10th October, 2000 - PCG wins permission to Judicially review IR35

In the Administrative Court today Mr Justice Gibbs gave permission to the Professional Contractors' Group to Judicially Review the IR35 provisions. PCG had maintained that it had a case which was fit for further consideration by the Court at a full hearing, and that its case was clearly arguable.

PCG seek to set aside the IR35 provisions on the basis that:

• they constitute a prohibited State Aid in that large and small consultancies in the sector are treated differently for tax purposes.
• they create obstacles to the free movement of workers and the right to provide services within the European Community
• they infringe the EHCR now enforceable in England via the HRA

The Inland Revenue contended that the measure could not be a State Aid as it did not confer an advantage on large companies because IR35 does not provide for taxation of companies at all. Mr Justice Gibbs indicated that it is artificial to suggest the legislation has no effect on the companies who are members of PCG.

There will be a full trial, likely to last about three days, not earlier than 5th February 2001.

For those unable to attend the hearing at the High Court on Monday 9th October, here is a brief sketch of the days' proceedings (Many thanks to Jon Antell) The hearing took place before Mr Justice Gibbs in Court 57 at the Royal Courts of Justice in the Strand in London. The public seats on the left hand side of the court room were almost completely filled by PCG members with one or two journalists taking notes.

On the left hand side of the benches PCG's leading counsel Gerald Barling QC stood in the second row with our junior counsel behind and staff from Bond Pearce, our solicitors, behind her with Tony Askham in the front row.

The opposing side were on the right hand side, leading counsel in the second row, junior counsel behind, and no less than three people in the solicitor's bench behind that. In addition Inland Revenue officials were there in force. Sarah Walker sat in the front bench with two colleagues and for much of the hearing she defied convention by turning her back to the judge and staring intently at Mr Barling, grimacing occasionally when Mr Barling made a remark that she was not wholly in agreement with.

Mr Barling started by explaining that, most unusually, this was an opposed permission hearing. Before an Application for Judicial Review can be heard, the Applicant must obtain permission from the court. Permission hearings are usually short because all the Applicant has to show to get permission is that it has an arguable case. In this case the Revenue instead of being content to defend the case at the substantive hearing, were actually opposing the granting of permission and arguing that the case was so obviously hopeless that it should not even be given permission to proceed to a full hearing.

Mr Barling then outlined our case. The first ground of challenge was that IR35 amounted to unlawful State Aid to large companies in the Knowledge-based sector because they were exempt from the increased taxation levied on their smaller competitors. The case law showed that State Aid was unlawful if it had the effect of distorting competition whatever the intention of the legislation might have been. In addition whether competition was distorted was to be determined by the competitive position immediately before the measure was introduced. Thus even if it were true that IR35 simply 'levelled the playing field' the permission of the European Commission was still required and implementation of the measure without such permission would be unlawful State Aid.

After the lunchtime adjournment, Mr Barling outlined the second ground of challenge, that IR35 breached the Right of Establishment, that is the right of a national of any EU member state to move to or do business in any other state. The uncertainty created by IR35 with its use of the already uncertain employment tests coupled with the additional uncertainty caused by the fact that the employment tests had to be applied to a hypothetical contract, deterred knowledge-based businesses from operating in the United Kingdom.

There was also a third ground of challenge, that IR35 amounted to confiscation of property contrary to the European Convention on Human Rights, though Mr Barling indicated that this third ground was added for completeness and was unlikely to be decisive.

At 3.00 p.m. counsel for the Revenue rose to make his reply. PCG's case, he said, was built on a simple fallacy. When that fallacy was exposed, all the complex argument and evidence which rested on that fallacy must fall away. The fallacy was the oft-repeated but completely untenable statement that IR35 was aimed at small knowledge-based companies. The legislation did not mention any particular sector and it was not aimed at companies. It was a personal taxation measure only. It was a general measure which applied across the board. It might impact on some individuals more than others because some individuals came within the criteria whilst others did not, but that could not be unlawful state aid otherwise all progressive taxation would be unlawful. EU case law allowed a margin of appreciation to members states.

Mr Barling replied briefly. It was aimed at the knowledge-based sector because the Revenue's own guidance gave 3 examples of the application of the employment rules, all of which were IT or engineering. The key feature of the knowledge-based sector was that the worker typically took nothing to the client's site except his brain, no tools we used and no goods were supplied, so unlike a craftsman with tools, an knowledge-based worker faced great uncertainty as to whether he would come within the employment tests. The evidence was that it did affect companies, indeed the original IR35 press announcement referred to the fiscal advantages of a corporate structure being exploited by Monday to Friday workers. But, in any event, it was the effect of the measure which mattered not the intention behind it, and the evidence was that it did affect small knowledge-based contracting companies by favouring their larger competitors.

Text of this article by Jon Antell, PCG member and Barrister

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