Contractors lose IR35 appeal

The Court of Appeal ruled on Friday morning that IR35, the controversial tax on self-employed contractors, is not illegal, rejecting claims from the Professional Contractors Group (PCG) that the legislation broke European law.

Speaking after the verdict was announced, the PCG's chairman announced that the battle was not over. "The judicial review was one part of our overall strategy but was not the whole part. It represented one possible knock-out blow for this unfair legislation," said Jane Akshar.

The PCG has said it will continue to campaign against IR35 by increasing its pressure to drive through relevant case law and by forging stronger links with clients and industry bodies.

The group argues that contract workers could flee UK companies by the thousands if IR35 is left in place, heading to countries that do not have as heavy a tax burden.

"The court has found that IR35 is not illegal, but that is not to say it is right or fair. Tens of thousands of small businesses have to try to operate with the uncertainty and unfairness of it and the PCG will continue to do all we can to remove this unfair burden on small business," Akshar added.

In a statement, the Inland Revenue said that the government was pleased to have won the case, and claimed that the uncertainty over IR35 has now come to an end.

It also warned that those affected by IR35 must pay all their tax and national insurance contributions by the end of January 2002.

The PCG believes that the Inland Revenue does not understand the role of contractors in the IT industry, and is now planning to bring a series of test cases to the courts early in 2002. "For the past few months, we have been preparing to launch a series of legal test cases, which will establish case law where there is currently a vacuum. We will drive through case law which is relevant to the way knowledge-based businesses, such as IT and engineering, operate in the 21st century, rather than the 'upstairs, downstairs' rules which belong in the 19th century and are currently in use by the Inland Revenue," explained Akshar.

The Professional Contractors Group (PCG) has led the battle against IR35. It took its case to the Court of Appeal after losing a judicial review back in April.

Under IR35, self-employed workers are forced to pay more tax if the Inland Revenue decides that they are effectively employees of the company they are contracted to.

Government ministers, and the Inland Revenue, have claimed that IR35 will stop employees resigning and then carrying on doing the same job as a contractor -- the "Friday to Monday" syndrome.

Such a scheme can be financially rewarding for the employer, who can avoid paying national insurance contributions and providing benefits such as sick pay and holidays.

The contractor can also pay less national insurance on gross income by declaring some of it as a company dividend rather than as salary.

The PCG has calculated that a contractor caught by IR35 could end up paying 38 percent tax on earnings, compared to the 32 percent paid by larger rival companies.

In court, the PCG argued that IR35 broke European law because it constituted illegal state aid -- as large corporations won't be affected, while some small businesses will -- and also restricted free movement in the EU.

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