Gerald Barling QC - Speaking Notes Part 2.
This part of the extracts from Gerald Barling QC's, speaking
notes which have been renumbered from the originals. Part
1 is in the archive on the left.
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.
Positive and negative aids
24. At the time of the hearing before him, and the filing
of the appellants appeal, there have been no case to come
before the European court which raised the issue of what
Burton J termed a “negative aid”. The only authority was
the UK case of Lunn Poly …….ultimately the question was,
as Lord Woolf stated, whether “you have the position of
one body of tax payers receiving a benefit which another
body of tax payers does not receive”.
25. Recently, however, the European Court has decided the
case of Ferring which confirms the approach in Lunn Poly
and which is even more similar to the present case.
26. Ferring concerned the adoption of legislation which
imposed a particular tax burden on a specific defined group
of undertakings (pharmaceutical companies selling directly).
The legislation did not impose that burden on another competing
group of undertakings (wholesale distributors of pharmaceutical
products). Following reasoning almost identical to that
in Lunn Poly, AG Tizzano and the courts found that the non-imposition
of the same tax on the wholesale distributors conferred
upon them a selective advantage.
27. Just as in both Lunn Poly and Ferring the IR35 legislation
imposes a tax burden on a defined group of undertakings:
companies defined as intermediaries which supply contracting
services…..The legislation does not impose the same burden
on a group of undertakings; non-intermediary companies supplying
exactly the same contracting services. Just as in both LP
and Ferring the two groups of undertakings are in competition.
28. The present case therefore merits exactly the same
result as in Lunn Poly and Ferring; that the restriction
of IR35 update to intermediaries companies and the exclusion
of the appellants competitors (large contracting service
providers) from this new unfavourable regime constitutes
a selective advantage to the latter.
Pragmatic test
29. ……It is common ground that the concept of pragmatism
cannot mean that there is a discretion in the evaluation
of state aid under Article 87(1): no such discretion
exists.
30. If that is the case then it must be asked what the
concept of pragmatism adds to analysis……the test of state
aid is a legal test set out in case law and Commission guidance.
If the legal criteria of state aid are satisfied, then the
measure is unlawful unless notified to the Commission; there
is no room for any further test of pragmatism or common
sense which could change the result of that analysis.
WTO Agreement on Subsidies and Countervailing Measures
(SCM)
31. The Commissioners rely finally, on the SCM agreement.
They argue that it can 1) it can provide an informative
analogy and 2) under that agreement IR35 would not be a
countervailable subsidy.
32. They are wrong in both respects……….
FREE MOVEMENTS
35. The appellants submit that IR35 infringes the free
movement rules of Articles 39, 43 and 49. The application
of these provisions is a well-known two stage test as accepted
by Burton J.
a) do the measures constitute a prima facie infringement
of one or more of the provisions;
b) if so the onus is on the member state to show that the
restriction is both justified and proportionate.
36. In essence, the learned judge found that there was
no prima facie infringement of Articles 39 and 43 and that
there was a prima facie infringement of Article 49 but that
it was justified and proportionate. The Commissioners assert
additionally that there was not even a prima facie infringement
of Article 49.
37. The appellants case is that the general approach of
Burton J was incorrect; that IR35 constitutes a prima facie
infringement of Articles 39, 43 and 49; that it was not
justified; and that in any event it does not satisfy the
requirement of proportionality.
The impediment to free movement
38. The appellants evidence was that the IR35 provisions
are so prohibitive and discriminatory and creates such intolerable
uncertainty as to employment and tax status that they deter
service contractors in other member states from exercising
their free movement rights…….
40. ……the measures in issue here are genuinely non-discriminatory
on the grounds of nationality but impede free movement as
described above……this kind of rule has been termed a ‘neutral’
restriction on free movement.
42. ……general principles make clear that there is no requirement
that the measure involves discrimination or dislocation,
whether in Articles 39, 43 or 49. On the contrary all three
provisions include cases of neutral restrictions on free
movement.
43. Burton J held that while Article 49 did extend to neutral
restrictions, Articles 39 and 43 did not.
44. This is clearly contrary to the case set out above
which does not differentiate between the three provisions.
Article 39 (workers)
45. Burton J held that IR35 did not infringe Article 39
on the grounds that the case law on this provision only
covered cases of discrimination on grounds of nationality
or discrimination on grounds of dislocation.
46. However, the case law on Article 39 has consistently
made clear that neither discrimination on grounds of nationality,
or discrimination on grounds of dislocation.
Article 43 (establishment)
51. The learned judge held that IR35 did not infringe Article
43 on the grounds that the case law on this provision only
covered cases of discrimination on grounds of nationality
or discrimination on grounds of dislocation. This made the
same error of law as in the case of Article 39.
52. Equally, as with Article 39 this conclusion is wholly
incorrect.
Article 49 (services)
55. By contrast with his approach to Articles 39 and 43,
Burton held that the neutral IR35 provisions did arguably
amount to a restriction under Article 49…..the Commissioners
contest this conclusion.
No requirement on total prohibition on supply of services
65 The Commissioners second argument is that the cases
cited by the appellants “concern the total prohibition on
supply of services”, which they accepts is manifestly a
restriction on the supply of services.
67 … the application of Article 49 is not restricted in
either of the ways contended for by the commissioners.
Justification
68 Burton held and the Commissioners have contended that
even if an infringement of free movement rules exists, the
measures are justified.
69 It is common ground that the Treaty and the case-law
of the court establish two categories of justification for
a restriction of free movement.
70 The first category is that of justification on the grounds
of public policy…
71 The second category is a judicially-developed justification
… where the court will permit certain restrictions to be
justified on the grounds of “imperative requirements in
the public interest”.
72 This second category of justification is relied upon
by the commissioners in the present case.
73 Burton held and the commissioners contend that the imperative
requirements/overriding reasons justification can include
prevention of tax avoidance and/or diminution in tax revenues.
The appellants submit however that such justification is
not in any case a permissible ground of justification for
a restriction of free movement rights, whether concerning
workers, establishment or services.
74 The dispute between the parties centres on three questions:
a) whether as a general principle economic aims may constitute
imperative requirements/overriding reasons in the general
interest.
b) whether specifically tax avoidance and/or diminution
in tax revenue may constitute imperative requirements/overriding
reasons in the general interest.
c) whether in the alternative the commissioners may rely
on an equal treatment justification.
General principle: economic aims
75 Both categories of justification … are subject to the
qualification that the justification cannot serve economic
ends.
79 It is now established that the qualification … applies
not only to the Treaty derogations, but also to the judicial
justifications of imperative requirements/overriding reasons.
80 The commissioners ONLY attempt at answering this point
is to criticise the appellants for “failing to distinguish
between the movement of goods, workers and services” and
to claim that none of the cases referred to concerned legislation
against tax avoidance which discriminated neither on the
grounds of nationality or dislocation.
81 This entirely misses the point. The statements made
by the court… are unequivocal in applying generally to ALL
the fundamental freedoms.
Tax avoidance and diminution in tax revenue
83 …the court has drawn a distinction between certain types
of tax measures which may or may not be legitimately justified
on the grounds of public interest.
84 On the one hand the court has never denied that a member
state may legitimately adopt measures to ensure the proper
enforcement of its laws… Equally a member state may adopt
measures to prevent ILLEGAL ACTIVITIES such as tax evasion
or tax fraud.
85 On the other hand a member state may NOT justify a restriction
on the grounds of raising revenue or preventing (legal)
tax avoidance activities.
87… it is manifest that … the specific rejection of tax
avoidance measures applies generally to any measure which
is contrary to a fundamental freedom, whether goods, workers,
establishment or services.
88 The commissioners dispute this…
90 The stark difference between the state aid and the free
movement provisions lies in the fact that by its nature
an aid is a “unmarketlike advantage” … In order to prove
that a measure is not an aid, therefore, the members state
MUST show that the measure is economically justified.
91 …the court has consistently asserted that economic aims
CANNOT justify interference with the fundamental Treaty
provisions on free movement.
93 The commissioners third argument consists of an entirely
incomprehensible series of assertions …
94 …it should be noted at the outset that the commissioners
entirely confuse fiscal supervision, fiscal cohesion and
tax avoidance…. The one and only justification put forward
has consistently related to tax avoidance.
98 The commissioners can therefore not avoid the conclusion
that a measure which restricts a fundamental Treaty freedom
may not be just be justified on the grounds of either tax
avoidance or diminution in tax revenue.
Equal treatment
99 As a “last shot” the commissioners in their skeleton
argument argue that the aim of the contested legislation
is not simply to prevent a reduction in tax revenues but
is also intended to ensure equality of treatment.
100 As is evident from the commissioners failure to adduce
any authority for this proposition a reference to “equality
of treatment” has not ever been recognised as an imperative
requirement of overriding reason which may justify an infringement
of a fundamental Treaty freedom.
101 … the appellants submit that on the contrary there
are strong reasons against allowing such a justification.
102… Even if permissible in law, however, the claim of
justification on this ground is simply untenable on the
facts. Regarding the situation pre-IR35, the indisputable
fact is that all companies providing contracting services
were taxed according to the same rules whether they were
small, medium or large. The difference in treatment occurs
post-IR35.
103 Moreover, the evidence shows that the legislation far
from levelling the playing field creates a large imbalance
between the affected contractors and their competitors.
Proportionality
105 The commissioners do not appear to dispute the test
of proportionality put forward by the appellants… The burden
of proof is on the member state when seeking to justify
a restriction on free movement, to establish that the measure
is proportionate.
106 Burton found that the measures were suitable and necessary
for the objective pursued and further that it was appropriate
for him to consider other less restrictive means of attaining
the objective sought by canvassing other possible methods
of fiscal reform. The appellants submit that both findings
were incorrect.
Suitable and necessary
108 One oft=repeated explanation of the commissioners has
been that a worker providing services to a client through
a service company who would have been regarded as an employee
but for the existence of that company, should be taxed on
the same basis as an employee of that company or of a large
contracting company.
109 However IR35 is neither a necessary nor a sufficient
means of achieving that objective; it goes both too far
and not far enough.
110 First, as the appellants have repeatedly explained,
the mechanism of IR35 and the commissioners reasoning behind
the legislation is based on an incorrect comparison of the
gross revenue of a service company from a particular engagement
with the salary of an individual employee from the same
engagement.
111. However the commissioners logic – and the conclusions
drawn from it in the mechanics of IR35 – is utterly flawed
and demonstrates a fundamental misunderstanding of the workings
of small businesses.
112 The result is that far from achieving tax neutrality
between a worker of a service company and an employee, IR35
renders the tax liability in respect of the workers significantly
greater than the tax liability in respect of an employee.
114 … if the revenue’s concern is to ensure that employment-like
services should be taxed under Schedule E, then IR35 falls
FAR SHORT of that aim, since it excludes the many engagements
undertaken by employees of large service providers, which
would equally have been employment had there been a direct
contract between the worker and the client.
115 The commissioners only answer to this is that this
leaves out of account the governments intention to address
situations where a single worker can influence what happens
to money received by his employer for work he has done.
If that was the intention, however, IR35 equally does not
achieve that. The provisions do not, anywhere, include a
test , of whether a worker on a particular engagement can
influence the direction of fees from that engagement. Rather
the provisions refer to an entirely different test of whether
the worker has a 5% or more shareholding in the company.
116 … Far from presenting a coherent, logical and proportionate
response to a defined problem, the 5% “material interest”
test sets an arbitrary threshold which has little or no
correlation with the purported aim of the legislation.
Least restrictive: judges wrong approach
117 Burton declined to consider the question of whether
the IR35 measures were in fact the least restrictive means
of achieving the aims sought. This was however contrary
to the requirements of a national court considering the
proportionality test.
118 Moreover as the European Court has recently stated
… the rigorous requirements of proportionality apply even
in the fiscal sphere.
119 It follows that while Burton did not have to opine
on the appropriateness or otherwise of specific alternative
fiscal means available to the government, he DID have to
decide under the principle of proportionality whether the
commissioners had demonstrated that IR35 was the least restrictive
means available to achieve whatever aim was put forward.
120 The commissioners in their skeleton argument do not
even attempt to address this serious error. Their only comment
is that the appellants had failed in any event to identify
any realistic alternative…
121 However
a) It is not for the appellants to identify a realistic
alternative. As set out above the burden of proof is on
the Commissioners…
b) The Commissioners noticeably fail to mention in their
list of possible alternative measures the suggestion by
the Appellants of payment of a minimum salary before dividends
became payable. The Commissioners response to this suggestion
in the witness statement of Sarah Walker was that it would
have been unfair to specify a single minimum salary which
would cover the range of occupations where service companies
are used. However, Sarah Walker goes on to admit that IR35
“does require a minimum payment of tax and NICs based on
the assumption of a minimum salary (though it does not require
any amount of salary to be paid)”. This admission which
betrays the truth of IR35; that it bases income tax and
NICs on an assumption of a salary equivalent to 95 per cent
of fee income, regardless of the true requirements and expenses
of the service company and entirely regardless of whether
or not that salary has been paid. The Commissioners have
not even started to explain how a measure this onerous and
unfair could be the least restrictive means available to
them to combat any perceived tax avoidance.
Last update: Wed Dec 5 15:08:10 2001
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