IR35 High Court showdown begins

Anti-IR35 campaigner the Professional Contractors Group (PCG) this morning went head to head in the High Court with representatives from the Inland Revenue, in a bid to have the controversial legislation overturned.

In a hearing lasting up to three days, the PCG will argue that IR35 is unfair because it taxes one-person businesses more harshly than larger organisations, effectively providing ‘state aid’ to large IT contracting companies.

The body, represented by Gerald Barling QC, believes this contravenes European Union competition law.

IR35 regulations came into force in April last year, and removed many of the tax advantages previously held by contractors who operated through personal services companies.

The PCG argues that the legislation is forcing IT contractors to seek employment outside the UK, a claim that has been vehemently denied by the Inland Revenue.

The government has said that there is no evidence that a significant number of IT consultants were moving overseas as a result of IR35, and that the rules ensure that everyone who meets the accepted definition of an employee pays tax on broadly the same basis.

The IR35 debate mobilised contractors throughout the UK, leading to the formation of the PCG, which now boasts 10,000 members. Today’s case follows the PCG’s victory in a hearing in October last year.

In the High Court hearing the PCG will argue that the IR35 legislation should be scrapped for the following reasons:

• It is incompatible with European Community (EC) law as it constitutes state aid to large consultant companies prohibited by the EC Treaty, and does not have the approval of the European Commission, making it therefore illegal.
• It infringes articles of the EC Treaty by creating unjustified obstacles to the free movement of workers, the right of establishment and the freedom to provide services within the EC.
• It is in breach of the general principles of law and Human Rights provisions.

The Inland Revenue will defend IR35 legislation along these principles:

• Its purpose is to ensure that everyone who meets the accepted definition of an employee pays tax on broadly the same basis.
• It does not attack entrepreneurs or those who run their own companies, nor is it targeted at the IT industry.
• It stops full-time employees posing as contractors to avoid paying tax at the 35 per cent rate.

Also published on accountancyage.co.uk