IR35 Case 2 - IR35 and Human Rights and European Legislation
Key lessons from this case
- IR35 provisions have been challenged in the High Court by those companies it will most dramatically affect, and the challenge was rejected
- Many contracts between personal services companies and contractors could be treated by the IR as direct employment
- Advice from the IR about whether a contract is direct employment or not has been contradictory.
Summary of the case
Background
After IR35 was announced in 1999, around 11,000 personal services companies/contractors, mainly in the IT sector, gathered together to form the Professional Contractors′ Group Ltd (PCG). The PCG challenged the legality of the IR35 provisions in the High Court on a number of grounds. They satisfied the Judge at a previous hearing in October 2000 that the PCG had legal grounds to challenge the IR about the legality of the IR35 provisions. This case is summarised in Case 1.
In the full details of the case the Judge summarises in detail the advantages of working through a personal services company and the legislative changes introduced by IR35.
Why did the Inland Revenue act?
The IR continued to maintain their stance that the IR35 provisions were introduced to close a loophole that allowed contractors who, if they were not working through their intermediary personal services company, would be employees and pay tax and National Insurance Contributions (NICs) as if directly employed.
In an attempt to mitigate the potential response from the many companies potentially affected by IR35, the IR issued a second more conciliatory press release stating their aim was only to ensure fairness across the board in taxation and NI contributions.
Why did the contractors appeal?
The PCG considered that the IR35 provisions were unlawful under EU legislation in the following ways:
- IR35 places an unfair tax burden on small knowledge-based companies
- Larger companies not affected by IR35 were given an unfair cost advantage and unofficial state aid
- IR35 would restrict the free movement of labour, because contractors from elsewhere in Europe would view the tax regime as unfavourable
- The uncertainty of not knowing whether or not a contract was subject to IR35 caused unnecessary suffering
- There is an added compliance burden on small companies, by them having to run additional payroll and accounting systems
- Human Rights laws allow the free enjoyment of property, in this case a contractor′s company, which IR35 technically restricts.
Who won and why?
The IR won the case and the Judge rejected all the legal arguments by the PCG. Specifically, the Judge reported:
- Human Rights laws do not apply as the increased tax is not viewed as a confiscation of property, and there are enough tests to determine employment status to remove uncertainty
- European case law does not support IR35 as unlawful state aid
- There is no discrimination under IR35 of citizens of different member states, so there is no barrier to freedom of movement
- The IR demonstrated a clear justification for the creation and implementation of the IR35 provisions as a legitimate action against tax avoidance.
The result of this case means that all the provisions of IR35 can continue to be enforced by the IR, and that EU law allows no grounds for defence.
Click here for full details of the case
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