Contractors win first IR35 battle

The Professional Contractors Group (PCG) today won the first round of its legal battle against the Inland Revenue over the controversial tax measure IR35.

The news followed an anxious wait by the founders of personal service companies after a High Court judge yesterday decided to reserve judgement until today on whether or not IR35 should undergo a judicial review.

After hearing arguments put forward by Gerald Barling QC on behalf of the PCG and Richard Plender QC for the Inland Revenue, Justice Gibbs gave permission for review.

IR35 regulations, which came into force in April, remove many of the tax advantages previously held by contractors who operated through personal service companies. The court reconvened at 10.30 this morning and a judgement was given a few hours later.

The PCG argued that IR35 is unfair because it taxes one-person businesses more harshly than other organisations, which it believes amounts to ‘state aid’ for large IT contracting companies. It has also said IR35 discourages contractors from trading in the UK and that IR35 contravenes the Human Rights Act.

But the Inland Revenue claimed the legislation ensures everyone who meets the accepted definition of an employee pays tax on broadly the same basis.

It argued that about 90,000 people working through service companies would otherwise be correctly taxed as employees.

The Revenue claimed these workers earn on average £50,000 a year, and of that they pay an average of 21 per cent in tax and National Insurance Contributions, compared with the 35 per cent which an equivalent direct employee would pay.

Members of the PCG immediately claimed IR35 should be dropped.

Gareth Williams, chairman of the PCG, said: “IR35 should now be suspended until this issue is resolved, and we ask the government to consider very carefully whether it should waste more tax payers money defending the indefensible. The government should now come clean – admit it made a mistake with IR35, repeal it and enter into proper consultation with the industry.”

First published on accountancyage.com