Gerald Barling QC - Speaking Notes Pt 1

This page of extracts from Gerald Barling QC's, speaking notes has been renumbered to suit.

State aid;
1. Both the appellants and the Commissioners are in agreement with the definition of state aid as set out by Burton J as comprising the following six elements.

1. An aid in the sense of a benefit or advantage which
2. is granted by the state or thru state resources,
3. favours certain undertaking over others (the selectivity principle)
4. distorts or threatens to distort competition
5. is capable of effecting trade between member states and
6. has not been notified to the Commission.

2. In this appeal the issue is a third of these elements, namely the selectivity principle.

3. Burton J found that IR35 was a general measure and therefore not a selective state aid. The appellants submit that this finding was incorrect and that IR35 does indeed constitute state aid.

The selectivity principle

5. In order to constitute aid, a measure must favour certain undertakings or the production of certain goods. This criterion, known as the selectivity criterion, serves to distinguish those measures which are aids from general legislative measures applying to all undertakings without distinction.

7. …the only relevant question is whether there is a advantage to some undertakings over others……this test has been concisely summarised by Lord Woolf MR in Lunn Poly:

“You can have state aid in relation to a group of tax payers where you have the position ……..of one body of tax payers receiving a benefit which another body of tax payers does not receive.”

10. Examples of selective measures are:
a. measures which favour an entire industry such as a textile industry;
b. measures which favour an entire economic sector, such as the manufacturing sector;
c. measures which, within a particular sector, favour certain undertakings over others, eg the favouring of certain providers of travel insurance over others or the favouring of smaller undertakings over larger undertaking in respect of the purchase of commercial vehicles;
d. measures which favour large insolvent companies over smaller insolvent companies.

General measures
12. A measure is not selective if it is a “general measure”.

13. It is important to understand, however, that not every legislative measure may be classified as a general measure simply because it is a measure of fiscal, social or economic policy……rather, Commission guidance and court case law have established that there are two specific kinds of state measures which may be categorised as general measures.

14. The first is where the measure applies “to persons in accordance with objective criteria without regard to the location, sector or undertaking in which the beneficiary may be employed”. Examples are measures which apply uniformly to ALL companies.

15. The second kind of general measure is where a measure applies differently to various undertakings, but where the differential effects are justified by or inherent in the “nature or general scheme of the system”.

16. The burden of proof is on the member state to show that an explanation of one of these kinds exists.

The present case

17. The provisions of IR35 apply ONLY to the contracting services sector. Within that economic sector they apply ONLY to certain undertaking, as defined in the legislation; essentially, small worker-owned contracting companies. The provisions impose a distinct and very significant disadvantage on the companies caught, and confer a corresponding advantage on their larger competitors who fall outside of the IR35 provisions. That competitive disadvantage was established, as a fact, by Burton J.

18…….it is simply not correct to assert, as Burton J did (and the Commissioners also apparently assert) that the legislation does not apply to a defined group since the appellants operate in a number of different industrial sectors.

20. The Commissioners argue that IR35 is a general measure variously on the grounds that:
a. it applies in accordance with objective criteria without regard to the location, sector or undertaking in which the beneficiary may be employed;
b. the differentiation is inherent in or justified by the logic of the system.

21. Their arguments are plainly incorrect for the following reasons:
a. IR35 only applies to the taxation of contracting services…..
b. Within the sector of contracting services, IR35 only applies to intermediary service contractors;
c. The selective differential effect of the measure is no accident, n the contrary IR35 was introduced precisely to increase the tax revenues from certain service contractors and as Burton J established it has exactly that effect;
d. The differential treatment, WHATEVER ITS JUSTIFICATION, cannot be regarded as “inherent in the system” since no IR35 type measure has existed in the many decades in which individuals have formed one-man companies and other small companies legitimately under the rules on incorporation of companies. The general scheme of the tax system thus clearly does not require “intermediary” companies as defined in IR35 to be subjected to a different tax regime from other companies;
e. The Commissioners argument on selectivity/general measures are contradicted by their own statements elsewhere……the significance of the Commissioners statement is that it admits that IR35 affects one selective group of tax payers by contrast to others - and was intended to do so;
f. ………………….in the Ferring case…..the Court concluded that the imposition of a tax on certain operators, but not their competitors, in order to restore competitive equilibrium and eliminate a pre-existing competitive advantage, was a selective favouring of the unaffected undertakings.

22. Far from being a general measure, therefore, IR35 is on all fours with cases such as those set out in paragraph 10 above which all have the characteristic that one group of undertakings was favoured over another, competing group of undertakings.

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Last update: Wed Dec 5 12:30:04 2001