High Court keeps IR35 but orders Revenue to ease company rules

Contractors rejoice at IR35 ruling

Chris Mugan

The High Court today ruled that IR35 is here to stay, but ordered the Inland Revenue to allow more contractors to form businesses.

Although Mr Justice Burton ruled that the regulations on how individuals can form companies were legal, he has drawn up guidelines for how the Revenue should apply them.

His decision follows a judicial review brought by the Professional Contractors Group (PCG), formed to represent contractors affected by the legislation that came into force last April. The PCG argued IR35 was unfair because its members would be unable to compete with larger contracting companies.

Many contractors were forced to pay tax and national insurance as if they were receiving salaries, rather than paying company rates on income, which, the PCG claimed, could increase tax burdens by 14%.

In his judgement, Mr Justice Burton said the Inland Revenue's guidelines for who could form personal service companies were inappropriate and inflexible. He also criticised the Government for using emotive language in its press notice launching the rules.

The PCG is happy with the judgement, and will not appeal against it, stated its director Simon Griffiths.

"The Revenue set a hurdle to forming a company that was too high, and the judge has brought that down to a manageable level," he said.

The PCG now wants to meet the Inland Revenue to deal with the implications of the ruling that was handed down just days before the end of the tax year.

"The Inland Revenue will now need to check the contracts for perhaps 150,000 contractors in the UK, and they don't have the manpower to handle that," said Griffiths.