On 2 April Mr Justice Burton ruled that IR35 does not contravene EU law. This is a point that the Professional Contractors Group may still seek to challenge at the Court of Appeal. But in any case it is important to understand what this ruling means.
Justice Burton found in favour of PCG on all significant points of fact, and delivered a damning critique of the Inland Revenue’s implementation of IR35, from the ‘colourful language’ of the press release to the guidance it has issued to its own inspectors.
He did not rule that all contractors must henceforth pay tax under IR35.
On the contrary he emphasised that if a contractor is ‘in business on his own account’, according to the case law on employment, IR35 will not apply. The judgment effectively rewrites the Inland Revenue’s status manual, overturning its guidance on substitution, mutuality of obligation, and ‘standard’ contracts.
He went further and said: ‘Clearly some uncertainty could be resolved by the drafting, agreement and approval of a series of acceptable new standard forms.’ This is a matter in which the PCG will seek the co-operation of other industry bodies and the Inland Revenue.
His remarks in court that contractors affected by IR35 would have a good case for claiming employment rights may alarm some clients. But it is important to understand the converse: that a contractor who is outside IR35 is also outside employment law. It is now in everyone’s interests to find forms of contract that give effect to the mutual intention – to form a consultancy agreement, not an employment contract.
The fight against IR35 will certainly continue. IR35 has become a byword for poorly considered and illogical legislation. IR35 means that company owners can make a profit out of work done by their employees, but cannot do so if they perform the same work themselves; that large companies and small companies providing exactly the same services will be taxed differently, the small company being taxed on turnover instead of profits; that consultants whose shareholding in their consultancy company goes up from 4% to 5% will risk being treated as an employee of their clients, landing their consultancy with a big tax bill.
The emphasis will now shift to fighting individual status cases before the tax commissioners and the courts. The PCG will be helping its members to establish that the provision of professional consultancy services is indeed a genuine business.