IR35 Judicial Review result (IT Contractors) ?
02 April 2001, 11:34 AM
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Only of interest to IT contractors - but I'm sure there are loads of you on here.
Finally got onto the IR35 site (15 minutesto download 1 page) but I can't make head nor tail of the ruling.
Anyone offer any clarification ? did we win, am I going to be poor ?
Gary
Finally got onto the IR35 site (15 minutesto download 1 page) but I can't make head nor tail of the ruling.
Anyone offer any clarification ? did we win, am I going to be poor ?
Gary
02 April 2001, 11:46 AM
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Update ONE: 02/04 - 10:30am
Judgement has been handed down. The application by the PCG has been
dismissed.
Mr Justice Burton stated in the judgement: "With grateful thanks for the
extremely full and lucid arguments and research of counsel which have formed
the entirety of the bedrock for my conclusion, I dismiss this application."
Appeal was also dismissed on all counts.
However, Justice Burton has issued new directions to the Inland Revenue on
the implementation of IR35.
The High Court today criticised the Inland Revenue's tests for the stealth
tax IR35 and laid down new guidance to make them more relevant to the
knowledge-based sector.
The decision followed a judicial review brought by the Professional
Contractors Group on behalf of its 13,000 members who operate their own
small businesses, mainly in the IT and engineering sector, and whose
companies were under threat because they were being wrongly classed as
'disguised employees'.
The PCG has argued for 18 months that the tests the Revenue used to assess
the status of these companies were inappropriate to the modern operating
practices of the knowledge-based sector and belonged to a bygone era.
PCG Chairman Gareth Williams said:
"IR35 has been a catalogue of disasters from the very beginning. The most
unfair aspect of it was that we had to pass a set of tests which had no
relevance to our working practices.
"The High Court has been the first authoritative body to listen to our
concerns and has confirmed that we were right. The Revenue got it wrong and
as a result has damaged many small businesses, some of which have closed
down and some have moved abroad.
"The Court has fortunately intervened to restrict further damage with a much
more relevant set of guidelines which prove that IR35 was unfair, unworkable
and created an uncertain climate. For example, the judgement was highly
critical of the Revenue's 'inflexible stance' regarding blanket advice that
standard agency contracts would be caught and he ruled that some of the
uncertainty could be removed by the drafting, agreement and approval of a
series of acceptable standard forms. He also found that the Revenue has been
incorrect in assuming that mutuality of obligation was not a relevant issue,
and he was critical of the Revenue's 'too inflexible approach' to the right
of substitution."
On every finding of fact the judge concurred with the PCG including the key
issue that contractors are in competition with larger consultancies and that
IR35 would distort the marketplace. He was also critical of the Revenue's
selective use of the employment tests to assess whether a small business
fell inside or outside of IR35. In his binding judgement, he described the
Revenue's guidance as inappropriate, unclear, inflexible, inaccurate and
unhelpful. He also made reference to the unnecessary emotive and 'colourful'
language in the original press notice which set the tone for a hostile
debate.
However, this judgement comes only days before the end of the tax year when
these small businesses will have to make decisions based on Revenue guidance
which has now been shown to be inaccurate and misleading. The PCG has
renewed its offer to meet with Ministers or officials at any time to assist
with this transition to the new guidelines with the minimum of disruption to
all parties.
The PCG, representing 13,000 members mainly in the IT and engineering
community, began a legal challenge to judicially review the Government's
action in introducing IR35 after the Treasury and Revenue refused to engage
in any constructive debate with the Group's members.
IR35 was announced in a press notice after the March 1999 Budget. It treats
small businesses in the knowledge-based sector as 'disguised employees' for
tax and NI purposes, thereby preventing them from operating on similar terms
to their larger competitors.
Notes to editors
1. The Professional Contractors Group was formed in May 1999 to lobby
against the Government's IR35 proposals. It is a non-party political group
and its patrons are cross-bench peer, Lord Weatherill, former Speaker of the
House of Commons; and industry guru Sir John Harvey-Jones. Since its
formation it has evolved into the representative body for independent
contractors from many disciplines including IT and engineering on many
issues affecting the knowledge-based sector. It is the fastest growing trade
association in the country and now has more than 13,000 members.
2. The PCG's aim is to work for proper recognition of independent
contractors as a genuine and valuable sector of the economy, generating
wealth and employment, providing industry with a flexible workforce. The
Internet has been the primary resource, providing fast, effective
communication.
3. The PCG brought the judicial review against the Government, claiming IR35
contravened European legislation.
4. During the actual judicial review hearing in March, the Court indicated
it agreed with a number of PCG's points which had previously been contested
by the Revenue. They included:
Certainty
-many of contractors will be taken out of 'certainty' and put into a
position of 'uncertainty' as to whether their contractors fall within IR35
Financial flexibility
-Unaffected companies have greater flexibility in arranging their financial
affairs than those affected by IR35
Competition
-there was real competition between small contracting companies and larger
body shops
Moving overseas
-Some contractors will move overseas or others will be deterred from coming
to the UK
Multiple clients
-seeking work opportunities from multiple clients would put a company
outside IR35.
Employment rights
-there was a strong case for employment rights for those caught under IR35.
-the employment rights issue could extend to employees of bodyshops selling
them into clients.
Freedom of movement
- the freedom of movement issue is potentially an easier hurdle to cross -
does not depend on sector or competition.
Evidence of competition
- fairly convinced of a competition element in IT and asked for additional
evidence of other sectors. Engineering evidence was provided to demonstrate
the point.
Same contract different opinion
- the example of one contract which received a 'yes' and a 'no' from
different IR offices. It took 4-5 months to get a decision (28 day limit)
and the 'inside IR35' was an obvious cut and paste job which showed that the
assessor hadn't read the content.
Restrictive
- the application of IR35 should be less restrictive.
Tax mitigation
-the different between tax mitigation (ie making arrangements in accordance
with tax regime after you've set up a business for other reasons) and tax
avoidance (ie setting up a business/arranging your affairs in order to
maximise tax benefits). Nothing wrong with setting up companies and using
them to mitigate tax.
Emotive language in press release
- there was criticism of the use of emotive language, such as 'disguised
employee' in the original IR35 press release which the judge described as
'wholly regrettable and unnecessary'
Friday to Monday
- there should be no prejudice in the assessment procedure because the first
client of the contractor had previously been an employer.
Expert competition evidence
- judge indicated that he could see the force of argument when supported by
our expert evidence, and that the IR were relying on assertions not
supported by evidence.
Freedom of Movement
- IR must show that there is an overriding reason of public interest - which
cannot be an 'economic one'.
Proportionality
- if the objective was to prevent Friday-to-Monday, it's a sledgehammer to
crack a nut.
Incorporation
- there was nothing critical in terms of people taking advantage of laws
allowing them to incorporate.
Implementation
- the judge was critical of the manner in which the IR was going about
implementation in practice
For further information or to arrange interviews,
please contact:
PCG's press officer: Susie Hughes
See also PCG's website:
Judgement has been handed down. The application by the PCG has been
dismissed.
Mr Justice Burton stated in the judgement: "With grateful thanks for the
extremely full and lucid arguments and research of counsel which have formed
the entirety of the bedrock for my conclusion, I dismiss this application."
Appeal was also dismissed on all counts.
However, Justice Burton has issued new directions to the Inland Revenue on
the implementation of IR35.
The High Court today criticised the Inland Revenue's tests for the stealth
tax IR35 and laid down new guidance to make them more relevant to the
knowledge-based sector.
The decision followed a judicial review brought by the Professional
Contractors Group on behalf of its 13,000 members who operate their own
small businesses, mainly in the IT and engineering sector, and whose
companies were under threat because they were being wrongly classed as
'disguised employees'.
The PCG has argued for 18 months that the tests the Revenue used to assess
the status of these companies were inappropriate to the modern operating
practices of the knowledge-based sector and belonged to a bygone era.
PCG Chairman Gareth Williams said:
"IR35 has been a catalogue of disasters from the very beginning. The most
unfair aspect of it was that we had to pass a set of tests which had no
relevance to our working practices.
"The High Court has been the first authoritative body to listen to our
concerns and has confirmed that we were right. The Revenue got it wrong and
as a result has damaged many small businesses, some of which have closed
down and some have moved abroad.
"The Court has fortunately intervened to restrict further damage with a much
more relevant set of guidelines which prove that IR35 was unfair, unworkable
and created an uncertain climate. For example, the judgement was highly
critical of the Revenue's 'inflexible stance' regarding blanket advice that
standard agency contracts would be caught and he ruled that some of the
uncertainty could be removed by the drafting, agreement and approval of a
series of acceptable standard forms. He also found that the Revenue has been
incorrect in assuming that mutuality of obligation was not a relevant issue,
and he was critical of the Revenue's 'too inflexible approach' to the right
of substitution."
On every finding of fact the judge concurred with the PCG including the key
issue that contractors are in competition with larger consultancies and that
IR35 would distort the marketplace. He was also critical of the Revenue's
selective use of the employment tests to assess whether a small business
fell inside or outside of IR35. In his binding judgement, he described the
Revenue's guidance as inappropriate, unclear, inflexible, inaccurate and
unhelpful. He also made reference to the unnecessary emotive and 'colourful'
language in the original press notice which set the tone for a hostile
debate.
However, this judgement comes only days before the end of the tax year when
these small businesses will have to make decisions based on Revenue guidance
which has now been shown to be inaccurate and misleading. The PCG has
renewed its offer to meet with Ministers or officials at any time to assist
with this transition to the new guidelines with the minimum of disruption to
all parties.
The PCG, representing 13,000 members mainly in the IT and engineering
community, began a legal challenge to judicially review the Government's
action in introducing IR35 after the Treasury and Revenue refused to engage
in any constructive debate with the Group's members.
IR35 was announced in a press notice after the March 1999 Budget. It treats
small businesses in the knowledge-based sector as 'disguised employees' for
tax and NI purposes, thereby preventing them from operating on similar terms
to their larger competitors.
Notes to editors
1. The Professional Contractors Group was formed in May 1999 to lobby
against the Government's IR35 proposals. It is a non-party political group
and its patrons are cross-bench peer, Lord Weatherill, former Speaker of the
House of Commons; and industry guru Sir John Harvey-Jones. Since its
formation it has evolved into the representative body for independent
contractors from many disciplines including IT and engineering on many
issues affecting the knowledge-based sector. It is the fastest growing trade
association in the country and now has more than 13,000 members.
2. The PCG's aim is to work for proper recognition of independent
contractors as a genuine and valuable sector of the economy, generating
wealth and employment, providing industry with a flexible workforce. The
Internet has been the primary resource, providing fast, effective
communication.
3. The PCG brought the judicial review against the Government, claiming IR35
contravened European legislation.
4. During the actual judicial review hearing in March, the Court indicated
it agreed with a number of PCG's points which had previously been contested
by the Revenue. They included:
Certainty
-many of contractors will be taken out of 'certainty' and put into a
position of 'uncertainty' as to whether their contractors fall within IR35
Financial flexibility
-Unaffected companies have greater flexibility in arranging their financial
affairs than those affected by IR35
Competition
-there was real competition between small contracting companies and larger
body shops
Moving overseas
-Some contractors will move overseas or others will be deterred from coming
to the UK
Multiple clients
-seeking work opportunities from multiple clients would put a company
outside IR35.
Employment rights
-there was a strong case for employment rights for those caught under IR35.
-the employment rights issue could extend to employees of bodyshops selling
them into clients.
Freedom of movement
- the freedom of movement issue is potentially an easier hurdle to cross -
does not depend on sector or competition.
Evidence of competition
- fairly convinced of a competition element in IT and asked for additional
evidence of other sectors. Engineering evidence was provided to demonstrate
the point.
Same contract different opinion
- the example of one contract which received a 'yes' and a 'no' from
different IR offices. It took 4-5 months to get a decision (28 day limit)
and the 'inside IR35' was an obvious cut and paste job which showed that the
assessor hadn't read the content.
Restrictive
- the application of IR35 should be less restrictive.
Tax mitigation
-the different between tax mitigation (ie making arrangements in accordance
with tax regime after you've set up a business for other reasons) and tax
avoidance (ie setting up a business/arranging your affairs in order to
maximise tax benefits). Nothing wrong with setting up companies and using
them to mitigate tax.
Emotive language in press release
- there was criticism of the use of emotive language, such as 'disguised
employee' in the original IR35 press release which the judge described as
'wholly regrettable and unnecessary'
Friday to Monday
- there should be no prejudice in the assessment procedure because the first
client of the contractor had previously been an employer.
Expert competition evidence
- judge indicated that he could see the force of argument when supported by
our expert evidence, and that the IR were relying on assertions not
supported by evidence.
Freedom of Movement
- IR must show that there is an overriding reason of public interest - which
cannot be an 'economic one'.
Proportionality
- if the objective was to prevent Friday-to-Monday, it's a sledgehammer to
crack a nut.
Incorporation
- there was nothing critical in terms of people taking advantage of laws
allowing them to incorporate.
Implementation
- the judge was critical of the manner in which the IR was going about
implementation in practice
For further information or to arrange interviews,
please contact:
PCG's press officer: Susie Hughes
See also PCG's website:
02 April 2001, 11:49 AM
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Just got the email from Contractor UK which says
"The application by the PCG has been dismissed"
So presumably that means his ruling is that IR35 does not contravene EU Law.
But then there's loads of stuff saying IR35 is a crock. Does that mean the self employment rules aren't going to be used in assessing us ?
Gary (Doesn't understand this legal stuff)
:Edit - Sorry I meant guidelines not rules.
[This message has been edited by Gary Foster (edited 02 April 2001).]
"The application by the PCG has been dismissed"
So presumably that means his ruling is that IR35 does not contravene EU Law.
But then there's loads of stuff saying IR35 is a crock. Does that mean the self employment rules aren't going to be used in assessing us ?
Gary (Doesn't understand this legal stuff)
:Edit - Sorry I meant guidelines not rules.
[This message has been edited by Gary Foster (edited 02 April 2001).]
02 April 2001, 01:18 PM
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I believe this is a good result for the contracting industry. An outright win or an outright loss would have meant an appeal on either side.
This way, IR35 stays but the judge issues guidance on how the rules/guidlines are to be implemented in real life.
At least, that's my take on it.
The devil will be in the detail.
C
This way, IR35 stays but the judge issues guidance on how the rules/guidlines are to be implemented in real life.
At least, that's my take on it.
The devil will be in the detail.
C
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03 April 2001, 02:21 PM
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Yes - I agree with ca.
At the very least, if the IR specify ahead of time what they will be looking for then you have an opportunity to word your contract appropriatly.
The vagueness was deliberate in that it allowed them to take an (inconsistent) view depending on how they felt when you had submitted it to them for vetting.
Still shafted though...
Cheers,
Alex
At the very least, if the IR specify ahead of time what they will be looking for then you have an opportunity to word your contract appropriatly.
The vagueness was deliberate in that it allowed them to take an (inconsistent) view depending on how they felt when you had submitted it to them for vetting.
Still shafted though...
Cheers,
Alex
04 April 2001, 09:18 AM
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<BLOCKQUOTE><font size="1" face="Verdana, Arial">quote:<HR>Originally posted by ca:
<B>I believe this is a good result for the contracting industry. An outright win or an outright loss would have meant an appeal on either side.
This way, IR35 stays but the judge issues guidance on how the rules/guidlines are to be implemented in real life.
At least, that's my take on it.
The devil will be in the detail.
C[/quote]
The thing about a high court judge's guidelines though are that they are totally binding.
In other words if he says that substitution implies being outside IR35 then if we have that clause then we are definitely safe and there is nothing the IR can do about it.
There's some latin term for this but I can't remember it.
My feelings are that any IR35 friendly contract (no name, and substitution) will bne untouchable, and if you haven't got one then start looking, because 75% of the offers I had in the last 3 weeks were all with friendly contracts. They are not hard to get (unless you are with BT....)
<B>I believe this is a good result for the contracting industry. An outright win or an outright loss would have meant an appeal on either side.
This way, IR35 stays but the judge issues guidance on how the rules/guidlines are to be implemented in real life.
At least, that's my take on it.
The devil will be in the detail.
C[/quote]
The thing about a high court judge's guidelines though are that they are totally binding.
In other words if he says that substitution implies being outside IR35 then if we have that clause then we are definitely safe and there is nothing the IR can do about it.
There's some latin term for this but I can't remember it.
My feelings are that any IR35 friendly contract (no name, and substitution) will bne untouchable, and if you haven't got one then start looking, because 75% of the offers I had in the last 3 weeks were all with friendly contracts. They are not hard to get (unless you are with BT....)
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