SUMMARY OF COURT OF APPEAL HEARING

Justice Burton found that PCG had established the facts of its case, but ruled against us on two points of law. On State Aid, he said that, while there was competition between PCG and its larger competitors, who were consequently advantaged, IR35 applied across all sectors on industry and so was a 'general measure' and not a state aid. On Freedom of Movement, he said that, while IR35 did present an obstacle to the movement of workers, it could be justified by the Government as a measure to prevent tax avoidance.

PCG was given permission to appeal, and Gerald Barling QC put the case to Lord Justices Auld, Walker and Dyson in the court of appeal this week. Barling argued that Justice Burton had been wrong on points of law. It was incorrect to say that a state aid must be confined to a single sector, and in any case it applied to the 'contract services sector', which was clearly defined in the IR35 legislation. PCG relied on the case of Lunn Poly, where it had been found that applying a higher rate of tax to services provided by travel agents, than to the same services provided by their competitors, was a state aid to the other companies.

Barling said that PCG members were not tax avoiders, and had done no more than take advantage of perfectly legal tax mitigation measures. On this point he had some assistance from counsel for the Inland Revenue, who said "it is no part of the Inland Revenues case that IR35 is aimed only at wholly artificial arrangements ... It is aimed at tax avoidance, or tax mitigation if Mr Barling prefers".

But whichever term applied, Barling said, it was well established that the Government could not rely on tax avoidance or mitigation as a reason to restrict free movement. There was no case law to support the idea that there was a lesser category of obstacles to which different justifications could be applied, and Justice Burton had been wrong so to hold. Such a finding would be an important new development in community law, and as such should be referred to the European Court of Justice. PCG relied on the Syndesmos case, in which tour guides working in Greece had been deemed to be employees when they would otherwise have been self-employed. This had been found to be restriction on free movement.

On both counts Barling said the law was clear and he urged the court to find in PCGs favour. But in the event the court was not clear on the points of European law, they should be referred to the ECJ.

For non-lawyers, the real meat of the argument was in the discussion of proportionality, where Barling savaged the sheer illogicality an unreasonableness of IR35. Its aims were unclear, and depending on the interpretation it went "both too far and not far enough".

If IR35 set out to tax the fees from all 'employment-like' engagements under schedule E then it failed to achieve that, because it excluded the large number of consultants employed by body-shops. If it sought simply to tax all the money paid to the worker, it went to far, by taxing sums needed to meet business expenses by the company, and never paid to the worker.

The comparison of a contractors fee with an employees salary was "wholly fallacious" since the fee had to pay for costs such as training, books and equipment that in the case of an employee would be met by the employer, but under IR35 were not tax deductible. Worker-owned contracting companies were allowed only 5% of their turnover to cover all their operating expenses, while expert evidence showed this was not nearly enough.

Furthermore, while being taxed as employees of their clients, contractors had been given no corresponding employment rights. This was a draconian piece of legislation, which had led businesses to close and skilled workers to move abroad.

Throughout most of the case the judges sat impassively, asking only for an occasional clarification. It was during the discussion of proportionality that Lord Justice Walker made quite a lengthy intervention. On the second day he had expressed apparent horror that PCG should have suggested reform of the National Insurance system as an alternative to IR35. On the third day he interrupted Counsel for the Inland Revenue to "think aloud".

There was a "huge gulf" between Schedule D and Schedule E, which had been with us since about 1842, he said. The Inland Revenue, perhaps understandably, might take the view that we were stuck with it, even if it was tough on individuals who found it sometimes hard to deal with, so they had come up with an "elaborate scheme" to bring contractors under schedule E. Would the alternative have been to "think the unthinkable" and bring schedules D and E closer together?

This was met with an audible release of tension around the court, as must have happened when a little boy said the emperor was wearing no clothes. Contractors and tax experts exchanged meaningful glances. The unthinkable had been thought, and the unsayable said.

Counsel for the Inland Revenue (perhaps unsurprisingly at this late stage) did not think this would have been more proportionate. This is unlikely to be a winning point, but it does illustrate how far the thinking of one judge (and an expert in tax law) had moved in the course of the hearing.

The hearing concluded in mid-afternoon of the third day, and judgment was reserved, without any further indication of how the judges were thinking. It is now up to them, and I know better to try to anticipate their decision. But as a layman who now knows more about EU competition law than any IT contractor decently ought, I don't see how, on the arguments presented, the appeal court could leave the lower courts decision entirely untouched.

Gareth Williams
7/12/01

Last update: Fri Dec 7 12:52:22 2001