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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