IR35 against European law, say contractors

The UK government’s controversial IR35 legislation is heading for a legal challenge as lobbyists question its compatibility with European law.

The Professional Contractors’ Group (PCG) is taking its case to the High Court in an attempt to overturn the proposals, which it claims discriminate against single-person services companies. ‘We are saying that IR35 is contrary to European law,’ said Susie Hughes, spokeswoman for the PCG. ‘IR35 is wrong, unfair, unworkable and illegal.’

The PCG is expected to release full details of its case in the next two weeks. It has raised £500,000 from members to fund the action, and is employing the services of barrister Gerald Barling QC. Barling previously brought a successful case against the government, on behalf of holiday company Lunn Poly, which argued that the 1998 Finance Bill contravened European tax law.

The Inland Revenue rejected the PCG’s argument, however. ‘Ministers will study any legal challenge when it is put to them,’ said a spokeswoman. “But they are confident that the IR35 legislation is fair and proportionate, and is compatible with all relevant EU obligations.”

The IR35 legislation, which redefines the role of a contractor for paying tax, has now passed through Parliament and needs only Royal Assent to become law. It was formally introduced through the Finance Bill in April by Chancellor Gordon Brown. The government’s own figures estimate that 66,000 single-person service companies will be affected by the change.

IR35 was announced by the government in April 1999, after the Inland Revenue claimed full-time employees were evading tax and National Insurance by posing as contractors. The PCG estimates that between 400,000 and 600,000 contractors will be affected by the move. Some 43 per cent of contractors intend to look overseas for work, according to a survey carried out in March by recruitment firm DP Connect.

First published in Computing

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