Judge criticises Revenue guidance to inspectors on day four of review

Latest news from Day 4 of the PCG's judicial review (Monday 19th)

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The Judicial Review – Day 4

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The fourth day of PCG’s judicial review began with Counsel for the Inland Revenue, Richard Plender QC, continuing with his arguments against the PCG case.

The morning session was concerned primarily with arguments of “fact”. The judge took the role of “devil’s advocate”, and asked Plender to clarify the Revenue’s position over points such as competition and freedom of movement.

The judge suggested that contractors should be able to see the client-agency contract, and that perhaps there could be an industry-wide “non-IR35” contract brought into use.

The judge was critical of Inland Revenue’s internal guidance to inspectors in assessing IR35 status. He was concerned that whereas the IR35 legislation (and indeed, the Revenue’s own submissions to the court) say that all the circumstances affecting the contractor and the contract should be taken into account when assessing IR35 liability, the inspector’s guidance tells them to only use the contracts. The Inland Revenue had no response to this criticism.

Justice Burton seems satisfied that competition exists between contractors and the larger service providers, in spite of Plender’s best efforts to argue that this was not the case.

Plender explained to the court that IR35 is a measure to stamp out tax avoidance through limited companies, quoting headlines in newspapers and a single letter from an accountant as evidence. He dismissed the Institute of Chartered Accountants of England and Wales (ICAEW) report into IR35, that was highly critical of the legislation.

The morning session finished on a positive note, as Plender seemed to struggle to challenge the PCG on points of *fact*. However, this case hinges on points of *law*, and this was the topic of the afternoon session.

Plender aimed some blows at the PCG case. IR35 may be damaging and unfair, but this does not make it illegal. He attacked the PCG case on two fronts:

1. IR35 is not a specific, targeted piece of legislation aimed at favouring one industry sector or individual company over another. He asserted that IR35 is a general measure. IR35 legislation does not name a particular industry sector, so even if it happens to affect a specific category of businesses, that does not make it specific under law. It therefore cannot be State Aid to a sector or company.

2. Even if we could show that IR35 only affects a particular sector or company, Plender used several examples from European law to show that this does not necessarily make it illegal. For example, the Inland Revenue maintains that IR35 is aimed at preventing tax avoidance. It is aimed generally at all companies with an “employee-like” relationship, it is not *intended* to help the big service providers squash contractors out of the market, and therefore it is not illegal. The judge seemed to agree and drew a parallel with “green” legislation. Carbon tax is not seen as State Aid to non-polluting companies, because it is “intended” to help the environment. The fact that it raises lots of money for the Treasury and may put laundrettes out of business is immaterial.

Plender will deal with the issue of Free Movement tomorrow (Tuesday). As a taster, the judge suggested that Plender ought to accept that contractors *might* decide not to come to the UK or leave the country due to IR35. Plender tried to argue this point without making much impression on the judge. The case is expected to finish at the end of Tuesday.

It needs to be borne in mind that the onus is on the PCG to prove that IR35 is illegal under European law. The Inland Revenue is “presumed innocent” for the purposes of this hearing. Plender will spend around an hour on Tuesday morning outlining the Inland Revenue’s defence of the Freedom of Movement argument, before both counsels will have the opportunity to reply to points raised in the case.