3rd April, 2001 - JR Ruling

Members will be aware that we received a ruling on the JR hearing today.

Mr Justice Burton’s judgement extends to 101 paragraphs.

In summary, his judgement is that the IR35 legislation is not illegal under EU law. However, on the factual arguments between the PCG and the Revenue, the judge overwhelmingly agreed with our evidence. He ruled that, as the PCG has always claimed, we do compete with larger companies who are exempt from IR35 but who provide the same services as us. He also found as a fact that the effect of IR35 will be that some contractors may move overseas and thus trade between member states of the EU will be distorted.

It has obviously been an extremely busy day for all concerned – and for the PCG webserver, which has seen record page requests and has on occasion, struggled with the load. We apologise that the service has intermittently been unavailable for this reason; but already things are calming down now, and we are back to normal.

The full judgement is available in the members

Members particularly interested in the points on guidance should look at paragraphs 47 to 51 of that document; a summary is included below.

Although the judge found against us on the technical points of law presented, there were some very positive aspects to the judgement. The judge criticised the Revenue’s published guidance which he said was often “neither clear nor helpful”. He emphasised that the Revenue had a duty to apply the common law of employment and criticised their statement that contracts over one month on standard terms will always be caught by IR35. Each contract must be considered on its merits and such a blanket rule was inappropriate. He also criticised the Revenue’s emphasis on the contents of written contracts – particularly the agency/client contract which the contractor may never have seen – to the exclusion of other evidence. Such contracts were only part of the picture, he ruled. He also dealt with substitution: “There appears to be…a too inflexible approach by the Inland Revenue…[it] would not be right to make an absolute statement, as the Revenue appears to do…that the need to obtain the client’s permission necessaril y negates the existence of a right to substitution, and/or points to employment”.

He said that the issue of being in business on ones own account was key. “The question of whether the [contractor], prior to that engagement, [is performing] or will subsequently, after the termination of that engagement, perform services for others, and is to be construed as carrying on business on his own account, is and must be a central consideration”.

He also criticised the IR35 press releases. “It seems…to have been assumed, without any or any adequate research, that all service companies fell within [the Friday to Monday scenario]”. “It appears to me wholly regrettable and unnecessary that such colourful language was used in the first press release.

However although the judge found in our favour on these disputed factual issues, he found against us on points of law. The State aid to our larger competitors was, in his judgement, not sufficiently specific to a particular industry to be unlawful under EU law. The legislation may affect our sector more than other sectors but that, he decided, is an incidental effect of legislation which is framed in general rather than specific terms.

As regards freedom of movement, the judge ruled that the legislation did not discriminate on grounds of nationality and was not therefore illegal under EU law. He added that even if he was wrong on that and IR35 did represent an impediment to free movement, it was nevertheless justified as an anti-tax avoidance measure.

It is clear to all that although we have not got rid of IR35, the Judicial Review has moved the goalposts significantly – and moved them our way. Businesses that were assessed as caught by the Revenue must urgently reconsider their position. As today’s issue of the Evening Standard says, the Revenue faces “chaos”. PCG is urgently seeking a meeting with the Revenue to determine the best way forward in the light of the judge’s comments.

Members wishing to get up to speed on the ruling may find it easier to refer to some of the comments published in the JR discussion forum, where some interpretation of the ruling is now available (comments from Kevin Miller & NeilW).

Susie Hughes
(Head of Executive Services)

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