IR35 Case 1 - IR35 and Human Rights and European Legislation
Key lessons from this case
- Highlighting the key test of IR35 – if you had a direct contractual relationship with your client would you be regarded as an employee of the company?
- If regarded as an employee for tax purposes, although not technically by law, then the way your income tax and NICs (National Insurance Contributions) are paid is radically changed
- Income from the client to your company is treated and taxed as personal income by you and costs and expenses can only be charged as if you were an employee
- Attempts by the IT-led Professional Contractors Group (PCG) to challenge the law under EU legislation were allowed to proceed and are summarised in Case 2.
Summary of the case
Background
Following the introduction of IR35 provisions in 1999 and the supporting legislation becoming law in 2000, the implications of the provisions were put before the Royal Court of Justice. The implications were felt to be far reaching, beyond the obvious financial disadvantages with personal services companies and contractors having to pay a higher rate of tax and NICs at different times of the year.
Why did the Inland Revenue act?
The IR was defending its IR35 related legislation and felt that it was justified in its actions in introducing the IR35 provisions. Its view was that IR35 would only affect those contractors deliberately using personal services companies as a tax shield, and would not stifle small companies′ abilities to innovate and compete in the wider marketplace.
Why did the contractors appeal?
The Professional Contractors′ Group Ltd represented 11,000 mainly IT based consultants, contractors and service companies. They considered that the IR35 provisions were unlawful because they contravened European laws and the Human Rights Act by:
- Placing a disproportionate tax burden on small knowledge-based companies, reducing their ability to compete with larger, mainly IT services related, larger companies
- Providing unofficial state aid, illegal under EU law, to larger companies in the UK and Europe
- Preventing the free movement of labour within Europe by offering a less attractive tax regime and competitive marketplace in the UK, so that contractors from other European states would be less likely to work in the UK
- Introducing a level of uncertainty as to the status of different contracts performed by service companies and contractors during a given financial year
- Infringing the general principles of the rights to "enjoy property", ie the equity held in the service company, allowed under the Human Rights Conventions.
Who won and why?
In this preliminary hearing, the Professional Contractors′ Group were granted the right to proceed to a full hearing. The Judge felt that the case was justified because:
- The Professional Contractors′ Group had satisfied the minimum threshold required to demonstrate they had a case that deserved a full hearing in court
- It was demonstrated that IR35 could potentially damage or drive out of business small knowledge-based contractors and personal services companies
- IR35 could favour competing larger companies offering the same services in the sector
- Some of the issues could only be resolved when considered in more detail at a full hearing.
Click here for full details of the case
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