14th March, 2001 - Judicial Review

DAY 1 (Monday, March 13, 2001)
Close to a hundred PCG members made it down to the High Court in London on Tuesday morning to cheer on the legal team challenging IR35. The Cheshire Cheese on Little Essex Street has been turned into a temporary war room and home for the next three days.

The case began at 10:30, with the judge, Mr Justice Michael Burton, explaining that he had only received the court documents late on Monday. As he had only a few hours to scan through a mountain of documents, the hearing started off more or less from scratch, with basic explanations of IR35 and the contracting industry. It’s possible, therefore, that the case will overrun the three days scheduled. If this happens, the court will reconvene on Monday 26th March. However, the judge understands the urgent need for clarification for contractors, and there will be a decision before 19th April. But members should remember that the judge could decide after the hearing to refer the case to Europe, although neither the PCG, nor it appears, the Inland Revenue, are pushing for this.

As the judge was unaware of how the contracting industry operates, and held many of the same preconceptions PCG members have encountered in explaining IR35 to our MPs and other parties. Counsel for the PCG, Gerald Barling, spent most of the first day explaining to the judge the *true* nature of the contracting market. He asserted that the Inland Revenue’s depiction of the industry – “disguised employees” competing with permanent employees – is simply wrong.

In hearing the case, the judge is attempting to thoroughly test the arguments put before him. When he is satisfied that he has understood the evidence put before him, and which arguments he considers watertight and which he will ignore, he will make his decision. So sitting in the courtroom, the atmosphere seems rather confrontational, as the judge challenges Barling at every turn.

The crux of the case is the competition contractors face in the market. The Inland Revenue insists that we only compete with the permanent employees of service providers and in-house IT departments. Gerald Barling spent most of the first day explaining that the Inland Revenue’s ideas of how our market works is wrong – we are small business actually competing with large service providers.

In exploring the competition issues of IR35, the judge challenged Barling on several points:

• The large service providers “bodyshop” contractors and permanent staff to their clients. The PCG can prove contractors do in fact work alongside these “bodyshop” employees – clear evidence of actual competition between contractors and larger companies.
• The Inland Revenue has placed an arbitrary ceiling of 5% on expenses. PCG research shows that contractors actually spend an average 16.6% of turnover on expenses. The judge suggested that the Inland Revenue should simply raise this ceiling to a more realistic level, to which Barling countered that no other business in the economy faces a restriction of this kind.

The other area of debate was whether IR35 is proportional or fair. The Inland Revenue insists that the measure is *not* just targeted at those in IT or engineering. They maintain this is a measure to stop the so-called abuse of limited companies to reduce the amount of tax they take. Barling pointed to evidence that IR35 *is* targeted at our industries.

The judge had been under the impression that IR35 status would be decided on a year-by-year basis. He seemed very surprised when Barling informed him that Inland Revenue inspectors intend to decide IR35 status on a contract-by-contract basis. He was even more surprised that contracts between agency and client that the contractor may not even see could be used. Barling pressed the point that this creates unacceptable levels of uncertainty for contractors.

The judge pressed the PCG counsel over why contractors do not operate as sole traders. This is an argument Gerald Barling intends to explore in more detail when the court reconvenes for the second day.

DAY 2 (Wednesday, March 14, 2001)
The PCG judicial review team had expected the second day of the hearing to be bogged down in detailed legal arguments of little interest to those outside the legal profession. Instead, it was a morning of high drama, ending with a legal bombshell.

After hearing the last of the representations from the counsel for the PCG, the judge announced that in the event the PCG lose the case, he is minded to issue guidance with the authority of the High Court. The judge was highly critical of the Inland Revenue’s guidance. He suggested that if contractors could show a ‘willingness’ and “intention” to work for multiple clients, they should be outside of IR35.

So what does this mean for contractors? Well, the first point to make is that this does not mean the PCG will lose the case. It simply puts us in a ‘win-much better off’ situation. The worst that can happen now is that it will now be much easier for members of the contracting community to place their businesses outside of IR35. If you register your details on the Portal, or are actively involved in joint ventures with other contractors or businesses, you have signalled your intention to work for multiple clients, even if you are currently on contract to a single client. This could put you outside of IR35, if the judge carries out his intention to issue this guidance.

As a final piece of evidence, the PCG submitted the example of ‘the two contracts’. A firm of accountants submitted a contract on behalf of a PCG member last year for IR35 status assessment. Four months later, after numerous phone calls and written reminders, the judgement turned up – the contract had been deemed ‘caught by IR35’. However, the PCG judicial review team were informed late Tuesday night that a duplicate opinion had been received. The same contract, same company, same circumstances but deemed ‘outside IR35’ – by the same Tax Office. This was presented in court on Wednesday as clear evidence that even Inland Revenue inspectors have no idea how to decide IR35 status.

Mr Barling QC led the judge through several decisions of the European Court of Justice relating to the PCG’s two main points: 1/. Un-notified State Aid (which distorts competition by subjecting small companies to a less favourable tax regime than competitors such as EDS) 2/. Restrictions of free movement (including free movement of workers, freedom to provide services where they choose to and freedom to set up a business wherever they wish.

The judge indicated that the competition evidence focused primarily on the IT sector and asked for further information about other sectors represented by PCG and supporting evidence.

Although it was originally expected that the case would conclude after three days, it has become apparent that it will now last longer.

The PCG is posting detailed reports online after each session:

http://www.ir35update.co.uk

and is storing the archives of these reports on the forum notice board.

Susie Hughes
(Head of Executive Services)

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