The High Court on Friday denied a software contractor's challenge to the IR35 tax regime in a case that a contractors' group called "a bitter blow" for the UK's 100,000 IT freelancers.
The court decided against IT consultant Gordon Stutchbury in his challenge to Inland Revenue's decision that he was a "disguised employee" of one of his clients, and therefore fell into the IR35 tax category.
IR35 was created to eliminate a loophole by which IT contractors could effectively work as full-time employees of one of their clients, while being taxed at lower contractors' rates, but confusion has arisen over which contractors should be covered by the rule.
Former police officer Stutchbury founded his software consultancy, Synaptek, in 1990. Following Friday's ruling, Stutchbury will have to pay more than 50 percent of his company's turnover in tax, according to the Professional Contractors Group (PCG), which backed Stutchbury in the case.
"This is a bitter blow for Britain's freelance community," said a PCG spokesman. "After three years of confusion, we are no closer to knowing who's inside the legislation and who's outside."
However Anne Redstone, Tax Partner at Ernst & Young, argued that other contractors could fare better than Stutchbury if they had professional advice from an early stage in any IR35 dispute. "Everybody needs to get good advice before they see the tax commissioners," she said. "It is very difficult for the high court to overturn the decision of the commissioners."
Shout99, a network for freelancers, said that the case should not be seen as the death knell for contractors wishing to remain outside of IR35 taxation. "This was a confused and uncertain case which was not typical," said Shout99 founder Andy White. "While it is unfortunate for the individual concerned, it would be a much bigger loss if thousands of freelancers lost heart and volunteered to pay the tax when they still may not need to."
Freelancers have until 19 April to volunteer to pay IR35 tax.
Shout99 is offering a seminar on IR35-related issues on 10 April, called Threats and Opportunities for Freelancers.