Consultants working in the UK are anxiously awaiting what could be a landmark ruling in a High Court case that ended on Friday. The case is an appeal by IT consultant Gordon Stutchbury against a decision of tax commissioners that he was a "disguised employee" of one of his clients and therefore subject to the controversial IR35 tax.
The IR35 legislation came into force in April 2000. It treats small businesses in the knowledge-based sector as "disguised employees" for tax and National Insurance purposes, thereby preventing them, argue its critics, from operating on similar terms to their larger competitors.
Stutchbury, a 42-year-old former policeman from Sunderland, is being supported in his appeal by the Professional Contractors Group (PCG). He has run his IT consultancy, called Synaptek Ltd, for 12 years and at times employed up to four members of staff.
In early 2000, Synaptek was working for three clients. "I wanted to know for certain my status under the new rules, so I submitted all three contracts to the Revenue," he explained. Two of the contracts were found to be outside the IR35 legislation, which came into force in April 2000; but in the third, Gordon was found to be a "disguised employee" of EDS, through whom he was providing services to the Benefits Agency in Longbenton, near Newcastle.
Stutchbury began a long correspondence with the Revenue trying to persuade them he was not a "disguised employee" but eventually there was no alternative but to appeal to the tax commissioners. He lost his claim and took his appeal to the High Court, with the financial assistance of the PCG.
The PCG was set up specifically to lobby against the IR35 tax. It sought judicial review to have the legislation wiped from the statute books, arguing that it was illegal under European law. In 2001, the PCG lost its case.
However, in his appeal, Stutchbury quoted Mr Justice Burton's comments in that case: "It is essential to any consideration of the common law test, as to whether an individual is trading as an employee or as an independent contractor, that consideration should be given to whether he is in business on his own account." Burton had added that this "should be on every tax inspector's wall".
The General Commissioners found Gordon Stutchbury to be "in business on his own account", yet upheld the Revenue's decision that he was subject to IR35.
"I knew that if the Commissioners decision went against me, I would not want to continue running a business on those terms," said Stutchbury. He continued, "With company turnover taxed as personal salary, which with both employers and employees NI comes to more than 50 percent, there would be no scope for investment, and no chance to develop the products we had been working on for over a decade."
Stutchbury has since put Synaptek on hold, instead becoming an employee of an investment bank. The Revenue's tax demands have been paid, but, if successful, the ruling in his case against HM Inspector of Taxes may result in him getting a rebate. More significantly, however, the ruling could provide important guidance for the remainder of the UK's 90,000 small contractors.
The ruling is expected within two weeks.