IR35 tax battle hits the courts

Professional Contractors Group takes its claim -- that IR35 is an illegal tax boost for big business and restricts the free movement of workers -- to a judicial review

The conflict over the government's controversial IR35 tax hit the High Court on Tuesday morning, as representatives of the UK's independent IT and engineering contractors took their claim that IR35 is illegal to a judicial review.

IR35, which was introduced in the March 1999 Budget, treats some IT self-employed contractors as permanent employees for tax purposes. The Professional Contractors Group (PCG) claims that it penalises individual IT contractors and small businesses because they are forced to pay more tax than their larger rivals -- 38 percent compared to 32 percent, according to the PCG.

In the judicial review, which could run until this Thursday, the PCG will argue that IR35 violates European law because it is in effect a tax break for big business. It will also claim that it creates unjustified obstacles to the free movement of workers within the European Community.

IR35 is also opposed by the Confederation of British Industry and the Institute of Directors. The Conservative Party has already vowed to repeal the law if it wins the next election.

The government rejects accusations that IR35 is unfair. Speaking on BBC Radio 5 this morning, e-minister Patricia Hewitt denied that the government was out of step with other countries. "IT workers who move abroad will find that, in most cases, similar taxes are already in operation," Hewitt claimed.

According to a PCG survey, at least 368 IT contractors have left the UK to work in other parts of the world since IR35 was introduced.

For complete business coverage, see ZDNet UK's Enterprise Channel.

Take me to ZDNet's Small Business Special.

Have your say instantly, and see what others have said. Click on the TalkBack button and go to the ZDNet News forum.

Let the editors know what you think in the Mailroom. And read other letters.