ie setting up a business/arranging your
affairs in order to maximise tax benefits). Nothing wrong
with setting up companies and using them to mitigate tax.
- Emotive language in press release - there was
criticism of the use of emotive language, such as 'disguised
employee' in the original IR35 press release which the
judge described as 'wholly regrettable and unnecessary'
- Friday to Monday - there should be no prejudice
in the assessment procedure because the first client of
the contractor had previously been an employer.
- Expert competition evidence - judge indicated
that he could see the force of argument when supported
by our expert evidence, and that the IR were relying on
assertions not supported by evidence.
- Freedom of Movement - IR must show that there
is an overriding reason of public interest - which cannot
be an 'economic one'.
- Proportionality - if the objective was to prevent
Friday-to-Monday, it's a sledgehammer to crack a nut.
- Incorporation - there was nothing critical in
terms of people taking advantage of laws allowing them
to incorporate.
- Implementation - the judge was critical of the
manner in which the IR was going about implementation
in practice
- For further information: https://www.pcgroup.org.uk
For media enquiries contact:
Susie Hughes
020 7462 7955
[email protected]
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